##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ______________ to ______________
 Commission File Number: 000-50066
 HARRINGTON WEST FINANCIAL GROUP, INC.
  Delaware
(State or other jurisdiction of incorporation or organization)
    
    48-1175170
(I.R.S. Employer Identification No.)
 
 
 
   þ Yes
    
    o No
  o Yes
    
    o No
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller Reporting Company þ  o Yes
    
    þ No




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##### 



HARRINGTON WEST FINANCIAL GROUP, INC.
 TABLE OF CONTENTS
 PagePart I  Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Statements of Financial Condition as of
September 30, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Income (Loss)
for the Three and Nine Months Ended September 30, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Stockholders Equity and Comprehensive
Income (Loss) for the Nine Months Ended September 30, 2009
and Year Ended December 31, 2008
    
    
    5Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2009 and 2008
    
    
    6Notes to Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    21Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    39Item 4T.
    
    Controls and Procedures
    
    
    40Part II  Other InformationItem 1.
    
    Legal Proceedings
    
    
    40Item 1A.
    
    Risk Factors
    
    
    40Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    41Item 3.
    
    Defaults upon Senior Securities
    
    
    41Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    41Item 5.
    
    Other Information
    
    
    41Item 6.
    
    Exhibits
    
    
    41Signatures
    
    
    42EX-31.1EX-31.2EX-31.3EX-32
  -2-




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##### Table of Contents



PART 1-FINANCIAL INFORMATION
 
 Item 1: Condensed Consolidated Financial Statements
 
 HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
(Dollars in thousands, except per share data)
 September 30,
    
    December 31,2009
    
    2008Assets:Cash and cash equivalents
    
    $
    26,306
    
    
    $
    27,040Trading account assets
    
    
    779
    
    
    
    744Securities, available-for-sale
    
    
    235,015
    
    
    
    273,678Securities held to maturity (fair value of $35 at September 30, 2009 and $38
at December 31, 2008)
    
    
    33
    
    
    
    37Loans held for sale
    
    
    91,832
    
    
    
    Loans receivable, net of allowance for loan losses of $19,678
at September 30, 2009 and $11,449 at December 31, 2008
    
    
    596,200
    
    
    
    798,325Accrued interest receivable
    
    
    3,381
    
    
    
    3,897Real estate owned
    
    
    18,723
    
    
    
    7,449Real estate sold on contract
    
    
    864
    
    
    
    Premises, equipment held for sale
    
    
    5,465
    
    
    
    Premises, equipment and other long-term assets
    
    
    11,578
    
    
    
    17,732Prepaid expenses and other assets
    
    
    4,360
    
    
    
    3,254Investment in FHLB stock, at cost
    
    
    11,501
    
    
    
    11,501Income taxes receivable
    
    
    5,109
    
    
    
    1,468Cash surrender value of life insurance
    
    
    24,115
    
    
    
    23,712Deferred tax asset
    
    
    16,307
    
    
    
    20,748Goodwill
    
    
    5,496
    
    
    
    5,496Other intangible assets
    
    
    445
    
    
    
    554Total assets
    
    $
    1,057,509
    
    
    $
    1,195,635Liabilities:Deposits:Interest-bearing deposits
    
    $
    773,376
    
    
    $
    853,523Interest-bearing deposits held for sale
    
    
    85,895
    
    
    
    Non-interest-bearing demand deposits
    
    
    33,468
    
    
    
    46,070Non-interest-bearing demand deposits held for sale
    
    
    7,714
    
    
    
    Total Deposits
    
    
    900,453
    
    
    
    899,593FHLB advances
    
    
    79,000
    
    
    
    190,000Securities sold under repurchase agreements held for sale
    
    
    4,801
    
    
    
    Securities sold under repurchase agreements
    
    
    17,620
    
    
    
    19,499Subordinated debt
    
    
    25,774
    
    
    
    25,774Accrued interest payable and other liabilities
    
    
    3,524
    
    
    
    14,331Total liabilities
    
    
    1,031,172
    
    
    
    1,149,197Shareholders equityPreferred stock, $.01 par value; 8% non-cumulative, 5,000,000 shares authorized;
57,000 shares issued and outstanding, as of September 30, 2009
and 142,999 shares issued and outstanding December 31, 2008
Liquidation preference of $1.4 million at September 30, 2009 and $3.6 million
at December 31, 2008
    
    
    1
    
    
    
    2Common stock, $.01 par value; 15,000,000 shares authorized;
7,364,089 shares issued and outstanding as of September 30, 2009
and 6,770,093 shares issued and outstanding December 31, 2008
    
    
    74
    
    
    
    72Additional paid-in capital  Common
    
    
    46,102
    
    
    
    45,437Additional paid-in capital  Preferred
    
    
    1,289
    
    
    
    4,649Stock subscriptions
    
    
    
    
    
    
    (3,857
    )Retained earnings
    
    
    2,527
    
    
    
    23,356Accumulated other comprehensive loss
    
    
    (23,656
    )
    
    
    (23,221
    )Total shareholders equity
    
    
    26,337
    
    
    
    46,438Total liabilities and shareholders equity
    
    $
    1,057,509
    
    
    $
    1,195,635
  -3-




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)  Dollars in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Interest income:Loans
    
    $
    10,508
    
    
    $
    13,745
    
    
    $
    34,502
    
    
    $
    41,616Securities
    
    
    1,931
    
    
    
    3,838
    
    
    
    6,278
    
    
    
    13,989Total interest income
    
    
    12,439
    
    
    
    17,583
    
    
    
    40,780
    
    
    
    55,605Interest expense:Deposits
    
    
    4,202
    
    
    
    6,497
    
    
    
    15,309
    
    
    
    22,809Interest on FHLB advances, repos & other debt
    
    
    2,234
    
    
    
    3,401
    
    
    
    6,563
    
    
    
    10,134Total interest expense
    
    
    6,436
    
    
    
    9,898
    
    
    
    21,872
    
    
    
    32,943Net interest income
    
    
    6,003
    
    
    
    7,685
    
    
    
    18,908
    
    
    
    22,662Provision for loan losses
    
    
    2,400
    
    
    
    1,565
    
    
    
    15,250
    
    
    
    2,465Net interest income after provision for loan losses
    
    
    3,603
    
    
    
    6,120
    
    
    
    3,658
    
    
    
    20,197Non-interest income:Other-than-temporary lossTotal impairment losses
    
    
    (2,432
    )
    
    
    (5,575
    )
    
    
    (13,700
    )
    
    
    (8,057
    )Loss recognized in other comprehensive income
    
    
    110
    
    
    
    
    
    
    
    5,099
    
    
    
    Net impairment losses recognized in earnings
    
    
    (2,322
    )
    
    
    (5,575
    )
    
    
    (8,601
    )
    
    
    (8,057
    )Gain on sale of available for sale securities
    
    
    239
    
    
    
    
    
    
    
    245
    
    
    
    1,107Gain (loss) from trading assets
    
    
    20
    
    
    
    (28
    )
    
    
    40
    
    
    
    (8,693
    )Gain on termination of cash flow hedge
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,338Gain (loss) on real estate owned activity
    
    
    30
    
    
    
    (393
    )
    
    
    (212
    )
    
    
    (2,996
    )Gain on sale of other assets
    
    
    9
    
    
    
    
    
    
    
    24
    
    
    
    1,049Increase in cash surrender value of life insurance
    
    
    125
    
    
    
    180
    
    
    
    409
    
    
    
    421Banking fee and other income
    
    
    1,033
    
    
    
    879
    
    
    
    2,836
    
    
    
    2,605Total non-interest income
    
    
    (866
    )
    
    
    (4,937
    )
    
    
    (5,259
    )
    
    
    (12,226
    )Non-interest expense:Salaries and employee benefits
    
    
    3,184
    
    
    
    3,428
    
    
    
    9,872
    
    
    
    10,225Premises and equipment
    
    
    991
    
    
    
    1,025
    
    
    
    2,974
    
    
    
    3,041Insurance premiums
    
    
    797
    
    
    
    247
    
    
    
    2,132
    
    
    
    685Marketing
    
    
    (1
    )
    
    
    143
    
    
    
    143
    
    
    
    383Computer services
    
    
    267
    
    
    
    235
    
    
    
    778
    
    
    
    781Professional fees
    
    
    203
    
    
    
    198
    
    
    
    611
    
    
    
    503Office expenses and supplies
    
    
    138
    
    
    
    192
    
    
    
    484
    
    
    
    620Other
    
    
    1,241
    
    
    
    801
    
    
    
    3,351
    
    
    
    2,223Total non-interest expense
    
    
    6,820
    
    
    
    6,269
    
    
    
    20,345
    
    
    
    18,461Loss before income taxes
    
    
    (4,083
    )
    
    
    (5,086
    )
    
    
    (21,946
    )
    
    
    (10,490
    )Provision for income tax benefit
    
    
    
    
    
    
    (1,908
    )
    
    
    (200
    )
    
    
    (3,935
    )Net loss
    
    $
    (4,083
    )
    
    $
    (3,178
    )
    
    $
    (21,746
    )
    
    $
    (6,555
    )Dividend on preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss available to common shareholders
    
    $
    (4,083
    )
    
    $
    (3,178
    )
    
    $
    (21,746
    )
    
    $
    (6,555
    )Basic loss per share
    
    $
    (0.55
    )
    
    $
    (0.52
    )
    
    $
    (3.05
    )
    
    $
    (1.10
    )Diluted loss per share
    
    $
    (0.55
    )
    
    $
    (0.52
    )
    
    $
    (3.05
    )
    
    $
    (1.10
    )Basic weighted-average shares outstanding
    
    
    7,364,089
    
    
    
    6,141,216
    
    
    
    7,119,696
    
    
    
    5,954,914Diluted weighted-average shares outstanding
    
    
    7,364,089
    
    
    
    6,141,216
    
    
    
    7,119,696
    
    
    
    5,954,914Other comprehensive loss
    
    
    (2,949
    )
    
    
    (4,674
    )
    
    
    (22,181
    )
    
    
    (12,001
    )
  -4-




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands, except share and per share data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalPreferred Stock
    
    
    Common Stock
    
    
    Paid-In
    
    
    Stock
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Subscriptions
    
    
    Earnings
    
    
    Loss
    
    
    Loss
    
    
    EquityBALANCE, DECEMBER 31, 2007
    
    
    
    
    
    
    
    
    
    
    5,554,003
    
    
    
    56
    
    
    
    34,424
    
    
    
    
    
    
    
    35,368
    
    
    
    
    
    
    
    (14,806
    )
    
    
    55,042Comprehensive lossNet loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,810
    )
    
    $
    (10,810
    )
    
    
    
    
    
    
    (10,810
    )Other comprehensive loss, net of taxUnrealized losses on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,350
    )
    
    
    (5,350
    )
    
    
    (5,350
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,065
    )
    
    
    (3,065
    )
    
    
    (3,065
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (19,225
    )Stock options exercised
including tax benefit of $25
    
    
    
    
    
    
    
    
    
    
    27,240
    
    
    
    
    
    
    
    233
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    233Common shares issued in
private offering at $7.75
    
    
    
    
    
    
    
    
    
    
    550,000
    
    
    
    5
    
    
    
    4,257
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,262Common shares issued in
private offering at $6.25
    
    
    
    
    
    
    
    
    
    
    638,850
    
    
    
    11
    
    
    
    6,153
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,164Preferred shares issued in
private offering at $25.00
    
    
    142,999
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    4,649
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,651Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    370Stock subscriptions unissued:Preferred stock 54,001
shares at $25.00
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,350
    )Common stock 401,150
shares at $6.25
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,507
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,507
    )Dividends on preferred
stock at 8% per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (61
    )
    
    
    
    
    
    
    
    
    
    
    (61
    )Dividends on common
stock at $.195 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,141
    )
    
    
    
    
    
    
    
    
    
    
    (1,141
    )BALANCE, DECEMBER 31, 2008
    
    
    142,999
    
    
    $
    2
    
    
    
    6,770,093
    
    
    $
    72
    
    
    $
    50,086
    
    
    $
    (3,857
    )
    
    $
    23,356
    
    
    
    
    
    
    $
    (23,221
    )
    
    $
    46,438Comprehensive lossCumulative effect of change
in accounting
principle, adoption of FSP
FAS 115-2 and
124-2 (net of tax)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    917
    
    
    
    
    
    
    
    
    
    
    
    917Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (21,746
    )
    
    $
    (21,746
    )
    
    
    
    
    
    
    (21,746
    )Other comprehensive loss,
net of taxChange in unrealized gains
(losses) on securities
available for sale, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,022
    )
    
    
    (6,022
    )
    
    
    (6,022
    )Change in unrealized gains
(losses) on securities
available for sale for which
a portion of an other-
than-temporary impairment
has been recognized in
earnings, net of
reclassifications and taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,187
    
    
    
    3,187
    
    
    
    3,187Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,400
    
    
    
    2,400
    
    
    
    2,400Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (22,181
    )Common shares issued in
private offering at $2.00 per share
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    2
    
    
    
    498
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    500Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    249Reverse stock subscriptions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0
    
    
    
    3,857
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,857Conversion of preferred stock to
common stock
    
    
    (85,999
    )
    
    
    (1
    )
    
    
    343,996
    
    
    
    
    
    
    
    (3,442
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,443
    )0BALANCE, SEPTEMBER 30, 2009
    
    
    57,000
    
    
    $
    1
    
    
    
    7,364,089
    
    
    $
    74
    
    
    $
    47,391
    
    
    $
    (0
    )
    
    $
    2,527
    
    
    
    
    
    
    $
    (23,656
    )
    
    $
    26,337
  -5-




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
 Nine Months EndedSeptember 30,2009
    
    
    2008Cash flows from operating activities:Net (loss) income
    
    $
    (21,746
    )
    
    $
    (6,555
    )Adjustments to reconcile net income (loss) to net cash provided by
operating activities:Accretion of deferred loan fees and costs
    
    
    (1,218
    )
    
    
    (429
    )Depreciation and amortization
    
    
    3,421
    
    
    
    1,038Amortization and accretion of premiums and discounts on loans
receivable and securities
    
    
    (420
    )
    
    
    (649
    )Deferred income taxes
    
    
    3,782
    
    
    
    Provision for loan losses
    
    
    15,250
    
    
    
    2,465Activity in trading account assets
    
    
    5
    
    
    
    (1,305
    )Loss (gain) on sale of trading securities
    
    
    (40
    )
    
    
    2,679Gain on sale of available-for-sale securities
    
    
    (245
    )
    
    
    (1,107
    )Gain on termination of cash flow swaps
    
    
    
    
    
    
    (2,338
    )Loss on other-than-temporary impairment
    
    
    8,601
    
    
    
    8,057Loss on real estate owned
    
    
    212
    
    
    
    2,996Gain on sale of loans
    
    
    (24
    )
    
    
    FHLB stock dividend
    
    
    
    
    
    
    (565
    )Earnings on bank owned life insurance
    
    
    (409
    )
    
    
    (421
    )Decrease in accrued interest receivable
    
    
    516
    
    
    
    1,294Increase in income tax receivable, net of payable
    
    
    (3,641
    )
    
    
    (4,568
    )Decrease in prepaid expenses and other assets
    
    
    1,518
    
    
    
    723Stock compensation expense
    
    
    249
    
    
    
    267Decrease in accounts payable, accrued expenses,
and other liabilities
    
    
    (11,083
    )
    
    
    (187
    )Net cash used in operating activities
    
    
    (5,272
    )
    
    
    1,395Cash flows from investing activities:Net (increase) decrease in loans receivable
    
    
    66,360
    
    
    
    (58,793
    )Proceeds from sale of loans
    
    
    14,540
    
    
    
    16,133Proceeds from sales of securities available for sale
    
    
    8,759
    
    
    
    171,925Purchases of securities available for sale
    
    
    (8,159
    )
    
    
    (162,501
    )Principal paydowns on securities available for sale
    
    
    27,030
    
    
    
    41,466Principal paydowns on securities held to maturity
    
    
    4
    
    
    
    18Proceeds from sale of real estate acquired through foreclosure
    
    
    3,047
    
    
    
    53Purchase of premises and equipment
    
    
    (411
    )
    
    
    (2,067
    )Proceeds from sale of fixed assets
    
    
    136
    
    
    
    1,100Purchase of FHLB Stock
    
    
    
    
    
    
    (262
    )Net cash provided by investing activities
    
    
    111,306
    
    
    
    7,072Cash flows from financing activities:Net increase in deposits
    
    
    859
    
    
    
    66,294Increase (decrease) in securities sold under agreements to repurchase
    
    
    2,922
    
    
    
    (29,835
    )Decrease in FHLB advances
    
    
    (111,000
    )
    
    
    (44,000
    )Proceeds from exercise of stock options, including tax benefits
    
    
    
    
    
    
    233Proceeds from shares issued in private offering
    
    
    451
    
    
    
    10,098Dividends paid on common stock
    
    
    
    
    
    
    (1,141
    )Net cash used in financing activities
    
    
    (106,768
    )
    
    
    1,649Net increase (decrease) in cash and cash equivalents
    
    
    (734
    )
    
    
    10,116Cash and cash equivalents at beginning of period
    
    
    27,040
    
    
    
    14,433Cash and cash equivalents at end of period
    
    $
    26,306
    
    
    $
    24,549
  -6-




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Business of the Company
 Basis of Presentation
   Allowance for Loan Losses
    -7-




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##### Table of Contents



Real Estate Owned
 Adoption
of New Accounting Guidance
 Financial Accounting Standards Board (FASB)
ASC
 Newly Issued But Not Yet Effective Accounting Pronouncements   , Accounting for Transfers of Financial Assets An Amendment of FASB
Statement No. 140, Amendments to FASB Interpretation No. 46(R)
 -8-




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##### Table of Contents



2. FAIR VALUE
     Fair Value Measurements
 Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That
Are Not Orderly,
   -9-




---



##### Table of Contents



Fair Value Measurements at September 30, 2009Quoted Prices in
    
    SignificantActive Markets
    
    Other
    
    Significantfor Identical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Trading securitiesGNMA securities
    
    $
    142
    
    
    $
    
    
    
    $
    142
    
    
    $
    Mutual funds
    
    $
    637
    
    
    $
    637
    
    
    $
    
    
    
    $
    Available for sale securities:Residential mortgage backed
securities
    
    $
    235,015
    
    
    $
    
    
    
    $
    90,543
    
    
    $
    144,472Interest rate swaps
    
    $
    938
    
    
    $
    
    
    
    $
    938
    
    
    $
    Fair Value Measurements at December 31, 2008 UsingQuoted Prices in
    
    SignificantActive Markets
    
    Other
    
    Significantfor Identical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsTotal
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Assets:Trading securities
    
    $
    744
    
    
    $
    575
    
    
    $
    169
    
    
    $
    Available for sale securities
    
    $
    273,678
    
    
    $
    
    
    
    $
    121,609
    
    
    $
    152,069Liabilities:Interest rate swaps
    
    $
    10,442
    
    
    $
    
    
    
    $
    10,442
    
    
    $
    
  -10-




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##### Table of Contents



Fair ValueMeasurementsUsing SignificantUnobservableInputsResidentialmortgage-backedBeginning balance at January 1, 2009
    
    $
    152,069Total gains or losses (realized / unrealized)Recognized in earnings:Other-than-temporary impairment
    
    
    (8,601
    )Unrealized in other comprehensive income:Reclassification adjustment for losses
recognized in earnings
    
    
    8,601Transfers in and / or out of Level 3
    
    
    31,546Level 3 fair value adjustment
    
    
    (39,143
    )Ending balance, September 30, 2009
    
    $
    144,472
  Fair ValueMeasurementsUsing SignificantUnobservableInputsResidentialmortgage-backedBeginning balance at January 1, 2008
    
    $
    Total gains or losses (realized / unrealized)Recognized in earnings:Other-than-temporary impairment
    
    
    (11,824
    )Unrealized in other comprehensive income:Reclassification adjustment for losses
recognized in earnings
    
    
    11,824Transfers into Level 3
    
    
    111,575Level 3 fair value adjustment
    
    
    40,494Ending balance, December 31, 2008
    
    $
    152,069
 -11-




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##### Table of Contents



Fair Value Measurements at September 30, 2009Quoted Prices inActive Markets
    
    Significant
    
    Significantfor Identical
    
    Other
    
    UnobservableAssets
    
    Observable
    
    InputsTotal
    
    (Level 1)
    
    Inputs (Level 2)
    
    (Level 3)Assets:Impaired loans
    
    $
    106,620
    
    
    $
    
    
    
    $
    106,620
    
    
    $
    Real estate owned
    
    $
    18,723
    
    
    $
    
    
    
    $
    
    
    
    $
    18,723
  Fair Value Measurements at December 31, 2008 UsingQuoted Prices inActive Markets
    
    Significant
    
    Significantfor Identical
    
    Other
    
    UnobservableAssets
    
    Observable
    
    InputsTotal
    
    (Level 1)
    
    Inputs (Level 2)
    
    (Level 3)Assets:Impaired loans
    
    $
    31,508
    
    
    $
    
    
    
    $
    31,508
    
    
    $
    
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueSeptember 30, 2009Mortgage-backed securities  pass throughs
    
    $
    43,217
    
    
    $
    876
    
    
    $
    (28
    )
    
    
    44,065Collateralized mortgage obligations
    
    
    69,503
    
    
    
    5
    
    
    
    (6,695
    )
    
    
    62,813Asset-backed securities (underlying
securities mortgages)
    
    
    152,697
    
    
    
    320
    
    
    
    (25,904
    )
    
    
    127,113Asset-backed securities
    
    
    1,525
    
    
    
    
    
    
    
    (501
    )
    
    
    1,024$
    266,942
    
    
    $
    1,201
    
    
    $
    (33,128
    )
    
    $
    235,015
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueDecember 31, 2008Mortgage-backed securities  pass throughs
    
    $
    50,284
    
    
    $
    315
    
    
    $
    (317
    )
    
    $
    50,282Collateralized mortgage obligations
    
    
    83,376
    
    
    
    
    
    
    
    (6,140
    )
    
    
    77,236Asset-backed securities (underlying
securities mortgages)
    
    
    165,721
    
    
    
    748
    
    
    
    (21,010
    )
    
    
    145,459Asset-backed securities
    
    
    1,655
    
    
    
    
    
    
    
    (954
    )
    
    
    701$
    301,036
    
    
    $
    1,063
    
    
    $
    (28,421
    )
    
    $
    273,678
 -12-




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##### Table of Contents



Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesSeptember 30, 2009Mortgage-backed securities  pass throughs
    
    $
    41,330
    
    
    $
    (9
    )
    
    $
    1,859
    
    
    $
    (19
    )
    
    $
    43,189
    
    
    $
    (28
    )Collateralized mortgage obligations
    
    
    4,926
    
    
    
    (447
    )
    
    
    57,882
    
    
    
    (6,248
    )
    
    
    62,808
    
    
    
    (6,695
    )Asset-backed securities (underlying
securities mortgages)
    
    
    2,914
    
    
    
    (345
    )
    
    
    123,879
    
    
    
    (25,559
    )
    
    
    126,793
    
    
    
    (25,904
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    1,024
    
    
    
    (501
    )
    
    
    1,024
    
    
    
    (501
    )$
    49,170
    
    
    $
    (801
    )
    
    $
    184,644
    
    
    $
    (32,327
    )
    
    $
    233,814
    
    
    $
    (33,128
    )
 Less than 12 months
    
    
    12 months or more
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesDecember 31, 2008Mortgage-backed securities  pass throughs
    
    $
    38,969
    
    
    $
    (109
    )
    
    $
    10,998
    
    
    $
    (208
    )
    
    $
    49,967
    
    
    $
    (317
    )Collateralized mortgage obligations
    
    
    55,514
    
    
    
    (4,215
    )
    
    
    21,722
    
    
    
    (1,925
    )
    
    
    77,236
    
    
    
    (6,140
    )Asset-backed securities (underlying
securities mortgages)
    
    
    17,144
    
    
    
    (1,504
    )
    
    
    127,567
    
    
    
    (19,506
    )
    
    
    144,711
    
    
    
    (21,010
    )Asset-backed securities
    
    
    12
    
    
    
    (72
    )
    
    
    689
    
    
    
    (882
    )
    
    
    701
    
    
    
    (954
    )$
    111,639
    
    
    $
    (5,900
    )
    
    $
    160,976
    
    
    $
    (22,521
    )
    
    $
    272,615
    
    
    $
    (28,421
    )
      -13-




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##### Table of Contents



09/30/09
    
    
    12/31/08Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    
    
    
    
    Average
    
    
    Amortized
    
    
    
    
    
    
    Average(Dollars in thousands)
    
    Cost
    
    
    Fair Value
    
    
    Yield
    
    
    Cost
    
    
    Fair Value
    
    
    YieldMortgage-backed securities  pass throughsDue from one to five years
    
    $
    
    
    
    $
    
    
    
    
    0.00
    %
    
    $
    149
    
    
    $
    146
    
    
    
    3.17
    %Due from five to ten years
    
    
    2,312
    
    
    
    2,414
    
    
    
    5.53
    %
    
    
    2,853
    
    
    
    2,927
    
    
    
    5.89
    %Due over ten years
    
    
    40,905
    
    
    
    41,651
    
    
    
    3.91
    %
    
    
    47,282
    
    
    
    47,209
    
    
    
    4.74
    %Total mortgage backed securities  pass throughs (1)
    
    
    43,217
    
    
    
    44,065
    
    
    
    4.00
    %
    
    
    50,284
    
    
    
    50,282
    
    
    
    4.80
    %Collateralized mortgage obligationsDue over ten years
    
    
    69,503
    
    
    
    62,813
    
    
    
    3.98
    %
    
    
    83,376
    
    
    
    77,236
    
    
    
    3.94
    %Total collateralized mortgage obligations
    
    
    69,503
    
    
    
    62,813
    
    
    
    3.98
    %
    
    
    83,376
    
    
    
    77,236
    
    
    
    3.94
    %Asset backed securities (underlying securities
mortgages)Due from one to five years
    
    
    1,125
    
    
    
    1,016
    
    
    
    0.80
    %
    
    
    1,125
    
    
    
    1,001
    
    
    
    1.03
    %Due over ten years
    
    
    151,572
    
    
    
    126,097
    
    
    
    1.77
    %
    
    
    164,596
    
    
    
    144,458
    
    
    
    2.33
    %Total asset backed securities
    
    
    152,697
    
    
    
    127,113
    
    
    
    1.76
    %
    
    
    165,721
    
    
    
    145,459
    
    
    
    2.32
    %Asset backed securitiesDue from one to five years
    
    
    225
    
    
    
    213
    
    
    
    2.74
    %
    
    
    355
    
    
    
    47
    
    
    
    5.35
    %Due over ten years
    
    
    1,300
    
    
    
    811
    
    
    
    0.84
    %
    
    
    1,300
    
    
    
    654
    
    
    
    2.52
    %Total asset backed securities
    
    
    1,525
    
    
    
    1,024
    
    
    
    1.12
    %
    
    
    1,655
    
    
    
    701
    
    
    
    3.13
    %Total
    
    $
    266,942
    
    
    $
    235,015
    
    
    
    2.68
    %
    
    $
    301,036
    
    
    $
    273,678
    
    
    
    3.16
    %
 
 (1)
    
    At September 30, 2009, AFS and HTM portfolio consisted of $3.5 million of Fannie Mae
participation certificates, $757 thousand of Freddie Mac participation certificates and $39.8
million of Ginnie Mae participation certificates. Disclosures about Fair Value of Financial Instruments
  -14-




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##### Table of Contents



September 30, 2009
    
    December 31, 2008Carrying
    
    Estimated
    
    Carrying
    
    EstimatedAmount
    
    Fair Value
    
    Amount
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    26,306
    
    
    $
    26,306
    
    
    $
    27,040
    
    
    $
    27,040Securities, held to maturity
    
    $
    33
    
    
    $
    36
    
    
    $
    37
    
    
    $
    38Loans held for sale
    
    $
    91,832
    
    
    $
    91,832
    
    
    $
    
    
    
    $
    Loans receivable, net, including
impaired loans
    
    $
    596,200
    
    
    $
    620,494
    
    
    $
    798,325
    
    
    $
    834,633FHLB stock
    
    $
    11,501
    
    
    
    n/a
    
    
    $
    11,501
    
    
    
    n/aAccrued interest receivable
    
    $
    3,381
    
    
    $
    3,381
    
    
    $
    3,897
    
    
    $
    3,897Liabilities:Deposits held for sale
    
    $
    93,609
    
    
    $
    97,709
    
    
    $
    
    
    
    $
    Demand deposits
    
    $
    170,841
    
    
    $
    170,841
    
    
    $
    223,411
    
    
    $
    223,411Certificates of deposit
    
    $
    636,003
    
    
    $
    639,876
    
    
    $
    676,183
    
    
    $
    680,331FHLB advances
    
    $
    79,000
    
    
    $
    79,896
    
    
    $
    190,000
    
    
    $
    191,538Securities sold under
repurchase agreements
    
    $
    4,801
    
    
    $
    4,893
    
    
    $
    19,499
    
    
    $
    19,997Subordinated debt
    
    $
    25,774
    
    
    $
    9,794
    
    
    $
    25,774
    
    
    $
    8,505Accrued interest payable
    
    $
    3,524
    
    
    $
    3,524
    
    
    $
    1,158
    
    
    $
    1,158
 Loans Accounting by Creditors for Impairment of a Loan
 -15-




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##### Table of Contents



3. REAL ESTATE OWNED
  September 30,
    
    
    December 31,2009
    
    
    2008Beginning balance real estate owned
    
    $
    7,449
    
    
    $
    Transfer of loans to real estate owned
    
    
    15,336
    
    
    
    12,756Sale proceeds
    
    
    (3,047
    )
    
    
    Net gain from sale of OREO
    
    
    274
    
    
    
    Loan to facilitate sale of REO
    
    
    
    
    
    
    (750
    )REO sold on contract
    
    
    (803
    )
    
    
    Other reductions
    
    
    
    
    
    
    (149
    )Provision for real estate owned
    
    
    (486
    )
    
    
    (4,408
    )Ending balance real estate owned
    
    $
    18,723
    
    
    $
    7,449
  September 30,
    
    
    December 31,2009
    
    
    2008Beginning valuation on real estate owned
    
    $
    4,408
    
    
    $
    Provision charged to operations
    
    
    
    
    
    
    4,408Amounts related to properties disposed
    
    
    (130
    )
    
    
    Amounts related to properties not disposed of
    
    
    486
    
    
    
    Ending valuation on real estate owned
    
    $
    4,764
    
    
    $
    4,408
 4. EARNINGS (LOSS) PER SHARE
  Three months ended September 30, 2009
    
    
    Nine months ended September 30, 2009(net income/(loss) amounts
    
    Income/(Loss)
    
    
    Shares
    
    
    Per-Share
    
    
    Income/(Loss)
    
    
    Shares
    
    
    Per-Sharein thousands)
    
    (Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountNet Income (Loss)
    
    $
    (4,083
    )
    
    
    
    
    
    
    
    
    
    $
    (21,746
    )Preferred Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic EPS
    
    
    (4,083
    )
    
    
    7,364,089
    
    
    $
    (0.55
    )
    
    
    (21,746
    )
    
    
    7,119,696
    
    
    $
    (3.05
    )Effect of dilutive
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    (4,083
    )
    
    
    7,364,089
    
    
    $
    (0.55
    )
    
    $
    (21,746
    )
    
    
    7,119,696
    
    
    $
    (3.05
    )
 Three months ended September 30, 2008
    
    
    Nine months ended September 30, 2008Income/(Loss)
    
    
    Shares
    
    
    Per-Share
    
    
    Income/(Loss)
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountNet Income (Loss)
    
    $
    (3,178
    )
    
    
    
    
    
    
    
    
    
    $
    (6,555
    )Preferred Dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Basic EPS
    
    
    (3,178
    )
    
    
    6,141,216
    
    
    $
    (0.52
    )
    
    
    (6,555
    )
    
    
    5,954,914
    
    
    $
    (1.10
    )Effect of dilutive
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPS
    
    $
    (3,178
    )
    
    
    6,141,216
    
    
    $
    (0.52
    )
    
    $
    (6,555
    )
    
    
    5,954,914
    
    
    $
    (1.10
    )
  -16-




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##### Table of Contents



5. OTHER-THAN-TEMPORARY IMPAIRMENT
 .
 Recognition and Presentation of
Other-Than-Temporary Impairments,
  Other-than-temporary Lossas Reported inEarningsBeginning balance of credit losses
at January 1, 2009
    
    $
    13,977Current period credit losses
    
    
    8,601Current period illiquid market losses
    
    
    Previously recognized other-than-
    
    
    temporary loss related to
    
    
    liquidity losses
    
    
    (1,467
    )Ending balance of credit and
    
    
    liquidity losses at September 30, 2009
    
    $
    21,111
 6. ASSETS AND LIABILITIES HELD FOR SALE
  -17-




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##### Table of Contents



Accounting
for Certain Mortgage
Banking Activities
 7. DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
  Accounting for Derivative Instruments and Hedging
Activities,
    -18-




---



##### Table of Contents



Location of Gain or(Loss)
    
    
    Amount of Gain or (Loss)Location of Gain or
    
    
    Amount of Gain or (Loss)
    
    
    Recognized In Income on
    
    
    Recognized In Income onDerivatives In
    
    Amount of Gain or (Loss)
    
    
    (Loss)
    
    
    Reclassified from
    
    
    Derivative (Ineffective
    
    
    Derivative (IneffectiveStatement
    
    Recognized in OCI on
    
    
    Reclassified from
    
    
    Accumulated
    
    
    Portion and Amount
    
    
    Portion and Amount133 Cash flow
    
    Derivative
    
    
    Accumulated OCI Into
    
    
    OCI Into Income
    
    
    Excluded From
    
    
    Excluded fromHedging
    
    (Effective Portion)
    
    
    Income
    
    
    (Effective Portion)
    
    
    Effectiveness
    
    
    Effectiveness Testing)Relationships
    
    9/30/2009
    
    
    9/30/2008
    
    
    (Effective Portion)
    
    
    9/30/2009
    
    
    9/30/2008
    
    
    Testing)
    
    
    9/30/2009
    
    
    9/30/2008Interest Rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other non-interestProducts
    
    $
    (16
    )
    
    $
    179
    
    
    Interest Income
    
    $
    (1,180
    )
    
    $
    
    
    
    expense
    
    $
    
    
    
    $
    (216
    )$
    (16
    )
    
    $
    179
    
    
    
    
    
    
    $
    (1,180
    )
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    (216
    )
  Location of Gain or(Loss)
    
    
    Amount of Gain or (Loss)Location of Gain or
    
    
    Amount of Gain or (Loss)
    
    
    Recognized In Income on
    
    
    Recognized In Income onDerivatives In
    
    Amount of Gain or (Loss)
    
    
    (Loss)
    
    
    Reclassified from
    
    
    Derivative (Ineffective
    
    
    Derivative (IneffectiveStatement
    
    Recognized in OCI on
    
    
    Reclassified from
    
    
    Accumulated
    
    
    Portion and Amount
    
    
    Portion and Amount133 Cash flow
    
    Derivative
    
    
    Accumulated OCI Into
    
    
    OCI Into Income
    
    
    Excluded From
    
    
    Excluded fromHedging
    
    (Effective Portion)
    
    
    Income
    
    
    (Effective Portion)
    
    
    Effectiveness
    
    
    Effectiveness Testing)Relationships
    
    9/30/2009
    
    
    9/30/2008
    
    
    (Effective Portion)
    
    
    9/30/2009
    
    
    9/30/2008
    
    
    Testing)
    
    
    9/30/2009
    
    
    9/30/2008Interest Rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other non-interestProducts
    
    $
    2,400
    
    
    $
    290
    
    
    Interest Income
    
    $
    (2,350
    )
    
    $
    
    
    
    expense
    
    $
    1
    
    
    $
    (221
    )$
    2,400
    
    
    $
    290
    
    
    
    
    
    
    $
    (2,350
    )
    
    $
    
    
    
    
    
    
    
    $
    1
    
    
    $
    (221
    )
  Asset Derivatives
    
    
    Liability DerivativesAs of September 30, 2009
    
    
    As of December 31, 2008
    
    
    As of September 30, 2009
    
    
    As of December 31, 2008Balance sheet
    
    
    
    
    
    
    Balance sheet
    
    
    
    
    
    
    Balance sheet
    
    
    
    
    
    
    Balance sheetlocation
    
    
    Fair Value
    
    
    location
    
    
    Fair Value
    
    
    location
    
    
    Fair Value
    
    
    location
    
    
    Fair ValueDerivatives designated as hedging
instruments under SFAS 133Interest Rate Products
    
    Other Assets
    
    $
    938
    
    
    Other Assets
    
    $
    
    
    
    Other Liabilities
    
    $
    
    
    
    Other Liabilities
    
    $
    (10,442
    )Total derivatives designated as
hedging
instruments under SFAS 133
    
    
    
    
    
    $
    938
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    (10,442
    )
 8. REGULATORY ACTIONS
 Agreement with the Office of Thrift Supervision (OTS )
   -19-




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9. SUBSEQUENT EVENTS
    10. INCOME TAXES
  -20-




---



##### Table of Contents



Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
 Corporate Profile
  Mission and Philosophy
  Multiple Market Strategy
  1.
    
    Diversification of the loan portfolio and economic and credit risk.2.
    
    Options to capitalize on the most favorable growth markets.3.
    
    The capability to deploy the Companys diversified product mix and emphasize
those products that are best suited for the market.4.
    
    The ability to price products strategically among the markets in an attempt to
maximize profitability.
 -21-




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##### Table of Contents



Product Line Diversification
  Investment Management
  Control Banking Risks
  -22-




---



##### Table of Contents



Performance Measurement
  Long-term Profitability Drivers
  1.
    
    Growing our non-costing consumer and commercial deposits and continuing to change the
mix of deposits to fewer time based certificates of deposit. This strategy is expected to
lower our deposit cost and increase our net interest margin over time. We have emphasized
the development of low cost business accounts and our full-service, free checking and money
market accounts for consumers.2.
    
    Changing the mix of our loans to higher risk-adjusted spread earning categories such as
business lending, commercial real estate lending, small tract construction,
construction-to-permanent loan lending and selected consumer lending activities such as
home equity line of credit loans, commensurate with our credit policy and the economic
environment.3.
    
    Diversifying and growing our banking fee income through existing and new fee income
sources such as our overdraft protection program and other deposit fees, loan fee income
from mortgage banking, prepayment penalty fees and other loan fees, Harrington Wealth
Management trust and investment fees, and other retail banking fees.4.
    
    Achieving a high level of performance on our investment portfolio by earning a pre-tax
total return consisting of interest income plus net gains and losses on securities and
related total return swaps over one month LIBOR of approximately 1.00% per annum. With our
skills in investment and risk management, we have utilized excess equity capital by
investing in a high credit quality, mortgage and related securities portfolio managed to a
short duration of three to six months. From 2001 to 2004, the investment portfolios
performance exceeded our goals and contributed to our record profit performance due to
favorable selection of securities and spread tightening on these securities. From 2005 to
2006 the investment portfolio underperformed our goal but still earned a total return in
excess of one-month LIBOR. In 2007, 2008 and the first nine months of 2009, the investment
portfolio significantly underperformed our goal as a result of the severe credit market
dislocations. Given the capital requirements in the Cease and Desist Order with the OTS of
12% total risk based and 8% Tier I core capital ratios, we plan to allow the investment
portfolio to decline through principal reduction of approximately $40.0 million per year to
build capital ratios. We expect to manage the investment portfolio on a more traditional
basis for liquidity and management of interest rate risk after our capital ratio goals are
met.5.
    
    Controlling interest rate risk of the institution and seeking high credit quality of
the loan and investment portfolios. The Bank seeks to hedge the
marked-to-market value of equity and net interest income to changes in interest rates by
matching the effective duration of our assets to our liabilities using risk management
tools and practices. The company maintains rigorous loan underwriting standards and credit
risk management and review process.
 Strategic Response to Cease and Desist Orders, the Current Operating Environment, Housing Downturn,
and Economic Recession
  -23-




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##### Table of Contents



1.
    
    The economy will remain in a major recession throughout most of 2009 with some
improvement in the latter quarters. Housing prices will continue to be under pressure
into 2010 and then start to stabilize with a very slow climb.2.
    
    A major fiscal stimulus bill and foreclosure reduction program has been enacted. We
expect additional stimulus programs will be implemented in 2009, especially if the housing
market or employment rates do not improve.3.
    
    The Federal Reserve will continue to aggressively use non-monetary policy tools to keep
interest and mortgage rates low and improve credit spreads by aggressively buying fixed
income and mortgage assets in order to stimulate buying in the housing market through early
2010.4.
    
    The Treasury will continue to allocate more TARP funds to banks from its troubled asset
repurchase program.5.
    
    Combined actions will pull the US into a more normal growth environment by mid 2010.
Credit spreads and credit availability will improve moderately over the 2009 to 2010
period.6.
    
    Our California markets will be more insulated from the housing recession and job losses
but still highly affected, with Arizona having higher real estate price depreciation on a
median basis. Arizona, however, will have a faster recovery due to its desirable weather
pattern and the strong immigration due to demographic trends and job availability (higher
retirement and more migration from higher cost and colder weather states).
 HWFGs Response
   1.
    
    Improve Capital Ratios
  -24-




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##### Table of Contents



2.
    
    Manage Aggressively Problem Assets to Positive Resolution
  3.
    
    Manage and Improve Liquidity of the Bank
  a.
    
    Leverage our intensive sales, marketing and service program that emphasizes the
building of core deposits at a lower cost. We have experienced favorable progress in
this with growth in deposits, after losing about 3% of our deposits in the September to
December 2008 quarters as the crisis of confidence in the banking industry became
elevated. The higher deposit insurance levels enacted in 2008 and the reduced amount
of high rate paying institutions in our markets starved for liquidity have improved the
situation.b.
    
    Efficiently pledge all mortgage and other eligible collateral to the FHLB and
FRB to increase borrowing capacity to maximum levels.c.
    
    Eliminate brokered deposits over time as the core franchise continues to build.d.
    
    Seek to maintain excess borrowing capacity between $75 and $100 million.
 4.
    
    Improve Net Interest Margins and Fee Income
 a.
    
    Re-price loan renewals to the current higher spread environment while adding
floors or maintaining floor rates on floating rate loans. Continue to hedge fixed rate
risk.b.
    
    Reduce NPAs to the extent possible to increase interest income.c.
    
    Re-price lower our core deposits to improve margins as the high rate paying
competition diminishes.d.
    
    Expand our deposit fee income sources, Harrington Wealth Management fees, and
explore new fee income programs.
 -25-




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##### Table of Contents



5.
    
    Continue to Manage our Banking Risks to a Low Level
 a.
    
    Interest rate risk through our rigorous assessment and applied hedging process.b.
    
    Operational risk through our policies, procedures and related controls.c.
    
    Liquidity Risk through our core deposit development and back up liquidity plans.d.
    
    Credit Risk though our underwriting and problem asset resolution process.
 6.
    
    Control Operating Costs
   Results of Operations
   
    
    $341 thousand of core banking income, defined as net interest income plus banking fee and
other income minus operating expenses.
    
    $298 thousand of gains on securities available for sale, from trading assets and other
assets.
    
    $2.4 million of non cash provisions for loan losses. HWFG added $2.4 million to its
general and specific allowances for loan losses in the September 2009 quarter, significantly
less than the $11.1 million in the June 2009 quarter, as the bulk of weak loans had been
reappraised in the June 2009 quarter, and the large reduction in loans associated with loans
held for sale to Arvest Bank. (See Asset Quality discussion below).
    
    $2.3 million of non cash other-than-temporary-impairment on $29.0 million book value of
residential mortgage backed securities (RMBS), as the delinquency and loss rates in these
securities indicate that all principal and interest cannot be returned.
  -26-




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-27-




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##### Table of Contents



Three Months Ended
    
    
    
    
    
    
    Three Months EndedSeptember 30, 2009
    
    
    
    
    
    
    September 30, 2008(In thousands)
    
    Balance
    
    
    Income
    
    
    Rate (6)
    
    
    Balance
    
    
    Income
    
    
    Rate (6)Interest earning assets:Loans receivable (1)
    
    $
    710,962
    
    
    $
    10,508
    
    
    
    5.90
    %
    
    $
    812,145
    
    
    $
    13,745
    
    
    
    6.76
    %FHLB stock
    
    
    11,501
    
    
    
    24
    
    
    
    0.83
    %
    
    
    13,549
    
    
    
    207
    
    
    
    6.08
    %Securities and trading account assets (2)
    
    
    275,494
    
    
    
    1,903
    
    
    
    2.76
    %
    
    
    326,455
    
    
    
    3,614
    
    
    
    4.43
    %Cash and cash equivalents (3)
    
    
    8,817
    
    
    
    4
    
    
    
    0.18
    %
    
    
    13,886
    
    
    
    17
    
    
    
    0.49
    %Total interest earning assets
    
    
    1,006,774
    
    
    
    12,439
    
    
    
    4.93
    %
    
    
    1,166,035
    
    
    
    17,583
    
    
    
    6.03
    %Non-interest-earning assets
    
    
    65,298
    
    
    
    
    
    
    
    
    
    
    
    37,177Total assets
    
    $
    1,072,072
    
    
    
    
    
    
    
    
    
    
    $
    1,203,212Interest bearing liabilities:Deposits:NOW and money market accounts
    
    $
    152,911
    
    
    
    386
    
    
    
    1.00
    %
    
    $
    174,341
    
    
    
    1,095
    
    
    
    2.50
    %Passbook accounts and certificates
of deposit
    
    
    688,872
    
    
    
    3,816
    
    
    
    2.20
    %
    
    
    628,823
    
    
    
    5,402
    
    
    
    3.42
    %Total deposits
    
    
    841,783
    
    
    
    4,202
    
    
    
    1.98
    %
    
    
    803,164
    
    
    
    6,497
    
    
    
    3.22
    %FHLB advances (4)
    
    
    98,288
    
    
    
    1,882
    
    
    
    7.60
    %
    
    
    261,946
    
    
    
    2,896
    
    
    
    4.40
    %Reverse repurchase agreements
    
    
    22,226
    
    
    
    153
    
    
    
    2.69
    %
    
    
    19,999
    
    
    
    159
    
    
    
    3.11
    %Other borrowings (5)
    
    
    25,774
    
    
    
    199
    
    
    
    3.02
    %
    
    
    25,774
    
    
    
    346
    
    
    
    5.25
    %Total interest-bearing liabilities
    
    
    988,071
    
    
    
    6,436
    
    
    
    2.57
    %
    
    
    1,110,883
    
    
    
    9,898
    
    
    
    3.53
    %Non-interest-bearing deposits
    
    
    44,077
    
    
    
    
    
    
    
    
    
    
    
    40,901Non-interest-bearing liabilities
    
    
    9,971
    
    
    
    
    
    
    
    
    
    
    
    9,379Total liabilities
    
    
    1,042,119
    
    
    
    
    
    
    
    
    
    
    
    1,161,163Stockholders equity
    
    
    29,953
    
    
    
    
    
    
    
    
    
    
    
    42,049Total liabilities and stockholders equity
    
    $
    1,072,072
    
    
    
    
    
    
    
    
    
    
    $
    1,203,212Net interest-earning assets (liabilities)
    
    $
    18,703
    
    
    
    
    
    
    
    
    
    
    $
    55,152Net interest income/interest rate spread
    
    
    
    
    
    $
    6,003
    
    
    
    2.36
    %
    
    
    
    
    
    $
    7,685
    
    
    
    2.50
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.41
    %
    
    
    
    
    
    
    
    
    
    
    2.67
    %Ratio of average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    101.89
    %
    
    
    
    
    
    
    
    
    
    
    104.96
    %
 
 1)
    
    Balance includes non-accrual loans. Income includes fees earned on
loans originated and accretion of deferred loan fees.2)
    
    Consists of securities classified as available for sale, held to
maturity and trading account assets. Excludes SFAS 115, ASC 320-10-05, adjustments to fair value, which are included in other
non-interest earning assets.3)
    
    Consists of cash due from banks and federal funds sold.4)
    
    Interest on FHLB advances is net of hedging costs. Hedging costs
include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive
floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.5)
    
    Consists of other subordinated debt.6)
    
    Annualized. -28-




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##### Table of Contents



Nine Months Ended
    
    
    
    
    
    
    Nine Months EndedSeptember 30, 2009
    
    
    
    
    
    
    September 30, 2008(In thousands)
    
    Balance
    
    
    Income
    
    
    Rate (6)
    
    
    Balance
    
    
    Income
    
    
    Rate (6)Interest earning assets:Loans receivable (1)
    
    $
    759,262
    
    
    $
    34,502
    
    
    
    6.06
    %
    
    $
    802,401
    
    
    $
    41,616
    
    
    
    6.92
    %FHLB stock
    
    
    11,501
    
    
    
    24
    
    
    
    0.28
    %
    
    
    13,421
    
    
    
    582
    
    
    
    5.79
    %Securities and trading account assets (2)
    
    
    287,501
    
    
    
    6,229
    
    
    
    2.89
    %
    
    
    360,233
    
    
    
    13,268
    
    
    
    4.91
    %Cash and cash equivalents (3)
    
    
    19,147
    
    
    
    25
    
    
    
    0.17
    %
    
    
    17,277
    
    
    
    139
    
    
    
    1.07
    %Total interest earning assets
    
    
    1,077,411
    
    
    
    40,780
    
    
    
    5.05
    %
    
    
    1,193,332
    
    
    
    55,605
    
    
    
    6.22
    %Non-interest-earning assets
    
    
    62,801
    
    
    
    
    
    
    
    
    
    
    
    38,126Total assets
    
    $
    1,140,212
    
    
    
    
    
    
    
    
    
    
    $
    1,231,458Interest bearing liabilities:Deposits:NOW and money market accounts
    
    $
    160,944
    
    
    
    1,520
    
    
    
    1.26
    %
    
    $
    154,912
    
    
    
    2,965
    
    
    
    2.56
    %Passbook accounts and certificates
of deposit
    
    
    704,159
    
    
    
    13,789
    
    
    
    2.62
    %
    
    
    667,020
    
    
    
    19,844
    
    
    
    3.97
    %Total deposits
    
    
    865,103
    
    
    
    15,309
    
    
    
    2.37
    %
    
    
    821,932
    
    
    
    22,809
    
    
    
    3.71
    %FHLB advances (4)
    
    
    135,509
    
    
    
    5,435
    
    
    
    5.36
    %
    
    
    247,326
    
    
    
    8,151
    
    
    
    4.40
    %Reverse repurchase agreements
    
    
    20,994
    
    
    
    447
    
    
    
    2.81
    %
    
    
    37,253
    
    
    
    858
    
    
    
    3.03
    %Other borrowings (5)
    
    
    25,774
    
    
    
    681
    
    
    
    3.48
    %
    
    
    25,774
    
    
    
    1,125
    
    
    
    5.73
    %Total interest-bearing liabilities
    
    
    1,047,380
    
    
    
    21,872
    
    
    
    2.78
    %
    
    
    1,132,285
    
    
    
    32,943
    
    
    
    3.87
    %Non-interest-bearing deposits
    
    
    43,453
    
    
    
    
    
    
    
    
    
    
    
    43,428Non-interest-bearing liabilities
    
    
    9,719
    
    
    
    
    
    
    
    
    
    
    
    11,101Total liabilities
    
    
    1,100,552
    
    
    
    
    
    
    
    
    
    
    
    1,186,814Stockholders equity
    
    
    39,660
    
    
    
    
    
    
    
    
    
    
    
    44,644Total liabilities and stockholders equity
    
    $
    1,140,212
    
    
    
    
    
    
    
    
    
    
    $
    1,231,458Net interest-earning assets (liabilities)
    
    $
    30,031
    
    
    
    
    
    
    
    
    
    
    $
    61,047Net interest income/interest rate spread
    
    
    
    
    
    $
    18,908
    
    
    
    2.27
    %
    
    
    
    
    
    $
    22,662
    
    
    
    2.35
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.35
    %
    
    
    
    
    
    
    
    
    
    
    2.55
    %Ratio of average interest-earning assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    102.87
    %
    
    
    
    
    
    
    
    
    
    
    105.39
    %
 
 1)
    
    Balance includes non-accrual loans. Income includes fees earned on loans originated and
accretion of deferred loan fees.2)
    
    Consists of securities classified as available for sale, held to maturity and trading account
assets. Excludes SFAS 115,
ASC 320-10-05, adjustments to fair value, which are included in other non-interest earning
assets.3)
    
    Consists of cash due from banks and federal funds sold.4)
    
    Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and
expense and ineffectiveness
adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to
hedge the short term
repricing characteristics of the floating FHLB advances.5)
    
    Consists of other subordinated debt.6)
    
    Annualized   -29-




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    September 302009
    
    
    2008
    
    
    2009
    
    
    2008(Dollars in Thousands)
    
    
    (Dollars in Thousands)Balance at beginning of period
    
    $
    17,401
    
    
    $
    6,847
    
    
    $
    11,449
    
    
    $
    6,446Charge-offs:Real estate loans:Commercial
    
    
    (124
    )
    
    
    (1,315
    )
    
    
    (6,829
    )
    
    
    (1,315
    )Consumer and other loans
    
    
    
    
    
    
    (62
    )
    
    
    (206
    )
    
    
    (586
    )Total charge-offs
    
    
    (124
    )
    
    
    (1,377
    )
    
    
    (7,035
    )
    
    
    (1,901
    )Recoveries
    
    
    1
    
    
    
    
    
    
    
    14
    
    
    
    25Net charge-offs
    
    
    (123
    )
    
    
    (1,377
    )
    
    
    (7,021
    )
    
    
    (1,876
    )Provision for losses on loans
    
    
    2,400
    
    
    
    1,565
    
    
    
    15,250
    
    
    
    2,465Balance at end of period
    
    $
    19,678
    
    
    $
    7,035
    
    
    $
    19,678
    
    
    $
    7,035Allowance for loan losses as a percent of
total loans (including loans held for sale)
outstanding at the end of the period
    
    
    2.78
    %
    
    
    0.86
    %
    
    
    2.78
    %
    
    
    0.86
    %Ratio of net charge-offs to average loans
outstanding during the period
    
    
    0.02
    %
    
    
    0.17
    %
    
    
    0.92
    %
    
    
    0.23
    %
    -30-




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##### Table of Contents



Banking Fee & Other Income
 September
    
    
    September
    
    
    
    
    
    
    September
    
    
    September
    
    
    Annual2009
    
    
    2008
    
    
    %
    
    
    2009
    
    
    2008
    
    
    %Quarter
    
    
    Quarter
    
    
    Change
    
    
    YTD
    
    
    YTD
    
    
    ChangeBanking Fee TypeMortgage Brokerage Fee, Prepayment
Penalties & Other Loan Fees
    
    $
    122
    
    
    $
    125
    
    
    
    (2.4
    %)
    
    $
    410
    
    
    $
    460
    
    
    
    (10.9
    %)Deposit, Other Retail Banking Fees &
Other Fee Income
    
    
    706
    
    
    
    520
    
    
    
    35.8
    %
    
    
    1,841
    
    
    
    1,402
    
    
    
    31.3
    %Harrington Wealth Management Fees
    
    
    205
    
    
    
    234
    
    
    
    (12.4
    %)
    
    
    585
    
    
    
    743
    
    
    
    (21.3
    %)Increase in Cash Surrender Value of Life
Insurance, net
    
    
    125
    
    
    
    180
    
    
    
    (30.6
    %)
    
    
    409
    
    
    
    421
    
    
    
    (2.9
    %)Total Banking Fee & Other Income
    
    $
    1,158
    
    
    $
    1,059
    
    
    
    9.3
    %
    
    $
    3,245
    
    
    $
    3,026
    
    
    
    7.2
    %
  HWFG Operating Expenses by Category
 Quarter Ended
    
    
    Nine months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Salaries and employee benefits
    
    $
    3,184
    
    
    $
    3,428
    
    
    $
    9,872
    
    
    $
    10,225Premises and equipment
    
    
    991
    
    
    
    1,025
    
    
    
    2,974
    
    
    
    3,041FDIC Insurance Premium
    
    
    720
    
    
    
    185
    
    
    
    1,926
    
    
    
    478Insurance premiums
    
    
    77
    
    
    
    62
    
    
    
    206
    
    
    
    207Marketing
    
    
    (1
    )
    
    
    143
    
    
    
    143
    
    
    
    383Computer services
    
    
    267
    
    
    
    235
    
    
    
    778
    
    
    
    781Professional fees
    
    
    203
    
    
    
    198
    
    
    
    611
    
    
    
    503REO Expense
    
    
    372
    
    
    
    150
    
    
    
    1,026
    
    
    
    276Office expenses and supplies
    
    
    138
    
    
    
    192
    
    
    
    484
    
    
    
    620Other (1)
    
    
    869
    
    
    
    651
    
    
    
    2,325
    
    
    
    1,947Total other expenses
    
    $
    6,820
    
    
    $
    6,269
    
    
    $
    20,345
    
    
    $
    18,461
 
 (1)
    
    Consists primarily of regulatory fees, and other miscellaneous expenses. Financial Condition
  -31-




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##### Table of Contents



Securities and Investment Activities
    AmortizedCost
    
    
    Fair ValueSeptember 30, 2009Agency MBS
    
    $
    43,217
    
    
    $
    44,066Non-agency mortgage securities
    
    
    70,196
    
    
    
    63,583Subprime mortgage securities
    
    
    150,327
    
    
    
    124,797Other securities
    
    
    3,202
    
    
    
    2,569$
    266,942
    
    
    $
    235,015
 AmortizedCost
    
    
    Fair ValueDecember 31, 2008Agency MBS
    
    $
    50,284
    
    
    $
    50,282Non-agency mortgage securities
    
    
    82,878
    
    
    
    76,522Subprime mortgage securities
    
    
    164,148
    
    
    
    144,274Other securities
    
    
    3,726
    
    
    
    2,600$
    301,036
    
    
    $
    273,678
  -32-




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##### Table of Contents



AmortizedCost
    
    
    Fair ValueSeptember 30, 2009Agency
    
    $
    43,217
    
    
    $
    44,066AAA
    
    
    15,892
    
    
    
    15,303AA
    
    
    69,262
    
    
    
    57,712A
    
    
    7,427
    
    
    
    6,484BBB
    
    
    18,352
    
    
    
    15,684Below investment grade
    
    
    112,792
    
    
    
    95,766$
    266,942
    
    
    $
    235,015
 AmortizedCost
    
    
    Fair ValueDecember 31, 2008Agency
    
    $
    50,284
    
    
    $
    50,282AAA
    
    
    49,419
    
    
    
    45,779AA
    
    
    91,981
    
    
    
    80,038A
    
    
    55,412
    
    
    
    49,840BBB
    
    
    25,016
    
    
    
    21,888Below investment grade
    
    
    28,924
    
    
    
    25,851$
    301,036
    
    
    $
    273,678
  AmortizedCost
    
    
    Fair ValueSeptember 30, 2009Mortgage-backed securities  pass throughs
    
    $
    43,217
    
    
    $
    44,065Collateralized mortgage obligations
    
    
    69,503
    
    
    
    62,813Asset-backed securities (underlying securities mortgages)
    
    
    152,697
    
    
    
    127,113Asset-backed securities
    
    
    1,525
    
    
    
    1,024$
    266,942
    
    
    $
    235,015
 -33-




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##### Table of Contents



AmortizedCost
    
    
    Fair ValueDecember 31, 2008Mortgage-backed securities  pass throughs
    
    $
    50,284
    
    
    $
    50,282Collateralized mortgage obligations
    
    
    83,376
    
    
    
    77,236Asset-backed securities (underlying securities mortgages)
    
    
    165,721
    
    
    
    145,459Asset-backed securities
    
    
    1,655
    
    
    
    701$
    301,036
    
    
    $
    273,678
  Loans
   -34-




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##### Table of Contents



HWFG Net Loan Growth and Mix
 (Dollars in millions)September 30, 2009
    
    
    December 31, 2008
    
    
    September 30, 2008% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofLoan Type
    
    Total
    
    
    Total
    
    
    Total
    
    
    Total
    
    
    Total
    
    
    TotalCommercial Real Estate
    
    $
    249.6
    
    
    
    35.2
    %
    
    $
    260.9
    
    
    
    32.2
    %
    
    $
    263.6
    
    
    
    32.1
    %Multi-family Real Estate
    
    
    60.2
    
    
    
    8.5
    %
    
    
    85.2
    
    
    
    10.4
    %
    
    
    89.2
    
    
    
    10.9
    %Construction (1)
    
    
    91.4
    
    
    
    12.9
    %
    
    
    125.7
    
    
    
    15.4
    %
    
    
    129.2
    
    
    
    15.8
    %Single-family Real Estate
    
    
    134.1
    
    
    
    18.9
    %
    
    
    139.3
    
    
    
    17.2
    %
    
    
    137.8
    
    
    
    16.8
    %Commercial and Industrial Loans
    
    
    94.0
    
    
    
    13.3
    %
    
    
    118.9
    
    
    
    14.7
    %
    
    
    120.7
    
    
    
    14.7
    %Unimproved Land
    
    
    47.2
    
    
    
    6.7
    %
    
    
    48.5
    
    
    
    6.0
    %
    
    
    48.6
    
    
    
    5.9
    %Consumer Loans
    
    
    30.5
    
    
    
    4.3
    %
    
    
    29.8
    
    
    
    3.7
    %
    
    
    28.0
    
    
    
    3.4
    %Other Loans (2)
    
    
    1.8
    
    
    
    0.2
    %
    
    
    3.1
    
    
    
    0.4
    %
    
    
    3.2
    
    
    
    0.4
    %Total Gross Loans(3)
    
    
    708.8
    
    
    
    100.0
    %
    
    
    811.4
    
    
    
    100.0
    %
    
    
    820.3
    
    
    
    100.0
    %Allowance for loan loss
    
    
    (19.7
    )
    
    
    
    
    
    
    (11.4
    )
    
    
    
    
    
    
    (7.0
    )Deferred fees
    
    
    (0.7
    )
    
    
    
    
    
    
    (1.2
    )
    
    
    
    
    
    
    (1.4
    )Discounts/Premiums
    
    
    (0.4
    )
    
    
    
    
    
    
    (0.5
    )
    
    
    
    
    
    
    (0.5
    )Net Loans Receivable
    
    $
    688.0
    
    
    
    
    
    
    $
    798.3
    
    
    
    
    
    
    $
    811.4
 
 (1)
    
    Includes loans secured by residential, land and commercial properties. At September
30, 2009 we had $16.8 million of construction loans secured by single-family residential
properties, $53.9 million secured by commercial properties, $19.0 million for land
development and $1.7 million secured by multi-family residential properties.(2)
    
    Includes loans collateralized by deposits and consumer line of credit loans.(3)
    
    Table included loans held for sale  Deposits
  FHLB Advances
  Stockholders Equity
  -35-




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Liquidity and Capital Resources
 Liquidity 
   Capital Resources.
  -36-




---



##### Table of Contents



Asset and Liability Management
    -37-




---



##### Table of Contents



i.e.,
    Critical Accounting Policies
  Cautionary Statement Regarding Forward-Looking Statements.
  -38-




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##### Table of Contents



Item 3: Quantitative and Qualitative Disclosures about Market Risk
    Change In Interest Rates (In Basis Points) (1)-300
    
    -200
    
    -100
    
    Base
    
    +100
    
    +200
    
    +300Market value gain (loss) in assets
    
    $
    27,407
    
    
    $
    21,432
    
    
    $
    12,607
    
    
    
    
    
    
    
    ($15,200
    )
    
    
    ($31,143
    )
    
    
    ($47,116
    )Market value gain (loss) of liabilities
    
    
    (14,335
    )
    
    
    (12,062
    )
    
    
    (6,650
    )
    
    
    
    
    
    
    8,675
    
    
    
    19,001
    
    
    
    29,352Market value gain (loss) of net assets
before interest rate contracts
    
    
    13,072
    
    
    
    9,370
    
    
    
    5,957
    
    
    
    
    
    
    
    (6,525
    )
    
    
    (12,142
    )
    
    
    (17,764
    )Market value gain (loss) of interest
rate contracts
    
    
    (11,576
    )
    
    
    (7,854
    )
    
    
    (3,790
    )
    
    
    
    
    
    
    3,513
    
    
    
    6,771
    
    
    
    9,797Total change in MVPE (2)
    
    $
    1,496
    
    
    $
    1,516
    
    
    $
    2,167
    
    
    
    
    
    
    
    ($3,012
    )
    
    
    ($5,371
    )
    
    
    ($7,967
    )Change in MVPE as a percent of:MVPE (2)
    
    
    2.50
    %
    
    
    2.53
    %
    
    
    3.62
    %
    
    
    
    
    
    
    -5.03
    %
    
    
    -8.97
    %
    
    
    -13.30
    %Total assets of the Bank (3)
    
    
    -0.02
    %
    
    
    0.02
    %
    
    
    0.13
    %
    
    
    
    
    
    
    -0.20
    %
    
    
    -0.33
    %
    
    
    -0.49
    %
 
 (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on the Companys pre-tax tangible MVPE of $65.8 million at September 30, 2009.(3)
    
    Pre-tax tangible MVPE as a percentage of tangible assets.  -39-




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##### Table of Contents



Item 4(T). Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   
 PART II  OTHER INFORMATION
 
 Item 1:
    
    Legal ProceedingsThe Company is involved in various legal proceedings occurring in the ordinary course of
business, which, in the aggregate, are believed by management to be immaterial to the
financial condition and results of operations of the Company.
 
 Item 1A.
    
    Risk FactorsExcept as set forth below, there were no material changes in the third quarter of
2009 to the risk factors discussed in the Companys 10-K for the year ended December 31,
2008.We are subject to various regulatory requirements and are subject to regulatory
restrictions and enforcement actions.In light of the current challenging operating environment, along with our elevated level
of non-performing assets, delinquencies, and adversely classified assets, we are subject
to increased regulatory scrutiny, and are, and may become, subject to potential
enforcement actions. Such enforcement actions could place limitations on our business and
adversely affect our ability to implement our business plans, including our growth
strategy. Currently the Bank is adequately capitalized, but at September 30, 2009, was
not, and the regulatory agencies have the authority to restrict our operations to those
consistent with less than adequately capitalized institutions. For example, if the
regulatory agencies were to impose such a restriction, we would likely have limitations on
our lending activities. The regulatory agencies also have the power to limit the rates
paid by the Bank to attract retail deposits in its local markets, and we currently are
operating under
 -40-




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##### Table of Contents



limitations on our use of brokered deposits, as defined by federal bank regulatory
guidelines. We have been, and may further be, required to reduce our levels of
non-performing and classified assets within specified time frames. These time frames
might not necessarily result in maximizing the price that might otherwise be received for
the underlying assets. In addition, if such restrictions were also imposed upon other
institutions that operate in the Banks markets, multiple institutions disposing of
assets, including properties taken through foreclosure on collateral, at the same time
could further diminish the potential proceeds received from the sale of these assets. If
any of these or other additional restrictions are placed on us, it would limit the
resources currently available to us.
 As previously disclosed, HWFG and the Bank currently are subject to Cease and Desist
Orders issued by the Office of Thrift Supervision. These Orders require us to take
certain steps to further strengthen the Bank and HWFG, including, but not limited to,
reducing the level of classified assets, significantly increasing capital levels, and
addressing other criticisms from our most recent examination. We are taking actions to
address all requirements of the Orders, but no assurance can be given that we will be
successful in fully complying with the Orders in the time frames required by our
regulators. Failure to fully comply with the Orders will subject HWFG and the Bank to
further enforcement action by the Office of Thrift Supervision and/or the Federal Deposit
Insurance Corporation.
 
 Item 2:
    
    Unregistered Sales of Equity Securities and Use of ProceedsNot applicable.
 
 Item 3:
    
    Defaults Upon Senior SecuritiesNot applicable.
 
 Item 4:
    
    Submission of Matters to a Vote of Security HoldersNone
 
 Item 5:
    
    Other InformationNot applicable.
 
 Item 6:
    
    Exhibits
 EXHIBIT NO.
    
    DESCRIPTION31.1
    
    Section 302 Certification by Chief Executive Officer filed herewith.31.2
    
    Section 302 Certification by Chief Operating Officer filed herewith.31.3
    
    Section 302 Certification by Chief Financial Officer filed herewith.32
    
    Section 906 Certification by Chief Executive Officer, Chief Operating Officer
and Chief Financial Officer furnished herewith.
 -41-




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##### Table of Contents



SIGNATURES
  HARRINGTON WEST FINANCIAL GROUP, INC.November 16, 2009
    By:
    /s/ Craig J. CernyCraig J. CernyChairman of the Board
and Chief Executive Officer
(Principal Executive Officer)November 16, 2009
    By:
    /s/ William W. Phillips, jr.William W. Phillips, Jr.President, Chief Operating Officer
(Principal Executive Officer)November 16, 2009
    By:
    /s/ Kerril SteeleKerril SteeleSr. Vice-President, Chief Financial Officer
(Principle Financial and Accounting Officer) -42-