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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K


þ		ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2006


o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No.: 000-50066

HARRINGTON WEST FINANCIAL GROUP, INC.

(Name of Registrant as Specified in Its Charter)


Delaware		48-1175170

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

610 Alamo Pintado Road
Solvang, California		93463

(Address of Principal Executive Offices)		(Zip Code)

Issuer’s telephone number, including area code:
(805) 688-6644
Securities registered under Section 12(b) of the Exchange Act:
NOT APPLICABLE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer o Non-accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)

o Yes þ No

The aggregate market value of common equity held by non-affiliates was $71.5 million as of June 30, 2006, based on the closing sale price of the registrant’s common equity on that date.

Number of shares of Common Stock outstanding as of March 7, 2007: 5,544,853

DOCUMENTS INCORPORATED BY REFERENCE

The registrant hereby incorporates its proxy statement for its 2007 annual meeting of stockholders in Part III, Items 10-14.

PART I

Cautionary Statement Regarding Forward-Looking Statements.

This Form 10-K contains and incorporates by reference forward-looking statements about our financial condition, results of operations and business. These statements may include statements regarding projected performance for future periods. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “will,” “plans” or similar words or expressions. These forward-looking statements involve substantial risks and uncertainties. Some of the factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following:

	•		we may experience higher defaults on our loan portfolio than we expect;

	•		changes in management’s estimate of the adequacy of the allowance for loan losses;

	•		changes in management’s valuation of our mortgage-backed and related securities portfolio and interest rate contracts;

	•		increases in competitive pressure among financial institutions;

	•		general economic conditions, either nationally or locally in areas in which we conduct or will conduct our operations, or conditions in financial markets may be less favorable than we currently anticipate;

	•		our net income from operations may be lower than we expect;

	•		natural disasters;

	•		we may lose more business or customers than we expect, or our operating costs may be higher than we expect;

	•		the availability of capital to fund our growth and expansion;

	•		changes in the interest rate environment and their impact on customer behavior and our interest margins;

	•		political and global changes arising from the war on terrorism;

	•		the impact of repricing and competitors’ pricing initiatives on loan and deposit products;

	•		our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place;

	•		our ability to access cost-effective funding;

	•		our ability to successfully complete our strategy to continue to grow our business in California, Kansas and Arizona;

	•		our returns from our securities portfolio may be lower than we expect;

•

legislative or regulatory changes or changes in accounting principles, policies or guidelines may adversely affect our ability to conduct our business.

Because these forward-looking statements are subject to risks and uncertainties, our actual results may differ materially from those expressed or implied by these statements. (See “Item 1A. Risk Factors”.)You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Form 10-K. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of our common stock may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict.

We do not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

Item 1. Business.

General

We are Harrington West Financial Group, Inc., a Delaware corporation and a diversified, community-based, financial institution holding company headquartered in Solvang, California, with executive offices in Scottsdale, Arizona. We conduct our operations primarily through our wholly-owned subsidiary, Los Padres Bank, FSB, a federally chartered savings bank, located in central California and Scottsdale, Arizona, and its division in the Kansas City metropolitan area, Harrington Bank. Los Padres Bank provides an array of financial products and services for businesses and retail customers through its sixteen full-service offices. At December 31, 2006, we had consolidated total assets of $1.2 billion, total deposits of $732.8 million and stockholders’ equity of $67.7 million.

We are focused on providing our diversified products and personalized service approach in three distinct markets: (i) the central coast of California, (ii) the Kansas City metropolitan area and (iii) the Phoenix/Scottsdale metropolitan area. Los Padres Bank operates eleven offices on the central coast of California, three offices in the Kansas City metropolitan area under the Harrington Bank brand name, and two banking offices in the Phoenix/Scottsdale, Arizona metropolitan area, since we opened our second office in the Scottsdale Airpark in late March 2005. In 2006, we opened our third Harrington Bank office in Johnson County, Kansas in the Kansas City metro and will open a Los Padres banking office in Surprise, Arizona in approximately the third quarter 2007. Each of our markets has its own local independent management team operating under the Los Padres or Harrington names. Our loan underwriting, corporate administration and treasury functions are centralized in Solvang, California to create operating efficiencies. Our commercial lending operations are centralized in Mission, Kansas.

Los Padres Bank is primarily engaged in attracting deposits from individuals and businesses and using these deposits, together with borrowed funds, to originate commercial real estate, commercial business, single-family and multi-family residential and consumer loans. We also generate fee income from the brokering of mortgage loans, deposit services, early prepayments of some loans, and loan originations. We maintain a portfolio of highly liquid mortgage-backed and related securities as a means of managing our excess liquidity and enhancing our profitability. We utilize various interest rate contracts as a means of managing our interest rate risk. We also operate Harrington Wealth Management Company, which provides trust and investment management services to individuals and small institutional clients on a fee basis, by employing a customized asset allocation approach and investing predominantly in low fee, indexed mutual funds and exchange traded funds.

The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.


	December 31,
	2006						2005						2004						2003						2002
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in Thousands)
Real estate loans:
Single-family	$	106,675			13.9	%	$	115,925			17.0	%	$	100,485			16.6	%	$	93,725			17.9	%	$	116,714			25.8	%
Multi-family		79,896			10.4			80,855			11.9			84,937			14.0			82,090			15.7			71,856			15.9
Commercial		264,915			34.6			253,208			37.2			260,759			43.1			234,606			44.8			183,264			40.5
Construction (1)		112,645			14.7			70,883			10.4			34,981			5.8			30,835			5.9			19,666			4.4
Land acquisition and development		54,738			7.1			36,085			5.3			27,460			4.5			8,312			1.6			14,948			3.3
Commercial and industrial loans		119,074			15.6			96,566			14.2			72,240			11.9			56,942			10.8			27,676			6.1
Consumer loans		25,304			3.3			26,653			3.9			23,757			3.9			16,613			3.1			17,565			3.9
Other loans (2)		2,206			0.4			1,271			0.1			1,044			0.2			1,035			0.2			503			0.1

Total loans receivable		765,453			100.0	%		681,446			100.0	%		605,663			100.0	%		524,158			100.0	%		452,192			100.0	%


Less:
Allowance for loan losses		(5,914	)					(5,661	)					(5,228	)					(4,587	)					(3,797	)

Net deferred loan fees		(2,103	)					(2,498	)					(1,730	)					(1,394	)					(1,332	)

Net (discounts) premiums		(403	)					(397	)					(263	)					319						987

		(8,420	)					(8,556	)					(7,221	)					(5,662	)					(4,142	)

Loans receivable, net	$	757,033					$	672,890					$	598,442					$	518,496					$	448,050


(1)		Includes loans secured by residential and commercial properties. At December 31, 2006, we had $57.7 million of construction loans secured by residential properties,$25.5 million of land and development (loans for the initial acquisition of land and off-site improvements) and $29.4 million of construction loans secured by commercial properties.

(2)		Includes loans collateralized by deposit accounts and consumer line of credit loans.

The following table sets forth certain information at December 31, 2006, regarding the dollar amount of loans maturing in our loan portfolio based on the contractual terms to maturity or scheduled amortization, but does not include potential prepayments. Loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.


			Due 1-5		Due 5 or more
			years after		years after
	Due 1 year		December 31,		December 31,
	or less		2006		2006		Total
	(In Thousands)
Real estate loans:
Single-family residential	$	22	$	4,021	$	102,632	$	106,675
Multi-family residential		6,231		11,795		61,870		79,896
Commercial		26,884		106,194		131,837		264,915
Construction (1)		62,924		15,359		34,362		112,645
Land acquisition and development		31,606		19,422		3,710		54,738
Commercial and industrial loans		69,232		40,992		8,850		119,074
Consumer loans		10		856		24,438		25,304
Other loans (2)		1,856		350		—		2,206


Total	$	198,765	$	198,989	$	367,699	$	765,453


(1)		Includes loans secured by residential and commercial properties.

(2)		Includes loans collateralized by deposit accounts and consumer line of credit loans.

Scheduled contractual amortization of loans does not reflect the expected term of our loan portfolio. The average life of loans is substantially less than their contractual terms because of prepayments and due-on-sale clauses, which gives us the right to declare a conventional loan immediately due and payable in the event that the borrower sells the real property subject to the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when current mortgage loan rates are higher than rates on existing mortgage loans and, conversely, decrease when rates on existing mortgage loans are lower than current mortgage loan rates. Under the latter circumstance, the weighted average yield on loans decreases as higher-yielding loans are repaid or refinanced at lower rates.

The following table sets forth the dollar amount of total loans due after one year from December 31, 2006, as shown in the preceding table, which have fixed interest rates or which have floating or adjustable interest rates.


			Floating or
			adjustable-
	Fixed rate		rate		Total
	(In Thousands)
Real estate loans:
Single-family residential	$	73,571	$	33,082	$	106,653
Multi-family residential		46,091		27,574		73,665
Commercial		144,869		93,162		238,031
Construction (1)		22,379		27,342		49,721
Land acquisition and development		1,503		21,629		23,132
Commercial and industrial loans		25,883		23,959		49,842
Consumer loans		616		24,678		25,294
Other loans (2)		—		350		350


Total	$	314,912	$	251,776	$	566,688


(1)		Includes loans secured by residential and commercial properties.

(2)		Includes loans collateralized by deposit accounts and consumer lines of credit loans.

Origination, Purchase and Sale of Loans. The lending activities of Los Padres Bank are subject to the written, non-discriminatory underwriting standards and loan origination procedures established by Los Padres Bank’s board of directors and management. Loan originations are obtained by a variety of sources, including referrals from real estate brokers, builders, existing customers, walk-in customers and advertising. In its present marketing efforts, Los Padres Bank emphasizes its community ties, customized personal service, competitive rates and terms, and its efficient underwriting and approval process. Loan applications are taken by lending personnel, and the loan department supervises the obtainment of credit reports, appraisals and other documentation involved with a loan. Property valuations are performed by independent outside appraisers approved by Los Padres Bank’s board of directors. Los Padres Bank requires title, hazard and, to the extent applicable, flood insurance on all security property.

Mortgage loan applications are initially processed by loan officers who do not have approval authority. All real estate loans which are either at or below the Federal Home Loan Mortgage Corporation’s (“Freddie Mac”), lending limit and which meet all of the bank’s underwriting guidelines can be approved by designated senior management of Los Padres Bank. All consumer loans up to $250,000 may be approved by designated senior management of Los Padres Bank. All loans in excess of these amounts up to $1.0 million ($500,000 for commercial and industrial loans) require the approval of two members of Los Padres Bank’s Executive Loan Committee, which consists of designated senior management of Los Padres Bank. Loans in excess of $1.0 million ($500,000 for commercial and industrial loans), but not exceeding $5.0 million, require the approval of a majority of Los Padres Bank’s Loan Committee, consisting of designated senior management of Los Padres Bank. All loans in excess of $5.0 million, up to Los Padres Bank’s legal lending limit, must be approved by either Los Padres Bank’s Loan Oversight Committee, comprised of both designated senior management and certain members of the Board of Directors, or the Board of Directors of Los Padres Bank.

A savings institution generally may not make loans to any one borrower and related entities in an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans are fully secured by readily marketable securities. At December 31, 2006, Los Padres Bank’s regulatory limit on loans-to-one borrower was $13.6 million and its five largest loans or groups of loans-to-one borrower, including related entities, aggregated $13.1 million, $13.1 million, $13.0 million, $13.0 million, and $13.0 million. These five

largest loans or loan concentrations were secured by commercial real estate and development of single-family homes. All of these loans or loan concentrations were performing in accordance with their payment terms at December 31, 2006.

The risks associated with lending are well defined. Credit risk is managed through the adherence, with few exceptions, to specific underwriting guidelines. We rely on our internal credit approval and administrative process to originate loans as well as our internal asset review process, which oversees our loan quality in order to ensure that our underwriting standards are maintained. We believe that the low level of our non-performing assets is evidence of our adherence to our underwriting guidelines.

As a federally chartered savings bank, Los Padres Bank has general authority to originate and purchase loans secured by real estate located throughout the United States. Despite this nationwide lending authority, we estimate that at December 31, 2006, the majority of the loans in Los Padres Bank’s portfolio are secured by properties located or made to customers residing in each of our primary market areas located in the California central coast, the Kansas City metropolitan area, and the Phoenix/Scottsdale metropolitan area.

Single-Family Residential Real Estate Loans. Los Padres Bank has historically concentrated its lending activities on the origination of loans secured by first mortgage liens on existing single-family residences. The single-family residential loans originated by Los Padres Bank are generally made on terms, conditions and documentation, which permit the sale of such loans to Freddie Mac, the Federal National Mortgage Association (“Fannie Mae”), and other institutional investors in the secondary market. Since January 2001, as a means of generating additional fee income and in order to reflect management’s decision to emphasize holding higher spread earning loans in its portfolio, Los Padres Bank has been brokering conforming permanent single-family residential loans on behalf of third parties in order to generate fee income. During the years ended December 31, 2006 and 2005, Los Padres Bank brokered $48.5 million and $39.0 million, respectively, of such single-family residential loans on behalf of third parties.

Los Padres Bank still holds a portfolio of single-family residential loans. Los Padres Bank will retain in its portfolio single-family residential loans that, due to the nature of the collateral, carry higher risk adjusted spreads. Examples of these types of loans include construction loans that have converted into permanent loans and non-conforming single-family loans, whether as a result of a non-owner occupied or rural property, balloon payment or other exception from agency guidelines. At December 31, 2006, Los Padres Bank had $106.7 million of single-family residential loans in its portfolio, which amounted to 13.9% of total loans receivable as of such date. At December 31, 2006, total loans due after one year had $73.6 million or 69.0% of Los Padres Bank’s single-family residential loans with fixed interest rates and $33.1 million or 31.0% with interest rates which adjust in accordance with a designated index. Single-family residential loans have terms of up to 30 years and generally have loan-to-value ratios of 80% or less, or 90% or less to the extent the borrower carries private mortgage insurance for the balance in excess of the 80% loan-to-value ratio.

Multi-Family Residential and Commercial Real Estate Loans. At December 31, 2006, Los Padres Bank had an aggregate of $79.9 million and $264.9 million invested in multi-family residential and commercial real estate loans, respectively, or 10.4% and 34.6% of total loans receivable, respectively.

Los Padres Bank’s multi-family residential loans are secured by multi-family properties of five units or more, while Los Padres Bank’s commercial real estate loans are secured by industrial, warehouse and self-storage properties, office buildings, office and industrial condominiums, retail space and strip shopping centers, mixed-use commercial properties, mobile home parks, nursing homes, hotels and motels. Substantially all of these properties are located in Los Padres Bank’s primary market areas. Los Padres Bank typically originates commercial real estate loans for terms of up to 20 years based upon a 30-year loan amortization period and multi-family residential loans for terms of up to 20 years based upon up to a 30-year amortization schedule. Los Padres Bank will originate these loans on both a fixed-rate or adjustable-rate basis, with the latter adjusting on a periodic basis of up to one year based on the London Interbank Offered Rate (“LIBOR”), the one-year U.S. Treasury index of constant comparable maturities, a designated prime rate, or

the 11th District Cost of Funds Index. Adjustable-rate loans may have an established ceiling and floor, and the maximum loan-to-value for these loan products is generally 75%. As part of the criteria for underwriting commercial real estate loans, Los Padres Bank generally requires a debt coverage ratio (the ratio of net cash from operations before payment of debt service to debt service) of 1.3:1 or more. It is also Los Padres Bank’s general policy to seek additional protection to mitigate any weaknesses identified in the underwriting process. Additional coverage may be provided through secondary collateral and personal guarantees from the principals of the borrowers.

Commercial real estate lending entails different and significant risks when compared to single-family residential lending because such loans typically involve large loan balances to single borrowers and because the payment experience on such loans is typically dependent on the successful operation of the project or the borrower’s business. In addition, the balloon payment features of these loans may require the borrower to either sell or refinance the underlying property in order to make the payment. These risks can also be significantly affected by supply and demand conditions in the local market for apartments, offices, warehouses or other commercial space. Los Padres Bank attempts to minimize its risk exposure by requiring that the loan does not exceed established loan-to-value and debt coverage ratios, and by monitoring the operation and physical condition of the collateral.

Construction Loans. Los Padres Bank originates loans to finance the construction of single-family and multi-family residences and commercial properties located in its primary market area. At December 31, 2006, Los Padres Bank’s construction loans amounted to $112.6 million or 14.7% of total loans receivable, $57.7 million of which were for the construction of residential properties, $25.5 million of which were for land acquisition and the development of residential properties, and $29.4 million of which were for the construction of commercial properties.

Los Padres Bank primarily provides construction loans to individuals building their primary or secondary residence as well as to local developers with whom Los Padres Bank is familiar and who have a record of successfully completing projects. Residential construction loans to developers generally are made with terms not exceeding two years, have interest rates which are fixed or adjust, with the latter adjusting on a periodic basis of up to one year based upon a designated prime rate or LIBOR, and are generally made with loan-to-value ratios of 80% or less. Residential construction loans to individuals are interest only loans for the term of the construction and then generally convert to a permanent loan. Los Padres Bank’s construction/permanent loans have been successful due to its ability to offer borrowers a single closing and, consequently, reduced costs. Los Padres Bank also offers adjustable-rate loans based on a designated prime rate or other indices with terms of up to two years for the construction of commercial properties. Such loans are generally made at a maximum loan-to-value ratio of 85% of discounted appraised value or less.

Construction lending and acquisition and development lending are generally considered to involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real estate. Risk of loss on construction loans and acquisition and development loans is dependent largely upon the accuracy of the initial appraisal of the property’s projected value at completion of construction as well as the estimated cost, including interest, of construction. During the construction phase, a number of factors could result in delays and cost overruns. If either estimate proves to be inaccurate or the borrower is unable to provide additional funds, the lender may be required to advance funds beyond the amount originally committed to permit completion of the project and/or be confronted at the maturity of the construction loan with a project whose value is insufficient to assure full payment. Los Padres Bank attempts to minimize the foregoing risks primarily by limiting its construction lending to experienced developers and by limiting the total amount of loans to builders for speculative construction projects. It is also Los Padres Bank’s general policy to obtain regular financial statements and tax returns from builders so that it can monitor their financial strength and ability to repay.

Land acquisition and development. Los Padres Bank has increased its loans for land acquisition and development (loans for the initial acquisition of land and off-site improvements) from $36.1 million at

December 31, 2005 to $54.7 million at December 31, 2006. The increase is caused by the expansion of our products to meet our customer needs. Land acquisition and development loans are typically issued with short terms, bearing adjustable-rates of interest based on a designated prime rate or LIBOR and are generally made with loan-to-value ratios of 70% or less.

Commercial and Industrial Loans. Los Padres Bank is placing increased emphasis on the origination of commercial business loans because of the higher risk-adjusted spreads generally associated with these types of loans. At December 31, 2006, Los Padres Bank’s commercial and industrial loans amounted to $119.1 million or 15.6% of total loans receivable.

The commercial and industrial loans that Los Padres Bank is originating include lines of credit, term loans and letters of credit. These loans are typically secured by collateral and are used for general business purposes, including working capital financing, equipment financing, capital investment and general investment. Depending on the collateral pledged to secure the extension of credit, maximum loan-to-value ratios are 80% or less. Loan terms generally vary from one to seven years. The interest rates on such loans are generally variable and are indexed to the Wall Street Journal Prime Rate, plus a margin. Commercial and industrial loans typically have shorter maturity terms and higher interest spreads than mortgage loans, but generally involve more credit risk than mortgage loans because of the type and nature of the collateral. Los Padres Bank’s business customers are typically small to medium sized, privately-held companies with local or regional businesses that operate in Los Padres Bank’s primary markets.

Consumer and Other Loans. Los Padres Bank is authorized to make loans for a wide variety of personal or consumer purposes. Los Padres Bank has been originating consumer loans in recent years in order to provide a wider range of financial services to its customers and because such loans generally carry higher interest rates than mortgage loans. The consumer and other loans offered by Los Padres Bank include home equity lines of credit, home improvement loans, vehicle loans, secured and unsecured personal lines of credit and deposit account secured loans. At December 31, 2006, $27.5 million or 3.7% of Los Padres Bank’s total loans receivable consisted of consumer loans.

Home equity lines of credit are originated by Los Padres Bank for up to 90% of the appraised value, less the amount of any existing prior liens on the property. Los Padres Bank also offers home improvement loans in amounts up to 80% of the appraised value, less the amount of any existing prior liens on the property. Home improvement loans have a maximum term of 15 years and carry fixed or adjustable interest rates. Home equity lines of credit have a maximum repayment term of 15 years and carry interest rates that adjust monthly in accordance with a designated prime rate. Los Padres Bank will secure each of these types of loans with a mortgage on the property, generally a second mortgage, and may originate the loan even if another institution holds the first mortgage. At December 31, 2006, home equity lines of credit and home improvement loans totaled $24.7 million or 89.7% of Los Padres Bank’s total consumer loan portfolio and an aggregate of $46.0 million were committed and un-drawn under these loans and lines of credit.

Los Padres Bank currently offers loans secured by deposit accounts, which amounted to $427,000 or 1.6% of Los Padres Bank’s total consumer and other loan portfolio at December 31, 2006. Such loans are originated for up to 90% of the deposit account balance, with a hold placed on the account restricting the withdrawal of the account balance.

At December 31, 2006, vehicle loans, secured and unsecured personal line of credit loans amounted to $868,000 or 3.2% of Los Padres Bank’s total consumer and other loan portfolio.

Consumer loans generally have shorter terms and higher interest rates than mortgage loans but generally involve more credit risk than mortgage loans because of the type and nature of the collateral. In addition, consumer lending collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness and personal bankruptcy. Los Padres Bank believes that the generally higher yields earned on consumer loans compensate for the increased credit risk

associated with such loans and Los Padres Bank intends to continue to offer consumer loans in order to provide a full range of services to its customers.

Asset Quality

General. Los Padres Bank’s Internal Asset Review Committee and the Internal Asset Oversight Committee, consisting of Los Padres Bank’s senior executive officers and certain members of the Board of Directors, monitors the credit quality of Los Padres Bank’s assets, reviews classified and other identified loans and determines the proper level of reserves to allocate against Los Padres Bank’s loan portfolio, in each case subject to guidelines approved by Los Padres Bank’s board of directors.

Loan Delinquencies. When a borrower fails to make a required payment on a loan, Los Padres Bank attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are generally made following the sixteenth day after a payment is due, at which time a late payment is assessed. In most cases, deficiencies are cured promptly. If a delinquency extends beyond 16 days, the loan and payment history is reviewed and efforts are made to collect the payment. While Los Padres Bank generally prefers to work with borrowers to resolve such problems, when the account becomes 45 days delinquent, Los Padres Bank will institute foreclosure by issuing a Notice of Intent to Foreclose or other proceedings, as necessary, to minimize any potential loss. After 75 days and the loan is not brought current or no workout agreement has been initiated, a Notice of Default is recorded.

Non-Performing Assets. Los Padres Bank will place loans on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. When such a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. Los Padres Bank generally does not accrue interest on loans past due 60 days or more.

Non-performing loans are defined as non-accrual loans 90 days past due. Non-performing assets are defined as non-performing loans and real estate acquired by foreclosure or deed-in-lieu thereof. Troubled debt restructurings are defined as loans which Los Padres Bank has agreed to modify by accepting below market terms either by granting interest rate concessions or by deferring principal and/or interest payments. The following table sets forth the amounts and categories of our non-performing assets and troubled debt restructurings at the dates indicated.


	At December 31,
	2006			2005			2004			2003			2002
	(Dollars in Thousands)
Non-accruing loans:
Single-family residential	$	—		$	—		$	—		$	—		$	218

Multi-family residential		—			—			—			—			—
Commercial real estate		—			—			—			—			—
Land acquisition and development		—			—			—			—			—
Commercial and industrial		98			—			95			8			—
Consumer and other		—			—			—			4			—

Total non-accruing loans		98			—			95			12			218


Total non-performing loans		98			—			95			12			218


Troubled debt restructurings		—			—			—			—			—

Real estate owned, net of reserves		—			—			—			—			—


Total non-performing assets and troubled debt restructurings	$	98		$	—		$	95		$	12		$	218


Total non-performing loans and troubled debt restructurings as a percentage of total loans		0.01	%		0.00	%		0.02	%		0.00	%		0.05	%


Total non-performing assets and troubled debt restructurings as a percentage of total assets		0.01	%		0.00	%		0.01	%		0.00	%		0.03	%

At December 31, 2006, 2005 and 2004, we had two, zero and one non-performing loans, respectively. At December 31, 2006, we had non-performing loans representing an increase of $98,000 from December 31, 2005.

The interest income that would have been recorded during the years ended December 31, 2006, 2005 and 2004 if Los Padres Bank’s non-accruing loans at the end of such periods had been current in accordance with their terms during such periods is $6,756, $0 and $52,269, respectively. The interest income that was recorded during the years ended December 31, 2006, 2005 and 2004 with respect to Los Padres Bank’s non-accruing loans was $4,000, $0 and $3,000, respectively.

Classified Assets. Federal regulations require that each insured savings institution classify its assets on a regular basis. In addition, in connection with examinations of insured institutions, federal examiners have authority to identify problem assets and, if appropriate, classify them. Los Padres Bank has established three classifications for potential problem assets: “substandard,” “doubtful” and “loss.” Substandard assets have one or more defined weaknesses and are characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified as loss is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. Los Padres Bank has established another category, designated “special mention,” for assets that do not currently expose Los Padres Bank to a sufficient degree of risk to warrant

classification as substandard, doubtful or loss. Assets classified as substandard or doubtful require Los Padres Bank to establish allowances for loan losses based on the methodology described below. If an asset or portion thereof is classified as loss, the insured institution must either establish specific allowances for loan losses in the amount of 100% of the portion of the asset classified loss, or charge-off such amount. At December 31, 2006, Los Padres Bank had $1.4 million of classified loans, $1.3 million of which was classified as substandard and $98 thousand was classified as doubtful or loss. As of December 31, 2006, Los Padres Bank had $12.1 million of loans that were designated special mention. At December 31, 2005, Los Padres Bank had $6.9 million of classified loans, $6.3 million of which was classified as substandard and $717 thousand were classified as doubtful or loss. As of December 31, 2005, Los Padres Bank had $8.2 million of loans that were designated special mention. Our classified and special mention loans, in addition to the non-performing loans discussed above, are the extent of the loans in our portfolio that give us some repayment concern at this time.

Allowance for Loan Losses. The allowance for loan losses reflects management’s judgment of the level of allowance adequate to provide for probable incurred losses inherent in the loan portfolio as of the balance sheet date. On a quarterly basis, Los Padres Bank assesses the overall adequacy of the allowance for loan losses, utilizing a consistent and systematic approach which includes the application of an allocated allowance for specifically identified problem loans, a formula allowance for non-homogenous loans, a formula allowance for large groups of smaller balance homogenous loans and an unallocated allowance.

Allocated allowance for specifically identified problem loans. A specific reserve is established for impaired loans in accordance with SFAS No. 114, Accounting by Creditors for Impairment of a Loan as amended by SFAS No. 118. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. The specific reserve is determined based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, we may measure impairment based on a loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent.

Formula allowance for non-homogenous loans. Los Padres Bank segments its non-homogenous loan portfolio into pools with similar characteristics based on loan type (collateral driven) and risk factor (loan grade). Currently, these loans are segmented into four categories by collateral, further stratified by loan grade (pass, special mention and substandard). The general pool categories are multi-family residential, commercial real estate, land acquisition and development, and commercial and industrial. These non-homogenous loans are reviewed individually.

The formula allowance is calculated by applying adjusted loss rates to these pools. Pool loss rates are established by examining historical charge-off data for groups of loans and adjusting them for a variety of qualitative factors deemed appropriate by management. The analysis of historical loss data in determining the initial loss rates is based on an average ten-year period. Where Los Padres Bank has no or nominal actual charge-off data for certain loan types, industry data and management’s judgment is utilized as representative starting loss rates.

Formula allowance for large groups of smaller balance homogenous loans. The allocated loan loss allowance for large groups of smaller balance homogenous loans is focused on loss experience for the pool rather than on an analysis of individual loans. Large groups of smaller balance homogenous loans consist of consumer loans and single-family residential loans. The allowance for groups of performing loans is based on historical losses over a ten year period.

Unallocated Allowance. The unallocated allowance contains amounts that are based on management’s evaluation of conditions that are not directly measured in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they are not identified with specific problem credits or portfolio segments. The

conditions evaluated in connection with the unallocated allowance include the following, which existed at the balance sheet date:

	•		trends in criticized and non-accrual assets;

	•		the levels and trends in charge-offs, recovery history and loan restructuring;

	•		changes in volumes and terms of the loan portfolio;

	•		changes in the effectiveness of the internal asset review process;

	•		changes in lending policies, procedures and practices;

	•		changes in the experience, ability and depth of lending management;

	•		changes in the national and local economic conditions; and

	•		the trend in local real estate values.

Management and the Internal Asset Review Committee review these conditions quarterly in discussion with our senior credit officers. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such condition may be reflected as a specific allowance, applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the probable loss related to such condition is reflected in the unallocated allowance.

The allowance for loan losses is based upon estimates of probable incurred losses inherent in the loan portfolio. The actual losses can vary from the estimated amounts. Our methodology includes several features that are intended to reduce the differences between estimated and actual losses. The loss migration model that is used to establish the loan loss factors is designed to be self-correcting by taking into account our loss experience over prescribed periods. Similarly, by basing the loan loss factors over a period reflective of two business cycles, the methodology is designed to take our recent loss experience for consumer and commercial and industrial loans into account. Furthermore, based on management’s judgment, our methodology permits adjustments to any loss factor used in the computation of the formula allowance for significant factors, which affect the collectibility of the portfolio as of the evaluation date, but are not reflected in the loss factors. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly basis, we are able to adjust specific and inherent loss estimates based upon the most recent information that has become available.

Although our management believes it uses the best information available to establish the level of the allowance, there can be no assurance that additions to such allowance will not be necessary in future periods. Furthermore, various regulatory agencies, as an integral part of their examination process, periodically review our valuation allowance. These agencies may require us to increase the allowance, based on their judgments of the information available to them at the time of the examination.

The following table is an allocation of our allowance for loan losses as of the dates presented:


	At December 31,
	2006		2005		2004
	(In Thousands)
Specific reserve	$	16	$	441	$	—
Formula-non homogeneous		5,296		4,611		4,477
Formula-homogeneous		560		605		570
Unallocated		42		4		181

	$	5,914	$	5,661	$	5,228

At December 31, 2006, the formula allowance for non-homogeneous loan allowance increased by $685,000 from December 31, 2005, primarily due to an increase in total non-homogeneous loans and, offset to a lesser extent, by a decrease in criticized loans related to non-homogeneous loans.

The formula allowance for homogeneous loans decreased by 45,000 for the year ended 2006 and increased by $35,000 for the year ended December 31, 2005, as a result of increasing single-family construction loan balances. Los Padres Bank shifted its strategic focus away from originating single-family loans for its portfolio and has opted to originate such loans on a brokered basis due to high competition and the resulting low risk-adjusted spreads.

Specific reserves are established for impaired loans in accordance with SFAS No. 114. At December 31, 2006, we had $16,000 in specific reserves. In 2005, we had $441,000 in specific reserves. In 2004, we reclassified the $50,000 in specific reserves to the general valuation allowance since the loan was no longer impaired as per SFAS No. 114.

The following table sets forth information concerning the allocation of our allowance for loan losses by loan category at the dates indicated.


	December 31,
	2006					2005					2004					2003					2002
			Percent of					Percent of					Percent of					Percent of					Percent of
			Loans in					Loans in					Loans in					Loans in					Loans in
			Each					Each					Each					Each					Each
			Category to					Category to					Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
	(Dollars in Thousands)
Real estate loans:
Single-family residential	$	231		13.9	%	$	265		17.0	%	$	265		16.6	%	$	308		17.9	%	$	390		25.8	%
Multi-family residential		417		10.4			422		11.9			554		14.0			416		15.7			344		15.9
Commercial		1,054		34.6			1,115		37.2			1,072		43.1			1,400		44.8			773		40.5
Construction		452		14.7			300		10.4			564		5.8			419		5.9			546		4.4
Land acquisition and development		520		7.1			272		5.3			211		4.5			123		1.6			215		3.3
Commercial and industrial loans		2,868		15.6			2,944		14.2			2,076		11.9			1,616		10.8			1,253		6.1
Consumer and other loans		329		3.7			340		3.9			305		4.1			216		3.3			149		4.0
Unallocated reserve		43		—			3		.1			181		—			89		—			127		—

Total	$	5,914		100	%	$	5,661		100	%	$	5,228		100	%	$	4,587		100	%	$	3,797		100	%

Investment Activities

General. Our securities portfolio is managed under the direction of our Chief Executive Officer in accordance with a comprehensive written investment policy which addresses strategies, types and levels of allowable investments which are reviewed and approved by Los Padres Bank’s board of directors. The management of the securities portfolio is set in accordance with strategies developed by Los Padres Bank’s Asset and Liability Committee (“ALCO”). In addition, Los Padres Bank has entered into an agreement with Smith Breeden Associates, Inc. (“Smith Breeden”) whereby Smith Breeden has been appointed as investment advisor with respect to the management of Los Padres Bank’s securities portfolio. With the assistance of Smith Breeden, Los Padres Bank’s Chief Executive Officer, in his role as Chief Investment Officer, has the primary responsibility for managing the investment portfolio in accordance with the policy. The Chief Investment Officer’s responsibilities include informing ALCO of the types of investments available, the status and performance of the portfolio and current market conditions. Designated officers of Los Padres Bank are authorized to: purchase or sell eligible investments under repurchase or reverse repurchase agreements; execute hedging strategies approved by the ALCO; pledge securities owned as collateral for public agency deposits or repurchase accounts or agreements; and lend securities to approved dealers in government securities or approved commercial banks. The Chief Executive Officer, the President, the Chief Financial Officer or the Controller of Los Padres Bank has the authority to purchase or sell designated instruments up to $5.0 million in any one transaction and, acting together, any two members of the ALCO have authority to purchase or sell securities of between $5.0 million and $30.0 million in any one transaction. For purchases or sales greater than $30.0 million, the prior approval of a majority of the ALCO is required. Designated officers are also authorized to invest excess liquidity in approved liquid investment vehicles. In addition, the Board of Directors of Los Padres Bank ratifies all securities purchased and sold by Los Padres Bank.

We invest in a portfolio of mortgage-backed and related securities, interest rate contracts, U.S. Government agency securities, government sponsored enterprises, asset-backed securities, corporate securities and, to a much lesser extent, equity securities. In selecting securities for our portfolio, we employ option-adjusted pricing analysis with the assistance of Smith Breeden in order to ascertain the net risk-adjusted spread expected to be earned with respect to the various investment alternatives. The nature of this analysis is to quantify the costs embedded in the yield of an investment, such as the duration-matched funding cost, the costs of the options embedded in the investment’s cash flow (such as a borrower’s ability to prepay a mortgage) and servicing costs. The objective of our investment management process is to select investments with the greatest net spreads and actively manage the underlying risks of these investments.

We manage our securities portfolio in order to enhance net interest income and net market value on a risk-adjusted basis and deploy excess capital until we can reinvest such assets into loans or other community banking assets. As a result, we monitor the net risk-adjusted spread of our investments and compare them with the spreads available with respect to other securities in the market. Accordingly, as market conditions fluctuate (e.g., as risk-adjusted spreads narrow), we may sell individual securities prior to their maturity and reinvest the proceeds into new investments, which generally carry wider risk-adjusted spreads. We utilize various interest rate contracts such as interest rate swaps, caps, floors, options and futures in order to mitigate our interest rate exposure in our securities portfolio, which allows us to respond to changing prepayment rates on our mortgage-backed and related securities. The investment portfolio, although hedged for interest rate risk, is still susceptible to adverse changes in the spreads between the yields on mortgage-backed and related securities and the related Treasury and LIBOR based hedges. Substantially all of our securities are classified as available for sale securities and, pursuant to SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, are reported at fair value with unrealized gains and losses included in stockholders’ equity.

Mortgage-Backed and Related Securities. At December 31, 2006, our mortgage-backed and related securities including pass-through mortgage-backed securities, collateral mortgage obligations and mortgage related asset-backed securities classified as available for sale and held to maturity amounted to $276.0 million or 88.8% of our securities portfolio and 23.9% of our total assets. By investing in mortgage-backed and

related securities, our management seeks to achieve a targeted option-adjusted spread over applicable funding costs.

We invest in mortgage-backed and related securities, including mortgage participation certificates, which are insured or guaranteed by U.S. Government agencies and government sponsored enterprises or by private issuers which are rated based on the underlying collateral and priority of cash flows, and investment grade collateralized mortgage obligations (“CMOs”) and real estate mortgage investment conduits (“REMICs”). Mortgage-backed securities, which also are known as mortgage participation certificates or pass-through certificates, represent a participation interest in a pool of single-family mortgages. The principal and interest payments on these securities are passed from the mortgage originators, through intermediaries, generally U.S. Government agencies and government sponsored enterprises, that pool and repackage the participation interests in the form of securities, to investors such as us. Such U.S. Government agencies and government-sponsored enterprises, which guarantee the payment of principal and interest to investors, primarily include Freddie Mac, Fannie Mae and the Government National Mortgage Association (“Ginnie Mae”).

Mortgage-backed securities typically are issued with stated principal amounts, and are backed by pools of mortgages that have loans with interest rates that are within a range and have varying maturities. The characteristics of the underlying pool of mortgages, i.e., fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder. The term of a mortgage-backed pass-through security thus approximates the terms of the underlying mortgages.

Our mortgage-backed and related securities, including CMO’s, include securities issued by entities which have qualified under the Internal Revenue Code of 1986, as amended (the “Code”) as REMICs. CMOs and REMICs, referred to in this document as CMOs, were developed in response to investor concerns regarding the uncertainty of cash flows associated with the prepayment option of the underlying mortgagor and are typically issued by governmental agencies, government sponsored enterprises and special purpose entities, such as trusts, corporations or partnerships, established by financial institutions or other similar institutions. In contrast to pass-through mortgage-backed securities, in which cash flow is received pro rata by all security holders, the cash flow from the mortgages underlying a CMO is segmented and paid in accordance with a predetermined priority to investors holding various CMO classes. By allocating the principal and interest cash flows from the underlying collateral among the separate CMO classes, different classes of bonds are created, each with its own stated maturity, estimated average life, coupon rate and prepayment characteristics.

Like most fixed-income securities, mortgage-backed and related securities are subject to interest rate risk. Unlike most fixed-income securities, however, the mortgage loans underlying a mortgage-backed or related security generally may be prepaid at any time without penalty. The ability to prepay a mortgage loan generally results in significantly increased price and yield volatility, with respect to mortgage-backed and related securities, than is the case with non-callable fixed income securities. Furthermore, mortgage-backed securities often are more sensitive to changes in interest rates and prepayments than traditional mortgage-backed securities and are, therefore, even more volatile. Nevertheless, we attempt to guard against both interest rate and prepayment risk. No assurance can be made, however, that these instruments will be effective.

Although mortgage-backed and related securities often carry lower yields than traditional mortgage loans, these securities generally increase the quality of our assets by virtue of the securities’ underlying insurance or guarantees or collateral support. These securities also require less capital under risk-based regulatory capital requirements than non-insured or non-guaranteed mortgage loans, are more liquid than individual mortgage loans, which enhances our ability to actively manage our portfolio, and may be used to collateralize borrowings or other obligations. At December 31, 2006, $222.1 million or 71.7% of our mortgage-backed and related securities were pledged to secure various obligations (such as Federal Home Loan Bank (“FHLB”) advances, repurchase agreements and collateral for interest rate swaps). In addition, as a

result of our maintaining a substantial portion of our assets in mortgage-backed and related securities, we have been able to maintain a relatively low level of operating expenses.

At December 31, 2006, the contractual maturity of substantially all of our mortgage-backed or related securities was in excess of 10 years. The actual maturity of a mortgage-backed or related security may be less than its stated maturity due to prepayments of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and affect its yield to maturity. The yield to maturity is based upon the interest income and the amortization of any premium or discount related to the security. In accordance with generally accepted accounting principles, premiums and discounts are amortized over the contractual life of the loans, which decrease and increase interest income, respectively. The prepayment assumptions used to determine the amortization period of premiums and discounts can significantly affect the yield of the mortgage-backed or related security, and these assumptions are reviewed periodically to reflect actual prepayments. Although prepayments of underlying mortgages depends on many factors, including the type of mortgages, the coupon rate, the age of mortgages, the geographical location of the underlying real estate collateralizing the mortgages and general levels of market interest rates, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security.

We also invest in investment grade commercial mortgage backed securities (“CMBS”), which are securities collateralized by mortgage loans secured by industrial, office, warehouse, retail space strip shopping centers, motels and other commercial related real estate. The cash flows from these mortgages are normally paid in a predetermined priority to investors holding the various classes of securities. The mortgage loans underlying these securities typically have a prepayment lockout for a period of five to ten years and, as such, have less prepayment risk than single-family mortgage securities. At December 31, 2006, we held $31.1 million of commercial mortgage-backed securities.

At December 31, 2006, of the $309.8 million of the available for sale and held to maturity mortgage-backed and mortgage related securities held by us, an aggregate of $97.4 million was secured by fixed-rate mortgage loans and an aggregate of $212.4 million was secured by adjustable-rate mortgage loans.

Corporate Debt Securities. We plan, from time to time, to invest in corporate investment grade notes and bonds that are general obligations of the issuing company or backed by specific equipment or other collateral of the issuing company. These securities are rated by the major rating agencies based on the financial strength of the issuing company, priority in the debt structure of the company, and the underlying security, if any. We sold $1.7 million of corporate debt securities in September 2005. At December 31, 2006, and December 31, 2005 we held no corporate debt securities.

Trading Account Assets and Other Securities. At December 31, 2006, we held a variety of assets classified as trading securities pursuant to SFAS No. 115, including mortgage-backed securities that had a carrying value of $237,000, and equity securities (consisting of mutual funds invested in a variety of corporate fixed income and equity securities) with a carrying value of $600,000.

We also invested in total rate of return interest rate swaps in our trading portfolio that during the year had a maximum notional amount of $111.8 million and a maximum carrying value of $315 thousand, in an effort to enhance our investment portfolio profits. As of December 31, 2006 all of the total return swaps had matured. With regard to the CMBS total return swaps, we received the net spread between the yield on certain investment grade CMBS indexes, such as the Bank of America AAA CMBS Index, Bank of America AA CMBS Index or the Bank of America BBB CMBS Index and the duration matched LIBOR yield (less a spread) plus any market value changes due to the spread changing between the index and the duration matched LIBOR yield. We also received the net spread between the yields on five referenced AA rated home equity,

All securities held do not have a single maturity date. The following table presents certain information regarding the composition and period to maturity of our securities classified as available for sale as of the dates indicated below.


	2006							2005							2004
					Weighted							Weighted							Weighted
	Amortized		Fair		Average			Amortized		Fair		Average			Amortized		Fair		Average
	Cost		Value		Yield			Cost		Value		Yield			Cost		Value		Yield
	(Dollars in thousands)
Mortgage-backed securities –pass throughs

Due from one to five years	$	1,039	$	1,011		4.57	%	$	1,674	$	1,634		5.39	%	$	1,453	$	1,463		5.71	%

Due from five to ten years		12,347		12,187		4.81			3,617		3,638		5.89			1,995		2,013		5.35

Due over ten years		84,858		83,747		4.62			119,862		117,568		4.15			110,917		110,226		3.65

Total mortgage backed securities - pass-throughs (1)		98,244		96,945		4.64			125,153		122,840		4.22			114,365		113,702		3.70


Collateralized mortgage obligations
Due over ten years		76,182		75,795		5.31			80,470		79,531		4.21			73,894		73,399		3.31

Total collateralized mortgage obligations		76,182		75,795		5.31			80,470		79,531		4.21			73,894		73,399		3.31


Commercial mortgage-backed securities
Due from one to five years		—		—					—		—		—			18,269		18,597		5.81
Due over ten years		31,312		31,081		4.13			40,647		40,179		3.63			29,276		29,324		3.63


Total commercial mortgage-back securities		31,312		31,081		4.13			40,647		40,179		3.63			47,545		47,921		4.47


Asset-backed securities (underlying securities mortgages)
Due over ten years		102,815		103,159		5.65			141,086		141,564		5.40			187,949		189,389		3.63

Total asset backed-securities		102,815		103,159		5.65			141,086		141,564		5.40			187,949		189,389		3.63


Asset-backed securities
Due from one to five years		1,447		1,459		11.15			—		—					—		—
Due over ten years		1,300		1,290		5.63			3,335		3,238		7.17			5,460		5,143		5.13

Total asset backed securities		2,747		2,749		8.54			3,335		3,238		7.17			5,460		5,143		5.13


Corporate debt securities
Due over ten years		—		—					—		—		—			1,569		1,652		15.88


Total corporate debt securities		—		—					—		—		—			1,569		1,652		15.88


Total	$	311,300	$	309,729		5.13		$	390,691	$	387,352		4.61		$	430,782	$	431,206		4.18


(1)		The fair value at December 31, 2006, consisted of $23.5 million of Fannie Mae participation certificates, $14.4 million of Freddie Mac participation certificates and $59.0 million of Ginnie Mae participation certificates. At December 31, 2005, the portfolio consisted of $34.0 million of Fannie Mae participation certificates, $18.6 million of Freddie Mac participation certificates and $70.2 million of Ginnie Mae participation certificates. At December 31, 2004, the portfolio consisted of $16.6 million of Fannie Mae participation certificates, $22.5 million of Freddie Mac participation certificates and $74.6 million of Ginnie Mae participation certificates.

The following table sets forth the fair value of our securities activities with respect to our securities classified as available for sale and held to maturity for the periods indicated.


	At or For the Years
	Ended December 31,
	2006			2005			2004
	(In Thousands)
Beginning balance	$	387,436		$	431,305		$	398,931

Mortgage-backed securities pass-throughs purchased- available for sale		10,712			48,663			43,238
Collateralized mortgage obligations purchased- available for sale		32,819			27,180			47,165
Commercial mortgage-backed securities purchased- available for sale		—			—			62
Asset-backed securities purchased- available for sale		20,344			31,838			64,064
Corporate debt securities purchased- available for sale		—			—			—


Total securities purchased		63,875			107,681			154,529


Less:
Sale and principal payments of mortgage-backed securities, pass throughs — available for sale		(36,610	)		(36,694	)		(56,943	)
Sale and principal payments of collateralized mortgage obligations — available for sale		(37,076	)		(20,523	)		(22,073	)
Sale and principal payments of commercial mortgage-backed securities – available for sale		(8,376	)		(5,619	)		(10,982	)
Sale and principal payments of asset-backed securities – available for sale		(59,139	)		(81,651	)		(29,797	)
Principal payments of mortgage-backed securities, pass throughs — held to maturity		(13	)		(13	)		(129	)
Sale and principal payments of corporate bonds, available for sale		—			(1,778	)		—

Total securities sold		(141,214	)		(146,278	)		(119,924	)


Change in net unrealized gain (loss) on securities available for sale and held to maturity		1,766			(2,832	)		353
Amortization of (premium)/discount		(2,063	)		(2,440	)		(2,584	)


Ending balance	$	309,800		$	387,436		$	431,305

Sources of Funds

General. We consider various sources of funds to fund our investing and lending activities and we evaluate the available sources of funds in order to reduce our overall funding costs. Deposits, reverse repurchase agreements, advances from the FHLB of San Francisco, notes payable, and sales, maturities and principal repayments on loans and securities have been the major sources of funds for use in our lending and investing activities, and for other general business purposes. We closely monitor rates and terms of competing sources of funds on a daily basis and utilize the source that we believe to be cost effective.

Deposits. Los Padres Bank attempts to price its deposits in order to promote deposit growth and offers a wide array of deposit products in order to satisfy our business and retail customers’ needs. Los Padres Bank’s current deposit products include passbook accounts, negotiable order of withdrawal (“NOW”) and demand deposit accounts, money market deposit accounts, fixed-rate, fixed-maturity retail certificates of deposit ranging in terms from one month to five years and individual retirement accounts.

Los Padres Bank’s retail deposits are generally obtained from residents in each of its primary market areas. Los Padres Bank opened a new location in the Scottsdale Airpark in early 2005, purchased a banking office and acquired the related deposits in Thousand Oaks, California in May 2005, opened its third banking office in the Kansas City metro area in the third quarter of 2006, and plans to open an office in Surprise, Arizona in mid to late 2007. The principal methods currently used by Los Padres Bank to attract deposit accounts include offering a variety of products and services, and competitive interest rates. Los Padres Bank utilizes traditional marketing methods to attract new customers and savings deposits, including various forms of advertising.

The following table sets forth the maturities of Los Padres Bank’s certificates of deposit having principal amounts of $100,000 or more at December 31, 2006.


	Amount
	(In Thousands)
Certificates of deposit maturing:
Three months or less	$	120,591
Over three through six months		82,961
Over six through twelve months		96,264
Over twelve months		8,836

Total	$	308,652

The following table sets forth by various interest rate categories the certificates of deposit with Los Padres Bank at the dates indicated.


	At December 31,
	2006		2005		2004
	(In Thousands)
0.00% to 2.99%	$	2,763	$	65,041	$	366,685
3.00% to 3.99%		24,339		301,287		18,389
4.00% to 4.99%		192,937		109,300		29,983
5.00% to 5.99%		336,245		6,584		6,940
6.00% to 6.99%		—		—		1,158
7.00% and higher		—		—		887

Total	$	556,284	$	482,212	$	424,042

The following table sets forth the amount and remaining maturities of Los Padres Bank’s certificates of deposit at December 31, 2006.


			Over Six
			Months		Over One		Over Two
	Six Months		Through One		Year Through		Years Through		Over Three
	and Less		Year		Two Years		Three Years		Years		Total
	(In Thousands)
0.00% to 2.99%	$	2,331	$	203	$	229	$	—	$	—	$	2,763
3.00% to 3.99%		12,741		3,789		5,096		2,457		255		24,338
4.00% to 4.99%		169,718		12,459		3,033		3,847		3,881		192,938
5.00% to 5.99%		188,287		146,071		551		752		584		336,245
6.00% to 6.99%		—		—		—		—		—		—
7.00% and higher		—		—		—		—		—		—

Total	$	373,077	$	162,522	$	8,909	$	7,056	$	4,720	$	556,284

Borrowings. We obtain both long-term fixed-rate and short-term variable-rate advances from the FHLB of San Francisco upon the security of our certain residential first mortgage loans and other assets, provided certain standards related to creditworthiness of Los Padres Bank have been met. FHLB of San Francisco advances are available for general business purposes to expand lending and investing activities. Borrowings have generally been used to fund the purchase of mortgage-backed and related securities and lending activities and have been collateralized with a pledge of loans, securities in our portfolio or any mortgage-backed or related securities purchased. Advances from the FHLB of San Francisco are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. At December 31, 2006, we had five advances from the FHLB of San Francisco, which mature between January 2007 and June 2010. At December 31, 2006, we had total FHLB of San Francisco advances of $257.0 million at a weighted average coupon of 5.44%. Our borrowings from the FHLB of San Francisco are limited to 35% of Los Padres Bank’s total assets, or $403.5 million at December 2006 and $399.1 million at December 31, 2005.

During 2005 and 2006, we obtained funds from the sales of securities to investment dealers under agreements to repurchase, known as reverse repurchase agreements. In a reverse repurchase agreement transaction, we will generally sell a mortgage-backed security agreeing to repurchase either the same or a substantially identical security on a specific later date. The difference between the sale and the purchase price (referred to as the “drop”) together with the foregone coupon interest represents the cost of the financing transaction. The mortgage-backed securities underlying the agreements are delivered to the dealers who arrange the transaction. For agreements in which we have agreed to repurchase substantially identical

securities, the dealers may sell, loan or otherwise dispose of our securities in the normal course of their operations; however, such dealers or third party custodians safe-keep the securities which are to be specifically repurchased by us. In this type of transaction, we are subject to the risk that the lender may default at maturity and not return the collateral. The amount at risk is the value of the collateral, which exceeds the balance of the borrowing. In order to minimize this potential risk, we only deal with large, established dealers when entering into these transactions. Reverse repurchase transactions are accounted for as financing arrangements rather than as sales of such securities, and the obligation to repurchase such securities is reflected as a liability in our consolidated financial statements. At December 31, 2006, we had four reverse repurchase agreements with Citigroup Financial Services totaling $59.0 million with a weighted average coupon of 2.96% and maturities ranging from April 2007 to July 2010. At December 31, 2005, we had four repurchase agreements with Citigroup Financial Services totaling $59.0 million with a weighted average coupon of 2.98% and maturities ranging from April 2007 to July 2010.

We are parties to a credit agreement with Harris Trust and Savings Bank and US Bank, N.A. Under the credit agreement, we have a revolving credit facility that enables us to borrow up to $15.0 million for general corporate purposes from time to time with a maturity of September 30, 2007. As of December 31, 2006 and December 31, 2005, we had no outstanding borrowings under the credit agreement.

We pay interest on the outstanding amount of our borrowings from time to time under the credit agreement at an interest rate that adjusts based upon our compliance with certain financial criteria and our selection of an interest rate formula. At our option, the interest rates per annum applicable to any particular borrowing under the credit agreement is either (1) adjusted LIBOR plus a margin ranging from 1.75% to 2.75% or (2) the prime rate announced from time to time by Harris Trust and Savings Bank minus a margin ranging from 0.5% to 0.0%. In September 2004, the credit agreement was renegotiated to reduce the LIBOR plus a margin range. The factors that determine the amount of the margin include our core profitability and our non-performing asset ratio. We are currently at the most favorable pricing level under the credit agreement. In each year, we also pay a commitment fee to the lenders equal to 0.25% of the average daily un-drawn portion of the borrowings available to us under the credit agreement for that year.

The credit agreement contains a number of significant covenants that restrict our ability to dispose of assets, incur additional indebtedness, invest in mortgage derivative securities above certain thresholds, create liens on assets, engage in mergers or consolidations or a change-of control, engage in certain transactions with affiliates, pay cash dividends or repurchase common stock. The credit agreement also requires us to comply with specified financial ratios and tests, including causing Los Padres Bank to maintain a ratio of non-performing assets to the sum of Tier 1 risk-based capital plus loan loss reserves of not more than 0.20 to 1, maintaining a ratio of outstanding loans under the credit agreement to the stockholders’ equity of Los Padres Bank of less than 0.50 to 1, maintaining Los Padres Bank’s status as a “well capitalized” institution and complying with minimum core profitability requirements. Management believes that as of December 31, 2006, it was in compliance with all of such covenants and restrictions and does not anticipate that such covenants and restrictions will significantly limit its operations.

On September 27, 2004, we completed a $10.3 million capital trust offering with a newly formed trust, Harrington West Capital Trust II, in a private transaction. The capital trust securities bear an interest rate of three-month LIBOR plus 1.90% and will mature on October 7, 2034 and have a five-year call feature. We used a portion of the proceeds to downstream capital to Los Padres Bank for the continued expansion of its operations.

On September 25, 2003, we completed a $15.5 million capital trust offering. The capital securities were issued through a newly formed trust, Harrington West Capital Trust I, in a private transaction. The capital trust securities bear an interest rate of three-month LIBOR plus 2.85% and will mature on October 8, 2033 and have a five-year call feature. We used $11.3 million to pay off the secured line of credit with Harris Trust and Savings Bank and US Bank, N.A. The remaining proceeds were used to expand the Los Padres Bank operations in Overland Park, Kansas, Ventura, California and Scottsdale, Arizona.

The following table sets forth certain information regarding our short-term borrowings that mature in one year or less at or for the dates indicated.


	At or For the Year Ended
	December 31,
	2006			2005			2004
	(Dollars in Thousands)
Securities sold under agreements to repurchase:
Average balance outstanding	$	1,212		$	10,853		$	20,749
Maximum amount outstanding at any month-end during the period		6,141			22,298			21,245
Balance outstanding at end of period		6,141			13			20,689
Average interest rate during the period		2.67	%		1.49	%		1.47	%
Average interest rate at end of period		4.11	%		1.05	%		1.48	%

Short-term FHLB advances:
Average balance outstanding	$	267,452		$	295,116		$	263,898
Maximum amount outstanding at any month-end during the period		310,000			339,050			298,000
Balance outstanding at end of period		238,000			300,000			297,000
Average interest rate during the period		5.05	%		3.26	%		1.46	%
Average interest rate at end of period		5.29	%		4.03	%		2.22	%

Subsidiaries

Our primary subsidiary is Los Padres Bank. We were formed for the purpose of acquiring Los Padres Bank, and we completed the acquisition in 1996. Los Padres Bank is a wholly-owned subsidiary.

In February 1999, we purchased a 49% interest in Harrington Wealth Management Company, (“HWMC”) which provides trust and investment management services to individuals and small institutional clients for fee income. In November 2001, we purchased the remaining 51% interest in HWM. HWM performs management of investment portfolios through knowledge and analysis of the customer’s investment needs, risk tolerance, tax situation and investment horizon. At December 31, 2006, HWM administered approximately 439 accounts and had $175.3 million of assets under management that are not included on our balance sheet. For the years ended December 31, 2006, 2005 and 2004, HWM generated revenues of $848,000, $726,000, and $614,000, respectively. HWM is a wholly owned subsidiary of Los Padres Bank.

On September 30, 2004, we decided to terminate our joint venture, Los Padres Mortgage Company, LLC (LPMC) with Resource Marketing, the holding company for RE/MAX Achievers. LPMC brokered residential and commercial mortgage loans for fee income. We terminated the LPMC joint venture as the penetration rates of RE/MAX Achievers’ clientele for mortgage loans were below the expected levels, and we could broaden loan originations on the Bank’s platform. The termination of the LPMC joint venture is also expected to provide economies by eliminating duplication of loan administration activities within LPMC and the Bank. The Bank retained selected LPMC loan origination staff and loan officers to continue its loan origination expansion in the Scottsdale, Arizona market.

Valley Oaks Financial Corporation was formed as a wholly owned service corporation of Los Padres Bank in 1983 and serves as the title-holder with respect to the mortgages we originate.

Harrington West Capital Trust I was formed as an unconsolidated subsidiary of Harrington West Financial Group in 2003 and was created in conjunction with the $15.5 million capital trust offering.

Harrington West Capital Trust II was formed as an unconsolidated subsidiary of Harrington West Financial Group in 2004 and was created in conjunction with the $10.3 million capital trust offering.

Employees

As of December 31, 2006, we had 189 full-time equivalent employees. Our employees are not subject to any collective bargaining agreements and we believe that our relationship with our employees is satisfactory.

Regulation of Harrington West Financial Group, Inc.

General. Savings and loan holding companies and savings associations are extensively regulated under both federal and state law. This regulation is intended primarily for the protection of depositors and the Savings Association Insurance Fund (“SAIF”) and not for the benefit of our stockholders. The following information describes certain aspects of that regulation applicable to us, Los Padres Bank and Harrington Wealth Management Company, and does not purport to be complete. The discussion is qualified in its entirety by reference to all particular statutory or regulatory provisions. We are a unitary savings and loan holding company subject to regulatory oversight by the Office of Thrift Supervision (“OTS”). As such, we are required to register and file reports with the OTS and are subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over us and our subsidiaries, which also permits the OTS to restrict or prohibit activities that are determined to be a serious risk to Los Padres Bank.

Activities Restriction Test. As a unitary savings and loan holding company, we are generally not subject to activity restrictions, provided Los Padres Bank satisfies the Qualified Thrift Lender (“QTL”), test or meets the definition of a domestic building and loan association pursuant to the Code. We presently intend to continue to operate as a unitary savings and loan holding company. Recent legislation terminated the “unitary thrift holding company exemption” for all companies that apply to acquire savings associations after May 4, 1999. However, since we are grandfathered, our unitary holding company powers and authorities were not affected. Despite our grandfathered status, if we acquire control of another savings association as a separate subsidiary, we would become a multiple savings and loan holding company, and our activities, and any activities of our subsidiaries (other than Los Padres Bank or any savings association), would be restricted generally to activities permissible for financial holding companies and other activities permitted for multiple savings and loan holding companies under OTS regulations, unless such other associations each also qualify as a QTL or a domestic building and loan association and were acquired in a supervisory acquisition. Furthermore, if we were in the future to sell control of Los Padres Bank to any other company, such company would not succeed to our grandfathered status and would be subject to the same business activity restrictions.

Restrictions on Acquisitions. We must obtain approval from the OTS before acquiring control of any other savings association. Such acquisitions are generally prohibited if they result in a multiple savings and loan holding company controlling savings associations in more than one state. However, such interstate acquisitions are permitted based on specific state authorization or in a supervisory acquisition of a failing savings association.

Federal law generally provides that no “person,” acting directly or indirectly or through or in concert with one or more other persons, may acquire “control,” as that term is defined in OTS regulations, of a federally insured savings association without giving at least 60 days written notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. In addition, no company may acquire control of such an institution without prior OTS approval. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of a savings and loan holding company, from acquiring control of any savings association not a subsidiary of the savings and loan holding company, unless the acquisition is approved by the OTS.

Regulation of Los Padres Bank

General. As a federally chartered, SAIF-insured savings association, Los Padres Bank is subject to extensive regulation by the OTS and the Federal Deposit Insurance Corporation (“FDIC”). Lending activities and other investments of Los Padres Bank must comply with various statutory and regulatory requirements. Los Padres Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board.

The OTS, in conjunction with the FDIC, regularly examines Los Padres Bank and prepares reports for the consideration of Los Padres Bank’s Board of Directors on any deficiencies found in the operations of Los Padres Bank. The relationship between Los Padres Bank and depositors and borrowers is also regulated by federal and state laws, especially in such matters as the deposit insurance of savings accounts and the form and content of mortgage documents utilized by Los Padres Bank.

Los Padres Bank must file reports with the OTS and the FDIC concerning its activities and financial condition, in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with or acquisitions of other financial institutions. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the SAIF and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulations, whether by the OTS, the FDIC, or the Congress could have a material adverse impact on us, Los Padres Bank, and our operations.

Insurance of Deposit Accounts. Los Padres Bank’s deposits are currently insured to a maximum of $100,000 ($250,000 for certain retirement accounts) through the Deposit Insurance Fund (DIF) administered by the FDIC. Los Padres Bank is required to pay deposit insurance premiums, which are assessed semiannually and paid quarterly. In November 2006, the FDIC adopted a new risk-based insurance assessment system effective January 1, 2007, designed to tie what banks pay for deposit insurance more closely to the risks they pose. The FDIC also adopted a new base schedule of rates that the FDIC can adjust up or down, depending on the needs of the DIF, and set initial premiums for 2007 that range from 5 cents per $100 of domestic deposits in the lowest risk category to 43 cents per $100 of domestic deposits for banks in the highest risk category. The new assessment system is expected to result in increased annual assessments on the deposits of Los Padres Bank of 5 to 7 basis points per $100 of domestic deposits. An FDIC credit available to Los Padres Bank for prior contributions is expected to offset the assessments for 2007 and may offset some or all assessments thereafter. Significant increases in the insurance assessments of our Bank will increase our costs once the credit is fully utilized.

In addition, all FDIC-insured institutions are required to pay assessments to the FDIC at an annual rate for the fourth quarter of approximately $0.0124 per $100 of assessable deposits to fund interest payments on bonds issued by the Financing Corporation (“FICO”), an agency of the Federal government established to recapitalize the predecessor to the SAIF (the predecessor fund to the DIF for insurance of savings institution deposits). These assessments will continue until the FICO bonds mature in 2017.

The FDIC is also empowered to make special assessments on insured depository institutions on amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary.

Regulatory Capital Requirements and Prompt Corrective Action. The prompt corrective action regulation of the OTS, requires certain mandatory actions and authorizes certain other discretionary actions to be taken by the OTS against a savings association that falls within certain undercapitalized capital categories specified in the regulation.

Under the regulation, an institution is well capitalized if it has a total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5.0%, with no written

agreement, order, capital directive, prompt corrective action directive or other individual requirement by the OTS to maintain a specific capital measure. An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8.0% and a Tier 1 risk-based capital ratio of at least 4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a composite rating of “1”). The regulation also establishes three categories for institutions with lower ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At December 31, 2006, Los Padres Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations.

In general, the prompt corrective action regulation prohibits an insured depository institution from declaring any dividends, making any other capital distribution, or paying a management fee to a controlling person if, following the distribution or payment, the institution would be within any of the three undercapitalized categories. In addition, adequately capitalized institutions may accept brokered deposits only with a waiver from the FDIC and are subject to restrictions on the interest rates that can be paid on such deposits. Undercapitalized institutions may not accept, renew, or roll over brokered deposits.

If the OTS determines that an institution is in an unsafe or unsound condition, or if the institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the institution is well capitalized, reclassify it as adequately capitalized; if the institution is adequately capitalized but not well capitalized, require it to comply with restrictions applicable to undercapitalized institutions; and, if the institution is undercapitalized, require it to comply with certain restrictions applicable to significantly undercapitalized institutions. Finally, pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard regulatory examination score or is considered undercapitalized without the express permission of the institution’s primary regulator.

OTS capital regulations also require savings associations to meet three capital standards:

	•		tangible capital equal to at least 1.5% of total adjusted assets,

	•		leverage capital (core capital) equal to 4% of total adjusted assets, and

	•		risk-based capital equal to 8% of total risk-weighted assets.

These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. Minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings associations, upon a determination that the savings association’s capital is or may become inadequate in view of its circumstances.

The following table reflects as of December 31, 2006, Los Padres Bank’s actual levels of regulatory capital and the applicable regulatory capital requirements.


	Tangible Capital(1)					Tier 1 Leverage Capital(1)					Risk-Based Capital(1)
	Amount		Percent			Amount		Percent			Amount		Percent
	(Dollars in Thousands)
Actual regulatory capital	$	85,008		7.41	%	$	85,008		7.41	%	$	90,921		10.78	%
Minimum regulatory capital		17,198		1.50			45,862		4.00			67,481		8.00

Excess regulatory capital	$	67,810		5.91	%	$	39,146		3.41	%	$	23,440		2.78	%


(1)		Tangible capital is computed as a percentage of tangible assets and Tier 1 leverage capital is computed as a percentage of the adjusted total assets, both of which amounted to $85.0 million as of December 31, 2006.

The Home Owners’ Loan Act (“HOLA”) permits savings associations not in compliance with the OTS capital standards to seek an exemption from certain penalties or sanctions for noncompliance. Such an exemption will be granted only if certain strict requirements are met, and must be denied under certain circumstances. If the OTS grants an exemption, the savings association still may be subject to enforcement actions for other violations of law or unsafe or unsound practices or conditions.

Loans-to-One Borrower Limitations. Savings associations generally are subject to the lending limits applicable to national banks. With certain limited exceptions, the maximum amount that a savings association or a national bank may lend to any borrower (including certain related entities of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by readily marketable collateral. Savings associations are additionally authorized to make loans to one borrower, by order of the Director of OTS, in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired capital and surplus to develop residential housing, provided:

	•		the savings association is in compliance with its capital requirements;

	•		the loans comply with applicable loan-to-value requirements; and

	•		the aggregate amount of loans made under this authority does not exceed 150% of unimpaired capital and surplus.

At December 31, 2006, Los Padres Bank’s loans-to-one-borrower limit was $13.6 million based upon the 15% of unimpaired capital and surplus measurement. At December 31, 2006, Los Padres Bank’s largest single lending relationship had an outstanding balance of $13.1 million, and consisted of one loan secured by commercial real estate, which was performing in accordance with its terms.

Qualified Thrift Lender Test. Savings associations must meet a QTL test, which may be met either by maintaining a specified level of assets in qualified thrift investments as specified in HOLA or by meeting the definition of a “domestic building and loan association” under the Code. Qualified thrift investments are primarily residential mortgages and related investments, including certain mortgage related securities. The required percentage of investments under HOLA is 65% of assets while the Code requires investments of 60% of assets. An association must be in compliance with the QTL test or the definition of domestic building and loan association on a monthly basis in nine out of every 12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging in any activity not permitted for both a national bank and a savings association. As of December 31, 2006, Los Padres Bank was in compliance with its QTL requirement and met the definition of a domestic building and loan association.

Affiliate Transactions. Generally, transactions between a savings association or its subsidiaries and its affiliates are required to be on terms and under circumstances that are substantially the same, or at least as favorable to the savings association or its subsidiary, as transactions with non-affiliates. Certain of these transactions, such as loans or extensions of credit to an affiliate, are restricted to a percentage of the association’s capital and surplus. In addition, a savings association may not make a loan or other extension of credit to any affiliate engaged in activities not permissible for a bank holding company or purchase or invest in securities issued by most affiliates. Affiliates of a savings association include, among other entities, the savings association’s holding company and companies that are under common control with the savings association. HWFG and HWM are considered to be affiliates of Los Padres Bank.

Capital Distribution Limitations. OTS regulations impose limitations upon all capital distributions by savings associations, like cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. Under the rule, a savings association in some circumstances may:

	•		be required to file an application and await approval from the OTS before it makes a capital distribution;

	•		be required to file a notice 30 days before the capital distribution; or

	•		be permitted to make the capital distribution without notice or application to the OTS.

The OTS regulations require a savings association to file an application if:

	•		it is not eligible for expedited treatment of its other applications under OTS regulations;

	•		the total amount of all of capital distributions, including the proposed capital distribution, for the applicable calendar year exceeds its net income for that year to date plus retained net income for the preceding two years;

	•		it would not be at least adequately capitalized, under the prompt corrective action regulations of the OTS following the distribution; or

	•		the association’s proposed capital distribution would violate a prohibition contained in any applicable statute, regulation, or agreement between the savings association and the OTS, or the FDIC, or violate a condition imposed on the savings association in an OTS-approved application or notice.

In addition, a savings association must give the OTS notice of a capital distribution if the savings association is not required to file an application, but:

	•		would not be well capitalized under the prompt corrective action regulations of the OTS following the distribution;

	•		the proposed capital distribution would reduce the amount of or retire any part of the savings association’s common or preferred stock or retire any part of debt instruments like notes or debentures included in capital, other than regular payments required under a debt instrument approved by the OTS; or

	•		the savings association is a subsidiary of a savings and loan holding company.

If neither the savings association nor the proposed capital distribution meet any of the above listed criteria, the OTS does not require the savings association to submit an application or give notice when making

the proposed capital distribution. The OTS may prohibit a proposed capital distribution that would otherwise be permitted if the OTS determines that the distribution would constitute an unsafe or unsound practice.

Community Reinvestment Act and the Fair Lending Laws. Savings associations have a responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities and the denial of applications. In addition, an institution’s failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in the OTS, other federal regulatory agencies as well as the Department of Justice taking enforcement actions. Based on an examination conducted in June 2006 for the period ended March 31, 2006, Los Padres Bank received an outstanding rating with respect to its performance pursuant to the Community Reinvestment Act.

Federal Home Loan Bank System. Los Padres Bank is a member of the FHLB system. Among other benefits, each FHLB serves as a reserve or central bank for its members within its assigned region. Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system. Each FHLB makes available loans or advances to its members in compliance with the policies and procedures established by the Board of Directors of the individual FHLB. As an FHLB member, Los Padres Bank is required to own capital stock in an FHLB in an amount equal to the greater of:

	•		1% of its aggregate outstanding principal amount of its residential mortgage loans, home purchase contracts and similar obligations at the beginning of each calendar year; or

	•		5% of its FHLB advances or borrowings.

Los Padres Bank’s required investment in FHLB stock, based on December 31, 2006, financial data, was $12.1 million. At December 31, 2006, Los Padres Bank had $14.6 million of FHLB stock.

Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain noninterest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. At December 31, 2006 Los Padres Bank was in compliance with these requirements.

Activities of Subsidiaries. A savings association seeking to establish a new subsidiary, acquire control of an existing company or conduct a new activity through a subsidiary must provide 30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in compliance with regulations and orders of the OTS. The OTS has the power to require a savings association to divest any subsidiary or terminate any activity conducted by a subsidiary that the OTS determines to pose a serious threat to the financial safety, soundness or stability of the savings association or to be otherwise inconsistent with sound banking practices.

Legislation

USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001 was enacted in response to the terrorist attacks in New York, Pennsylvania and Washington, D.C. that occurred on September 11, 2001. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering. Recently, Congress passed and the President signed a bill that extends portions of the Patriot Act.

Financial Services Modernization Legislation. In November 1999, the Gramm-Leach-Bliley Act of 1999 (“GLB”) was enacted. The GLB repeals provisions of the Glass-Steagall Act which restricted the affiliation of Federal Reserve member banks with firms “engaged principally” in specified securities activities, and which restricted officer, director, or employee interlocks between a member bank and any company or person “primarily engaged” in specified securities activities.

In addition, the GLB also contains provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law is to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company to engage in a full range of financial activities through a new entity known as a “financial holding company.” “Financial activities” is broadly defined to include not only banking, insurance and securities activities, but also merchant banking and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to such financial activities, or complementary activities that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.

The GLB provides that no company may acquire control of an insured savings association unless that company engages, and continues to engage, only in the financial activities permissible for a financial holding company, unless the company is grandfathered as a unitary savings and loan holding company. The Financial Institution Modernization Act grandfathers any company that was a unitary savings and loan holding company on May 4, 1999 or became a unitary savings and loan holding company pursuant to an application pending on that date.

The GLB also permits national banks to engage in expanded activities through the formation of financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized for national banks directly or any financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking, which may only be conducted through a subsidiary of a financial holding company. Financial activities include all activities permitted under new sections of the Bank Holding Company Act or permitted by regulation.

To the extent that the GLB permits banks, securities firms, and insurance companies to affiliate, the financial services industry may experience further consolidation. The GLB is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis and which unitary savings and loan holding companies already possess. Nevertheless, the GLB may have the result of increasing the amount of competition that we face from larger institutions and other types of companies offering financial products, many of which may have substantially more financial resources than we have.

Sarbanes-Oxley Act. In July 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOA”) implementing legislative reforms intended to address corporate and accounting improprieties. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934 (the “Exchange Act”). The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

As a public reporting company, we are subject to the provisions of the SOA and related rules and regulations issued by the SEC and NASDAQ. Although we are not yet subject to compliance with section 404 of the SOA, we have taken steps to implement that section and incurred related expenses. To date, our

compliance costs related to the SOA have not been material. However, it is anticipated that we will incur additional expense as a result of the SOA, and the implementation cost of compliance with section 404 may be material.

Regulation of Non-banking Affiliates

Harrington Wealth Management Company is registered with the SEC as an investment advisor. Harrington Wealth Management Company is subject to various regulations and restrictions imposed by the SEC, as well as by various state authorities.

Item 1A. Risk Factors

An investment in our common stock is subject to risks inherent to our business. The material risks and uncertainties that management believes may affect our business are described below. Before making an investment decision, you should carefully consider the risks and uncertainties described below together with all of the other information included or incorporated by reference in this Form 10K. The risks and uncertainties described below are not the only ones facing our business. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This Form 10-K is qualified in its entirety by these risk factors.

If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of your investment.

Our business is subject to various lending risks which could adversely impact our results of operations and financial condition.

Our commercial real estate and multi-family residential loans involve higher principal amounts than other loans, and repayment of these loans may be dependent on factors outside our control or the control of our borrowers. At December 31, 2006, commercial real estate loans totaled $264.9 million, or 34.6%, of our total loan portfolio while multi-family real estate loans totaled $79.9 million, or 10.4%, of our total loan portfolio. Commercial and multi-family real estate lending typically involves higher loan principal amounts and the repayment of such loans generally is dependent, in large part, on the successful operation of the property securing the loan or the business conducted on the property securing the loan. These loans may be more adversely affected by conditions in the real estate markets or in the economy generally. For example, if the cash flow from the borrower’s project is reduced due to leases not being obtained or renewed, the borrower’s ability to repay the loan may be impaired. In addition, many of our commercial real estate and multi-family residential loans are not fully amortizing and contain large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment.

Repayment of our commercial and industrial loans is often dependent on the cash flows of the borrower, which may be unpredictable, and the collateral securing these loans may fluctuate in value. At December 31, 2006, commercial and industrial loans totaled $119.1 million, or 15.6%, of our total loan portfolio. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. Most often, this collateral consists of accounts receivable, inventory or equipment. Credit support provided by the borrower for most of these loans and the probability of repayment is based on the liquidation of the pledged collateral and enforcement of a personal guarantee, if any exists. As a result, in the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. The collateral securing other loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business.

Our construction loans are based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. At December 31, 2006, construction loans totaled $112.6 million, or 14.7%, of our total loan portfolio while land acquisition and development loans totaled $54.7 million, or 7.1%, of our total loan portfolio. Construction and acquisition and development lending involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, as well as the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. As a result, construction loans and acquisition and development loans often involve the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss.

Our consumer loans generally have a higher risk of default than our other loans. At December 31, 2006, consumer loans totaled $27.5 million, or 3.7%, of our total loan portfolio. Consumer loans typically have shorter terms and lower balances with higher yields as compared to one- to four-family residential mortgage loans, but generally carry higher risks of default. Consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on these loans.

Our allowance for loan losses may prove to be insufficient to absorb probable incurred losses inherent in our loan portfolio.

Like all financial institutions, every loan we make carries a certain risk that it will not be repaid in accordance with its terms or that any collateral securing it will not be sufficient to assure repayment. This risk is affected by, among other things:

	•		cash flow of the borrower and/or the project being financed;

	•		in the case of a collateralized loan, the changes and uncertainties as to the future value of the collateral;

	•		the credit history of a particular borrower;

	•		changes in economic and industry conditions; and

	•		the duration of the loan.

We maintain an allowance for loan losses which we believe is appropriate to provide for any probable losses inherent in our loan portfolio. The amount of this allowance is determined by management through a periodic review and consideration of several factors which are discussed in more detail under “Item 1. Business – Asset Quality – Allowance for Loan Losses.”

At December 31, 2006, our allowance for loan losses was $5.9 million. Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. Although we believe our loan loss allowance is adequate to absorb probable incurred losses in our loan portfolio, we cannot predict these losses or whether our allowance will be adequate or that regulators will not require us to increase this allowance. Any of these occurrences could materially and adversely affect our business, financial condition, prospects and profitability.

Our business is subject to economic and other general risks which may adversely impact our results of operations and financial condition.

Changes in economic conditions, in particular an economic slowdown in the markets in which we operate, could hurt our business. Our business is directly affected by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control. A deterioration in economic conditions, in particular an economic slowdown in the markets in which we operate in California, Kansas or Arizona, could result in the following consequences, any of which could materially and adversely affect our business, financial condition, prospects and profitability:

	•		loan delinquencies may increase;

	•		problem assets and foreclosures may increase;

	•		demand for our products and services may decline;

	•		low cost or noninterest-bearing deposits may decrease; and

	•		collateral, for loans made by us, especially real estate, may decline in value, in turn reducing customers’ borrowing power.

A downturn in the real estate market may adversely affect our business. As of December 31, 2006, approximately 83.3% of the book value of our loan portfolio consisted of loans secured by various types of real estate. Approximately 64.8% of our real property collateral is located in California, approximately 18.4% is located in the Kansas City metropolitan area, and 16.8% is in the Arizona market. Negative conditions in the real estate markets where collateral for a mortgage loan is located could adversely affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Our ability to recover on defaulted loans by selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans. If there is a significant decline in real estate values, the collateral for our loans will provide less security. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and among other things, earthquakes and other national disasters particular to our market areas.

We are exposed to risk of environmental liabilities with respect to properties to which we take title. In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, we could suffer a material and adverse effect on our business, financial condition, prospects and profitability.

We may suffer losses in our loan portfolio despite our underwriting practices. We seek to mitigate the risks inherent in our loan portfolio by adhering to certain underwriting practices. These practices include analysis of prior credit histories, financial statements, tax returns and cash flow projections, valuation of collateral based on reports of independent appraisers and verification of liquid assets. Although we believe that our underwriting criteria are appropriate for the various kinds of loans we make, we may incur losses on loans that meet our underwriting criteria, and these losses may exceed the amounts set aside as reserves for losses in the allowance for loan losses.

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

Like other financial institutions, our operating results are largely dependent on our net interest income. Net interest income is the difference between interest earned on loans and securities and interest expense incurred on deposits and borrowings. Our net interest income is impacted by changes in market rates of interest, the interest rate sensitivity of our assets and liabilities, prepayments on our loans and securities and limits on increases in the rates of interest charged on our loans. We expect that we will continue to realize income from the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities.

We cannot control or accurately predict changes in market rates of interest. The following are some factors that may affect market interest rates, all of which are beyond our control:

	•		inflation;

	•		slow or stagnant economic growth or recession;

	•		unemployment;

	•		money supply and the monetary policies of the Federal Reserve Board;

	•		international disorders; and

	•		instability in domestic and foreign financial markets.

We are vulnerable to an increase in interest rates because our interest-earning assets generally have longer maturities than our interest-bearing liabilities. Under such circumstances, material and prolonged increases in interest rates will negatively affect our net interest income. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower volume of loan originations. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan origination volume, securities portfolio, and overall profitability. Although we attempt to manage our interest rate risk, we cannot assure you that we can minimize our interest rate risk. Our net interest margin was 2.83% for the year ended December 31, 2006, compared to 2.83% for the year ended December 31, 2005, and 2.81% in the December 2006 quarter compared to 2.81% for the quarter ended December 2005. Over the last few quarters the net interest margin has stabilized near the 2.81% level.

Our investment portfolio includes securities and total rate of return swaps which are sensitive to interest rates and spread changes and which we may be required to sell at a loss to meet our liquidity needs.

Our available for sale portfolio totaled $309.7 million at December 31, 2006. The unrealized gains or losses in our available for sale portfolio are reported as a separate component of stockholders’ equity until realized upon sale. As a result, future interest rate fluctuations may impact stockholders’ equity, causing material fluctuations from quarter to quarter. The risk of us realizing a loss upon a sale in our available for sale portfolio is a function of our liquidity needs and market conditions at the time of sale. Failure to hold our securities until maturity or until market conditions are favorable for a sale could materially and adversely affect our business, financial condition, profitability and prospects.

We invest in interest rate contracts which can cause losses to us in excess of the value at which we carry these investments.

We invest in interest rate contracts for the purpose of reducing interest rate risk and, to a much more limited extent, to enhance spread income through asset based interest rate swaps. These interest rate contracts may include interest rate swaps, caps and floors and exchange traded futures and options. At December 31, 2006, we had invested in interest rate swaps with an aggregate notional amount of $181 million. Although, we have utilized caps, floors and exchange traded futures and options in prior periods, as of December 31, 2006, we did not have any investments in such interest rate contracts. Interest rate contracts can cause losses to us which will be reflected in our statements of earnings, and the maximum potential loss reflected in our statements of earnings may exceed the value at which we carry these instruments. These losses result from changes in the market values of such interest rate contracts. At December 31, 2006, the approximate net market value of our interest rate contracts was $586,812. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management.”

Our interest rate contracts expose us to:

	•		basis or spread risk, which is the risk of loss associated with variations in the spread between the interest rate contract and the hedged item;

	•		credit risk, which is the risk of the insolvency or other inability of another party to the transaction to perform its obligations;

	•		interest rate risk;

	•		volatility risk, which is the risk that the expected uncertainty relating to the price of the underlying asset differs from what is anticipated; and

	•		liquidity risk.

If we suffer losses on our interest rate contracts, our business, financial condition and prospects may be negatively affected, and our net income will decline.

We are subject to extensive regulation which could adversely affect our business.

Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of our operations. We believe that we are in substantial compliance in all material respects with applicable federal, state and local laws, rules and regulations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. There are currently proposed various laws, rules and regulations that, if adopted, would impact our operations. If these or any other laws, rules or regulations are adopted in the future, they could make compliance much more difficult or expensive, restrict our ability to originate, broker or sell loans, further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold by us or otherwise materially and adversely affect our business, financial condition, prospects or profitability.

Our continued pace of growth may require us to raise additional capital in the future, but that capital may not be available when it is needed.

We are required by federal regulatory authorities to maintain adequate levels of capital to support our operations. In addition, due to our business strategy which has concentrated on growth and a shift in our lending focus to more commercial lending and the size and character of our available for sale and trading securities portfolio, we may be required to hold capital in excess of well capitalized levels as defined by the OTS. To the extent that Los Padres Bank fails to comply with required capital ratios, the OTS could take such

failure to comply into consideration in connection with further requests to have Los Padres Bank pay dividends to us and in additional future branch applications. Los Padres Bank’s failure to comply could also impact its overall assessment by the OTS in future regulatory examinations, which, if adverse, could also impact its FDIC insurance assessment. See “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Capital Resources,” and “Regulation – Los Padres Bank – Regulatory Capital Requirements and Prompt Corrective Action.”

We anticipate that our existing capital resources will satisfy our capital requirements for the near term. However, we may at some point need to raise additional capital to support continued growth, both internally and through acquisitions. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial performance. Accordingly, we cannot assure you of our ability to raise additional capital if needed or on terms acceptable to us. If we cannot raise additional capital when needed, our ability to further expand our operations through internal growth and acquisitions could be materially impaired.

Our plan to expand the franchise with additional banking offices in California, Kansas and Arizona may not be successful, which would negatively affect our growth strategy and prospects, and profitability.

We intend to open a banking office located in Surprise, Arizona, and our third in the Phoenix metro area, in the third quarter of 2007. Management estimates that it will take approximately 12 to 18 months for each of the new branches to be profitable. These estimates are based on our financial model which reflects various assumptions, and we cannot give assurance that we will achieve profitability when estimated or that losses will not be greater than anticipated. While our management has significant experience in the Kansas and Arizona markets, we cannot be sure that our expansion in those markets will meet our expectations. In addition, although we have hired experienced personnel who are familiar with the markets and although our senior management has extensive knowledge of the area, we may not be successful in these operations and we may not be able to compete successfully. If we are unsuccessful in expanding our business in Kansas and Arizona, our growth strategy, financial condition, prospects and profitability may be adversely affected.

We are dependent on key individuals and our ability to attract and retain banking professionals with significant experience in our local markets.

We currently depend heavily on Craig J. Cerny, our Chief Executive Officer, William W. Phillips, Jr., our President, Mark Larrabee, our Region President of Kansas and Chief Commercial Lending Officer, Susan Weber, our Executive Vice President of Mortgage Lending, Vern Hansen, our Region President of Arizona, and Rick Harrison, our President of Harrington Wealth Management Company. We believe that the prolonged unavailability or the unexpected loss of the services of these individuals could have a material adverse effect upon us because attracting suitable replacements may involve significant time and/or expense. We do not have employment agreements with Mr. Cerny, Mr. Phillips or any of our other executive officers.

In order to continue our expansion, we must attract and retain experienced banking professionals. The competition to hire experienced banking professionals is intense. If we are unable to attract qualified banking professionals, our expansion plans could be delayed or curtailed. If we are unable to retain our current banking professionals, our business, financial condition, prospects and profitability may be adversely affected.

We rely on the investment advice and research of an independent advisor, and the loss of services from that advisor could disrupt our business.

Los Padres Bank has entered into an Investment and Interest Rate Advisory Agreement with Smith Breeden Associates, Inc., or Smith Breeden. Under the terms of the agreement, Smith Breeden provides us with investment advice and research related to Los Padres Bank’s portfolio of investments and its asset and liability management strategies. Los Padres Bank employs ‘option-adjusted pricing analysis’ with respect to the purchase and sale of mortgage-backed and related securities for its investment portfolio and relies on Smith Breeden with respect to this analysis as well as the execution of Los Padres Bank’s asset and liability

management strategies. We believe that there are other investment advisors that could perform the services currently being provided by Smith Breeden; however, there can be no assurance that an alternative investment advisor could be retained on a timely basis if Los Padres Bank’s agreement with Smith Breeden was terminated or Smith Breeden was otherwise unable to perform its services to Los Padres Bank. In addition, Smith Breeden provides consulting and investment advice for a number of other financial institutions. Although Smith Breeden has adopted a policy in order to reduce potential conflicts of interest with respect to its financial institution consulting practice, no assurance can be made that a conflict of interest would not arise which conflict could adversely affect Los Padres Bank. Craig J. Cerny, our chief executive officer, and Stanley Kon, Director, still hold a minority equity interest in Smith Breeden.

We face strong competition from other financial institutions, financial service companies and other companies that offer banking services which can hurt our business.

We conduct our banking operations primarily along the central coast of California, the Phoenix metro, and the Kansas City metro areas. Many competitors offer the banking services that we offer in our service area, and in the areas we intend to expand in. These competitors include other savings associations, national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Increased competition in our market areas may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors.

Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are thereby able to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened low-end production offices or that solicit deposits in our market areas. If we are unable to attract and retain banking customers, we may be unable to continue our loan growth and level of deposits and our business, financial condition and prospects may otherwise be negatively affected.

We continually encounter technological change, and we may have fewer resources than many of our competitors to continue to invest in technological improvements.

The financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology to provide products and services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers.

Our ability to service our Trust Preferred Securities, pay dividends, and otherwise pay our obligations as they come due is substantially dependent on capital distributions from Los Padres Bank, and these distributions are subject to regulatory limits and other restrictions.

Padres Bank – Capital Distributions.” It is possible; depending upon the financial condition of Los Padres Bank, and other factors, that the OTS could assert that payment of dividends or other payments is an unsafe or unsound practice. We are also subject to contractual restrictions on our ability to pay dividends under our revolving loan facility. See “Trading History and Dividend Policy.” In the event Los Padres Bank is unable to pay dividends to us, we may not be able to service our debt, pay our obligations or pay dividends on our common stock. The inability to receive dividends from Los Padres Bank would adversely affect our business, financial condition, results of operations and prospects.

Provisions in our certificate of incorporation and bylaws limit the authority of our stockholders, and therefore minority stockholders may not be able to significantly influence our governance or affairs.

Our board of directors has the authority to issue shares of preferred stock and to determine the price, rights, preferences and restrictions, including the voting rights, of those shares without any further vote or action by stockholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.

Our Certificate of Incorporation and Bylaws also provide for limitations on the ability of stockholders to call special meetings and prohibit cumulative voting for directors. As a result, minority stockholder representation on the board of directors may be difficult to establish. These documents also establish advance notice requirement for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.

The provisions of our Certificate of Incorporation and Bylaws described above may, in certain circumstances, have the effect of delaying, deferring or preventing a change in control of us, may discourage bids for our common stock at a premium over the current market price of the common stock and could have an adverse effect on our stock price.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

Office Locations

The following table sets forth certain information with respect to our offices at December 31, 2006.


	Leased/Owned	Date Office	Total Deposits at
	and	Opened or Purchase	December 31, 2006
Office Location	Lease Expiration Date	Date	(Dollars in thousands)
Solvang Branch and Administrative Offices 610 Alamo Pintado Road Solvang, CA 93463	Lease expires on 1/31/10 with one option for five years	June 1983	$	117,243

Loan Center 1992 Old Mission Drive Solvang, CA 93463	Lease expires on 1/31/10 with one option for five years	March 1998		—

Pismo Branch 831 Oak Park Boulevard Pismo Beach, CA 93449	Lease expires on 2/9/08 with two options for five years each	May 1988		82,150

Atascadero Branch 7315 El Camino Real Atascadero, CA 93422	Lease expires on 4/30/11 with three options for five years each	May 1991		51,981

Santa Maria Branch 402 E. Main Street Santa Maria, CA 93454	Lease expires on 6/30/07 with three options for five years each	July 1992		66,438

Buellton Branch 234 E. Highway 246, Suite 109 Buellton, CA 93427	Lease expires on 11/2/07 with one option for five years	December 1997		20,476

Goleta Branch 197 North Fairview Goleta, CA 93117	Lease expires on 10/31/08 with three options for five years each	February 1999		81,399

San Luis Branch 1322 Madonna Road San Luis Obispo, CA 93405	Lease expires on 12/31/10 with one option for five years	January 2001		24,643

Nipomo Branch 542 W. Teft Road Nipomo, CA 93444	Lease expires on 12/31/10 with two options for five years each	July 2001		24,923

Storage Area 1120 Mission Drive Solvang, CA 93463	Month-to-month Lease with no expiration date	June 1992		—


	Leased/Owned	Date Office	Total Deposits at
	and	Opened or Purchase	December 31, 2006
Office Location	Lease Expiration Date	Date	(Dollars in thousands)
Human Resources, Compliance & Training Room Suite A-4 and A-5 1984 Old Mission Drive Solvang, CA 93463	Lease expires on 1/31/10 with one option for five years.	March 2000		—

Loan Origination Center Suite B-12 1988 Old Mission Drive Solvang, CA 93463	Lease expires on 1/31/10 with one option for five years	April 2002		—

Harrington Bank 6300 Nall Avenue Shawnee Mission, KS 66208	Lease expires on 12/31/10 with four options for five years each	November 2001		67,862

Harrington Wealth Management Company 10150 Lantern Road, Suite 150 Fishers, IN 46038	Lease expires on 10/31/11	November 2001		—

Arizona — Scottsdale Branch 10555 North 114th Street, Suite 100 Scottsdale, AZ 85295	Lease expires on 9/30/12 with two options for five years each	November 2002		37,700

Ventura Branch 1171 S. Victoria Ave., Suite A Ventura, CA 93003	Lease expires on 6/30/08 with four options for five years each	May 2004		34,664

Thousand Oaks Branch 2920 Thousand Oaks Blvd, Suite A Thousand Oaks, CA 91360	Lease expires on 5/31/10 with three options for five years each.	June 1, 2005		33,935

Arizona – Northsight Branch 14100 N. Northsight Blvd. Scottsdale, AZ 85260	Owned	December 17, 2004		21,188


	Leased/Owned	Date Office	Total Deposits at
	and	Opened or Purchase	December 31, 2005
Office Location	Lease Expiration Date	Date	(Dollars in thousands)
Ojai Branch 110 South Ventura Street Ojai, CA 93023	Owned	November 1997		45,974

Hanalei Bay Condo 5380 Honiki Road Princeville, Kauai	Owned	July 1994		—

Metcalf Branch 14300 Metcalf Overland Park, KS 66223	Owned	December 2003		17,654

Olathe Branch College & Pflumm Rds Olathe, KS 66215	Owned	November 2005		4,527

Surprise Branch Bell Road & 114^th Ave. Surprise, AZ 85374	Owned	January 2006		—

				$732,757

Item 3. Legal Proceedings

We are involved in a variety of litigation matters in the ordinary course of our business and anticipate that we will become involved in new litigation matters from time to time in the future. Based on the current assessment of these matters, we do not presently believe that any one of them or all such matters taken as a whole is likely to have a material adverse impact on our financial condition, results of operations, cash flows or prospects.

Item 4. Submission of Matters to a Vote of Security Holders.

None.

PART II


Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Stock Information

As of March 7, 2007, we had 5,544,853 shares of common stock outstanding and approximately 98 stockholders of record, which does not include the number of persons or entities holding stock in nominee or street name through various brokers and banks.

The following table sets forth the high and low sale prices of our common stock for each of the quarters of 2006 and 2005. Our common stock began trading on the NASDAQ Global Market on November 6, 2002 under the stock symbol “HWFG.”


Quarter Ended	High		Low		Dividends
March 31, 2005		16.85		16.56		.11
June 30, 2005		15.46		15.27		.125
September 30, 2005		17.10		17.00		.125
December 31, 2005		16.70		16.59		.125
March 31, 2006		17.17		15.46		.125
June 30, 2006		16.49		15.50		.125
September 30, 2006		16.98		15.73		.125
December 31, 2006		18.49		16.33		.125

Dividends

In all four quarters of 2006, we paid a quarterly dividend of $0.125. In 2005, we paid a quarterly dividend of $.11 in the first quarter and a quarterly dividend of $0.125 in the second, third and fourth quarters.

The dividend rate on our common stock and the continued payment of dividends is determined by our board of directors, which takes into account our consolidated earnings, financial condition, liquidity and capital requirements, applicable governmental regulations and policies, and other factors deemed relevant by our board of directors. More specifically, Delaware law provides that a corporation may make a dividend to its stockholders out of the corporation’s capital surplus or, in case there shall be no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The holders of our common stock are entitled to receive and share equally in such dividends as may be declared by our board of directors out of funds legally available therefore. Our ability to pay dividends may also be dependent on our ability to receive dividends from Los Padres Bank, which is subject to compliance with federal regulatory requirements. Additionally, under the terms of our revolving line of credit agreement with unaffiliated lenders, we cannot declare dividends in an amount exceeding the greater of $450,000 or 40% of our consolidated net income during any fiscal quarter or declare dividends at any time an event of default has occurred under the revolving line of credit.

The ability to declare or pay dividends would also be restricted if we deferred quarterly interest payments due for the subordinated debt of $25.8 million. As of December 31, 2006, all interest payments due were paid in full in accordance with the capital trust securities agreements.

On February 11, 2004, we declared a 6 for 5 stock split in the form of a stock dividend payable on March 11, 2004 to holders of record on February 25, 2004. Fractional shares distributed in connection with this stock dividend were paid in cash based on the closing market price on the record date.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In May 2005, our board of directors authorized the repurchase of up to 200,000 shares of our common stock through open market or privately arranged sales. To date, no shares have been repurchased and the authorization remains in place.

Item 6. Selected Financial Data.

(Dollars in Thousands, Except Share and Per Share Data)

The following summary presents our selected consolidated financial information at or for the five years ended December 31, 2006. Financial information at or for each of the five years ended December 31, 2006 is derived from our audited consolidated financial statements. The selected historical consolidated financial and other data set forth below should be read in conjunction with, and is qualified in its entirety by, our historical consolidated financial statements, including the related notes, included in Item 8 herein.


	At or For the Year Ended December 31,
	2006			2005			2004			2003			2002
Selected Financial Condition Data:
Total assets	$	1,154,473		$	1,140,187		$	1,081,330		$	974,799		$	824,331
Loans receivable, net		757,033			672,890			598,442			518,496			448,050
Securities available for sale		309,729			387,352			431,206			398,691			324,530
Securities held to maturity		69			80			93			222			2,368
Trading account assets		837			975			1,046			2,111			1,934
Deposits		732,757			669,145			598,182			570,697			525,271
Federal Home Loan Bank advances		257,000			319,000			316,000			262,500			235,000
Note payable		—			—			—			—			11,300
Securities sold under repurchase agreements		65,141			59,013			79,689			65,728			517
Other debt		25,774			25,774			25,774			15,464			—
Stockholders’ equity		67,698			59,574			52,660			48,076			42,472
Shares outstanding		5,460,393			5,384,843			5,278,934			5,206,109			5,193,509

Selected Income Statement Data:
Interest income	$	74,095		$	62,056		$	52,266		$	46,434		$	43,493
Interest expense		43,341			31,898			22,718			20,308			21,921

Net interest income		30,754			30,158			29,548			26,126			21,572
Provision for loan losses		565			435			650			790			391

Net interest income after provision for loan losses		30,189			29,723			28,898			25,336			21,181
Other income:
Net gain (loss) on sale of available-for-sale securities		(613	)		933			690			—			—
Income (loss) from trading assets		1024			3			571			2,647			(31	)
(Loss) on extinguishment of debt		—			—			(189	)		(1,610	)		—
Other gain (loss)		(39	)		(15	)		(57	)		30			(350	)
Banking fee income and other income(1)		4,085			3,948			3,148			4,108			2,531
Other expenses:
Salaries and employee benefits		12,478			11,166			10,522			10,086			7,847
Premises and equipment		3,744			3,884			3,153			2,722			2,197
Other expenses(2)		5,938			6,026			5,741			5,041			4,713

Income before income taxes		12,486			13,516			13,645			12,662			8,574
Income taxes		4,258			5,180			5,436			5,249			3,529

Net income	$	8,228		$	8,336		$	8,209		$	7,413		$	5,045


Common Stock Summary:
Basic earnings per share	$	1.51		$	1.56		$	1.56		$	1.43		$	1.20
Diluted earnings per share		1.48			1.48			1.46			1.36			1.15
Dividends per share		0.50			0.49			0.88			0.21			0.08
Stockholders’ equity per share		12.40			11.06			9.98			9.23			8.18
Diluted weighted average shares outstanding		5,572,664			5,620,556			5,603,680			5,455,002			4,370,021


	At or For the Year Ended December 31,
	2006			2005			2004			2003			2002
Selected Operating Data(3):

Performance Ratios and Other Data:
Return on average assets		0.72	%		0.75	%		0.80	%		0.82	%		0.68	%
Return on average equity		12.85			14.61			16.30			16.37			15.36
Average equity to average assets		5.62			5.14			4.87			4.93			5.15
Interest rate spread (4)		2.56			2.63			2.77			2.90			2.97
Net interest margin (4)		2.83			2.83			2.93			3.07			3.14
Average interest-earning assets to average interest-bearing liabilities		106.82			106.61			107.09			107.03			105.21
Total noninterest expenses to average total assets		1.94			1.86			1.88			2.04			1.97
Efficiency ratio(5)		63.61			61.80			59.38			59.04			61.22

Asset Quality Rations (6):
Non-performing assets and troubled debt restructurings to total assets		0.01	%		0.00	%		0.00	%		0.00	%		0.03	%
Non-performing loans and troubled debt restructurings to total loans		0.01			0.00			0.02			0.00			0.05
Allowance for loan losses to total loans		0.78			0.84			0.87			0.88			0.83
Net charge-offs to average loans outstanding		0.01			0.00			0.00			0.00			0.08

Bank Regulatory Capital Ratios:
Tier 1 risk-based capital ratio		10.08			9.96			10.37			10.20			11.14
Total risk-based capital ratio		10.78			10.69			11.13			10.99			11.97
Tier 1 leverage capital ratio		7.41			6.78			6.68			6.08			6.11


(1)		Consists of service charges, wholesale mortgage banking income, other commissions and fees, other miscellaneous noninterest income and increase in cash surrender value of life insurance.

(2)		Consists of computer services, consulting fees, marketing and other miscellaneous noninterest expenses.

(3)		With the exception of return on average assets and return on average equity, all ratios are based on average daily balances.

(4)		Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate on interest- bearing liabilities. Net interest margin represents net interest income as a percentage of average interest-earning assets.

(5)		Efficiency ratio represents noninterest expenses as a percentage of the aggregate of net interest income before provision for loan losses and noninterest income, excluding gains on sales of securities, deposits and loans.

(6)		Non-performing loans generally consist of non-accrual loans and non-performing assets generally consist of non-performing loans and real estate acquired by foreclosure or deed-in-lieu thereof.


Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Mission

Our mission is to develop diversified and highly profitable community-focused, banking operations in the markets of the Central Coast of California, the Kansas City metro, and the Phoenix/Scottsdale metro. Although these markets are geographically dispersed, we have considerable market knowledge of each of these areas, local management with extensive experience in banking and the particular market, relationship development potential due to our ties to the communities, and each market offers favorable demographic and economic characteristics. All of these banking operations are operated under the Los Padres Bank, FSB charter so that we can gain operating efficiencies from centralized administration and operating systems. However, each region’s banking operation is distinct to its market and its clientele, and lead by a local management team responsible for developing and expanding the banking operations on a profitable basis. The Kansas City banking offices operate under the Harrington Bank (dba) brand name, and the California and Arizona offices operate under the Los Padres Bank brand name.

Multiple Market Strategy

We believe this multiple market banking strategy provides the following benefits to our shareholders:

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.

We plan to grow the banking operations in these markets opportunistically and expect the opening of two to three banking offices every 18 months through new branching. We evaluate financial institution acquisition opportunities but are value oriented. Acquisitions are expected to be accretive to earnings per share within a 12-month period.

2006 marked HWFG’s eleventh year of operations and was highlighted by a high degree of success in executing our strategy to grow our core banking franchise of loans, deposits and HWM fees, while we made further progress in identifying and acquiring new banking sites in our markets for future expansion.

Since HWFG’s acquisition of Los Padres Bank almost 11 years ago, we have approximately increased our loans by 4 times, our deposits by 4 times and our earnings by 18 times. We have had a great deal of success over these 10 years and look forward to more positive results in the future.

Since 1997, we have grown from 4 banking offices to 16 banking offices including the Thousand Oaks deposit acquisition, opening the Scottsdale Airpark office in mid 2005 and opening in the Olathe, Kansas in August, 2006. We have 11 full service banking offices on the Central Coast of California from Thousand Oaks to Atascadero along Highway 101, 3 banking offices in Johnson County, Kansas in the fastest growing area of the Kansas City metro, and 2 offices in Scottsdale, Arizona. We will open our third banking office in the Phoenix metro area in the first quarter of 2007. We are working on additional expansion opportunities in each market.

Product Line Diversification

We have broadened our product lines over the last 6 years to diversify our revenue sources and to become a full service community banking company. In 1999, we added Harrington Wealth Management Company, a federally registered trust and investment management company, to provide our customers a consultative and customized investment process for their trust and investment funds. In 2000, we added a full line of commercial banking and deposit products for small to medium sized businesses and expanded our consumer lending lines to provide Home Equity Lines of Credit. In 2001, we added internet banking and bill pay services to augment our in-branch services and consultation. In 2002, we further expanded our mortgage banking and brokerage activities in all of our markets. In 2004 we added the Overdraft Privilege Program and Uvest. Uvest expanded Harrington Wealth Management’s services to include brokerage and insurance products.

Modern Financial Skills

We believe we have considerable expertise in investment and asset liability management from the CEO’s background in this field for over 20 years, during which he spent 13 years consulting on risk management practices with banking institutions and advising on billions of mortgage assets managed on a short duration basis. We attempt to control interest rate risk to a low level through the use of interest rate risk management tools, and we utilize excess capital in a low duration and high credit quality investment portfolio of largely mortgage related securities to enhance our earnings. Our goal is to produce a pre-tax return on these investments of 1.00% to 1.25% over the related funding sources. We believe our ability to price loans and investments on an option-adjusted spread basis and then manage the interest rate risk of longer term, fixed rate loans allows us to compete effectively against other institutions.

Control Banking Risks

We seek to control banking risks. We have established a disciplined credit evaluation and underwriting environment that emphasizes the assessment of collateral support, cash flows, guarantor support, and stress testing. We manage operational risk through stringent policies, procedures, and controls and interest rate risk through our modern financial and hedging skills.

Performance Measurement

We evaluate our performance based upon the primary measures of return on average equity, which we are trying to maintain in the low to mid-teens, earnings per share growth, and additional franchise value creation through the growth of deposits, loans and wealth management assets. We may forego some short term profits to invest in operating expenses for branch development in an effort to earn future profits.

Profitability Drivers

The factors that we expect to drive our profitability in the future are as follows:

	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 and construction-to-permanent loan lending, and selected consumer lending activities such as home equity line of credit loans.

	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.

The following chart shows the comparison of banking fee income sources for 2006, 2005 and 2004.


	(Dollars in thousands)
	Year Ended December 31,
Banking Fee Type	2006		2005		% Change			2005		2004		% Change
Mortgage Brokerage Fees and Prepayment Penalties	$	623	$	1,077		(42.2	%)	$	1,077	$	1,290		(16.5	%)
Other Loan Fees		203		233		(12.9	%)		233		226		3.1	%
Deposit, Other Retail Banking Fee & Other Income		1,666		1,293		28.8	%		1,293		1022		26.5	%
Harrington Wealth Management Fees		848		724		17.1	%		724		610		18.7	%
BOLI		745		621		20.0	%		621		—

Total	$	4,085	$	3,948		3.5	%	$	3,948	$	3,148		25.4	%

Over the last three years, we have increased our recurring deposit and retail banking fee income and Harrington Wealth Management fees. However, mortgage brokerage and prepayment penalty fees have been volatile. Although we will continue to provide mortgage brokerage services, we are emphasizing purchase mortgage originations though our banking platform.

Achieving a high level of performance on our investment portfolio by earning a pre-tax total return 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 utilize 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 2002 to 2006, the investment portfolio’s performance has exceeded our goals and has contributed to our record profit performance due to favorable selection of securities and spread tightening on these

			securities. In 2006, the portfolio achieved a 87 basis points total return to one month LIBOR as compared to 50 basis points in 2005. The increase was due primarily to the favorable performance of our total return swaps during 2006. The total excess return of the investment portfolio (the total return over one month LIBOR) over the last five years has achieved a 1.76% total return spread to one month LIBOR and a 1.48% spread since the portfolio was established in April of 1996.

	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. As such, non-performing asset levels have been low with corresponding low loan charge-offs.

Together, we believe these factors will contribute to more consistent and growing profitability. The effect of these factors on our financial results is discussed further in the following sections.

Critical Accounting Policies

General. The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances; however, actual results may differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

The financial information contained in our consolidated financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when recognizing income or expense, recovering an asset or relieving a liability. We use historical loss factors to determine the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. We also calculate the fair value of our interest rate contracts and securities based on market prices and the expected useful lives of our depreciable assets. We enter into interest rate contracts that are classified as trading account assets or to accommodate our own risk management purposes. The interest rate contracts are generally interest swaps, caps, floors and futures contracts, although we could enter into other types of interest rate contracts. We value these contracts at fair value, using readily available, and market quoted prices. We have not historically entered into derivative contracts, which relate to credit, equity, commodity, energy or weather-related indices. Generally accepted accounting principles themselves may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. As of December 31, 2006, we have not created any special purpose entities to securitize assets or to obtain off-balance sheet funding. Although we have sold loans in past years, those loans have been sold to third parties without recourse, subject to customary representations and warranties.

Allowance for loan losses. The allowance for loan losses is an estimate of the probable incurred losses that may be inherent in our loan portfolio. The allowance is based on two principles of accounting: (i) Statement of Financial Accounting Standards, or SFAS, No. 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable; and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures, which requires that losses be accrued based on the differences between

the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has four components: (i) an allocated allowance for specifically identified problem loans, (ii) a formula allowance for non-homogenous loans, (iii) a formula allowance for large groups of smaller balance homogenous loans and (iv) an unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a model based on historical losses as an indicator of future losses and as a result could differ from the losses incurred in the future; however, since this history is updated with the most recent loss information, the differences that might otherwise occur may be mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, discounted cash flows, fair market value of collateral and secondary market information are all used to estimate those losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates.

Trading and Investment Portfolio. Substantially all of our securities are classified as available for sale securities and, pursuant to SFAS No. 115, are reported at fair value with unrealized gains and losses included in stockholders’ equity. We invest in a portfolio of mortgage-backed and related securities, interest rate contracts, U.S. Government agencies or government sponsored enterprise securities, and to a much lesser extent, equity securities. The Company has also entered into various total return swaps in an effort to enhance income, where cash flows are based on the level and changes in the yield spread on investment grade commercial mortgage backed security indexes relative to similar duration LIBOR swap rates. These swaps do not qualify for hedge accounting treatment and are included in the trading account assets and are reported at fair value with realized and unrealized gains and losses on these instruments recognized in income (loss) from trading account assets, pursuant to SFAS No. 115.

Hedging Activity. SFAS No.133, Accounting for Derivative Instruments and Hedging Activities was implemented on January 1, 2001. SFAS No. 133 requires an entity to recognize all interest rate contracts that meet the definition of a derivative, as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, an interest rate contract may be specifically designated as a fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure. The accounting for changes in the fair value of an interest rate contract (that is, gains and losses) depends on the intended use of the interest rate contract and the resulting designation. To qualify for hedge accounting, the Company must show that, at the inception of the interest rate contracts, and on an ongoing basis, the changes in the fair value of the interest rate contracts are expected to be highly effective in offsetting related changes in the cash flows of the hedged liabilities. The Company has entered into various interest rate swaps for the purpose of hedging certain of its short-term liabilities. These interest rate swaps qualify for hedge accounting. Accordingly, the effective portion of the accumulated change in the fair value of the cash flow hedges is recorded in a separate component of stockholders’ equity, net of tax, while the ineffective portion is recognized in earnings immediately.

Results of Operations

Summary of Earnings. We reported net income for the year ended December 31, 2006 of $8.2 million, compared to $8.3 million and $8.2 million for the years ended December 31, 2005 and 2004. Our net income declined by $108 thousand or 1.30% during 2006 as compared to 2005 and increased $127 thousand or 1.55% in 2005 as compared to 2004. On a diluted earnings per share basis, we earned $1.48, $1.48, and $1.46 for the years ended December 31, 2006, 2005 and 2004, respectively.

HWFG’s net earnings have been affected by the strategic decision to reduce the investment securities portfolio in 2006 by $77.6 million to a $309.8 million balance at December 31, 2006 and to allow all of HWFG’s $129.0 million of total return mortgage and asset backed swaps to mature in 2006. This reduction of earning investment assets was undertaken for two reasons: (1) the net margins on these investments had tightened to the extent that holding them did not present a favorable risk return tradeoff, and (2) the reduction of these investments allowed HWFG to substantially grow its diversified net loan portfolio by $84.1 million or 12.5% in 2006 to $757.0 million, thus re-deploying its equity capital in the community banking franchise. The reduction in the net interest income from investments and the positive carry on total return swaps was

substantially offset by the net interest income from the loan growth, resulting in nominal growth in net interest income from 2005 to 2006. HWFG anticipates that incremental net interest income from loan growth will exceed any reduction in net interest income from the further reduction of investments in 2007 if investment spreads remain tight. HWFG is focused on further building a diversified loan portfolio, low and non-costing deposits, and Harrington Wealth Management (HWM) and other banking fees.

Net Interest Income. Net interest income is determined by (i) our interest rate margin, which is the difference between the yields earned on our interest-earning assets and the rates paid on our interest-bearing liabilities and (ii) the relative amounts of interest-earning assets and interest-bearing liabilities.

Net interest income after provision for loan losses increased by $466 thousand or 2.0% to $30.2 million during the year ended December 31, 2006 over 2005. Although the asset mix change contributed favorably to net interest margin, deposit cost pressure (spread to LIBOR rates) and some lag in the repricing of floating rate loans and securities, the net interest margin remained stable at 2.83% from December 31, 2006 as compared to the same period 2005. We believe our hedging activities will result in our maintaining relatively stable margins over time (refer to the Asset and Liability Management section of this discussion for a detailed discussion of what our strategies are for hedging of interest rate exposure and why we believe that our management of interest rate fluctuations give us a competitive advantage over other financial institutions).

Net interest income after provision for loan losses increased by $825 thousand or 2.9% to $29.7 million during the year ended December 31, 2005 over 2004. The increase in net interest income is partly due to a $63.2 million or 6.3% increase in the average balance of interest-earning assets, while the interest rate margin decreased slightly by 10 basis points to 2.83% for 2005 from 2.93% for 2004. The decline in net interest margin reflects the slight lag in the repricing of floating rate borrowings and floating rate loans and hedges, and the prepayment of higher rate loans.

Average Balances, Net Interest Income, Yields Earned and Rates Paid

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income; (iv) interest rate spread; and (v) net interest margin. No tax equivalent adjustments were made during the periods presented. Information is based on average daily balances during the indicated periods, except noninterest-bearing deposits information is based on average balances for all periods.


	Year Ended December 31,
	2006							2005							2004
					Average							Average							Average
	Average				Yield/			Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost			Balance		Interest		Cost
	(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1)	$	715,520	$	54,963		7.68	%	$	636,490	$	43,269		6.80	%	$	561,665	$	36,166		6.44	%
Securities and trading account assets(2)		347,917		18,051		5.19			408,753		17,914		4.38			419,716		15,439		3.68
FHLB stock		15,395		826		5.37			16,237		709		4.37			14,197		573		4.04
Cash and cash equivalents(3)		11,252		255		2.27			9,602		164		1.71			12,318		88		0.71

Total interest-earning assets		1,090,084		74,095		6.80			1,071,082		62,056		5.79			1,007,896		52,266		5.18

Noninterest-earning assets		49,316							38,813							24,570

Total assets	$	1,139,400						$	1,109,895						$	1,032,466

Interest-bearing liabilities:
Deposits:
NOW and money market accounts	$	99,226	$	2,214		2.23		$	119,742	$	1,945		1.62		$	120,353	$	1,154		0.96
Passbook accounts and certificates of deposit		548,784		23,376		4.26			475,374		13,723		2.89			442,679		9,475		2.14

Total deposits		648,010		25,590		3.95			595,116		15,668		2.63			563,032		10,629		1.89
FHLB advances(4)		286,452		13,912		4.86			314,066		12,732		4.05			284,977		9,285		3.26
Reverse repurchase agreements		60,212		1,772		2.98			69,720		1,928		2.77			75,541		1,981		2.62
Other borrowings(5)		25,774		2,067		8.13			25,774		1,570		6.09			17,623		823		4.67

Total interest-bearing liabilities		1,020,448		43,341		4.24			1,004,676		31,898		3.16			941,173		22,718		2.41

Noninterest-bearing deposits		48,660							41,579							31,563
Noninterest-bearing liabilities		6,265							6,564							9,358

Total liabilities		1,075,373							1,052,819							982,094
Stockholders’ equity		64,027							57,076							50,372

Total liabilities and stockholders’ equity	$	1,139,400						$	1,109,895						$	1,032,466

Net interest-earning assets (liabilities)	$	69,636						$	66,406						$	66,723

Net interest income/interest rate spread			$	30,754		2.56				$	30,158		2.63				$	29,548		2.77

Net interest margin						2.83							2.83							2.93
Ratio of average interest-earnings assets to average interest-bearing liabilities						106.82							106.61							107.09


(1)		Includes non-accrual loans. Interest income includes fees earned on loans originated and accretion of deferred loan fees.

(2)		Consists of securities classified as available for sale and held to maturity and trading account assets. Excludes SFAS 115 adjustments to fair value, which are included in other assets.

(3)		Consists of cash and due from banks and federal funds sold.

(4)		Interest on FHLB advances is net of hedging costs. We use interest rate swaps to hedge the short-term repricing characteristics of our floating-rate FHLB advances. See “–Asset and Liability Management.”

(5)		Consists of a note payable under a revolving line of credit.

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume); (ii) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); and (iii) changes in rate/volume (change in rate multiplied by change in volume).


	Year Ended December 31, 2006												Year Ended December 31, 2005
	Compared to Year Ended December 31, 2005												Compared to Year Ended December 31, 2004
	Increase (decrease) due to												Increase (decrease) due to
										Total Net												Total Net
							Rate/			Increase									Rate/			Increase
	Rate			Volume			Volume			(Decrease)			Rate			Volume			Volume			(Decrease)
	(In Thousands)
Interest-earning assets:
Loans receivable	$	5,601		$	5,374		$	719		$	11,694		$	2,022		$	4,819		$	262		$	7,103
Securities and trading account Assets (1)		3,311			(2,665	)		(509	)		137			2,938			(403	)		(60	)		2,475
FHLB stock		162			(37	)		(8	)		117			47			82			7			136
Cash and cash equivalents (2)		54			28			9			91			123			(19	)		(28	)		76


Total net change in income on interest-earning assets		9,128			2,700			211			12,039			5,130			4,479			181			9,790

Interest-bearing liabilities:
Deposits
NOW and money market accounts		730			(332	)		(129	)		269			794			(6	)		3			791
Passbook accounts and certificates of deposit		6,513			2,122			1,018			9,653			3,320			700			228			4,248

Total deposits		7,243			1,790			889			9,922			4,114			694			231			5,039
FHLB advances (3)		2,544			(1,118	)		(246	)		1,180			2,251			948			248			3,447
Reverse repurchase agreements		146			(263	)		(39	)		(156	)		113			(150	)		(16	)		(53	)
Other borrowings (4)		526			—			(29	)		497			250			374			123			747


Total net change in expense on interest-bearing liabilities		10,459			409			575			11,443			6,728			1,866			586			9,180

Change in net interest income	$	(1,331	)	$	2,291		$	(364	)	$	596		$	(1,598	)	$	2,613		$	(405	)	$	610


(1)		Consists of securities classified as available for sale and held to maturity and trading account assets.

(2)		Consists of cash and due from banks and federal funds sold.

(3)		Interest on FHLB advances is net of cash flow hedging costs. We use interest rate swaps to hedge the short-term repricing characteristics of our floating-rate FHLB advances. See “–Asset and Liability Management.”

(4)		Consists of a note payable under a revolving line of credit and the subordinated debt.

Interest Income. Total interest income increased by $12.0 million or 19.4% for 2006 over 2005 from $62.1 million to $74.1 million. Interest income increased during the current year due to the re-pricing of adjustable rate loans and securities, and an increase in the volume of loans. Total interest income increased by $9.8 million or 18.7% for 2005 over 2004 from $52.3 million to $62.1 million. The Federal Reserve Board maintained a low federal funds rate during 2004, and since a substantial portion of our earning assets reprice with the general level of interest rates, our average yield on earning assets declined commensurate with the increases in federal fund rates.

Interest Expense. Total interest expense increased by $11.4 million or 35.9% during the year ended December 31, 2006 over 2005, from $31.9 million to $43.3 million. During 2006, the cost of floating rate borrowings and deposits increased with general market rates. Also, our average interest-bearing liabilities increased by $15.8 million or 15.7%, due primarily to the increase in borrowings to support our growth and the growth in deposits in new offices in Ventura, California and Overland Park, Kansas.

Provision for Loan Losses. We established provisions for loan losses of $565,000, $435,000, and $650,000 during the years ended December 31, 2006, 2005, and 2004, respectively. Provisions for loan losses are charged to income to bring our allowance for loan losses to a level deemed appropriate by management. For more detailed information regarding the methodology used to maintain the allowance for loan losses, refer to the Asset Quality section in Item 1 – Business.

Other Income. Total other income has fluctuated over the periods presented, due to our management of our securities portfolio, which is intended to enhance both net interest income as well as creating net gains on securities and hedges by capitalizing on changes in option-adjusted spreads. Other income includes net gains and losses from our trading activities, extinguishment of debt and other gains and losses plus banking fee income.

The following table sets forth information regarding other income for the periods shown.


	Year Ended December 31,
	2006			2005			2004
	(In Thousands)
Net gain (loss) on sale of available-for-sale securities	$	(613	)	$	933		$	690
Income from trading assets		1,024			3			571
Loss on extinguishment of debt		—			—			(189	)
Other gain (loss)		(39	)		(15	)		(57	)
Banking fee income and other income (1)		4,085			3,948			3,148

Total other income	$	4,457		$	4,869		$	4,163


(1)		Consists primarily of banking fee income such as service charges and fees on deposit accounts, fees from our trust and investment management services, other miscellaneous fees and increase in cash surrender value of life insurance.

As HWFG reduced the investment and total rate of return swap portfolio in 2006, it realized net gains from sales and expiring total rate of return swaps of $411 thousand in 2006 compared to $936 thousand in 2005. These gains emanate from the purchase of securities and total rate of return swaps at relatively wide spread to LIBOR based benchmarks, and as the spreads tighten, gains are realized.

Banking fee and other income was $4.1 million in 2006 versus $3.9 million in 2005, a 3.5% increase HWM fees, deposit related fees, and other retail banking fees demonstrated strong growth in 2006, while prepayment penalty fees were down $583 thousand in 2006 from 2005, as refinancing activity waned.

Other Expenses. Operating expenses were controlled in 2006, in light of the expansion of banking operations in the year and the expensing of stock options. Operating expenses were $22.2 million in 2006 compared to $21.1 million in 2005, a 5.1% increase, including the opening and ongoing expenses for a new Harrington banking office in the Kansas City metro, and $448 thousand of stock option expense not incurred in 2005 due to implementing FAS 123R in 2006.

The following table sets forth certain information regarding other expenses for the periods shown.


	Year Ended December 31,
	2006		2005		2004
	(In Thousands)
Salaries and employee benefits	$	12,478	$	11,166	$	10,522
Premises and equipment		3,744		3,884		3,153
Insurance premiums		417		509		486
Marketing		453		403		427
Computer services		841		785		696
Professional fees		998		1,271		1,188
Office expenses and supplies		881		870		824
Other (1)		2,348		2,188		2,120

Total other expenses	$	22,160	$	21,076	$	19,416


(1)		Consists primarily of regulatory fees, and other miscellaneous expenses.

Total other expenses increased by $1.1 million or 5.1% to $22.2 million during the year ended December 31, 2006 over the prior year, and increased by $1.7 million or 8.5% to $21.1 million during the year ended December 31, 2005 over 2004. The growth in other operating expenses has been largely attributed to the expenses required to support the growth of our banking offices and expansion of lending staff.

The principal category of our other expenses is salaries and employee benefits, which increased by $1.3 million or 11.7% during the year ended December 31, 2006, compared to the prior year. Salaries and employee benefits increased by $644,000, or 6.1% during 2005. The increases during periods ended December 31, 2006 and 2005 were primarily due to the implementation of FAS 123(R) and the hiring of additional employees in connection with the opening of new branch offices in Overland Park, Kansas in the end of 2006, Thousand Oaks location in 2005 and the Ventura, California location in the middle of 2004, together with our general growth in operations. The Company has plans to open three more banking offices in the Phoenix metro through 2008 to bring the offices in this market to five. An office in Surprise, Arizona in the Northeast Valley is scheduled to commence construction in March 2007 and be completed in the fall of 2007. A parcel in Gilbert, Arizona in the Southeast Valley was acquired in December 2006, and a banking office is expected to be completed thereon in mid 2008. A banking office in North Phoenix in the Deer Valley Airpark will likely be completed near the end of 2008 or early 2009.

Premises and equipment expenses decreased by $140,000 or 3.6% during the year ended December 31, 2006, as compared to the prior year, and increased by $731,000 or 23.2% during 2005. The increase in premises and equipment expense during the year ended December 31, 2005 was primarily due to the banking office openings and general growth in operations.

We have contracted with Smith Breeden to provide investment advisory services and interest rate risk analysis. Certain of our directors are also principals of Smith Breeden. The consulting fees paid by us to Smith Breeden during the years ended December 31, 2006 and 2005, amounted to $405,000 and $425,000, respectively. Expenses related to audit and tax services for 2006 was $385,000, compared to $380,000 in 2005. We have also made expenditures in administration and systems to support our growth and have increased consulting and internal support to implement new corporate governance regulations, such as the Sarbanes Oxley Act (SOA).

The increases in miscellaneous other expenses since 2004, primarily reflects our growth in our number of offices over the periods as well as expenses associated with our public company status and new corporate governance regulations.

Income Taxes. We incurred income tax expense of $4.3 million, $5.2 million and $5.4 million during the years ended December 31, 2006, 2005 and 2004. The amount of our income tax expense is a function of the amount of our income before income taxes during the periods presented. Our effective tax rates were 34.1%, 38.3% and 39.8%, the years ended December 31, 2006, 2005 and 2004. HWFG benefited from a favorable tax ruling from the Franchise Tax Board of California in 2006, confirming the apportionment of income to states in which HWFG does business and from higher income being reported in states with lower tax rates, a benefit of HWFG’s multiple market strategy. Tax exempt income from bank-owned life insurance and tax exempt loans also helped lower HWFG’s combined tax rate in 2006.

Changes in Financial Condition

General. At December 31, 2006, our total assets amounted to $1.2 billion, compared to $1.1 billion at December 31, 2005. The increase of $14.3 million in total assets was primarily attributable to an increase in net loans receivable. At December 31, 2006, our total liabilities amounted to $1.1 billion, compared to $1.1 billion at December 31, 2005.

Cash and Cash Equivalents. Cash and cash equivalents, consisting of cash and due from banks and federal funds sold, amounted to $21.2 million at December 31, 2006, and $19.3 million at December 31, 2005. We manage our cash and cash equivalents based upon our operating, investing and financing activities. We generally attempt to invest our excess liquidity into higher yielding assets such as loans or securities. See “Liquidity and Capital Resources.”

Securities. In order to limit our credit risk exposure and to earn an incremental income, we maintain a significant portion of our assets in various types of securities, consisting primarily of investment grade mortgage-backed securities and CMOs, and REMICs, which we collectively refer to as “mortgage-backed and related securities.” Our securities portfolio also includes U.S. Government agency securities, government sponsored enterprise securities and, to a much lesser extent, equity securities. At December 31, 2006, our securities portfolio, which is comprised of securities classified as available for sale and held to maturity, amounted to $309.7 million or 26.8% of our total assets. Mortgage-backed and related securities, which are the principal components of our securities portfolio, often carry lower yields than traditional mortgage loans. These types of securities, however, generally increase the quality of our assets by virtue of the securities’ underlying insurance or guarantees, require less capital under risk-based regulatory capital requirements than non-insured or non-guaranteed mortgage loans, are more liquid than individual mortgage loans, which enhances our ability to actively manage our portfolio, and may be used to collateralize borrowings or other obligations we incur.

Securities classified as available for sale (AFS), which consist of mortgage-backed and related securities, amounted to $309.7 million at December 31, 2006 and $387.4 million at December 31, 2005. The $77.6 million or 20.0% decrease during the year ended December 31, 2006 was to reap the economic gains from the tightening in spreads on AFS securities. Securities classified as held to maturity, consisting of mortgage-backed and U.S. Government agency securities, remained relatively stable at the end of the periods presented, amounting to $69,000 at December 31, 2006 and $80,000 at December 31, 2005. The decrease of $11,000 was due primarily to principal prepayments.

Trading Account Assets. We also classify certain mortgage-backed and related securities and equity securities as trading securities in accordance with SFAS No. 115 and enter into interest rate contracts that do not qualify for hedge accounting treatment. These assets are collectively referred to as trading account assets. At December 31, 2006, the trading account assets totaled $837,000, consisting of $237,000 in mortgage-backed securities, $600,000 in equity securities. At December 31, 2005, the trading portfolio totaled $975,000 and

consisted of $323,000 in mortgage-backed securities, $524,000 in equity securities and $128,000 of unrealized gains associated with the $129.0 million notional amount of CMBS total return swaps.

Loans Receivable. At December 31, 2006, loans receivable, net of our allowance for loan losses, amounted to $757.0 million or 65.6% of total assets, as compared to $672.9 million or 59.0% of total assets at December 31, 2005. The $84.1 million or 12.5% increase in the loan portfolio during 2006, and the related loan mix change to higher spread earning loans was due to our emphasis on commercial real estate, commercial and industrial, construction, and multifamily mortgage loans and Los Padres Bank’s strategy to broker for third parties substantially all new single-family mortgage originations in order to generate fee income.

Allowance for Loan Losses. At December 31, 2006, our allowance for loan losses totaled $5.9 million, compared to $5.7 million at December 31, 2005. At December 31, 2006, our allowance for loan losses represented approximately 0.78% of the total net loan portfolio as compared to 0.84% at December 31, 2005. The increase in our allowance for loan losses during the periods reflects the growth of our loan portfolio and the mix change to business and commercial mortgage loans which continues our favorable loss history. We establish reserves for loan losses based on the nature of the risk of the comparable historical loss exposure. For a discussion of our loan loss reserve see “Item 1. Business – Allowance for Loan Losses” on page 12.

Prepaid expenses and other assets. At December 31, 2006, prepaid expenses and other assets amounted to $5.0 million, as compared to $3.8 million as of December 31, 2005. The $1.2 million or 31.1% increase in prepaid expenses and other assets since December 31, 2005 reflected the increase in accounts receivable and prepaid expenses due to the additional banking office locations and expanded operations of the Company.

Deposits. HWFG seeks to grow its deposits at high single to low double-digit rates through its controlled expansion of banking operations in the markets of the Central Coast of California, the Phoenix, Arizona metro, and the Kansas City metro. At December 31, 2006, deposits totaled $732.8 million, as compared to $669.1 million as of December 31, 2005. The December 31, 2005 deposit balance was favorably impacted by the May 2005 acquisition of a banking office in Thousand Oaks, California and the opening of a new branch in Scottsdale, Arizona. HWFG continued to grow deposits at a high single-digit pace in 2006 and core non-costing deposits at a double-digit annual rate. With the steady rise in market interest rates and competition for insured deposits, the spreads on certificates of deposits did increase to LIBOR rates, somewhat affecting margins. We attempt to manage our overall funding costs by evaluating all potential sources of funds, including retail deposits and short and long-term borrowings, and identifying which particular source will result in an all-in cost to us that meets our funding benchmark. At the same time, Los Padres Bank has attempted to price the deposits offered through its branch system in order to promote retail deposit growth and offer a wide array of deposit products to satisfy its customers. In addition to providing a cost-efficient funding source, these retail deposits provide a source of fee income and the ability to cross-sell other products or services.

Borrowings. Advances from the FHLB of San Francisco amounted to $257.0 million at December 31, 2006 and $319.0 million at December 31, 2005. The decrease in FHLB advances in 2006 was due to our decreased utilization of such borrowings to fund our investments. At December 31, 2006, our FHLB advances had a weighted average interest rate of 5.44%, as compared to 4.23% at December 31, 2005. Our outstanding FHLB advances have maturities ranging from 2007 to 2010.

Subordinated debt amounted to $25.8 million at December 31, 2006 compared to $25.8 million at December 31, 2005. In September 2004, our newly created special purpose business trust, Harrington West Capital Trust II, issued $10.3 million of trust-preferred securities. The trust preferred securities bear an interest rate of three month LIBOR plus 1.90%, will mature on October 7, 2034 and have a five-year call feature. A portion of the proceeds from the offering were used to downstream capital to Los Padres Bank to support its growth in operations. In September 2003, we created a special purpose business trust, Harrington West Capital Trust I and issued $15.5 million of trust-preferred securities. The trust preferred securities issued in September

2003 bear an interest rate of three month LIBOR plus 2.85%, will mature on October 8, 2033 and have a five-year call feature. We used $11.3 million to pay off the secured line of credit with Harris Trust and Savings Bank and US Bank, N.A. The remaining proceeds were used to expand the Los Padres Bank operations in Overland Park, Kansas, Ventura, California and Scottsdale, Arizona.

Stockholders’ Equity. Our stockholders’ equity amounted to $67.7 million at December 31, 2006, an increase of $8.1 million from December 31, 2005. Net income earned during 2006 largely contributed to the increase in stockholder’s equity. Moreover, our stockholders’ equity was also affected by unrealized gains and losses on securities and interest rate contracts, dividends paid on our common stock, and the exercise of stock options.

Asset and Liability Management

In general, savings institutions are negatively affected by an increase in interest rates to the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. The lending activities of savings institutions have historically emphasized the origination of long-term, fixed-rate loans secured by single-family residences, and the primary source of funds of such institutions has been deposits, which largely mature or are subject to repricing within a shorter period of time. This factor has historically caused the income and market value of portfolio equity (“MVPE”) of savings institutions to be more volatile than other financial institutions.

MVPE is defined as the net present value of the cash flows from an institution’s existing assets, liabilities and off-balance sheet instruments. The MVPE is estimated by valuing our assets, liabilities and off-balance sheet instruments under various interest rate scenarios. The extent to which assets gain or lose value in relation to the gains or losses of liabilities determines the appreciation or depreciation in equity on a market value basis. MVPE analysis is intended to evaluate the impact of immediate and sustained interest rate shifts of the current yield curve upon the market value of the current balance sheet. While having liabilities that reprice more frequently than assets is generally beneficial to net interest income and MVPE in times of declining interest rates, such an asset/liability mismatch is generally detrimental during periods of rising interest rates.

Our management believes that its asset and liability management strategy, as discussed below, provides us with a competitive advantage over other financial institutions. We believe that our ability to hedge our interest rate exposure through the use of various interest rate contracts provides us with the flexibility to acquire loans structured to meet our customer’s preferences and investments that provide attractive net risk-adjusted spreads, regardless of whether the customer’s loan or our investment is fixed-rate or adjustable-rate or short-term or long-term. Similarly, we can choose a cost-effective source of funds and subsequently engage in an interest rate swap or other hedging transaction so that the interest rate sensitivities of our interest-earning assets and interest-bearing liabilities are more closely matched.

Our asset and liability management strategy is formulated and monitored by the board of directors of Los Padres Bank. The board of director’s written policies and procedures are implemented by the Asset and Liability Committee of Los Padres Bank (“ALCO”), which is comprised of Los Padres Bank’s chief executive officer, president/chief financial officer, executive vice-president/chief lending officer, principal accounting officer, president of Harrington Bank, and four non-employee directors of Los Padres Bank. The ALCO meets at least eight times a year to review the sensitivity of Los Padres Bank’s assets and liabilities to interest rate changes, investment opportunities, the performance of the investment portfolios, and prior purchase and sale activity of securities. The ALCO also provides guidance to management on reducing interest rate risk and on investment strategy and retail pricing and funding decisions with respect to Los Padres Bank’s overall asset and liability composition. The ALCO reviews Los Padres Bank’s liquidity, cash flow needs, interest rate sensitivity of investments, deposits and borrowings, core deposit activity, current market conditions and interest rates on both a local and national level in connection with fulfilling its responsibilities.

Smith Breeden provides consulting services to us regarding, among other things, the selection of our investments and borrowings, the pricing of loans and deposits, and the use of various interest rate contracts to

reduce interest rate risk. Smith Breeden is a consulting firm, which renders investment advice and asset and liability management service to financial institutions and management services to corporations, endowments and funds. Two of our directors are minority stockholders in and one is an officer of Smith Breeden.

The ALCO regularly reviews interest rate risk by utilizing analyses prepared by Smith Breeden with respect to the impact of alternative interest rate scenarios on net interest income and on Los Padres Bank’s MVPE. The ALCO also reviews analyses prepared by Smith Breeden concerning the impact of changing market volatility, prepayment forecast error, and changes in option-adjusted spreads and non-parallel yield curve shifts.

In the absence of our hedging activities, our MVPE would decline significantly more as a result of a general increase in market rates of interest. This decline would be due to the market values of our assets being more sensitive to interest rate fluctuations than are the market values of our liabilities due to our investment in and origination of generally longer-term assets which are funded with shorter-term liabilities. Consequently, the elasticity (i.e., the change in the market value of an asset or liability as a result of a change in interest rates) of our assets is greater than the elasticity of our liabilities.

Accordingly, the primary goal of our asset and liability management policy is to effectively increase the elasticity of our liabilities and/or effectively contract the elasticity of our assets so that the respective elasticities are matched as closely as possible. This elasticity adjustment can be accomplished internally by restructuring our balance sheet or externally by adjusting the elasticities of our assets and/or liabilities through the use of interest rate contracts. Our strategy is to hedge either internally through the use of longer-term certificates of deposit or less sensitive transaction deposits and FHLB advances or externally through the use of various interest rate contracts.

External hedging generally involves the use of interest rate swaps, caps, floors, options and futures. The notional amount of interest rate contracts represents the underlying amount on which periodic cash flows are calculated and exchanged between counterparties. However, this notional amount does not necessarily represent the principal amount of securities, which would effectively be hedged by that interest rate contract.

In selecting the type and amount of interest rate contract to utilize, we compare the elasticity of a particular contract to that of the securities to be hedged. An interest rate contract with the appropriate offsetting elasticity could have a notional amount much greater than the face amount of the securities being hedged.

We adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001. SFAS No. 133 requires that an entity recognize all interest rate contracts which meet the definition of a derivative as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, an interest rate contract may be specifically designated as a fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure. The accounting for changes in the fair value of an interest rate contract (that is, gains and losses) depends on the intended use of the interest rate contract and the resulting designation. To qualify for hedge accounting, we must show that, at the inception of the interest rate contracts and on an ongoing basis, the changes in the fair value of the interest rate contracts are expected to be highly effective in offsetting related changes in the cash flows of the hedged liabilities. We have entered into various interest rate swaps for the purpose of hedging certain of our short-term liabilities. These interest rate swaps qualify for hedge accounting. Accordingly, the effective portion of the accumulated change in the fair value of the cash flow hedges is recorded in a separate component of stockholders’ equity, net of tax, while the ineffective portion is recognized in earnings immediately. We have also entered into various interest rate swaps which assist in mitigating the rate risk on a portion of our securities portfolio. These swaps do not qualify for hedge accounting treatment and are included in the trading account assets and are reported at fair value with realized and unrealized gains and losses on these instruments recognized in income (loss) from trading account assets.

An interest rate swap is an agreement where one party agrees to pay a fixed rate of interest on a notional principal amount to a second party in exchange for receiving from the second party a variable rate of interest on the same notional amount for a predetermined period of time. No actual assets are exchanged in a swap of this type and interest payments are generally netted. These swaps are generally utilized by us to synthetically convert

floating-rate deposits and borrowings into fixed-rate liabilities or convert fixed-rate assets into adjustable-rate instruments, in either case without having to sell or transfer the underlying liabilities or assets.

At December 31, 2006, we held interest rate swaps, which are utilized to hedge liabilities and which qualify for hedge accounting pursuant to SFAS No. 133 and are included in other assets or other liabilities. These swap agreements had an aggregate notional amount of $164.0 million and maturities from January 2007 to October 2014. With respect to these agreements, we make fixed-rate payments ranging from 3.6% to 6.3% and receive payments based upon three-month LIBOR. These fixed-pay swaps are used to effectively modify the interest rate sensitivity of a portion of Los Padres Bank’s short-term LIBOR correlated borrowings which include short-term deposits, securities sold under agreements to repurchase and FHLB advances.

During the year ended December 31, 2006 the swaps generated $972 thousand of interest income. The interest expense related to these swaps was $1.6 million, and $4.1 million during the years ended December 31, 2005 and 2004, respectively. This income or expense is included in interest expense on FHLB advances and subordinated debt in our consolidated statements of earnings. The approximate market value of the interest rate swaps was an unrealized net gain of $587 thousand, and an unrealized gain of $33 thousand as of December 31, 2006 and 2005, respectively. These gains are reflected as a separate component in stockholders’ equity, net of tax.

At December 31, 2006, we did not hold any interest rate swaps as trading account assets.

An interest rate cap or an interest rate floor consists of a guarantee given by the issuer (i.e., a broker) to the purchaser (i.e., us), in exchange for the payment of a premium. This guarantee states that if interest rates rise above (in the case of a cap) or fall below (in the case of a floor) a specified rate on a specified interest rate index, the issuer will pay to the purchaser the difference between the then current market rate and the specified rate on a notional principal amount. No funds are actually borrowed or repaid. At December 31, 2006 and 2005, we did not have any interest rate caps or floors

Interest rate futures are commitments to either purchase or sell designated instruments at a future date for a specified price. Futures contracts are generally traded on an exchange, are marked-to-market daily and are subject to initial and maintenance margin requirements. We generally use 91-day Eurodollar certificates of deposit contracts (“Eurodollar futures contracts”) which are priced off LIBOR as well as Treasury Note and Bond futures contracts. We will from time to time agree to sell a specified number of contracts at a specified date. To close out a contract, we will enter into an offsetting position to the original transaction.

If interest rates rise, the value of our short futures positions increase. Consequently, sales of futures contracts serve as a hedge against rising interest rates. At December 31, 2006, 2005 and 2004, we did not have any futures contracts.

Options are contracts, which grant the purchaser the right to buy or sell the underlying asset by a certain date for a specified price. Generally, we will purchase options on financial futures to hedge the changing elasticity exhibited by mortgage loans and mortgage-backed securities. The changing elasticity results from the ability of a borrower to prepay a mortgage or caps and floors on the underlying loans. As market interest rates decline, borrowers are more likely to prepay their mortgages, shortening the elasticity of the mortgages. Consequently, where interest rates are declining, the value of mortgage loans or mortgage-backed securities will increase at a slower rate than would be expected if borrowers did not have the ability to prepay their mortgage.

We are subject to the risk that our counterparties with respect to various interest rate contracts may default at or prior to maturity of a particular instrument. In such a case, we might be unable to recover any unrealized gains with respect to a particular contract. To reduce this potential risk, we generally deal with large, established investment brokerage firms when entering into these transactions. In addition, we have a policy whereby we limit our unsecured exposure to any one counterparty to 25% of Los Padres Bank’s equity during any two-month period and 35% of Los Padres Bank’s equity during any one-month period.

The OTS requires each thrift institution to calculate the estimated change in the institution’s MVPE assuming an instantaneous, parallel shift in the Treasury yield curve of 100 to 300 basis points either up or down in 100 basis point increments. The OTS permits institutions to perform this MVPE analysis using their own internal model based upon reasonable assumptions. Smith Breeden assists us in performing the required calculation of the sensitivity of our market value to changes in interest rates.

The following table sets forth at December 31, 2006, the estimated sensitivity of Los Padres Bank’s MVPE to parallel yield curve shifts using our internal market value calculation. The table demonstrates the sensitivity of our assets and liabilities both before and after the inclusion of our interest rate contracts.


	Change In Interest Rates (In Basis Points)(1)
2006	-300			-200			-100			-		+100			+200			+300
	(Dollars in Thousands)
Market value gain (loss) in assets	$	27,788		$	20,864		$	12,159			—	$	(15,076	)	$	(31,987	)	$	(49,751	)
Market value gain (loss) of liabilities		(21,404	)		(14,831	)		(7,577	)				7,653			15,359			23,124

Market value gain (loss) of net assets before interest rate contracts		6,384			6,033			4,582					(7,423	)		(16,628	)		(26,627	)
Market value gain (loss) of interest rate contracts		(12,760	)		(8,295	)		(4,044	)				3,845			7,515			11,015


Total change in MVPE(2)	$	(6,376	)	$	(2,262	)	$	538			—	$	(3,578	)	$	(9,113	)	$	(15,612	)


Change in MVPE as a percent of:
MVPE(2)		-6.35	%		-2.25	%		.54	%		—		-3.56	%		-9.08	%		-15.55	%
Total assets of Los Padres Bank		-0.74	%		-0.35	%		0.05	%		—		-0.20	%		-0.57	%		-1.03	%


	Change In Interest Rates (In Basis Points)(1)
2005	-300			-200			-100			-		+100			+200			+300
	(Dollars in Thousands)
Market value gain (loss) in assets	$	34,553		$	25,333		$	14,260			—	$	(17,231	)	$	(36,436	)	$	(56,745	)
Market value gain (loss) of liabilities		(23,899	)		(16,488	)		(8,421	)				8,541			17,184			26,039

Market value gain (loss) of net assets before interest rate contracts		10,654			8,845			5,839					(8,690	)		(19,252	)		(30,706	)
Market value gain (loss) of interest rate contracts		(14,259	)		(9,237	)		(4,493	)				4,235			8,258			12,069


Total change in MVPE(2)	$	(3,605	)	$	(392	)	$	1,346			—	$	(4,455	)	$	(10,994	)	$	(18,637	)


Change in MVPE as a percent of:
MVPE(2)		-3.76	%		-0.41	%		1.40	%		—		-4.65	%		-11.47	%		-19.44	%
Total assets of Los Padres Bank		-0.55	%		-0.22	%		0.01	%		—		-0.27	%		-0.72	%		-1.28	%


(1)		Assumes an instantaneous parallel change in interest rates at all maturities.

(2)		Based on our pre-tax MVPE of $95.9 million at December 31, 2005.

The table set forth above does not purport to show the impact of interest rate changes on our equity under generally accepted accounting principles. Market value changes only impact our income statement or the balance sheet to the extent the affected instruments are marked to market, and over the life of the instruments, as an impact on recorded yields.

Liquidity and Capital Resources

Liquidity. The liquidity of Los Padres Bank, a consolidated subsidiary of the Company is monitored closely for regulatory purposes at the Bank level by calculating the ratio of cash, cash equivalents (not committed, pledged or required to liquidate specific liabilities), investments and qualifying mortgage-backed securities to the

sum of total deposits plus borrowings payable within one year, which was 15.5% at December 31, 2006. At December 31, 2006, Los Padres Bank’s “liquid” assets totaled approximately $84.2 million.

In general, the Bank’s liquidity, represented by cash and cash equivalents, is a product of our operating, investing and financing activities. The Company’s primary sources of internal liquidity consist of deposits, prepayments and maturities of outstanding loans and mortgage-backed and related securities, maturities of short-term investments, sales of mortgage-backed and related securities and funds provided from operations. While scheduled loan and mortgage-backed and related securities amortization and maturing short-term investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Company’s external sources of liquidity consist of borrowings, primarily advances from the FHLB of San Francisco and a revolving line of credit loan facility, which we maintain with two banks. At December 31, 2006, we had $257.0 million in FHLB advances and we had $147.1 million of additional borrowing capacity with the FHLB of San Francisco.

The Company has a revolving line of credit with a maximum borrowing capacity of $15.0 million with a maturity of September 30, 2007. The Company intends to extend the maturity date and renegotiate the line to a lower amount. Future utilization of the line would be to support growth opportunities, as they develop and to provide working capital. At December 31, 2006 and 2005, the Company was not indebted under its revolving line of credit.

On September 16, 2004, we entered into an amendment to our credit agreement, which reduced the LIBOR margin range from 2.0% to 3.0% to 1.75% to 2.75%. We pay interest on the outstanding amount of our borrowings from time to time under the credit agreement at an interest rate that adjusts based upon our compliance with certain financial criteria and our selection of an interest rate formula. At our option, the interest rates per annum applicable to any particular borrowing under the credit agreement is either (1) adjusted LIBOR plus a margin ranging from 1.75% to 2.75% or (2) the prime rate announced from time to time by Harris Trust and Savings Bank minus a margin ranging from 0.5% to 0.0%. The factors that determine the amount of the margin include our core profitability and our non-performing asset ratio. We are currently at the most favorable pricing level under the credit agreement. In each year, we also pay a commitment fee to the lenders equal to 0.25% of the average daily un-drawn portion of the borrowings available to us under the credit agreement for that year. All of the covenants remain in place and are unchanged. Management believes that as of December 31, 2006, it was in compliance with all of such covenants and restrictions and does not anticipate that such covenants and restrictions will limit our operations.

Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally used to pay down short-term borrowings. On a longer-term basis, we maintain a strategy of investing in various mortgage-backed and related securities and loans. We use our sources of funds primarily to meet our ongoing commitments, to pay maturing savings certificates and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed and related securities as well as certain other investments. At December 31, 2006, the total approved loan commitments outstanding amounted to $183.5 million. Certificates of deposit scheduled to mature in one year or less at December 31, 2006 totaled $536.1 million and FHLB borrowings and repurchase agreements that are scheduled to mature within the same period amounted to $258.1 million. Management believes that we have adequate resources to fund all of our commitments and the Company could either adjust the rate of certificates of deposit in order to retain deposits in changing interest rate environments or replace such deposits with advances from the FHLB of San Francisco if it proved to be cost-effective to do so.

A substantial source of our income from which we service our debt, pay our obligations and from which we can pay dividends is the receipt of dividends from Los Padres Bank. The availability of dividends from Los Padres Bank is limited by various statutes and regulations. Los Padres Bank was pre-approved to pay up to $5.0 million of dividends to us between July 1, 2006 and June 30, 2007, with certain limitations, primarily to maintain capital ratios at a level that would qualify Los Padres Bank as a well capitalized institution immediately prior to and after payment of any dividend. At December 31, 2006 Los Padres Bank had $3.8 million remaining of the pre-approved $5.0 million. Los Padres Bank annually requests a pre-approval of dividends to be paid to us from to

OTS. Los Padres can also make larger dividends if needed, but in order to make such dividend payment, Los Padres Bank is required to provide 30 days advance notice to the OTS, during which time the OTS may object to such dividend payment. It is possible, depending upon the financial condition of Los Padres Bank, and other factors, that the OTS could object to the payment of dividends by Los Padres Bank on the basis that the payment of such dividends is an unsafe or unsound practice. In addition, we are also subject to restrictions on our ability to pay dividends under our revolving loan facility and subordinated debt. In the event Los Padres Bank is unable to pay dividends to us, we may not be able to service our debt, pay our obligations or pay dividends on our common stock.

Capital Resources. Federally insured savings institutions such as Los Padres Bank are required to maintain minimum levels of regulatory capital. Los Padres Bank’s failure to comply could also impact its overall assessment by the OTS in future regulatory examinations, which, if adverse, could also impact its FDIC insurance assessment.

Contractual Obligations and Commercial Commitments

The following tables present our contractual obligations (not including interest) and commercial commitments as of December 31, 2006.


			Payment due period
			Less than		One to		Three to		More than
	Total		One Year		Three Years		Five Years		Five Years
	(In Thousands)
Contractual obligations:
Certificates of deposit	$	556,284	$	536,097	$	15,606	$	4,422	$	159
FHLB advances		257,000		238,000		—		19,000		—
Reverse repurchase agreements		65,141		20,141		30,000		15,000		—
Leases		4,460		1,244		2,075		963		178
Other debt		25,774		—		—		—		25,774
Due from broker		142		142		—		—		—


Total contractual obligations	$	908,801	$	795,624	$	47,681	$	39,385	$	26,111


			Amount of Commitment Expiration Per Period
	Unfunded		Less than		One to		Three to		After
	Commitments		One Year		Three Years		Five Years		Five Years
	(In Thousands)
Commitments:
Commercial lines of credit	$	38,419	$	25,534	$	8,903	$	1,703	$	2,279
Consumer lines of credit (1)		48,532		2,520		—		650		45,362
Undisbursed portion of loans in process		83,855		45,411		38,444		—		—
Approved but, not funded mortgage loans		7,463		7,463		—		—		—
Approved but, not funded commercial loans		540		540		—		—		—
Approved but not funded consumer loans		300		300		—		—		—
Letters of credit		4,387		4,387		—		—		—

Total commitments	$	183,496	$	86,155	$	47,347	$	2,353	$	47,641


(1)		Lines of credit with no stated maturity date are included in commitments for less than one year.

Off-Balance Sheet Arrangements

As discussed in the Asset and Liability Management section above, we utilize external hedging transactions to effectively increase the elasticity of our liabilities and/or effectively contract the elasticity of our assets so that the respective elasticities are matched as closely as possible with the use of external hedging. External hedging generally involves the use of interest rate swaps, caps, floors, options and futures, which are off-balance sheet arrangements. We use interest rate swap instruments to effectuate our external hedging strategy. At December 31, 2006, we held interest rate swaps, which are utilized to hedge liabilities and which qualify for hedge accounting pursuant to SFAS No. 133 and are included in other assets or other liabilities. These swap agreements had an aggregate notional amount of $181.0 million and maturities from January 2007 to October 2014. The notional amount of interest rate contracts represents the underlying amount on which periodic cash flows are calculated and exchanged between counterparties. However, this notional amount does not necessarily represent the principal amount of securities, which would effectively be hedged by that interest rate contract. Our interest rate swap instruments require that we make fixed-rate payments ranging from 3.6% to 6.3% and receive payments based upon three-month LIBOR. These fixed-pay swaps are used to effectively modify the interest rate sensitivity of a portion of Los Padres Bank’s short-term LIBOR correlated borrowings which include short-term deposits, securities sold under agreements to repurchase and FHLB advances.

At December 31, 2006 and 2005, the interest rate swaps listed below are hedging the interest rate risk of cash flows associated with short-term FHLB advances and certificates of deposit with terms between six and twelve months. These swaps qualify as cash flow hedges.


	Contract or
	Notional		Estimated		Weighted-Average
	Amount		Fair Value		Interest Rate
					Receivable			Payable
December 31, 2006 -
Interest rate swaps — pay fixed
receive 3-month LIBOR	$	164,000	$	587		5.36	%		4.73	%

December 31, 2005 -
Interest rate swaps — pay fixed receive 3-month LIBOR	$	152,000	$	33		4.39	%		4.42	%

The following table sets forth the maturity distribution and weighted-average interest rates of the interest rate swaps used to limit the repricing risk of deposits and short-term borrowings as of December 31, 2006:


Maturities	2007			2008			2009			2010			2011			Thereafter
Interest rate swaps:
Notional amount	$	52,000		$	4,000		$	60,000		$	10,000		$	10,000		$	28,000
Weighted-average payable rate		3.80	%		3.78	%		5.25	%		6.29	%		4.90	%		4.84	%
Weighted-average receivable rate		5.36	%		5.37	%		5.36	%		5.36	%		5.38	%		5.36	%

At December 31, 2006, we did not hold any interest rate swaps as trading account assets, except for certain interest rate swaps that we utilize in order to enhance our returns and not for the purpose of interest rate risk management.

Inflation and Changing Prices

Our consolidated financial statements and related data presented in this annual report have been prepared in accordance with accounting principles generally accepted in the U.S., which require the measurement of financial position and operating results in terms of historical dollars (except with respect to securities which are carried at market value), without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services.

See “Effect of Newly Issued But Not Yet Effective Accounting Standards” included in Footnote 1.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asset and Liability Management” in Item 7 hereof.

Item 8. Financial Statements and Supplementary Data.

Audited consolidated financial statements and related documents required by this item are included in this Annual Report on Form 10-K on the pages indicated:

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
Harrington West Financial Group, Inc
Solvang, California

We have audited the accompanying consolidated statement of financial condition of Harrington West Financial Group, Inc. as of December 31, 2006, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2006, and the results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 of the consolidated financial statements, the Company adopted new accounting guidance which impacts accounting for stock options.

/s/ Crowe Chizek and Company LLP

Oak Brook, Illinois
March 21, 2007

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of
Harrington West Financial Group, Inc.
Solvang, California

We have audited the accompanying consolidated statement of financial condition of Harrington West Financial Group, Inc. (the “Company”) as of December 31, 2005, and the related consolidated statements of earnings, stockholders’ equity and comprehensive income, and cash flows for each of the two years in the period ended December 31, 2005. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Harrington West Financial Group, Inc. as of December 31, 2005, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2005, in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Los Angeles, California
March 31, 2006

HARRINGTON WEST FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)


	December 31,
	2006			2005
ASSETS

Cash and cash equivalents	$	21,178		$	19,312
Trading account assets		837			975
Securities available for sale at fair value		309,729			387,352
Securities held to maturity (fair value of $71 in 2006 and $84 in 2005)		69			80
Loans receivable, net of allowance for loan losses of $5,914 in 2006 and $5,661 in 2005		757,033			672,890
Accrued interest receivable		5,315			4,463
Premises and equipment, net		15,581			10,276
Due from broker		142			—
Prepaid expenses and other assets		4,959			3,783
Investment in FHLB stock, at cost		14,615			16,364
Income taxes receivable		112			251
Bank-owned life insurance		18,472			17,621
Deferred taxes		—			137
Goodwill		5,496			5,496
Core deposit intangible, net		935			1,187


TOTAL	$	1,154,473		$	1,140,187


LIABILITIES AND STOCKHOLDERS’ EQUITY

LIABILITIES:
Deposits:
Interest bearing	$	677,665		$	619,213
Noninterest bearing		55,092			49,932


Total deposits		732,757			669,145

FHLB advances		257,000			319,000
Securities sold under repurchase agreements		65,141			59,013
Subordinated debt		25,774			25,774
Due to broker		—			2,474
Accrued interest payable and other liabilities		5,005			5,207
Deferred taxes		1,098			—


Total liabilities		1,086,775			1,080,613


COMMITMENTS AND CONTINGENCIES (Notes 2 and 14)

STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value; 1,200,000 shares authorized; none issued and outstanding
Common stock, $.01 par value; 10,800,000 shares authorized; 5,460,393 shares issued and outstanding as of December 31, 2006 and 5,384,843 shares issued and outstanding December 31, 2005		55			54
Additional paid-in capital		33,332			32,059
Retained earnings		34,964			29,458
Accumulated other comprehensive loss, net of tax		(653	)		(1,997	)


Total stockholders’ equity		67,698			59,574


TOTAL	$	1,154,473		$	1,140,187

See notes to consolidated financial statements.

HARRINGTON WEST FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share and per share data)


	Year Ended
	December 31,
	2006			2005			2004
INTEREST INCOME:
Interest on loans	$	54,963		$	43,269		$	36,166
Interest and dividends on securities		19,132			18,787			16,100


Total interest income		74,095			62,056			52,266


INTEREST EXPENSE:
Interest on deposits		25,590			15,668			10,629
Interest on FHLB advances, subordinated debt & repurchase agreements		17,751			16,230			12,089


Total interest expense		43,341			31,898			22,718


NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		30,754			30,158			29,548

PROVISION FOR LOAN LOSSES		565			435			650


NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		30,189			29,723			28,898


OTHER INCOME (LOSS):
Net gain (loss) on sale of available-for-sale securities		(613	)		933			690
Income from trading assets		1,024			3			571
Loss on extinguishment of debt		—			—			(189	)
Other (loss)		(39	)		(15	)		(57	)
Increase in cash surrender value of life insurance		745			621			—
Banking fee income and other income		3,340			3,327			3,148


Total other income		4,457			4,869			4,163


OTHER EXPENSES:
Salaries and employee benefits		12,478			11,166			10,522
Premises and equipment		3,744			3,884			3,153
Insurance premiums		417			509			486
Marketing		453			403			427
Computer services		841			785			696
Professional fees		998			1,271			1,188
Office expenses and supplies		881			870			824
Other		2,348			2,188			2,120


Total other expenses		22,160			21,076			19,416


INCOME BEFORE INCOME TAXES		12,486			13,516			13,645

INCOME TAXES		4,258			5,180			5,436


NET INCOME	$	8,228		$	8,336		$	8,209


BASIC EARNINGS PER SHARE	$	1.51		$	1.56		$	1.56


DILUTED EARNINGS PER SHARE	$	1.48		$	1.48		$	1.46


BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING		5,441,075			5,347,757			5,256,030


DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING		5,572,664			5,620,556			5,603,680

See notes to consolidated financial statements

HARRINGTON WEST FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY and COMPREHENSIVE INCOME
(Dollars in thousands)


													Accumulated
					Additional					Compre-			Other			Total
	Common Stock				Paid-In		Retained			hensive			Comprehensive			Stockholders’
	Shares		Amount		Capital		Earnings			Income			Loss			Equity

BALANCE, DECEMBER 31, 2003		5,206,109		52	$	30,710	$	20,073					$	(2,759	)	$	48,076

Comprehensive Income

Net Income								8,209		$	8,209						8,209

Other comprehensive income, net of tax
Unrealized gains (losses) on securities											(324	)		(324	)		(324	)
Effective portion of change in fair value of cash flow hedges											828			828			828


Total comprehensive income										$	8,713


Stock options exercised, including tax benefit of $0		72,825		1		515											516
Dividends on Common Stock at $.41 per share								(4,645	)								(4,645	)


BALANCE, DECEMBER 31, 2004		5,278,934		53		31,225		23,637						(2,255	)		52,660


Comprehensive Income

Net Income							$	8,336		$	8,336						8,336

Other comprehensive income, net of tax
Unrealized gains (losses) on securities											(2,270	)		(2,270	)		(2,270	)
Effective portion of change in fair value of cash flow hedges											2,528			2,528			2,528


Total comprehensive income										$	8,594


Stock options exercised, including tax benefit of $250		105,909		1		834											835
Dividends on Common Stock at $. 485 per share								(2,515	)								(2,515	)


BALANCE, DECEMBER 31, 2005		5,384,843		54		32,059		29,458						(1,997	)		59,574


Comprehensive Income

Net Income								8,228		$	8,228						8,228

Other comprehensive income, net of tax
Unrealized gains (losses) on securities											1,008			1,008			1,008
Effective portion of change in fair value of cash flow hedges											336			336			336


Total comprehensive income										$	9,572


Stock options exercised, including tax benefit of $397		75,550		1		825											826
Stock options earned						448											448

Dividends on Common Stock at $.50 per share								(2,722	)								(2,722	)

BALANCE, DECEMBER 31, 2006		5,460,393	$	55	$	33,332	$	34,964					$	(653	)	$	67,698

See notes to consolidated financial statements

HARRINGTON WEST FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(Dollars in thousands)


	Year ended
	December 31,
	2006			2005			2004
DISCLOSURE OF RECLASSIFICATION AMOUNT:

Unrealized holding (loss) arising during period, net of tax (benefit) expense of $542, ($1,123), and $58 for 2006, 2005 and 2004, respectively	$	613		$	(1,706	)	$	85
Less: Reclassification adjustment for gains (losses) included in net income, net of tax expense (benefit) of ($218), $369 and $281 for 2006, 2005 and 2004, respectively		(395	)		564			409


Net unrealized (loss) on securities, net of tax (benefit) expense of $760, ($1,492) and ($223) for 2006, 2005 and 2004, respectively	$	1,008		$	(2,270	)	$	(324	)


Unrealized net gain on cash flow hedges, net of tax expense of $212, $1,733 and $631 for 2006, 2005 and 2004 respectively	$	339		$	2,524		$	919
Less: Reclassification adjustment for net gains (losses) on cash flow hedges included in net income, net of tax (benefit) expense of ($2), ($2) and $63 for 2006, 2005 and 2004, respectively		3			(4	)		91


Net unrealized gain on cash flow hedges, net of tax expense of $214, $1,735 and $569 for 2006, 2005 and 2004, respectively	$	336		$	2,528		$	828


Total change in Other Comprehensive Income	$	1,344		$	258		$	504

See notes to consolidated financial statements.

HARRINGTON WEST FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)


	Year Ended
	December 31,
	2006			2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	8,228		$	8,336		$	8,209
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of deferred loan fees and costs		(395	)		767			338
Depreciation and amortization		1,475			1,452			1,204
Amortization of premiums and discounts on loans receivable and securities		2,075			2,589			3,171
Deferred income taxes		505			1,023			781
Provision for loan losses		565			435			650
Activity in trading account assets		135			75			1,059
Loss (gain) on sale of trading account securities		3			(4	)		—
Loss (gain) on sale of available-for-sale securities		613			(933	)		(690	)
FHLB stock dividend		(808	)		(675	)		(557	)
Earnings in bank owned life insurance		(745	)		(621	)		—
Increase in accrued interest receivable		(852	)		(1,141	)		(394	)
(Increase) decrease in income taxes (payable) receivable		139			(713	)		(250	)
(Increase) decrease in prepaid expenses and other assets		(1,479	)		1,019			(1,877	)
Stock options expensed		448			—			—
Decrease in accrued interest payable and other liabilities		(2,321	)		(507	)		(1,684	)


Net cash provided by operating activities		7,586			11,102			9,960

CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans receivable		(85,381	)		(75,783	)		(81,505	)
Proceeds from sales of securities available for sale		44,327			61,819			28,316
Purchases of securities available for sale		(63,875	)		(105,207	)		(154,529	)
Principal paydowns on securities available for sale		96,261			84,446			91,479
Principal paydowns on securities held to maturity		13			13			129
Purchase of bank-owned life insurance		—			(17,000	)		—
Proceeds from sale of real estate acquired through foreclosure		1,062			—			—
Acquisition, net of cash acquired		—			(1,954	)		—
Purchase of premises and equipment		(6,528	)		(2,414	)		(3,463	)
Redemption (purchase) of FHLB stock		2,557			(555	)		(1,152	)


Net cash used in investing activities		(11,564	)		(56,635	)		(120,725	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		63,612			70,963			27,504
(Decrease) increase in securities sold under agreements to repurchase		6,128			(20,676	)		13,962
Increase (decrease) in FHLB advances		(62,000	)		3,000			53,500
Increase in subordinated debt		—			—			10,310
Exercise of stock options on common stock, including tax benefits		826			835			516
Dividends paid on common stock		(2,722	)		(2,515	)		(4,645	)


Net cash provided by financing activities		5,844			51,607			101,147


NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,866			6,074			(9,618	)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		19,312			13,238			22,856


CASH AND CASH EQUIVALENTS, END OF YEAR	$	21,178		$	19,312		$	13,238

See notes to consolidated financial statements

(Continued)

HARRINGTON WEST FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Table amounts in thousands, except share and per share data)

1.		SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

		*Business of the Company* - Harrington West Financial Group, Inc. is a savings and loan holding company incorporated on August 29, 1995 to acquire and hold all of the outstanding common stock of Los Padres Bank (the “Bank”), referred to herein on a consolidated basis as the “Company”. The Bank is a federally chartered savings bank which operates 16 branches serving individuals and small to medium-sized businesses. Eleven banking facilities are operated on the California Central Coast, three banking facilities are located in Kansas, and operated as a division under the Harrington Bank brand, and two banking facilities are located in Scottsdale, Arizona.

		On February 1, 1999, the Bank purchased a 49% interest in Harrington Wealth Management Company (“HWMC”). HWMC offers trust and investment management services to the customers of the Bank. On October 31, 2001, the Bank purchased the remaining 51% interest in HWMC. Beginning in November 2001, HWMC became a wholly owned subsidiary of the Bank and is consolidated into the Bank. HWMC performs management of investment portfolios through knowledge and analysis of the customer’s investment needs, risk tolerance, tax situation and investment horizon. At December 31, 2006, HWMC administered approximately 439 accounts and had $175.3 million of assets under management that are not included on the consolidated statements of financial condition. For the years ended December 31, 2006, 2005 and 2004, HWMC generated revenues of $848,000, $726,000 and $614,000, respectively.

		On November 3, 2001, the Bank purchased from Harrington Bank, FSB, its’ $75 million bank located in Shawnee Mission, Kansas, in the heart of the Kansas City metropolis.

		*Basis of Presentation* -. The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and general practices within the banking industry. The following is a summary of significant principles used in the preparation of the accompanying consolidated financial statements. In preparing the consolidated financial statements, management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, including the allowance for loan losses, valuation of investment securities, fair value of derivatives, fair value of financial instruments and stock-based compensation. Actual results could differ from those estimates.

		*Principles of Consolidation* – The consolidated financial statements include the accounts of Harrington West Financial Group, Inc. and its wholly owned subsidiary, Los Padres Bank (the “Bank”), and the Bank’s wholly owned subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The Company also has two wholly-owned subsidiaries that are statutory business trusts (the “Trusts”). In accordance with Financial Accounting Standards Board Interpretation No. 46R, Consolidation of Variable Interest Entities (“FIN No. 46R”), the Trusts are not consolidated into the accounts of Harrington West Financial Group, Inc.

		*Segments* - The Company has a single operating segment, banking operations.

		*Cash and Cash Equivalents* - For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.

		*Trading Account Assets* - Trading account assets are debt and equity securities, as well as derivative instruments not receiving hedge treatment (as further described in Note 15) that are bought and held

principally for the purpose of active management. These assets are reported at fair value and included in trading account assets on the statements of financial condition. Realized and unrealized gains and losses are included in income from trading account assets.

Available for Sale Securities - Debt and equity securities not classified as either held to maturity or trading securities are classified as securities available for sale and recorded at fair value, with unrealized gains and losses, after applicable taxes, excluded from earnings and reported as a separate component of stockholders’ equity. Declines in the value of debt securities and marketable equity securities that are considered to be other than temporary are recorded as realized losses in the statement of earnings. Amortization of premiums and accretion of discounts on securities are recorded as yield adjustments on such securities using an effective interest method that considers estimates of future principal prepayments. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

A security may become impaired, (i.e. there may be an unrecognized loss). The impairment may be temporary or other than temporary. In the case of debt securities, the impairment may imply a judgment by the market that the issuer will not be able to make interest and principal payments as contractually required. Alternatively, the impairment may be due only to changes in interest rates that do not impact the issuer’s ability to meet its contractual obligations. The Company periodically reviews impaired securities to determine whether the impairment is other than temporary. If the impairment is determined to be other than temporary, the Company will recognize this impairment by charging a realized loss to earnings in the period in which the impairment occurs or is otherwise deemed to be other than temporarily impaired.

Held to Maturity Securities - Held to maturity securities represent investments that the Bank has the positive intent and ability to hold to maturity and are reported at amortized cost. Declines in the value of held to maturity securities that are considered to be other than temporary are recorded as realized losses in the statement of earnings. Similar to available for sale securities, premiums and discounts are amortized using an effective interest method that considers estimates of future principal prepayments.

Loans Receivable - Loans receivable are carried at the principal amount outstanding, net of deferred loan fees, costs, premiums and allowance for loan losses.

Loan Interest Income and Fees - Interest on loans is accrued as earned, except non-accrual loans on which interest is normally discontinued whenever the payment of principal or interest is considered to be in doubt, generally when the interest becomes 60 days past due. When a loan is placed on non-accrual, all previously accrued but uncollected interest is reversed against current period income. In general, subsequent payments received are applied to the outstanding principal balance of the loan. A loan is returned to accrual status when the borrower has demonstrated a satisfactory payment trend subject to management’s assessment of the borrower’s ability to repay the loan.

Loan origination fees and certain direct loan origination costs are deferred and amortized over the lives of the related loans as an adjustment to yield using a method that approximates the level-yield method. Calculation of the yield is done on a loan-by-loan basis. Unamortized fees are recognized in interest income in the period the related loans are sold or paid off. Other loan fees and charges representing service costs for the repayment of loans, delinquent payments or miscellaneous loan services are recorded as income when collected.

Discounts and premiums on loans are amortized into interest income, using a method that approximates the level-yield method over the estimated life of the related loans.

Allowance for Loan Losses - Allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries). Charge-offs are recorded when management believes the uncollectibility of the loan balance is confirmed.

The allowance is maintained at a level believed by management to be sufficient to absorb probable incurred credit losses in the loan portfolio. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates, including, among others, the amounts and timing of expected future cash flows on impaired loans, estimated losses on consumer loans and residential mortgages, and general amounts for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which may be susceptible to significant change.

In determining the adequacy of the allowance for loan losses, the Company makes specific allocations to impaired loans in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan as amended by SFAS No. 118. Loans are identified as impaired when it is deemed probable that the borrower will be unable to meet the scheduled principal and interest payments under the terms of the loan agreement. Impairment is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, impairment may be measured based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Allocation of the allowance for loan losses to non-homogenous loan pools are developed by loan type and risk factor and are based on historical loss trends and management’s judgment concerning those trends and other relevant factors. These factors may include, among others, trends in criticized assets, regional and national economic conditions, changes in lending policies and procedures, trends in local real estate values and changes in volumes and terms of the loan portfolio.

Homogenous (consumer and residential mortgage) loan allocation of the allowance for loan losses are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and economic conditions.

Management believes the level of the allowance as of December 31, 2006 is adequate to absorb probable incurred losses in the loan portfolio.

Transfers of Financial Assets - Transfers of financial assets are accounted for as sales, when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from the Company, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Premises and Equipment – Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the assets. The depreciable lives range from 3 to 25 years for leasehold improvements, 3 to 20 years for furniture, fixtures and equipment and 15 to 39 years for the office buildings.

The Company reviews its long-lived assets for impairment annually or when events or circumstances indicate that the carrying amount of these assets may not be recoverable. An asset is considered impaired when the expected undiscounted cash flows over the remaining useful life is less than the net book value. When impairment is indicated for an asset, the amount of impairment loss is the excess of the net book value over its fair value.

Real Estate Acquired through Foreclosure - Real estate acquired through foreclosure is carried at estimated fair value at the time of foreclosure. Any subsequent operating expense or income, reduction in estimated values, and gains or losses on disposition of such properties are included in current operations. The Company had no real estate acquired through foreclosure at December 2006 and 2005.

Income Taxes – Income tax expense is the total of the current-year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets or liabilities shown on the balance sheet are adjusted to reflect differences between the tax bases of assets and liabilities and their reported amounts in the financial statements, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.

Investment in Federal Home Loan Bank of San Francisco Stock – As a member of the Federal Home Loan Bank (“FHLB”) of San Francisco, the Bank is required to own common stock in the FHLB of San Francisco based upon its balance of residential mortgage loans and outstanding FHLB advances. FHLB stock is carried at cost and may be sold back to the FHLB at its carrying value. Both cash and stock dividends received are reported as dividend income.

Bank Owned Life Insurance – The Company has purchased life insurance policies on certain key executives. Company owned life insurance is recorded at cash surrender value (or the amount that can be realized).

Core Deposit Intangibles - Core deposit intangibles are established in connection with purchase business combinations of banking or thrift institutions. The intangible asset represents the fair market value of acquiring the long-term depositor relationship. Core deposit intangibles have a finite useful life and it is the Company’s policy to amortize the intangible over the estimated useful life of the deposit base acquired, currently 10 years, using an accelerated amortization method. At December 31, 2006 and 2005, the gross balance of core deposit intangibles was $2.4 million and the accumulated amortization was $1.5 million and $1.2 million, respectively. The amortization expense was $252 thousand, $228 thousand, and $194 thousand for the years ended December 31, 2006, 2005 and 2004, respectively. Estimated future amortization of core deposit intangibles is $233 thousand for December 31, 2007, $148 thousand for December 31, 2008, $146 thousand for December 31, 2009, $143 thousand for December 31, 2010, $123 thousand for December 31, 2011, and $142 thousand thereafter.

Goodwill – Goodwill is no longer amortized, but instead is tested for impairment at least annually. A goodwill impairment test was completed as of September 30, 2006. No impairment loss was recorded by the Company.

Derivatives Held for Asset and Liability Management Purposes - SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a fair value hedge, a cash flow hedge or a hedge of foreign currency exposure. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation.

In accordance with the standards, the Company has identified certain types of short-term interest-bearing liabilities as a source of interest rate risk to be hedged in connection with the Company’s overall asset-liability management process. Although these liabilities have contractually fixed rates of interest, their short-term maturities, together with the expectation that they will be continually refinanced or replaced with similar products, give rise to the risk of fluctuations in interest expense as interest rates rise and fall in future periods. In response to this identified risk, the Company uses interest rate swaps as cash flow hedges to hedge the interest rate risk associated with the cash flows of short-term deposits, securities sold under agreements to repurchase and FHLB advances.

To qualify for hedge accounting, the Company must show that, at the inception of the hedges and on an ongoing basis, the changes in the fair value of the hedging instruments are expected to be highly effective in offsetting related changes in the cash flows of the hedged liabilities. These interest rate

swaps have been shown to be effective in hedging the exposure to the short-term liability variability in cash flows and, therefore, qualify for hedge accounting. For our cash flow hedges, the effective portion of the derivative’s gain or loss is initially reported in shareholders’ equity (as a component of accumulated other comprehensive income (loss)) and is subsequently reclassified into income, as an increase or decrease to interest expense, in the same period or periods during which the hedged forecasted transaction affects income. The ineffective portion of the gain or loss is reported as interest expense immediately. During the next twelve months, the Company expects a benefit of $371, net of tax, from the amount recorded in the separate component of stockholders’ equity to be reclassified to interest expense.

Securities Sold Under Repurchase Agreements – The Company sells securities under repurchase agreements. These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral to the counterparty, as necessary.

Comprehensive Income - Comprehensive income consists of net income and other comprehensive income or loss. Other comprehensive income or loss includes unrealized gains and losses on securities available for sale and unrealized gains and losses on cash flow hedges which are also recognized as separate components of equity.

Loss Contingencies - Loss contingencies, including claims and legal actions arising in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements.

Fair Value of Financial Instruments - Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in a separate note. Fair value estimates involve uncertainties and matters of significant judgment regarding interest rates, credit risk, prepayments, and other factors, especially in the absence of broad markets for particular items. Changes in assumptions or in market conditions could significantly affect the estimates.

The fair value estimates presented herein are based on pertinent information available to management as of each reporting date. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date, and therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Cash Flows - Cash and cash equivalents includes cash, deposits with other financial institutions under 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions, interest bearing deposits in other financial institutions, and federal funds purchased and repurchase agreements and other short-term borrowings with original maturities under 90 days.

Adoption of new accounting standards:

Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-based Payment. Under SFAS 123(R), compensation cost is calculated on the date of grant using the fair value of the option as determined using the Black Scholes model. The compensation cost is then amortized straight-line over the vesting period. The Black Scholes valuation calculation requires the Company to estimate key assumptions such as expected option term, expected volatility of the Company’s stock, the risk-free interest rate, annual dividend yield and forfeiture rates to determine the stock options fair value. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends. The Company elected to adopt the modified prospective application method as provided by SFAS 123(R), and, accordingly, the Company recorded

compensation costs as the requisite service is rendered for the unvested portion of previously issued awards that remain outstanding at the initial date of adoption and for any awards issued, modified, repurchased, or cancelled after the effective date of SFAS 123(R). The Company assumes a forfeiture rate of 3% annually.

As a result of adopting SFAS 123(R), total stock-based compensation resulted in a decrease to income before income taxes of $448 thousand, a reduction in net income of $295 thousand, and a decrease in basic and diluted earnings per share of $.05 and $.03, respectively. The pre-tax unearned compensation expense for the remaining three year vesting period through December 31, 2010, of the non-vested stock options is $896 thousand as of December 31, 2006.

Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS 123, “Accounting for Stock-Based Compensation”. No stock-based compensation was recognized on employee stock options in the Consolidated Statements of Earnings before January 1, 2006. Accordingly, financial statement amounts for the prior periods presented have not been restated to reflect the fair value method of expensing share-based compensation.

Had compensation cost for these plans been determined based on the fair value at the grant dates of options consistent with the method defined in SFAS No. 123, the Company’s net income and earnings per share would have been reduced to the pro forma amounts indicated below for the years ended December 31, 2005 and 2004:


Dollars in thousands, except per share data	Year ended December 31,
	2005		2004
Net income, as reported	$	8,336	$	8,209

Deduct:

Total stock-based compensation expense determined under the fair value based method for all awards, net of related tax effect		236		151


Pro forma net income	$	8,100	$	8,058


Earnings per share:

Basic earnings per share:

As reported	$	1.56	$	1.56

Pro forma	$	1.51	$	1.46

Effect of Newly Issued, But Not Yet Effective Accounting Standards

In February 2006, the Financial Accounting Standards Board (FASB) issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment to FASB Statements No. 133 and 140. This Statement permits fair value re-measurement for any hybrid financial instruments, clarifies which instruments are subject to the requirements of Statement No. 133, and establishes a requirement to evaluate interests in securitized financial assets and other items. The new standard is effective for financial assets acquired or issued after the beginning of the entity’s first fiscal year that begins after September 15, 2006. Management does not expect the adoption of this statement to have a material impact on its consolidated financial position or results of operations.

In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets-an amendment of FASB Statement No. 140. This Statement provides the following: 1) revised guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of available-for-sale securities to trading securities for securities which are identified as offsetting the entity’s exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. This standard is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. Management does not expect the adoption of this statement will have a material impact on its consolidated financial position or results of operations.

In September 2006, the FASB issued Statement No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This Statement establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The standard is effective for fiscal years beginning after November 15, 2007. Management does not expect the adoption of this statement will have a material impact on its consolidated financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109 (FIN 48), which prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company has determined that the adoption of FIN 48 will not have a material effect on the financial statements.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. This issue requires that a liability be recorded during the service period when a split-dollar life insurance agreement continues after participants’ employment or retirement. The required accrued liability will be based on either the post-

employment benefit cost for the continuing life insurance or based on the future death benefit depending on the contractual terms of the underlying agreement. This issue is effective for fiscal years beginning after December 15, 2007. Management does not expect the adoption of this statement will have a material impact on its consolidated financial position or results of operations.

In September 2006, the FASB Emerging Issues Task Force finalized Issue No. 06-5, Accounting for Purchases of Life Insurance — Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4 (Accounting for Purchases of Life Insurance). This issue requires that a policyholder consider contractual terms of a life insurance policy in determining the amount that could be realized under the insurance contract. It also requires that if the contract provides for a greater surrender value if all individual policies in a group are surrendered at the same time, that the surrender value be determined based on the assumption that policies will be surrendered on an individual basis. Lastly, the issue discusses whether the cash surrender value should be discounted when the policyholder is contractually limited in its ability to surrender a policy. This issue is effective for fiscal years beginning after December 15, 2006. The Company does not believe the adoption of this issue will have a material impact on the financial statements.

Reclassifications - Certain reclassifications have been made to the prior financial statements to conform to the current year presentation.

Stock Split – The accompanying consolidated financial statements of the Company reflect the 6 for 5 stock split in the form of a stock dividend paid on March 11, 2004 to holders of record on February 25, 2004. Fractional shares distributed in connection with this stock dividend were paid in cash based on the closing market price on the record date. All share and per share information herein has been retroactively restated to reflect this stock split. The accompanying consolidated financial statements also reflect an increase in its authorized capital shares from 3,000,000 to 12,000,000, which occurred contemporaneously with the stock split. Of the 12,000,000 shares authorized, 1,200,000 shares are reserved for preferred stock.

2.		LOANS RECEIVABLE

		The Bank’s loan portfolio as of December 31 is summarized as follows:


	2006			2005
Real estate loans:
Residential property — one to four units	$	106,675		$	115,925
Residential property — more than four units		79,896			80,855
Residential property — construction		57,660			50,590
Nonresidential property — construction		54,985			20,293
Commercial and other income — producing properties		264,915			253,208
Loans for the acquisition and development of land		54,738			36,085


Total real estate loans		618,869			556,956

Commercial and industrial loans		119,074			96,566
Consumer loans		25,304			26,653
Loans collateralized by deposit accounts		1,964			1,070
Consumer line-of-credit loans		242			201


		765,453			681,446

Net deferred loan fees		(2,103	)		(2,498	)
Net (discount) premiums		(403	)		(397	)
Allowance for loan losses		(5,914	)		(5,661	)


Loans receivable, net	$	757,033		$	672,890

The Bank’s lending is concentrated in California’s Central Coast, Kansas City and the Scottsdale, Arizona metropolitan area. Deterioration in the economic conditions of these markets could adversely affect its business, financial condition and profitability. Such deterioration could give rise to increased loan delinquencies, increased problem asset and foreclosures, decreased loan demand and a decline in real estate values.

A downturn in the real estate market may adversely affect our business. As of December 31, 2006, approximately 83.3% of the book value of our loan portfolio consisted of loans secured by various types of real estate. Approximately 64.8% of our real property collateral is located in California, approximately 18.4% is located in the Kansas City metropolitan area, and 16.8% is in the Arizona market.

At December 31, 2006, Los Padres Bank had an aggregate of $79.9 million and $264.9 million invested in multi-family residential and commercial real estate loans, respectively, or 10.4% and 34.6% of total loans receivable, respectively. Los Padres Bank’s multi-family residential loans are secured by

multi-family properties of five units or more, while Los Padres Bank’s commercial real estate loans are secured by industrial, warehouse and self-storage properties, office buildings, office and industrial condominiums, retail space and strip shopping centers, mixed-use commercial properties, mobile home parks, nursing homes, hotels and motels. Substantially all of these properties are located in Los Padres Bank’s primary market areas.

Los Padres Bank originates loans to finance the construction of single-family and multi-family residences and commercial properties located in its primary market area. At December 31, 2006, Los Padres Bank’s construction loans amounted to $112.6 million or 14.7% of total loans receivable, $57.7 million of which were for the construction of residential properties, $25.5 million of which were for land acquisition and the development of residential properties, and $29.4 million of which were for the construction of commercial properties.

At December 31, 2006, the Bank’s regulatory limit on loans-to-one borrower was $13.6 million and its five largest loans or groups of loans-to-one borrower, including related entities, aggregated $13.1 million, $13.1 million, $13.0 million, $13.0 million and $13.0 million. These five largest loans or loan concentrations were secured by commercial real estate and development of single family residences. All of these loans or loan concentrations were performing in accordance with their payment terms at December 31, 2006.

Activity in the allowance for loan losses is summarized as follows for the years ended December 31:


	2006			2005			2004
Balance, beginning of year	$	5,661		$	5,228		$	4,587

Charge-offs		(356	)		(2	)		(9	)

Recoveries		44			—			—

Provision for loan losses		565			435			650


Balance, end of year	$	5,914		$	5,661		$	5,228

Loans for which impairment has been recognized are as follows at December 31:


	2006		2005
Impaired loans with a valuation allowance	$	98	$	1,549
Impaired loans without a valuation allowance		—		—


Total impaired loans		98		1,549


Valuation allowance related to impaired loans	$	16	$	441


	2006		2005		2004
Average recorded investment in impaired loans	$	824	$	853	$	440
Interest income recognized on impaired loans		—		—		14
Interest income recognized on a cash basis		—		—		14

At December 31, 2006 and 2005, we had two and zero non-accrual loans with $98 thousand and $0, respectively. There were no restructured loans or real estate acquired through foreclosure at December 31, 2006 and 2005.

At December 31, 2006 and 2005, the Bank had the following outstanding loan commitments:

Unfunded Loan Commitments as of December 31,
(In Thousands)


	2006		2005
Commercial lines of credit	$	38,419	$	40,139
Consumer lines of credit		48,532		46,423
Undisbursed portion of loans in process		83,855		78,306
Approved but, not funded mortgage loans		7,463		6,531
Approved but, not funded commercial loans		540		8,292
Approved but, not funded consumer loans		300		1,080
Letters of credit		4,387		4,560

Total commitments	$	183,496	$	185,331

Commitments to make loans are generally made for periods of 60 days or less. As of December 31, 2006 loan commitments included fixed rate commercial loans with rates from 5.20% to 8.81% and terms of 18 months to 360 months.

3.		SECURITIES

		All securities held do not have a single maturity date. The amortized cost and estimated fair values of securities available for sale are summarized as follows:

		Securities Available for Sale:


			Gross
			Unrealized		Gross Unrealized
	Amortized Cost		Gains		Losses			Fair Value

December 31, 2006

Mortgage-backed securities — pass throughs	$	98,244	$	215	$	(1,514	)	$	96,945
Collateralized mortgage obligations		76,182		130		(517	)		75,795
Commercial mortgage-backed securities		31,312		—		(231	)		31,081
Asset-backed securities (underlying securities mortgages)		102,815		519		(175	)		103,159
Asset-backed securities		2,747		45		(43	)		2,749


	$	311,300	$	909	$	(2,480	)	$	309,729


			Gross
			Unrealized		Gross Unrealized
	Amortized Cost		Gains		Losses			Fair Value

December 31, 2005

Mortgage-backed securities — pass throughs	$	125,153	$	126	$	(2,439	)	$	122,840
Collateralized mortgage obligations		80,470		25		(964	)		79,531
Commercial mortgage-backed securities		40,647		—		(468	)		40,179
Asset-backed securities (underlying securities mortgages)		141,086		659		(181	)		141,564
Asset-backed securities		3,335		52		(149	)		3,238


	$	390,691	$	862	$	(4,201	)	$	387,352

The fair values and unrealized losses of the securities classified as available-for-sale or held-to-maturity with unrealized losses as of December 31, 2006 and 2005 segregated by investments that have been in a continuous unrealized loss position for less than 12 months and investments that have been in a continuous unrealized loss position for 12 months or longer are summarized below:


	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2006	Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities - pass throughs	$	4,560	$	(10	)	$	71,356	$	(1,504	)	$	75,916	$	(1,514	)
Collateralized mortgage obligations		23,705		(102	)		11,664		(415	)		35,369		(517	)
Commercial mortgage-backed securities		0		0			31,081		(231	)		31,081		(231	)
Asset-backed securities - (underlying securities mortgages)		4,294		(25	)		10,274		(150	)		14,568		(175	)
Asset-backed securities		1,290		(10	)		1,096		(33	)		2,386		(43	)


	$	33,849	$	(147	)	$	125,471	$	(2,333	)	$	159,320	$	(2,480	)


	Less than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2005	Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities - pass throughs	$	55,827	$	(684	)	$	55,881	$	(1,755	)	$	111,708	$	(2,439	)
Collateralized mortgage obligations		29,370		(175	)		26,270		(789	)		55,640		(964	)
Commercial mortgage-backed securities		33,517		(332	)		6,662		(136	)		40,179		(468	)
Asset-backed securities - (underlying securities mortgages)		25,237		(136	)		2,923		(45	)		28,160		(181	)
Asset-backed securities		—		—			2,433		(149	)		2,433		(149	)


	$	143,951	$	(1,327	)	$	94,169	$	(2,874	)	$	238,120	$	(4,201	)

Our mortgage-backed securities – pass throughs are issued by U.S. Government agencies and government sponsored enterprises, which primarily include Freddie Mac, Fannie Mae and the Government National Mortgage Association (“Ginnie Mae”). As of December 31, 2006, there are 84 mortgage-backed securities in an unrealized loss position; of those, 73 have been in an unrealized loss position for twelve months or more. At December 31, 2005, 90 mortgage-backed securities were in an unrealized loss position; of those, 54 had been in an unrealized loss position for over twelve months. Management believes that the unrealized losses associated with these investments are attributable to changes in interest rates and spreads, and accordingly, the unrealized losses are not “other-than-temporary impairments.” Management intends to hold these securities until recovery.

As of December 31, 2006 and December 31, 2005, there are 14 and 18, respectively, collateralized mortgage obligation securities in an unrealized loss position. Of the 14 securities in an unrealized loss position as of December 31, 2006, 3 have been in an unrealized loss position for over twelve months; and at December 31, 2005, of the 18 securities that were in an unrealized loss position, 8 had been in an unrealized loss position for over twelve months.

Our commercial mortgaged-backed securities are issued by various entities or trusts and, as of December 31, 2006, all are rated as investment grade by a nationally recognized rating agency. As of December 31, 2006, there are 5 commercial mortgage-backed securities in an unrealized loss position with 5

securities in an unrealized loss position for twelve months or more. At December 31, 2005, there were 6 commercial mortgage-backed securities in an unrealized loss position with one security in an unrealized loss position for over twelve months. Due to the investment grade ratings noted above, management believes that the unrealized losses associated with these investments are attributable to changes in interest rates and spreads, and accordingly, the unrealized losses are not “other-than-temporary impairments.” Management intends to hold these securities until recovery.

All of our asset-backed securities are issued by private entities or trusts and, as of December 31, 2006, all but 4 are rated as investment grade by a nationally recognized rating agency. The underlying collateral of these investments are single-family mortgages and student loans, with the exception of the securities discussed in the next paragraph. As of December 31, 2006, there are 25 asset-backed securities that are in an unrealized loss position with 11 securities in an unrealized loss position for twelve months or more. As of December 31, 2005, there are 14 asset-backed securities that are in an unrealized loss position, with 2 securities in an unrealized loss position for twelve months or more. As to the mortgage-related asset backed securities, management believes that the unrealized losses associated with these investments are attributable to changes in interest rates and spreads, and accordingly, the unrealized losses are not “other-than-temporary impairments.” Management intends to hold these securities until recovery.

The asset-backed securities are collateralized by a pool of loans and leases on medical equipment and medical business loans and they have a fair value of $1.5 million and $3.2 million as of December 31, 2006 and 2005, respectively. The securities are of the senior tranches with priority cash flow rights and are rated CCC by Fitch and B1 by Moody’s, as of December 31, 2006. Management believes the improvement in the unrealized loss from $149,000 as of December 31, 2005 to $33,000 as of December 31, 2006 is attributed to the return of principal on these securities. The delinquencies on the underlying loans of these securities have increased from 12.0% per the December 2005 servicer report to 13.5% per the December 2006 servicer report. Furthermore, management performs a stress test of the cash flows based on various delinquency, default and recovery rates on the underlying loans. Based on this analysis, all payments can be made on this security and, as such, the current unrealized loss associated with this investment is not an “other-than-temporary impairment.” Management intends to hold these securities until recovery.

At December 31, 2006, $222.1 million, or 71.7% of our mortgage-backed and related securities were pledged to secure various obligations (such as Federal Home Loan Bank (“FHLB”) advances, repurchase agreements and collateral for interest rate swaps.

Proceeds from sales of available for sale securities were $44.3 million, $61.8 million and $28.3 million, with related gross realized gains of $110,000, $933,000 and $690,000 for 2006, 2005 and 2004, respectively. There were $723,000 realized losses during the year ended December 31, 2006, with no losses in 2005 and 2004.

5. DEPOSITS

A summary of deposits by type of account as of December 31 is as follows:


	2006					2005
			Weighted-					Weighted-
			Average					Average
	Amount		Interest Rate (1)			Amount		Interest Rate(1)
Noninterest bearing:
Noninterest bearing	$	12,022		—		$	14,590		—
Commercial noninterest bearing		43,070		—			35,342		—

Total noninterest bearing		55,092		—			49,932		—

Interest bearing:
Passbook		17,597		0.87	%		21,924		0.88	%
NOW accounts		35,082		0.61	%		34,973		0.40	%
Money Market		60,602		3.67	%		69,291		2.85	%
Commercial Money Market		8,100		2.97	%		10,813		1.55	%

Total interest bearing		121,381		2.33	%		137,001		1.81	%

Total		176,473		1.60	%		186,933		1.33	%


Certificates of deposits:
$100,000 or greater		308,652		4.96	%		244,468		3.68	%
Under $100,000		247,632		4.84	%		237,744		3.63	%


Total certificates of deposits		556,284					482,212


Total deposits	$	732,757		4.11	%	$	669,145		3.00	%


(1)		Weighted Average interest rate as of the end of the period.

As of December 31, 2006, certificates of deposits are scheduled to mature as follows:


	$100,000 or		Less than
December 31	Greater		$100,000		Total

2007	$	299,816	$	235,783	$	535,599
2008		3,741		5,168		8,909
2009		2,904		4,152		7,056
2010		1,512		1,607		3,119
2011		679		922		1,601


	$	308,652	$	247,632	$	556,284

6. FEDERAL HOME LOAN BANK ADVANCES

We obtain both long-term fixed-rate and overnight advances from the FHLB of San Francisco upon the security of certain of our residential first mortgage loans, mortgage-backed securities or FHLB stock. FHLB of San Francisco advances are available for general business purposes to expand lending and investing activities. Advances from the FHLB of San Francisco are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Our advances are limited to 35% of our total Bank assets, or $403.5 million and $399.1 million at December 31, 2006 and 2005, respectively.

FHLB advances are collateralized by the investment in the stock of the FHLB and certain mortgage loans aggregating $227.2 million and $253.6 million at December 31, 2006 and 2005, respectively, and mortgage-backed securities aggregating $144.5 million and $207.8 million, market value, at December 31, 2006 and 2005, respectively. The weighted-average interest rate on these advances was 5.44% and 4.23% at December 31, 2006 and 2005 respectively.

The maturities of FHLB advances at December 31 are as follows:


	2006
2007 - overnight	$	238,000
2010 - long-term		19,000


	$	257,000


	At or For the Year Ended
	December 31,
	2006			2005			2004
	(Dollars in Thousands)
Overnight FHLB advances:
Average balance outstanding during the year	$	267,452		$	295,116		$	263,898
Maximum amount outstanding at any month-end during the period		310,000			339,050			298,000
Balance outstanding at end of period		238,000			300,000			297,000
Average interest rate during the period		5.05	%		3.26	%		1.46	%
Average interest rate at end of period		5.29	%		4.03	%		2.22	%

7. NOTE PAYABLE

At December 31, 2006 and 2005, the Company had a loan facility from two banks consisting of a revolving line of credit of $15.0 million. There have not been any draws on the line of credit since the Company paid off the outstanding balance of $11.3 million in 2003.

On September 16, 2004, we entered into an amendment to our credit agreement, which reduced the LIBOR margin range from 2.0% to 3.0% to 1.75% to 2.75%. Under the new terms, interest is payable quarterly and the rate is based on three defined performance-based levels determined from quarterly operating results related to core profitability and nonperforming asset ratios: Level 1 allows for the choice of London Interbank Offered Rate (“LIBOR”) plus 175 basis points (in maturities of 30, 60 or 90 days) or prime rate less 50 basis points; Level 2 allows for the choice of LIBOR plus 225 basis points or prime rate less 50 basis points; Level 3 allows for the choice of LIBOR plus 275 basis points or prime rate. At December 31, 2006, the Company qualified for Level 1 loan pricing. A .25% commitment fee on the unused portion of the line is payable quarterly.

The credit agreement contains a number of significant covenants that restrict our ability to dispose of assets, incur additional indebtedness, invest in mortgage derivative securities above certain thresholds, create liens on assets, engage in mergers or consolidations or a change-of control, engage in certain transactions with affiliates, pay cash dividends or repurchase common stock. The credit agreement also requires the Company to comply with specified financial ratios and tests, including causing the Bank to maintain a ratio of non-performing assets to the sum of Tier 1 risk-based capital plus loan loss reserves of not more than 0.20 to 1, maintaining a ratio of outstanding loans under the credit agreement to the stockholders’ equity of the Bank of less than 0.50 to 1, maintaining the Bank’s status as a “well capitalized” institution and complying with minimum core profitability requirements. The covenant that restricts payment of cash dividends in an aggregate amount not to exceed the greater of (a) $450,000 during any fiscal quarter, or (b) 40% of our consolidated net income during any fiscal quarter or declare dividends at any time an event of default has occurred under the revolving line of credit. The Bank’s status as a “well capitalized” institution and complying with minimum core profitability requirements is also a covenant associated with the credit agreement. Management believes that as of December 31, 2006, it was in compliance with all of such covenants and restrictions and does not anticipate that such covenants and restrictions will significantly limit its operations.

8. SUBORDINATED DEBT

On September 27, 2004, the Company completed a $10.3 million capital trust offering which consisted of $10.0 million of subordinated debt and $310,000 of common stock. The capital trust securities bear interest at LIBOR plus 1.90% and will mature on October 7, 2034. The capital securities were issued through a newly formed trust, Harrington West Capital Trust II, in a private transaction. Interest is payable, and the rate resets, quarterly. The interest rate at December 31, 2006 was 7.27%.

On September 25, 2003, the Company completed a $15.5 million capital trust offering which consisted of $15.0 million of subordinated debt and $464,000 of common stock. The capital trust securities bear interest at LIBOR plus 2.85% and will mature on October 8, 2033. The capital securities were issued through a newly formed trust, Harrington West Capital Trust I, in a private transaction. Interest is payable, and the rate resets, quarterly. The interest rate at December 31, 2006 was 8.22%.

9. SECURITIES SOLD UNDER REPURCHASE AGREEMENTS

We obtain funds from the sales of securities to investment dealers under agreements to repurchase, known as reverse repurchase agreements. In a reverse repurchase agreement transaction, we will generally sell a mortgage-backed security agreeing to repurchase either the same or a substantially identical security on a specific later date. For agreements in which we have agreed to repurchase substantially identical securities, the dealers may sell, loan or otherwise dispose of our securities in the normal course of their operations; however, such dealers or third party custodians safe-keep the securities which are to be specifically repurchased by us. At December 31, 2006 and 2005, the Company had $70.7 million and $63.3 million of mortgage-backed securities from the available-for-sale portfolio, which were pledged as collateral for our repurchase agreements. Reverse repurchase transactions are accounted for as financing arrangements rather than as sales of such securities, and the obligation to repurchase such securities is reflected as a liability in our consolidated financial statements.

At December 31, 2006 and 2005, we had four wholesale repurchase agreements, respectively, with Citigroup Financial Services totaling $59.0 million and $59.0 million with a weighted average coupon of 2.96% and 2.98% and maturities ranging from April 2007 to July 2010. We also had retail repurchase agreements with our customers of $6.1 million and $13 thousand at December 31, 2006 and 2005, respectively. The retail repurchase agreements mature daily and have a weighted-average interest rate of 4.11% and 1.05% at December 31, 2006 and 2005 respectively. During the year ended December 31, 2006, 2005 and 2004, the maximum balance of repurchase agreements at any month-end was $65.1 million, $81.3 million and $80.6 million, respectively, average balance was $60.2 million, $69.7 million and $75.5 million, respectively, and weighted average interest rates were 2.98%, 2.73%, and 2.62%, respectively.

11.		STOCKHOLDERS’ EQUITY

		Retained earnings are restricted to the extent that earnings deducted for tax purposes as bad debt deductions are not available for payment of cash dividends or other distributions to stockholders without payment of federal income taxes by the Company at the then-prevailing corporate tax rates. At December 31, 2006, this restricted amount was $671.

		*Qualified Stock Option Plan* - The Company has a qualified stock option plan that provides for the granting of stock options to key employees of the Bank. Options granted under the plan are vested ratably over a four-year period. The option price is based on a determination of a price that is not less than the fair value of the shares at the date of grant by the Compensation Committee and ratified by the Board of Directors.

		During 1996, the Company granted 180,000 options with a stock price of $4.86 per share and an expiration date of April 14, 2001. Such options were granted to Smith Breeden Associates (“SBA”) for financial advisory services provided in connection with the Company’s acquisition of the Bank. The estimated value of such options as of the date granted was considered as part of the purchase price of the Bank. During 2001, 129,056 of the options were exercised and the balance of 50,944 options was extended to expire on June 30, 2003.

		During 2002, the maturity of the 50,944 options was extended two years from June 30, 2003 to June 30, 2005. A $124 thousand pre-tax charge to earnings was recorded in 2002, which was equal to the change in the fair value of the underlying stock since the last extension, applied to the number of options extended. Specifically, the $124 thousand pre-tax charge was calculated by taking the difference between the fair values of the underlying stock at the extension date (i.e., $9.00) and the fair value of the stock at the previous extension date (i.e., $6.66) multiplied by 50,944. The offsetting entry was recorded to paid-in capital in stockholders’ equity.

		*2005* *Equity Based Compensation Plan —* In May 2005, Company stockholders approved the 2005 Equity Based Compensation Plan (the “Plan”). The principal purpose of the 2005 Plan is to promote the success of the Company by attracting, motivating, and retaining key employees, including officers, and directors of the Company, through the grant of stock-based compensation awards and incentives for high levels of individual performance and improved financial performance of the Company. The availability of stock options and other equity awards combined with the ability to condition vesting of those awards on performance based criteria can provide the Company flexibility not currently found in the 1996 Stock Option Plan. This flexibility will help the Company craft compensation practices that better align management’s interests with those of the stockholders.

		The Board also considered a number of other issues in adopting the 2005 Plan. The 1996 Stock Option Plan commenced in July 1996 and expired in 2005. A significant portion of the total options authorized in the 1996 Stock Option Plan are granted and, therefore, are already included in the Company’s diluted share count and earnings per share calculations. Accordingly, the Company expects additional dilution from unvested shares in the 1996 Stock Option Plan will be minimal. The shares of Company stock subject to the 2005 Plan are limited to ten percent (10%) of the number of shares issued and outstanding at any time to minimize future dilution.

		The material aspects of the 2005 Plan are as follows:

•

the 2005 Plan authorizes the granting of:

Incentive Stock Options;
Non-Qualified Stock Options;
Stock Appreciation Rights (“SARs”);
Restricted Stock Awards;
Restricted Stock Units; and
Performance Share Cash Only Awards

100

	•		vesting restrictions on awards may be time based and/or performance based;

	•		participation in the 2005 Plan is limited to officers at the level of Vice President or above and other employees who provide substantial services to the Company as well as the Company’s directors;

	•		the 2005 Plan provides for a maximum of a “floating” ten percent (10%) of the Company’s issued and outstanding shares of common stock that may be delivered for awards subject to adjustment as set forth therein; and

	•		the maximum number of Incentive Stock Options (ISO) that may be issued under the Plan is the lesser of 1,000,000 or the maximum number of shares allocated to the Plan.

	•		the right to acquire stock may not remain outstanding more than 10 years after the grant date, and any ISO Award granted to any eligible employee owning more than 10% of the Company’s stock must be granted at 110% of the fair market value of the stock. Awards do not vest or become exercisable until six months after the date of grant.

The weighted average fair value for options granted during 2006, 2005 and 2004 was $7.08, $9.01 and $5.93, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:


	Year Ended December 31,
	2006			2005			2004
Risk-free interest rate		4.98	%		4.32	%		4.07	%

Expected volatility		52.79	%		49.80	%		36.37	%

Expected lives	7 years			9 years			9 years

Contractual lives	10 years			10 years			10 years

Dividend Yield		3.11	%		2.92	%		2.18	%

Information related to the stock option plan during each year follows:


	2006		2005		2004
Intrinsic value of options exercised	$	794	$	1,195	$	747
Cash received from option exercises		429		587		515
Tax benefit realized from option exercises		397		250		—
Weighted average fair value of options granted		7.08		9.01		5.93

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A summary of the status of the Company’s stock options as of December 31 and changes during the years are presented below:


($ in Thousands Except Per Share Information)	2006
						Weighted-
				Weighted-		Average
				Average		Remaining		Aggregate
				Exercise		Contractual		Intrinsic
	Shares			Price		Life		Value
Incentive stock options:
Outstanding beginning of year		620,440		$	9.55
Granted		102,500		$	16.80
Forfeited/Expired unexercised		(2,050	)	$	16.89
Options exercised		(75,550	)	$	5.68


Outstanding, end of the period		645,340		$	11.18		5.4	$	4,002


Vested or expected to vest at 12/31/06		639,102		$	11.14		5.4	$	3,992


Exercisable, end of the period		437,392		$	8.90		4.1	$	3,695

The outstanding options have prices ranging from $5.69 to $19.10. Remaining available options to be issued under the 2005 Equity Compensation Plan at December 31, 2006, were 441,539. There are no available options remaining under the 1996 Stock Option Plan. The plan expired May 24, 2005.

12.

REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures that have been established by regulation to ensure capital adequacy require the Bank to maintain minimum capital amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defines). Management believes, as of December 31, 2006, that the Bank meets all capital adequacy requirements to which it is subject.

The Bank’s primary regulatory agency, the Office of Thrift Supervision (“OTS”), currently requires that the Bank maintain minimum ratios of tangible capital (as defined in the regulations) to tangible assets of 1.5%, core capital (as defined) to adjusted tangible assets of 4%, and total capital (as defined) to risk-weighted assets of 8%. These capital requirements are viewed as minimum standards by the OTS, and most institutions are expected to maintain capital levels well above the minimum. Minimum capital levels higher than those provided in the regulations may be established by the OTS for individual savings associations, upon a determination that the savings association’s capital is or may become inadequate in view of its circumstances.

102

As of December 31, 2006 and 2005, the most recent notification from the OTS categorized the Bank as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that notification which management believes have changed the Bank’s category.

Federal regulations place certain restrictions on dividends paid by the Bank to the Company. The total amount of dividends that may be paid at any date is generally limited to the retained earnings of the Bank. At December 31, 2006, the Bank’s retained earnings available for the payment of dividends were $21.9 million. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

Harrington West Financial Group, Inc. can not issue or renew any debt, increase any current lines of credit, or guarantee the debt of any entity without advance notification to the OTS.

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REGULATORY CAPITAL
FINANCIAL STATEMENT FOOTNOTE

Actual and required capital amounts (dollars in thousands) and ratios for the Bank are presented below:


												To Be Well
												Capitalized Under
						For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Actions Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
As of December 31, 2006:
Total Capital
(to risk weighted assets)	$	90,921		10.78	%	$	67,481	>		8.00	%	$	84,351	>		10.00	%

Core capital
(to adjusted tangible assets)	$	85,008		7.41	%	$	45,862	>		4.00	%	$	57,328	>		5.00	%

Tangible capital
(to tangible assets)	$	85,008		7.41	%	$	17,198	>		1.50	%		N/A			N/A

Tier 1 capital
(to risk weighted assets)	$	85,008		10.08	%	$	33,741			4.00	%		50,611	>		6.00	%

As of December 31, 2005:
Total Capital
(to risk weighted assets)	$	82,594		10.69	%	$	61,784	>		8.00	%	$	77,230	>		10.00	%

Core capital
(to adjusted tangible assets)	$	76,933		6.78	%	$	45,361	>		4.00	%	$	56,702	>		5.00	%

Tangible capital
(to tangible assets)	$	76,933		6.78	%	$	17,010	>		1.50	%		N/A			N/A

Tier 1 capital
(to risk weighted assets)	$	76,933		9.96	%	$	30,892			4.00	%	$	46,338	>		6.00	%

104

13.		EARNINGS PER SHARE

		The following tables represent the calculations of earnings per share (“EPS”) for the periods presented.


	Year Ended December 31, 2006
	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	8,228		5,441,075	$	1.51
Effect of dilutive stock options				131,589		(0.03	)


Diluted EPS	$	8,228		5,572,664	$	1.48


	Year Ended December 31, 2005
	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	8,336		5,347,757	$	1.56
Effect of dilutive stock options				272,799		(0.08	)


Diluted EPS	$	8,336		5,620,556	$	1.48


	Year Ended December 31, 2004
	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount
Basic EPS	$	8,209		5,256,030	$	1.56
Effect of dilutive stock options				347,650		(0.10	)


Diluted EPS	$	8,209		5,603,680	$	1.46

Anti-dilutive options totaling 200,750, 97,500 and 92,750 are excluded from the calculation of earnings per share for the years ended December 31,2006, 2005 and 2004, respectively.

14.		COMMITMENTS AND CONTINGENCIES

		Aggregate minimum lease commitments under long-term operating leases as of December 31, 2006 are as follows:


2007	$	1,244
2008		1,099
2009		976
2010		656
2011		307
2012 and thereafter		178

	$	4,460

Minimum lease payments for the Bank’s premises are adjusted annually based upon the Consumer Price Index. Rental expense was $1.3 million, $1.4 million and $1.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.

Neither the Company nor the Bank is involved in any material legal proceedings at December 31, 2006. The Bank, from time to time, is a party to litigation which arises in the ordinary course of business, such as claims to enforce liens, claims involving the origination and servicing of loans, and other issues related to the business of the Bank. After taking into consideration information furnished by

105

counsel to the Company and the Bank, management believes that the resolution of such issues will not have a material adverse impact on the financial position, results of operations, or liquidity of the Company or the Bank.

15.

TRADING ACCOUNT ASSETS

Derivative Instruments Not Receiving Hedge Treatment - The Bank is a party to a variety of interest rate contracts such as interest rate swaps, caps, floors, futures, options and total return swaps (“Interest Rate Agreements”), which are recorded in the financial statements at fair value with changes in fair value and periodic payments recorded in income from trading account assets.

Interest rate swaps are contracts in which the parties agree to exchange fixed and floating rate payments for a specified period of time on a specified (“notional”) amount. The notional amount is only used to calculate the amount of the periodic interest payments to be exchanged and does not represent the amount at risk. At December 31, 2006, all of the Interest Rate Agreements had matured.

106

The following is a summary of the Interest Rate Agreements as of December 31:


	Contract or		Estimated					Weighted Average
	Notional		Fair Value					Interest Rate
	Amount		Asset		Liability			Payable	Receivable
2005

Total return swaps — receive total return CMBS investment grade total return,	$	50,000	$	116		—		Bank receives the spread on Lehman Brothers AAA CMBS Index Plus a spread and receives or pays the market value change of index

Total return swaps — receive total return on CMBS investment grade total return	$	25,000	$	76		—		Bank receives the spread on Banc of America BAS CMBS AAA Index Plus a spread and receives or pays the market value change of index

Total return swaps — receive total return on CMBS investment grade total return	$	9,000	$	6		—		Bank receives the spread on Banc of America BAS CMBS AA Index Plus a spread and receives or pays the market value change of index.

Total return swaps — receive total return on CMBS investment grade total return	$	15,000		—	$	(58	)	Bank receives the spread on Banc of America BAS CMBS BBB Index Plus a spread and receives or pays the market value change of index

Total return swaps — receive total return on one month LIBOR-based ABS securities	$	30,000		—	$	(12	)	Bank receives the spread on five specific AA floating ABS securities plus a spread of 3 basis points and receives or pays the market value change at maturity.

107

The Interest Rate Agreements used have an active secondary market and are included in trading account assets at fair value with realized and unrealized gains and losses on these instruments recognized immediately in other income.

The Bank’s exposure to credit risk from derivative financial instruments is represented by the fair value of the instruments. Credit risk amounts represent the replacement cost the Bank could incur should counterparties with contracts in a gain position completely fail to perform under the terms of those contracts. Counterparties are subject to the credit approval and credit monitoring policies and procedures of the Bank. The Bank limits its credit exposure by entering into International Swap Dealer Association (“ISDA”) Master Agreements with each counterparty. ISDA Master Agreements set the legal framework for transactions with counterparties in over the counter derivative markets. The Bank only deals with counterparties that are investment grade.

The following table shows the various components of the Company’s recorded net gain (loss) on its trading account assets for the years ended December 31.


						Income
	Realized		Unrealized			from
	Gains		Gains			Trading
	(Losses)		(Losses)			Assets
December 31, 2006

Interest rate contracts:
Swaps	$	1,074	$	(127	)	$	947

MBS and other trading assets		63		14			77


Total trading portfolio	$	1,137	$	(113	)	$	1,024


December 31, 2005

Interest rate contracts:
Swaps	$	24	$	50		$	74

MBS and other trading assets		4		(75	)		(71	)


Total trading portfolio	$	28	$	(25	)	$	3


December 31, 2004

Interest rate contracts:
Swaps	$	674	$	(71	)	$	601

MBS and other trading assets		1		(31	)		(30	)


Total trading portfolio	$	675	$	(102	)	$	571

108

		The following table shows the Company’s trading securities included in trading account assets as of December 31:

		Securities Held for Trading:


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2006

Mortgage-backed securities and other	$	235	$	2	$	—		$	237
Mutual funds		585		20		(5	)		600

Trading assets	$	820	$	22	$	(5	)	$	837


			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
December 31, 2005

Mortgage-backed securities and other	$	324	$	1	$	(2	)	$	323
Mutual funds		522		2		—			524
CMBS total return swaps		—		198		(70	)		128

Trading assets	$	846	$	201	$	(72	)	$	975

16.		DERIVATIVES HELD FOR ASSET AND LIABILITY MANAGEMENT

		At December 31, 2006, the swaps listed below are hedging the interest rate risk of cash flows associated with deposits and borrowings. These swaps qualify as cash flow hedges. During 2006, 2005 and 2004, the ineffective portion of the change in fair value of the cash flow hedges was ($6) thousand, ($6) thousand, and $155 thousand, respectively. The fair values for the cash flow swaps in a gain position are reported in Other assets, those in a loss position are reported in Other liabilities. No significant cash flow hedges were discontinued during fiscal years 2006, 2005 or 2004.


	Contract or				Weighted-Average
	Notional		Estimated		Interest Rate
	Amount		Fair Value		Receivable			Payable
December 31, 2006 -
Interest rate swaps — pay fixed receive 3-month LIBOR	$	164,000	$	587		5.36	%		4.73	%

December 31, 2005 -
Interest rate swaps — pay fixed receive 3-month LIBOR	$	152,000	$	33		4.39	%		4.42	%

109

The following table sets forth the maturity distribution and weighted-average interest rates of the interest rate swaps used to limit the repricing risk of deposits and borrowings as of December 31, 2006:


Maturities	2007			2008			2009			2010			2011			Thereafter
Interest rate swaps:
Notional amount	$	52,000		$	4,000		$	60,000		$	10,000		$	10,000		$	28,000
Weighted-average payable rate		3.80	%		3.78	%		5.25	%		6.29	%		4.90	%		4.84	%
Weighted-average receivable rate		5.36	%		5.37	%		5.36	%		5.36	%		5.38	%		5.36	%

The Bank is dedicated to managing credit risks associated with investment and interest rate risk management activities. The Bank maintains positions with a variety of counterparties or obligors (“counterparties”). To limit credit exposure arising from such transactions, the Bank evaluates the credit standing of counterparties, establishes limits for the total exposure to any one counterparty, monitors exposure against the established limits, and monitors investment portfolio composition to manage concentrations.

The Bank pledges certain mortgage-backed securities as collateral for our interest rate swaps.

17.

FAIR VALUES OF FINANCIAL INSTRUMENTS

SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Company disclose estimated fair values for its financial instruments. The estimated fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies; however, considerable judgment is required to interpret market data to develop estimates of fair value.

110

Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts at December 31:


	2006				2005
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
Assets:
Cash and cash equivalents	$	21,178	$	21,178	$	19,312	$	19,312
Trading account assets		837		837		975		975
Securities, available for sale		309,729		309,729		387,352		387,352
Securities, held to maturity		69		71		80		84
Loans receivable, net		757,033		760,913		672,890		675,326
FHLB stock		14,615		14,615		16,364		16,364
Due from broker		142		142		—		—
Accrued interest receivable		5,315		5,315		4,463		4,463

Liabilities:
Demand deposits		176,473		176,473		186,933		186,933
Certificates of deposits		556,284		554,971		482,212		479,443
FHLB advances		257,000		256,551		319,000		318,359
Securities sold under repurchase agreements		65,141		65,027		59,013		58,894
Subordinated debt		25,774		25,774		25,774		25,774
Due to broker		—		—		2,474		2,474
Accrued interest payable		1,063		1,063		914		914

Hedging Instruments -
Interest rate swaps		587		587		33		33

The methods and assumptions used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value are explained below:

Cash and Cash Equivalents - The carrying amounts approximate fair values due to the short-term nature of these instruments.

Trading Account Assets - The fair values of trading securities included in trading account assets are obtained from market bids or from independent securities brokers or dealers. Fair values of interest rate contracts are based on quoted market price or dealer quotes.

Securities - The fair values of securities are generally obtained from market bids for similar or identical securities or are obtained from independent security brokers or dealers.

Loans - Fair values are estimated for portfolios of loans with similar financial characteristics, primarily fixed and adjustable rate interest terms. The fair values of mortgage loans are based upon discounted cash flows utilizing applicable risk-adjusted discount rates relative to available mortgage-backed securities having similar rate and repricing characteristics, as well as anticipated prepayment schedules. No adjustments have been made for changes in credit within the loan portfolio. It is management’s opinion that the allowance for estimated loan losses pertaining to performing and nonperforming loans results in a fair valuation of such loans.

FHLB Stock - The carrying amounts approximate fair values, as the stock may be sold back to the FHLB at cost.

111

Accrued Interest Receivable — The carrying amount of accrued interest receivable approximates fair value due to its short-term nature.

Deposits - The fair values of deposits are estimated based upon the type of deposit product. Demand accounts, which include passbooks and transaction accounts, are presumed to have equal book and fair values, since the interest rates paid on these accounts are based on prevailing market rates and the amounts are payable upon demand. The estimated fair values of time deposits are determined by discounting the cash flows of settlements of deposits having similar maturities and current rates, utilizing a LIBOR swap curve adjusted for Federal Deposit Insurance Corporation (“FDIC”) insurance that approximates the prevailing rates offered on the Company’s term borrowings less the cost of FDIC insurance as of the reporting date.

FHLB Advances - The fair values of FHLB advances are based upon discounted cash flows utilizing applicable risk-adjusted spreads relative to the current pricing for similar advances.

Securities Sold under Repurchase Agreements - The Company has entered into sales of securities under agreements to repurchase. At both December 31, 2006 and December 31, 2005, $59 million of the securities sold under repurchase agreements are long-term in nature and the fair value is calculated by discounting future cash flows based on expected maturities or repricing dates, utilizing estimated market discount rates at each reporting date. The call features of these instruments are also considered in the determination of fair values.

Subordinated Debt - The carrying amount approximates fair value, as the rate is based on current market rates.

Due to/Due from Broker – The carrying amount of due to/due from broker approximates fair value due to its short-term nature.

Hedging instruments consist of interest rate swaps used to modify the interest rate sensitivity of certain short-term certificates of deposit, a portion of the Bank’s securities sold under agreements to repurchase and the short-term FHLB advances. Fair values are based on quoted market prices or dealer quotes. Where such quotes are not available, fair value is estimated by using quoted market prices for similar securities or by discounting future cash flows at a risk-adjusted spread to the LIBOR-based swap curve.

Commitments to Extend Credit, and Standby and Commercial Letters of Credit - The fair values of commitments to extend credit and standby letters of credit were not significant at either December 31, 2006 or 2005, as these instruments predominantly have adjustable terms and are of a short-term nature.

Accrued Interest Payable - The carrying amount of accrued interest payable approximates fair value due to its short-term nature.

18.		RELATED-PARTY TRANSACTIONS

		The Bank has contracted with Smith Breeden Associates (SBA) to provide investment advisory services and interest rate risk analysis. A principal of SBA is a director for the Company and the Bank. Several principals and employees of SBA are stockholders of the Company. The amount of consulting expense relating to SBA for the years ended December 31, 2006, 2005 and 2004 was $405,000, $425,000 and $412,000, respectively.

112

		The Bank grants loans to principal officers and directors and their affiliates. Other than draws on existing lines of credit, there were no new loans granted in 2005 and 2006.

		The following table is a roll-forward of the related party loan activity and outstanding balances on previously granted loans as of December 31, 2006 and 2005.


Amounts in thousands	2006			2005
Beginning balance	$	4,929		$	5,382
Additions		9			—
Repayments		(113	)		(453	)


Ending balance	$	4,825		$	4,929

19.		EMPLOYEE BENEFIT PLAN

		The Company sponsors a defined contribution plan for the benefit of its employees. The Company’s contributions to the plan are determined annually by the Board of Directors in accordance with plan requirements. For tax purposes, eligible participants may contribute up to a maximum of 15% of their compensation, not to exceed the dollar limit imposed by the Internal Revenue Service. The expense associated with the employee benefit plan is included in salary and employee benefits in the consolidated statements of earnings. For the plan years ended December 31, 2006, 2005 and 2004, the Company contributed $345,000, $392,000 and $473,000, respectively.

113

20.		PARENT COMPANY ONLY FINANCIAL INFORMATION

		Condensed Statements of Financial Condition


	December 31,
	2006			2005
ASSETS

Cash and cash equivalents	$	1,711		$	2,743
Trading account assets		175			167
Investment in Bank		90,792			81,614
Investment in capital trusts		891			832
Other assets		429			672


TOTAL	$	93,998		$	86,028


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Subordinated debt	$	25,774		$	25,774
Accounts payable and other liabilities		526			680


Total liabilities		26,300			26,454


Stockholders’ Equity:
Preferred stock, $.01 par value; 1,200,000 shares authorized:
none issued and outstanding
Common stock, $.01 par value; 10,800,000 shares authorized; 5,460,393 shares issued and outstanding as of December 31, 2006 and 5,384,843 shares as of December 31, 2005		55			54
Additional paid-in capital		33,332			32,059
Retained earnings		34,964			29,458
Accumulated other comprehensive loss, net of tax		(653	)		(1,997	)


Total stockholders’ equity		67,698			59,574


TOTAL	$	93,998		$	86,028

114

Condensed Statements of Cash Flows


	Year Ended December 31,
	2006			2005			2004
Cash Flows from Operating Activities:
Net income	$	8,228		$	8,336		$	8,209
Adjustments:
Equity in net undistributed earnings of subsidiary		(7,051	)		(9,875	)		(9,299	)
(Increase) decrease in unrealized gain in trading assets		(8	)		(4	)		(17	)
Amortization and depreciation		22			33			(3	)
(Decrease) in income taxes payable receivable		(267	)
Decrease in other assets		221			336			11
(Decrease) increase in accounts payable and other liabilities		115			117			(454	)


Net cash used in operating activities		(1,260	)		(1,057	)		(1,553	)


Cash Flows from Investing Activities:
Net decrease in investment securities		—			—			714
Investment in capital trusts		—			—			(303	)
Purchase of furniture, fixtures and equipment		—			—			(99	)


Net cash used in investing activities		—			—			312


Cash Flows from Financing Activities:
Net proceeds from exercise of stock options		430			835			516
Cash contribution to subsidiary		—			—			(7,400	)
Cash dividends received from Bank		—			2,900			4,000
Cash dividends paid		(2,722	)		(2,515	)		(4,645	)
Increase in subordinated debt		—			—			10,310


Net cash provided by financing activities		(2,292	)		1,220			2,781


Net (decrease) increase in cash and cash equivalents		(1,032	)		163			1,540

Cash and cash equivalents, beginning of year		2,743			2,580			1,040


Cash and cash equivalents, end of year	$	1,711		$	2,743		$	2,580

116

21.

QUARTERLY FINANCIAL INFORMATION (UNAUDITED)


	Quarters Ended
	December 31,		September 30,		June 30,		March 31,
2006

Interest income	$	19,250	$	18,978	$	18,207	$	17,664
Interest expense		11,700		11,275		10,510		9,858


Net interest income		7,550		7,703		7,697		7,806
Provision for loan losses		75		200		150		140


Net interest income after provision for loan loss		7,475		7,503		7,547		7,666
Noninterest income		1,078		1,055		1,162		1,166
Noninterest expense		5,674		5,543		5,560		5,392


Income before provision for income taxes		2,879		3,015		3,149		3,440
Provision for income taxes		926		913		1,074		1,342


Net income	$	1,953	$	2,102	$	2,075	$	2,098


Basic earnings per share	$	0.36	$	0.39	$	0.38	$	0.39
Diluted earnings per share	$	0.35	$	0.38	$	0.37	$	0.38

2005
Interest income	$	16,738	$	15,847	$	15,163	$	14,308
Interest expense		9,186		8,285		7,680		6,747


Net interest income		7,552		7,562		7,483		7,561
Provision for loan losses		85		—		200		150


Net interest income after provision for loan loss		7,467		7,562		7,283		7,411
Noninterest income		1,019		1,241		1,046		1,563
Noninterest expense		5,349		5,379		5,138		5,210


Income before provision for income taxes		3,137		3,424		3,191		3,764
Provision for income taxes		1,085		1,326		1,240		1,529


Net income	$	2,052	$	2,098	$	1,951	$	2,235


Basic earnings per share	$	0.38	$	0.39	$	0.36	$	0.42
Diluted earnings per share	$	0.36	$	0.37	$	0.35	$	0.40

117

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

The registrant hereby incorporates by reference the change in Accounting Firms pursuant to Regulation S-K, Section 229.304 in its 8-K, Item 4.01, filed on April 5, 2006.

. Item 9a. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer along with our Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon that evaluation, our Chief Executive Officer along with the our Senior Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting us to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings. There have been no significant changes in our internal control over financial reporting during our most recent quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Our board of directors has adopted a Code of Ethics, a copy of which was filed as Exhibit 14 to the 2003 Annual Report on Form 10-K.

There were no material changes to the procedures by which our stockholders may recommend nominees to our board of directors during 2006.

The balance of the information required by Item 10 is incorporated by reference from our definitive proxy statement for our 2006 Annual Meeting of Stockholders (“Proxy Statement”) which will be filed pursuant to Regulation 14A.

Item 11. Executive Compensation.

This information is incorporated by reference from our Proxy Statement which will be filed pursuant to Regulation 14A.

118


Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

This information with respect to beneficial ownership by beneficial owners and management is incorporated by reference from our Proxy Statement which will be filed pursuant to Regulation 14A.

EQUITY COMPENSATION PLAN INFORMATION

The following table presents information for all equity compensation plans with individual compensation arrangements (whether with employees or non-employees such as directors), in effect as of December 31, 2006.

Number of securities

Number of

remaining available for

securities to be

future issuance under

issued upon exercise

Weighted-average

equity compensation

of outstanding

exercise price of

plans (excluding

options, warrants

outstanding options,

securities reflected in

and rights

warrants and rights

column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by security holders

645,340

11.18

441,539

Total

645,340

11.18

441,539

Item 13. Certain Relationships and Related Transactions.

This information is incorporated by reference from our Proxy Statement which will be filed pursuant to Regulation 14A.

Item 14. Principal Accountant Fees and Services

The information is incorporated by reference from our Proxy Statement which will be filed pursuant to Regulation 14A.

119

Part IV

Item 15. Exhibits and Financial Statement Schedules.

(a) Documents filed as part of this report.

(1) The following documents are filed as part of this Annual Report on Form 10-K and are incorporated herein by reference to Item 8 hereof:

Report of Independent Registered Public Accounting Firm

Consolidated Statements of Financial Condition as of December 31, 2006 and 2005.

Consolidated Statements of Earnings for the Years Ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2006, 2005 and 2004.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004.

Notes to Consolidated Financial Statements.

(2) All schedules for which provision is made in the applicable accounting regulation of the SEC are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto.

(b) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit Index.


EXHIBIT NO.		DESCRIPTION
3.1		Certificate of Incorporation of Harrington West Financial Group, Inc. (1)

3.1.1		Certificate of Amendment to Certificate of Incorporation. (1)

3.1.2		Second Certificate of Amendment to Certificate of Incorporation. (1)

3.2		Bylaws of Harrington West Financial Group, Inc. (1)

3.2.1		Amendment to Bylaws. (1)

4.0		Specimen stock certificate of Harrington West Financial Group, Inc. (1)

4.1		Indenture Agreement dated September 25, 2003. (2)

4.2		Amended and Restated Declaration of Trust of Harrington West Capital Trust I dated September 25, 2003 (2)

4.3		Preferred Securities Guarantee Agreement dated September 25, 2003 (2)

4.4		Indenture Agreement dated September 27, 2004 (2)

4.5		Amended and Restated Declaration of Trust of Harrington West Capital Trust II dated September 27, 2004 (2)

4.6		Guarantee Agreement dated September 27, 2004 (2)

10.1		Harrington West Financial Group 1996 Stock Option Plan, as amended. (1)

10.2		Amended and Restated Credit Agreement dated as of October 30, 1997 among Harrington West Financial Group, Inc., the lenders party thereto and Harris Trust and Savings Bank, as amended on October 1, 1999, May 2, 2000 and November 1, 2001. (1)

10.2.1		Fourth Amendment to Amended and Restated Credit Agreement dated September 17, 2002. (1)

120


EXHIBIT NO.		DESCRIPTION
10.2.2		Fifth Amendment to Amended and Restated Credit Agreement dated February 24, 2003. (2)

10.2.3		Sixth Amendment to Amended and Restated Credit Agreement dated October 30, 2003. (2)

10.2.4		Seventh Amendment to Amended and Restate Credit Agreement dated September 16, 2004.(2)

10.3		Investment and Interest Rate Advisory Agreement between Los Padres Savings Bank, FSB and Smith Breeden Associates, Inc., dated February 3, 1997. (1)

10.4		Purchase and Assumption Agreement by and between Los Padres Bank, FSB and Harrington Bank, FSB dated as of May 30, 2001. (1)

10.5		Los Padres Mortgage Company, LLC Operating Agreement by and between Resource Marketing Group, Inc. and Los Padres Bank FSB dated June 13, 2002. (1)

10.6		Option Agreement, dated as of April 4, 1996 by and between Smith Breeden Associates, Inc. and Harrington West Financial Group, Inc. Assignment of Option, dated as of January 19, 2001, by and between Craig Cerny and Smith Breeden Associates, Inc. (1)

10.7		Stock Purchase Agreement by and between Harrington Bank, FSB and Los Padres Bank, FSB dated as of May 30, 2001. (1)

10.8		2005 Equity Based Compensation Plan (2)

10.9		Smith Breeden Associates, Inc. Portfolio Advisory & Rate Risk Analysis Agreement (2)

11		Statement re computation of per share earnings – Reference is made to Item 8. “Financial Statements and Supplementary Data” for the required information.

14		Code of Ethics (3)

23.1		Consent of Crowe Chizek and Company LLP

23.2		Consent of Deloitte & Touche LLP

31.1		Section 302 Certification by Chief Executive Officer filed herewith.

31.2		Section 302 Certification by Chief Financial Officer filed herewith.

32		Section 906 Certification by Chief Executive Officer and Chief Financial Officer furnished herewith.


(1)		Incorporated by reference to the Registrant’s Form S-1 (File No. 333-99031) filed with the Securities and Exchange Commission (the “SEC”) on August 30, 2002, as amended.

(2)		Incorporated by reference to the Registrant’s Form 10-Q for the quarter ending September 30, 2003 filed with the SEC on November 11, 2003.

(3)		Previously filed.

121

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	HARRINGTON WEST FINANCIAL GROUP, INC.
March 23, 2007	By:	/s/ Craig J. Cerny
		Craig J. Cerny
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)



March 23, 2007	By:	/s/ William W. Phillips, jr.
		William W. Phillips, Jr.
		President, Chief Operating Officer (Principal Executive Officer)



March 23, 2007	By:	/s/ Kerry Steele
		Kerry Steele
		Sr. Vice-President, Chief Financial Officer (Principle Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


NAME	TITLE	DATE

/s/ Craig J. Cerny Craig J. Cerny	Chairman of the Board and Chief Executive Officer	March 23, 2007

/s/ William W. Phillips William W. Phillips, Jr.	Director, President, and Chief Operating Officer	March 23, 2007

/s/ John J. McConnell John J. McConnell	Director	March 23, 2007

/s/ Paul O. Halme Paul O. Halme	Director	March 23, 2007

/s/ William D. Ross William D. Ross	Director	March 23, 2007

/s/ Tim Hatlestad Tim Hatlestad	Director	March 23, 2007

122


	Page
PART I
Item 1. Business
General		2
Principal Products and Services
Lending Activities		3
Asset Quality		10
Investment Activities		17
Sources of Funds		25
Subsidiaries		28
Employees		29
Regulation of Harrington West Financial Group		29
Regulation of Los Padres Bank		30
Legislation		34
Regulation of Non-banking Affiliates		36
Item 1A. Risk Factors		36
Item 1B. Unresolved Staff Comments		44
Item 2. Properties		44
Item 3. Legal Proceedings		46
Item 4. Submission of Matters to a Vote of Security Holders		46
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		47
Item 6. Selected Financial Data		48
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Mission		49
Multiple Market Strategy		49
Product Line Diversification		50
Modern Financial Skills		50
Control Banking Risks		51
Performance Measurement		51
Profitability Drivers		51
Critical Accounting Policies		53
Results of Operation		54
Changes in Financial Condition		60
Asset and Liability Management		62
Liquidity and Capital Resources		65
Contractual Obligations and Commercial Commitments		67
Off Balance Sheet Arrangements		68
Inflation and Changing Prices		69
Effect of Newly, But Not Yet Effective Accounting Standards		69
Item 7A. Quantitative and Qualitative Disclosures About Market Risk		69
Item 8. Financial Statements and Supplementary Data		69
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		118
Item 9A. Controls and Procedures		118
Item 9B. Other Information		118
PART III
Item 10. Directors, Executive Officers and Corporate Governance		118
Item 11. Executive Compensation		118
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		119
Item 13. Certain Relationships, Related Transactions and Director Independence		119
Item 14. Principal Accounting Fees and Services		119
PART IV
Item 15. Exhibits, Financial Statement Schedules		120
SIGNATURES		122
CERTIFICATIONS		123
EXHIBIT 23.1
EXHIBIT 23.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32


	At and For the Year Ended
	December 31,
	2006			2005			2004			2003			2002
	(Dollars in Thousands)
Balance at beginning of period	$	5,661		$	5,228		$	4,587		$	3,797		$	3,736

Charge-offs:
Real estate loans
Commercial		(352	)		—			—			—			(330	)
Consumer and other loans		(4	)		(2	)		(9	)		—			—


Total charge-offs		(356	)		(2	)		(9	)		—			(330	)


Recoveries		44			—			—			—			—


Net charge-offs		(312	)		(2	)		(9	)		—			(330	)



Provision for losses on loans		565			435			650			790			391


Balance at end of period	$	5,914		$	5,661		$	5,228		$	4,587		$	3,797

Allowance for loan losses as a percent of total net loans outstanding at the end of the period		0.78	%		0.84	%		0.87	%		0.88	%		0.83	%

Ratio of net charge-offs to average loans outstanding during the period		0.01	%		—	%		—	%		—	%		0.07	%


(1)		Consists entirely of Fannie Mae participation certificates.


(1)		The balance at December 31, 2006, 2005 and 2004 consisted of total return swaps, which we use to enhance our returns, and interest rate contracts, which do not qualify for hedge accounting treatment pursuant to SFAS No. 133 .


		Page
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – 2006		71

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM – 2005 and 2004		72

CONSOLIDATED FINANCIAL STATEMENTS:

Consolidated Statements of Financial Condition — December 31, 2006 and 2005		73

Consolidated Statements of Earnings for the Years Ended December 31, 2006, 2005 and 2004		74

Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004		75

Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004		77

Notes to Consolidated Financial Statements		79

4.		PREMISES AND EQUIPMENT

		Premises and equipment consist of the following at December 31:


	2006		2005
Land	$	4,873	$	1,811
Buildings		6,128		4,091
Leasehold improvements		3,620		3,088
Furniture, fixtures and equipment		6,789		6,303


Total		21,410		15,293
Less: accumulated depreciation and amortization		5,829		5,017


Premises and equipment, net	$	15,581	$	10,276

10.		INCOME TAXES

		The provision for taxes on income consists of the following components for the years ended December 31:


	2006			2005
Deferred tax asset:
Unrealized hedging loss on cash flow hedges	$	—		$	74
Unrealized loss on available for sale securities		559			1,321
Non-qualified Stock Options		242			—
Allowance for loan losses		2,544			2,434
State tax		436			405
Deferred rent		92			91


Gross deferred tax asset		3,873			4,325


Deferred tax liabilities:
Net loan fees/costs		2,890			2,166
FHLB stock dividends		1,459			1,308
Depreciation		302			492
Unrealized hedging gain on cash flow hedges		139			—
Other		181			222


Gross deferred tax liability		4,971			4,188


Net deferred tax asset (liability)	$	(1,098	)	$	137

	1.		I have reviewed this annual report on Form 10-K of Harrington West Financial Group, Inc.;

	2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

	3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

	4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

	(a)		Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	(b)		Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	(c)		Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

	(a)		All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	(b)		Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.



	By:	/s/ William W. Phillips, jr.
		William W. Phillips, Jr.
		President, Chief Operating Officer



	By:	/s/ Kerril Steele.
		Kerril Steele
		Sr. Vice-President Chief Financial Officer