e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008


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

For the transition period from to

Commission File Number: 000-50066

HARRINGTON WEST FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		48-1175170 (I.R.S. Employer Identification No.)

610 Alamo Pintado Road
Solvang, California
(Address of principal executive offices)

93463
(Zip Code)

(805) 688-6644
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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. þ Yes o No

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


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).
o Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,590,011 shares of Common Stock, par value $0.01 per share, outstanding as of October 31, 2008.

PART 1-FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollars in thousands, except per share data)


	September 30,			December 31,
	2008			2007

Assets:
Cash and cash equivalents	$	24,549		$	14,433
Trading account assets		933			2,307
Securities, available-for-sale		285,099			351,466
Securities held to maturity (fair value of $40 at September 30, 2008 and $58 at December 31, 2007)		38			56
Loans receivable, net of allowance for loan losses of $7,035 at September 30, 2008 and $6,446 at December 31, 2007		811,372			782,626
Accrued interest receivable		3,874			5,168
Real estate owned		8,841			—
Premises, equipment and other long-term assets		17,750			16,917
Due from broker		43			1
Prepaid expenses and other assets		2,607			2,848
Investment in FHLB stock, at cost		13,301			12,474
Income taxes receivable		4,065			—
Cash surrender value of life insurance		20,943			20,524
Deferred tax asset		12,823			8,384
Goodwill		5,496			5,496
Other intangible assets		591			702

Total assets	$	1,212,325		$	1,223,402


Liabilities:
Deposits:
Interest-bearing deposits	$	856,822		$	786,263
Non-interest-bearing demand deposits		45,805			50,070

Total Deposits		902,627			836,333
FHLB advances		203,000			247,000
Securities sold under repurchase agreements		20,146			49,981
Subordinated debt		25,774			25,774
Accrued interest payable and other liabilities		8,280			8,769
Income taxes payable		—			503

Total liabilities		1,159,827			1,168,360


Shareholders’ equity
Preferred stock, $ .01 par value; 8% non-cumulative, 1,000,000 shares authorized; 118,757 shares issued and outstanding as of September 30, 2008 with no shares issued and outstanding December 31, 2007		1			—
Common stock, $.01 par value; 9,000,000 shares authorized; 6,590,011 shares issued and outstanding as of September 30, 2008 and 5,554,003 shares issued and outstanding December 31, 2007		66			56
Additional paid-in capital — Common		42,043			34,424
Additional paid-in capital — Preferred		2,968			—
Retained earnings		27,672			35,368
Accumulated other comprehensive loss		(20,252	)		(14,806	)

Total shareholders’ equity		52,498			55,042

Total liabilities and shareholders’ equity	$	1,212,325		$	1,223,402

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 2 -

HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)

(Dollars in thousands, except per share data)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007

Interest income:
Loans	$	13,745		$	15,130		$	41,616		$	45,202
Securities		3,838			5,112			13,989			13,674

Total interest income		17,583			20,242			55,605			58,876

Interest expense:
Deposits		6,497			8,700			22,809			24,077
Interest on FHLB advances, repos & other debt		3,401			3,500			10,134			11,452

Total interest expense		9,898			12,200			32,943			35,529

Net interest income		7,685			8,042			22,662			23,347
Provision for loan losses		1,565			200			2,465			400

Net interest income after provision for loan losses		6,120			7,842			20,197			22,947

Non-interest income:
Gain (loss) on sale of available for sale securities		—			—			1,107			(1,004	)
Loss from trading assets		(28	)		(378	)		(8,693	)		(372	)
Other-than-temporary loss		(5,575	)		(1,906	)		(8,057	)		(1,906	)
Gain on termination of cash flow hedge		—			—			2,338			—
Loss on write-down of real estate owned		(393	)		—			(2,996	)		—
Other income		—			—			1,049			—
Increase in cash surrender value of life insurance		180			209			421			616
Banking fee and other income		879			787			2,605			2,582

Total non-interest income		(4,937	)		(1,288	)		(12,226	)		(84	)

Non-interest expense:
Salaries and employee benefits		3,428			3,308			10,225			9,817
Premises and equipment		1,025			975			3,041			2,893
Insurance premiums		247			83			685			254
Marketing		143			84			383			314
Computer services		235			239			781			687
Professional fees		198			162			503			628
Office expenses and supplies		192			195			620			613
Other		801			703			2,223			1,987

Total non-interest expense		6,269			5,749			18,461			17,193

Income (loss) before income taxes		(5,086	)		805			(10,490	)		5,670
Provision for income tax expense (benefit)		(1,908	)		307			(3,935	)		2,121

Net income (loss)	$	(3,178	)	$	498		$	(6,555	)	$	3,549


Basic earnings/(loss) per share	$	(0.52	)	$	0.09		$	(1.10	)	$	0.64
Diluted earnings/(loss) per share	$	(0.52	)	$	0.09		$	(1.10	)	$	0.63
Basic weighted-average shares outstanding		6,141,216			5,550,353			5,954,914			5,537,873
Diluted weighted-average shares outstanding		6,141,216			5,642,512			5,954,914			5,641,914

The accompanying notes are an integral part of these condensed consolidated financial statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS) (Unaudited)

(Dollars in thousands, except share and per share data)


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

BALANCE, JANUARY 1, 2007		—	$	—		5,460,393	$	55	$	33,332	$	34,964					$	(653	)	$	67,698
Comprehensive income/(loss)

Net income												4,168			4,168						4,168

Other comprehensive loss, net of tax
Unrealized losses on securities															(10,757	)		(10,757	)		(10,757	)
Effective portion of change in fair value of cash flow hedges															(3,396	)		(3,396	)		(3,396	)


Total comprehensive loss														$	(9,985	)


Stock options exercised including tax benefit of $125						93,610		1		719											720
Stock compensation expense										373											373
Dividends on Common Stk at $.675/Shr												(3,764	)								(3,764	)


BALANCE, DECEMBER 31, 2007		—		—		5,554,003		56		34,424		35,368						(14,806	)		55,042


Comprehensive loss

Net loss												(6,555	)	$	(6,555	)					(6,555	)

Other comprehensive loss, net of tax
Unrealized losses on securities															(5,736	)		(5,736	)		(5,736	)
Effective portion of change in fair value of cash flow hedges															290			290			290


Total comprehensive loss														$	(12,001)


Stock options exercised including tax benefit of $25						27,240		—		233											233
Shares issued in private offering at $7.75						550,000		5		4,257											4,262
Shares issued in private offering at $6.25						458,768		5		2,862											2,867
Shares issued in private offering at $25.00		118,757		1						2,968											2,969
Stock compensation expense										267											267

Dividends on Common Stk at $.195/Shr												(1,141	)								(1,141	)


BALANCE, SEPTEMBER 30, 2008		118,757	$	1		6,590,011	$	66	$	45,011	$	27,672					$	(20,252	)	$	52,498

The accompanying notes are an integral part of these condensed consolidated financial statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)


	Nine Months Ended
	September 30
	2008			2007

Cash flows from operating activities:
Net (loss) income	$	(6,555	)	$	3,549
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Accretion of deferred loan fees and costs		(429	)		(192	)
Depreciation and amortization		1,038			1,141
Amortization of premiums and discounts on loans receivable and securities		(649	)		797
Provision for loan losses		2,465			400
Activity in trading account assets		(1,305	)		(13	)
Loss (gain) on sale of trading securities		2,679			(454	)
Loss (gain) on sale of available-for-sale securities		(1,107	)		2,910
Gain on termination of cash flow swaps		(2,338	)		—
Loss on other-than-temporary impairment		8,057			—
Loss on write-down of real estate owned		2,996			—
FHLB stock dividend		(565	)		(566	)
Earnings on bank owned life insurance		(421	)		(616	)
Decrease in accrued interest receivable		1,294			69
Increase in income tax receivable, net of payable		(4,568	)		(359	)
Decrease in prepaid expenses and other assets		723			697
Stock compensation expense		267			288
Decrease in accounts payable, accrued expenses, and other liabilities		(187	)		(354	)

Net cash provided by operating activities		1,395			7,297


Cash flows from investing activities:
Net increase in loans receivable		(58,793	)		(9,258	)
Proceeds from sale of loans		16,133			—
Proceeds from sales of securities available for sale		171,925			35,999
Purchases of securities available for sale		(162,501	)		(175,892	)
Principal paydowns on securities available for sale		41,466			83,522
Principal paydowns on securities held to maturity		18			10
Proceeds from sale of real estate acquired through foreclosure		53			—
Purchase of bank owned life insurance		—			(2,000	)
Net purchase of premises and equipment		(2,067	)		(1,083	)
Proceeds from sale of fixed assets		1,100			—
Redemption (purchase) of FHLB Stock		(262	)		3,377

Net cash provided by (used in) investing activities		7,072			(65,325	)


Cash flows from financing activities:
Net increase in deposits		66,294			92,930
Decrease in securities sold under agreements to repurchase		(29,835	)		(15,414	)
Decrease in FHLB advances		(44,000	)		(21,000	)
Proceeds from exercise of stock options, including tax benefits		233			731
Proceeds from shares issued in private offering		10,098			—
Dividends paid on common stock		(1,141	)		(3,066	)

Net cash provided by financing activities		1,649			54,181

Net increase (decrease) in cash and cash equivalents		10,116			(3,847	)
Cash and cash equivalents at beginning of period		14,433			21,178

Cash and cash equivalents at end of period	$	24,549		$	17,331

The accompanying notes are an integral part of these condensed consolidated financial statements.

- 5 -

HARRINGTON WEST FINANCIAL GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business of the Company – Harrington West Financial Group, Inc. (the “Company”) is a diversified, community-based financial institution holding company, incorporated on August 29, 1995 to acquire and hold all of the outstanding common stock of Los Padres Bank, FSB (the “Bank”), a federally chartered savings bank. We provide a broad menu of financial services to individuals and small to medium sized businesses and operate seventeen banking offices in three markets as follows: eleven Los Padres banking offices on the California Central Coast, three Los Padres banking offices in Scottsdale, Arizona, and three banking offices located in the Kansas City metropolitan area, which are operated as a division under the Harrington Bank brand name. The Company also owns Harrington Wealth Management Company, a trust and investment management company with $182.7 million in assets under management or custody, which offers services to individuals and small institutional clients through a customized asset allocation approach by investing predominantly in low fee, indexed mutual funds and exchange traded funds.

Basis of Presentation – The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and general practices within the banking industry. In the opinion of the Company’s management, all adjustments consisting of normal recurring accruals necessary for a fair presentation of the financial condition and results of operation for the interim periods included herein have been made.

The following is a summary of significant principles used in the preparation of the accompanying financial statements. In preparing the 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, real estate owned, valuation of investment securities and derivatives, the disclosure of contingent assets and liabilities and the disclosure of income and expenses for the periods presented in conformity with accounting principles generally accepted in the United States of America. Actual results could differ from those estimates.

The unaudited condensed consolidated interim financial statements of the Company and subsidiaries presented herein should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2007, included in the Company’s Annual Report on Form 10-K.

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 uncollectability of the loan balance is confirmed.

The allowance is maintained at a level believed by management to be sufficient to absorb estimated probable incurred credit losses. 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 commercial loans, consumer loans and 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.

- 6 -

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. 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, a creditor may measure impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Allocations 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 allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and economic conditions.

Real Estate Owned – Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed.

Adoption of new accounting standards – In September 2006, the Financial Accounting Standards Board (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. In February 2008, the FASB issued Staff Position (FSP) 157-2, Effective Date of FASB Statement No. 157. This FSP delays the effective date of FAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The impact of adoption was not material.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. The standard provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. The new standard is effective for the Company on January 1, 2008. The Company did not elect the fair value option for any financial assets or financial liabilities as of January 1, 2008.

In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133. This Statement expands the disclosure requirements of FASB Statement No. 133 and requires the reporting entity to provide enhanced disclosures about the objectives and strategies for using derivative instruments, quantitative disclosures about fair values and amounts of gains and losses on derivative contracts, and credit-risk related contingent features in derivative agreements. The Statement is effective for fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company plans to include the required disclosures in its first interim reporting period ending March 31, 2009.

- 7 -

In December 2007, the FASB issued SFAS No. 141 (revised), “Business Combinations.” SFAS No. 141(R) changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. The Company is required to adopt SFAS No. 141(R) no later than January 1, 2009. The Company has not yet determined the impact SFAS No. 141(R) may have on its financial position, results of operations or cash flows.

2. FAIR VALUE

Statement 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as, quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing and asset or liability.

The fair values of trading securities and securities available-for-sale are determined by obtaining matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). Many of our securities are quoted using observable market information for similar assets which requires HWFG to report and use Level 2 pricing. In early October 2008, the FASB Staff Position (FSP) No. FAS 157-3 was issued to clarify the applications of FASB Statement 157, Fair Value Measurements, in a market that is not active. The FSP clarified that in cases where observable inputs (Level 2) required significant adjustments based on unobservable data, it would be appropriate to consider Level 3 (model pricing) fair value measurements. This guidance was used in the September 2008 quarter to value selected asset-backed securities currently trading in inactive markets.

Our derivative instruments consist of interest rate swaps. As such, significant fair value inputs can generally be verified by counterparties and do not typically involve significant management judgments (Level 2 inputs).

- 8 -

Assets and liabilities measured at fair value on a recurring basis are summarized below:


			Fair Value Measurements at September 30, 2008
			Quoted Prices in
			Active Markets				Significant
			for Identical		Significant Other		Unobservable
			Assets		Observable Inputs		Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Trading securities	$	933		—	$	933		—
Available for sale securities	$	285,099		—	$	185,258	$	99,842
Liabilities:
Interest rate swaps	$	4,723		—	$	4,723		—

The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the quarter ended September 30, 2008:


	Fair Value
	Measurements
	Using Significant
	Unobservable
	Inputs
	(Level 3)
	Available for sale
	securities
Transfers in to Level 3	$	80,471
Total gains or losses (realized / unrealized)
Recognized in earnings:
Other than temporary impairment		(5,575	)
Unrealized in other comprehensive income:
Reclassification adjustment for losses recognized in earnings		5,575
Level 3 fair value adjustment		19,371

Ending balance, September 30, 2008	$	99,842

In accordance with FASB Staff Position (FSP) No. FAS 157-3, the company measured the fair value of certain available for sale securities with a carrying amount of $99.8 million using significant unobservable inputs due to a lack of an active market. The Company’s methodology utilizes pertinent information derived primarily from the security issuers’ remittance reports which then are applied to an internal cash flow model. The significant unobservable inputs include assumptions for discount rate and default rates. These securities are primarily in our adjustable rate asset-backed securities portfolio and were transferred from Level 2 to Level 3 at September 30, 2008 due to clarification of the definition of securities trading in markets that are not active as provided by FSP FAS 157-3 issued in early October 2008.

- 9 -

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

Fair Value Measurements at September 30, 2008

Quoted Prices in

Active Markets

Significant

for Identical

Significant Other

Unobservable

Assets

Observable Inputs

Inputs

Total

(Level 1)

(Level 2)

(Level 3)

Assets:

Impaired loans

10,657

—

10,657

—

Loans — The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures impairment in accordance with SFAS 114, “Accounting by Creditors for Impairment of a Loan”. The fair value of impaired loans is estimated primarily by using the value of the underlying collateral. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans, where an allowance is established based on the fair value of collateral, require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans had a carrying amount of $10.7 million, with a valuation allowance of $1.1 million.

3. REAL ESTATE OWNED

Real estate owned is summarized as follows:


	September 30,			September 30,
	2008			2007
Beginning balance real estate owned	$	—		$	—
Transfer of loans to real estate owned		11,837			—
Provision for real estate owned		(2,996	)		—

Ending balance real estate owned	$	8,841		$	—

- 10 -

Changes in the valuation allowance for losses on other real estate owned were as follows:


	September 30,		September 30,
	2008		2007
Beginning valuation on real estate owned	$	—	$	—
Provision charged to operations		2,996		—
Amounts related to properties disposed		—		—

Ending valuation on real estate owned	$	2,996	$	—

4. EARNINGS (LOSS) PER SHARE

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


	Three months ended September 30, 2008								Nine months ended September 30, 2008
(net income/(loss) amounts	Income/(Loss)			Shares		Per-Share			Income/(Loss)			Shares		Per-Share
in thousands)	(Numerator)			(Denominator)		Amount			(Numerator)			(Denominator)		Amount
Basic EPS	$	(3,178	)		6,141,216	$	(0.52	)	$	(6,555	)		5,954,914	$	(1.10	)
Effect of dilutive stock options & preferred stock					—		—						—		—

Diluted EPS	$	(3,178	)		6,141,216	$	(0.52	)	$	(6,555	)		5,954,914	$	(1.10	)


	Three months ended September 30, 2007						Nine months ended September 30, 2007
	Income/(Loss)		Shares		Per-Share		Income/(Loss)		Shares		Per-Share
	(Numerator)		(Denominator)		Amount		(Numerator)		(Denominator)		Amount
Basic EPS	$	498		5,550,353	$	0.09	$	3,549		5,537,873	$	0.64
Effect of dilutive stock options				92,159		—				104,041		(0.01	)

Diluted EPS	$	498		5,642,512	$	0.09	$	3,549		5,641,914	$	0.63

Anti-dilutive options totaling 711,115 and 320,000 for year-to-date ended September 30, 2008 and 2007, respectively, are excluded from the calculation of earnings per share. Anti-dilutive options were 711,115 and 321,700 for quarter-to-date ended September 30, 2008 and 2007, respectively

5. OTHER-THAN-TEMPORARY IMPAIRMENT

At September 30, 2008 our asset-backed securities and collateralized mortgage backed securities had unrealized losses aggregating $28.7 million. Management reviews all securities with unrealized losses for impairment on a quarterly basis. For those with severe price declines, ratings downgrades or other indications of impairment, management stress-tests the cash flows for various delinquency, foreclosure, and recovery rate scenarios on the underlying loans, in order to determine the likelihood of receiving all scheduled interest and principal on these securities. If, as a result of that analysis, it is determined that management will not receive all scheduled interest and principal, management recognizes other than temporary impairment. As part of management’s quarterly evaluation, it was determined that eight available-for-sale securities with an amortized cost of $10.3 million were deemed other than temporarily impaired. As such, these securities were written down by $5.6 million to fair value through

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earnings in the September 2008 quarter. For securities where no other than temporary impairment was noted, management’s evaluation of the cash flows resulted in a conclusion that the scheduled cash flows would be realized and therefore no other than temporary impairment was recognized.

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

Corporate Profile

Harrington West Financial Group, Inc. (NASDAQ: HWFG) is a diversified, community-based, financial institution holding company. Our primary business is delivering an array of financial products and services to commercial and retail consumers through our seventeen full-service banking offices in multiple markets. We also operate Harrington Wealth Management Company, our wholly owned subsidiary, which provides trust and investment management services to individuals and small institutional clients through customized investment allocations and a high service approach. The culture of our company emphasizes building long-term customer relationships through exemplary personalized service. Our corporate headquarters are in Solvang, California with executive offices in Scottsdale, Arizona.

Mission and Philosophy

Our mission is to increase shareholder value through the development of highly profitable, community-based banking operations that offer a broad range of high value loan alternatives, deposit products, and investment and trust services for commercial and retail customers in the markets of the California central coast and the metropolitan areas of Kansas City and Phoenix/Scottsdale.

Multiple Market Strategy

Although our markets are geographically dispersed, we can compete effectively in each region due to our considerable market knowledge of each area, our placement of local management with extensive banking experience in the respective market, our strong community ties that enhance relationship development, the favorable demographic and economic characteristics specific to each market, and our broad product menu.

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

	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.

Based upon HWFG’s financial performance and economic conditions, we 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.

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Since 1997, we have grown from 4 banking offices to 17 banking offices. 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 3 offices in the Phoenix, Arizona metro area. The Company also owns two parcels for future development in Gilbert, Arizona and Phoenix, Arizona in the Deer Valley Airpark. These banking centers are expected to be developed over the next 18 to 24 months depending on the Company’s performance and the length of the entitlement process.

Product Line Diversification

We have broadened our product lines over the last 8 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. During this past year, with emphasis on core deposit development, HWFG introduced the successful Power-Up account and Remote Deposit Capture. In 2008, we have added numerous convenience services to our product line such as no surcharge ATM access nationwide through the Money Pass network, E-statements for savings and checking customers, internet check re-order capability, and the convenience of on-line application for various mortgage-related products.

Modern Financial and Investment Management Skills

We have expertise in investment and asset liability management. Our Chief Executive Officer spent thirteen years in this field consulting on risk management practices with banking institutions and advising on mortgage and related assets managed on a short duration basis. Our Chief Investment Officer, hired in February 2007, brought over twenty years experience in the investment and risk management fields.

We invest in short duration, investment grade securities and our investment portfolio is comprised largely of mortgage and related securities. We believe our ability to price loans and investments on an option-adjusted spread basis and manage the interest rate risk of longer term, fixed rate loans, allow us to compete effectively against other institutions that do not engage in these activities.

Control Banking Risks

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

Concentrate on Selected Performance Measures

We evaluate our performance based upon the primary measures of return on average equity, earnings per share growth, additional franchise value creation through the growth of deposits, loans and wealth management assets and risk management of credit, operations, interest rate risk and liquidity. We may forego some short term profits to invest in operating expenses for branch development in an effort to earn future profits. Given the current environment in 2008, evidenced by a very weak housing market,

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adverse credit conditions, and a soft economy, we have shifted our emphasis to heightened risk management, capital preservation, increasing liquidity, and producing stable earnings.

Profitability Drivers

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

	1.		Growing our low and 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 focused on home equity line of credit loans, using prudent underwriting guidelines and procedures.

	3.		Diversifying and growing our banking fee income through existing and new fee income sources such as our overdraft protection program and other deposit fees, loan fee income from mortgage banking, prepayment penalty fees and other loan fees, Harrington Wealth Management trust and investment fees, and other retail banking fees.

	4.		Achieving a higher level of performance on our investment portfolio by earning a pre-tax total return consisting of interest income plus net gains and losses on securities and related total return swaps relative to one month LIBOR over 1.00% per annum. With our skills in investment and risk management, we have utilized excess equity capital by investing in a high credit quality, mortgage and related securities portfolio managed to a short duration of three to six months. In recent quarters, with the extremely volatile investments spreads and prices and the on going credit crisis, HWFG has allowed the investment portfolio to pay-down to increase capital levels and reduce risk.

	5.		Controlling the 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.

Together, we believe these factors will lead to improving profitability. The effect of these factors on our financial results is discussed further in the following sections:

Results of Operations

The Company reported a net loss of $3.2 million or 52 cents per share on a diluted basis in the September 2008 quarter compared to net income of $498 thousand or 9 cents per diluted share, respectively, in the September 2007 quarter. For the first nine months of 2008, HWFG reported a loss of $6.6 million or $1.10 dollars per diluted share compared to net income of $3.5 million or 63 cents per diluted share in the same period a year ago. These losses have been the direct result of the weak economy, severe declines in residential real estate, and the resulting credit crisis of the last 15 months,

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causing downward pressure on the values of mortgage loans, mortgage securities, and the underlying real estate collateral.

The net loss for the September 2008 quarter of $3.2 million was comprised of the following components:

	1.		$1.5 million of after-tax core banking income (net interest income before provision for loan loss plus banking fee income minus operating expenses).

	2.		$3.5 million after-tax other-than-temporary impairment on $10.3 million of securities available for sale. This loss was transferred from equity to earnings upon determination of the impairment and, therefore, has no effect on book value per share.

	3.		$1.2 million in after-tax addition to reserves and write-downs on loans and real estate owned. On a pre-tax basis, this expense includes $1.6 million of provision for loan losses and $400 thousand of write-downs on real estate owned.

The net loss for the first nine months of 2008 of $6.6 million consist of the following components:

	1.		$4.5 million of after-tax core banking income (net interest income before provision for loan loss plus total banking fee income minus operating expenses).

	2.		$2.7 million after tax net loss on sales of CMBS, other assets and securities, CMBS total rate of return swaps and hedges, and cash flow hedges of borrowings. All CMBS related securities were eliminated in the June 2008 quarter.

	3.		$5.0 million after-tax other-than-temporary impairment on $17.0 million book value of mortgage securities.

	4.		$1.5 million in after-tax specific and general allowances for loan losses.

	5.		$1.9 million after-tax write-downs on real estate owned.

HWFG’s net interest income was $7.7 million in the September 2008 quarter versus $8.0 million in the September 2007 quarter and up from the $7.3 million in the June 2008 quarter. Net interest margin in the September 2008 quarter was 2.67% compared to 2.37% and 2.95% in the June 2008 and September 2007 quarters, respectively. The lower net interest income in the September 2008 quarter relative to these comparative quarters were due to the lag in the repricing of the interest rates on our deposit accounts (money market and certificates of deposit) relative to the PRIME rates earned on approximately $300 million of loans and the LIBOR rates earned on approximately $200 million of securities and loans. Net interest income and net interest margin, however, rebounded to 2.67% in the September 2008 quarter from 2.37% in the June 2008 quarter as this lag in the repricing of HWFG’s CD deposit accounts started to catch-up with the repricing of HWFG’s floating rate LIBOR and PRIME based loans and securities and as HWFG reduced lower spread investment securities at the end of the June 2008 quarter. Furthermore, HWFG has made a concerted effort to re-price loan renewals and new loans at wider spreads to its funding cost to compensate for the credit environment. We expect this expansion of net interest margin will continue into the December 2008 quarter, especially if the high spreads of LIBOR rates to comparable maturity FHLB borrowing and CD rates persist throughout the quarter, tempered somewhat by the 1% decrease in the Fed Funds and PRIME rates in October 2008.

The following tables set forth, for the periods presented, 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 before provision for loan losses; (iv) interest rate spread; and (v) net interest margin. Information is based on average daily balances during the periods presented.

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	Three Months Ended							Three Months Ended
	September 30, 2008							September 30, 2007
(In thousands)	Balance		Income		Rate (6)			Balance		Income		Rate (6)
Interest earning assets:
Loans receivable (1)	$	812,145	$	13,745		6.76	%	$	763,000	$	15,130		7.91	%
FHLB stock		13,549		207		6.08	%		12,081		161		5.29	%
Securities and trading account assets (2)		326,455		3,614		4.43	%		317,215		4,890		6.17	%
Cash and cash equivalents (3)		13,886		17		0.49	%		11,552		61		2.09	%

Total interest earning assets		1,166,035		17,583		6.03	%		1,103,848		20,242		7.32	%

Non-interest-earning assets		37,177							51,388

Total assets	$	1,203,212						$	1,155,236


Interest bearing liabilities:
Deposits:
NOW and money market accounts	$	174,341	$	1,095		2.50	%	$	97,757	$	642		2.61	%
Passbook accounts and certificates of deposit		628,823		5,402		3.42	%		651,325		8,058		4.91	%

Total deposits		803,164		6,497		3.22	%		749,082		8,700		4.61	%

FHLB advances (4)		261,946		2,896		4.40	%		209,752		2,570		4.86	%
Reverse repurchase agreements		19,999		159		3.11	%		50,330		405		3.15	%
Other borrowings (5)		25,774		346		5.25	%		25,774		525		7.97	%

Total interest-bearing liabilities		1,110,883		9,898		3.53	%		1,034,938		12,200		4.66	%

Non-interest-bearing deposits		40,901							45,164
Non-interest-bearing liabilities		9,379							8,704

Total liabilities		1,161,163							1,088,806
Stockholders’ equity		42,049							66,430

Total liabilities and stockholders’ equity	$	1,203,212						$	1,155,236


Net interest-earning assets (liabilities)	$	55,152						$	68,910

Net interest income/interest rate spread			$	7,685		2.50	%			$	8,042		2.66	%

Net interest margin						2.67	%						2.95	%

Ratio of average interest-earning assets to average interest-bearing liabilities						104.96	%						106.66	%


1)		Balance includes non-accrual loans. Income includes fees earned on loans originated and accretion of deferred loan fees.

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

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

4)		Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.

5)		Consists of other subordinated debt.

6)		Annualized.

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	Nine Months Ended							Nine Months Ended
	September 30, 2008							September 30, 2007
(In thousands)	Balance		Income		Rate (6)			Balance		Income		Rate (6)
Interest earning assets:
Loans receivable (1)	$	802,401	$	41,616		6.92	%	$	761,381	$	45,202		7.92	%
FHLB stock		13,421		582		5.79	%		13,463		528		5.24	%
Securities and trading account assets (2)		360,233		13,268		4.91	%		302,550		12,934		5.70	%
Cash and cash equivalents (3)		17,277		139		1.07	%		11,996		212		2.36	%

Total interest earning assets		1,193,332		55,605		6.22	%		1,089,390		58,876		7.21	%

Non-interest-earning assets		38,126							52,822

Total assets	$	1,231,458						$	1,142,212


Interest bearing liabilities:
Deposits:
NOW and money market accounts	$	154,912	$	2,965		2.56	%	$	100,742	$	1,992		2.64	%
Passbook accounts and certificates of deposit		667,020		19,844		3.97	%		606,846		22,085		4.87	%

Total deposits		821,932		22,809		3.71	%		707,588		24,077		4.55	%

FHLB advances (4)		247,326		8,151		4.40	%		228,927		8,574		5.01	%
Reverse repurchase agreements		37,253		858		3.03	%		56,432		1,320		2.73	%
Other borrowings (5)		25,774		1,125		5.73	%		25,774		1,558		8.75	%

Total interest-bearing liabilities		1,132,285		32,943		3.87	%		1,018,721		35,529		4.65	%

Non-interest-bearing deposits		43,428							47,315
Non-interest-bearing liabilities		11,101							7,761

Total liabilities		1,186,814							1,073,797
Stockholders’ equity		44,644							68,415

Total liabilities and stockholders’ equity	$	1,231,458						$	1,142,212


Net interest-earning assets (liabilities)	$	61,047						$	70,669

Net interest income/interest rate spread			$	22,662		2.35	%			$	23,347		2.56	%

Net interest margin						2.55	%						2.86	%

Ratio of average interest-earning assets to average interest-bearing liabilities						105.39	%						106.94	%


1)		Balance includes non-accrual loans. Income includes fees earned on loans originated and accretion of deferred loan fees.

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

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

4)		Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.

5)		Consists of other subordinated debt.

6)		Annualized.

The Company reported interest income of $17.6 million for the three months ended September 30, 2008, compared to $20.2 million for the three months ended September 30, 2007, a decrease of $2.7 million or 13.1%. The Company reported interest income of $55.6 million for the nine months ended September 30, 2008, compared to $58.9 million for the nine months ended September 30, 2007, a decrease of $3.3 million or 5.6%. The decrease during the periods was due primarily to a declining yield on loans and securities, which was a reflection of declining market rates.

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The Company reported total interest expense of $9.9 million for the three months ended September 30, 2008, compared to $12.2 million for the three months ended September 30, 2007, a decrease of $2.3 million or 18.9%. For the nine months ended September 30, 2008, the Company reported total interest expense of $32.9 million, compared to $35.5 million for the nine months ended September 30, 2007, a decrease of $2.6 million or 7.3%. The decrease in interest expense during the period was attributable to a reduced cost of funds on FHLB advances and deposits.

The following table sets forth the activity in our allowance for loan losses for the periods indicated.


	Three Months Ended						Nine Months Ended
	September 30						September 30
	2008			2007			2008			2007
	(Dollars in Thousands)						(Dollars in Thousands)
Balance at beginning of period	$	6,847			6113		$	6,446		$	5,914

Charge-offs:
Real estate loans:
Commercial		(1,315	)		—			(1,315	)		—
Consumer and other loans		(62	)		(5	)		(586	)		(6	)

Total charge-offs		(1,377	)		(5	)		(1,901	)		(6	)


Recoveries		—			—			25			—

Net charge-offs		(1,377	)		(5	)		(1,876	)		(6	)

Provision for losses on loans		1,565			200			2,465			400

Balance at end of period	$	7,035		$	6,308		$	7,035		$	6,308


Allowance for loan losses as a percent of total loans outstanding at the end of the period		0.86	%		0.82	%		0.86	%		0.82	%

Ratio of net charge-offs to average loans outstanding during the period		0.17	%		0.00	%		0.23	%		0.00	%

The provision reflects the reserves management believes are required based upon, among other things, the Company’s analysis of the composition, credit quality, growth or reduction of its single-family real estate and construction loans and commercial and industrial and other segments of the loan portfolios. Our allowance for loan losses has three 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. 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.

In the September 2008 quarter, $1.6 million was added to the provision for loan losses for specific valuation allowances and for the general allowance based on the mix and growth in loans. The credit quality of the loan portfolio remained relatively stable in the September 2008 quarter with $10.3

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million of non-accrual loans and real estate owned (net of reserves) at September 30, 2008 compared with $11.0 million at June 30, 2008 and $9.5 million at December 31, 2007. HWFG is continuing to manage the portfolio with a heightened concern and attention given the very adverse credit conditions and the extremely weak housing market putting considerable stress on borrowers. In the September quarter, a non-performing loan on entitled land for a single family residential development in California became real estate owned, and based on a recent appraisal, a specific reserve of $965 thousand was recorded and charged off, reducing its book value to $4.9 million. Furthermore, a participation loan in a high-end residential development, which became REO in the June 2008 quarter, was also written down further by $584 thousand to $863 thousand based on recent valuation information.

The available-for-sale investment portfolio continues to decrease from principal repayments and prepayments and is now $285.1 million. These principal reductions continue to be approximately $13 million per quarter. The portfolio remains performing and largely highly-rated with 78% rated AA or higher by all rating agencies rating the securities. Securities with a fair value of $16.0 million have been downgraded by at least one rating agency to below investment grade as of September 30, 2008 compared with $14.1 million at June 30, 2008. Based on HWFG’s policy for other-than-temporary impairment, $10.3 million of these below investment grade mortgage backed securities were written down by $5.6 million before-tax in the September 2008 quarter. HWFG continues to believe that the after-tax mark-to-market loss on available-for-sale securities of $17.5 million recorded in HWFG’s equity will be recovered to a material extent as the credit markets stabilize and the Treasury implements its Troubled Asset Relief Program to buy mortgage loans and securities, or as principal on these securities is returned to HWFG at par over their average 4 year life.

Total banking fee and other income was $1.1 million in the September 2008 quarter compared to $935 thousand and $996 thousand in the June 2008 and September 2007 quarters, respectively. The increase in the third quarter of 2008 over the June 2008 quarter is due primarily to higher deposit fees and bank-owned life insurance income, as the crediting rate increased on its cash value. The increase in September 2008 quarter over the September 2007 quarter is due to primarily to higher deposit fees. The following schedule shows the comparisons of income sources:


	Banking Fee & Other Income
	(Dollars in thousands)
	September		June		September		September		June		September
	2008		2008		2007		2008		2008		2007
	Quarter		Quarter		Quarter		YTD		YTD		YTD

Banking Fee Type
Mortgage Brokerage Fee, Prepayment
Penalties & Other Loan Fees	$	125	$	188	$	119	$	460	$	335	$	628
Deposit, Other Retail Banking Fees & Other Fee Income		520		442		430		1,402		882		1,239

Harrington Wealth Management Fees		234		256		238		743		509		715
Increase in Cash Surrender Value of Life
Insurance, net		180		49		209		421		242		616


Total Banking Fee & Other Income	$	1,059	$	935	$	996	$	3,026	$	1,968	$	3,198

Operating expenses in the September 2008 quarter were $6.3 million compared to $5.7 million in the September 2007 quarter and $6.1 million in the June 2008 quarter. Operating expenses were higher at $6.3 million in the September 2008 quarter than comparative quarters due to three primary factors:

With lower loan volumes as HWFG sought to build capital levels, the deferral of loan origination costs has been reduced, thus increasing expenses about $200 thousand on a quarterly basis

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	2.		With higher levels of real estate owned, the cost to stabilize and maintain the real estate has increased expenses about $120 thousand per quarter, especially considering initial acquisition and refurbishment, when necessary.

	3.		Deposit insurance premium expense was initiated in the June 2008 quarter after the HWFG’s FDIC insurance credit was fully exhausted, adding about $160 thousand in expense per quarter.

These increases were offset somewhat by lower salary expense and incentive compensation, consulting fees, and other expenses.

Financial Condition

HWFG continues to be affected by the dislocations in the credit markets, the weak real estate market, and the overall slowdown in the economy. Although its investment portfolio is primarily of high credit quality, spreads on these largely mortgage investments have widened greatly due to the severe illiquidity and credit crisis in the markets, and as a result, the fair values have declined. HWFG performs independent analysis of the credit quality of the investment portfolio and its ability to earn all cash flows, and based on this analysis and the current state of the housing market, it expects to earn virtually all the related principal and interest from these investments, except those securities which have become other-than-temporary impaired. However, a further weakening of the housing market and general economy adversely could affect this expected outcome. Also, although HWFG has not experienced concentrated credit quality issues in its loan portfolio due to its diversification by market and loan type and underwriting standards, the weak real estate markets and economy have affected some borrowers and related credits, with deterioration of credit quality in some already classified credits and a few other credits.

Securities and Investment Activities

The Company manages the securities portfolio in an effort to enhance net interest income and market value, as opportunities arise, and deploys excess capital in investments until such time as the company can reinvest into loans or other community banking assets that generate higher risk-adjusted returns.

The fair value of securities classified as available-for-sale decreased to $285.1 million at September 30, 2008, as compared to $351.5 million at December 31, 2007, a decrease of $66.4 million, or 18.9%, due to net sales, principal pay-downs, amortization, and market value declines. As of the quarter ended September 30, 2008, the Company’s available-for-sale portfolio had an unrealized after-tax market value loss of $17.5 million, which is reflected as a reduction in stockholders’ equity. The $17.5 million unrealized after-tax loss at September 30, 2008 compares to the after-tax unrealized losses of $25.2 million and $11.8 million at June 30, 2008 and December 31, 2007, respectively. As of September 30, 2008, based on the current state of the housing market, HWFG expects to earn virtually all principal and interest on its investment securities; however, a more severe deterioration of the housing market could result in a material portion of the amount of the unrealized loss on investment securities at September 30, 2008, to be recognized in the income statement. If all cash flows are earned on the investments, the gross unrealized loss of $28.0 million on the AFS portfolio would be near zero with a substantial increase in shareholders’ equity and book value per share.

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The amortized cost and market values of available-for-sale securities are as follows:


	Amortized
	Cost		Fair Value
September 30, 2008

Mortgage-backed securities — pass throughs	$	52,630	$	52,741
Collateralized mortgage obligations		87,210		78,337
Asset-backed securities (underlying securities mortgages)		171,576		152,905
Asset-backed securities		1,690		1,116


	$	313,106	$	285,099


	Amortized
	Cost		Fair Value
December 31, 2007

Mortgage-backed securities — pass throughs	$	69,570	$	69,101
Collateralized mortgage obligations		114,101		111,805
Asset-backed securities (underlying securities mortgages)		184,724		168,822
Asset-backed securities		1,900		1,738

	$	370,295	$	351,466

Over the past several quarters, the rating agencies have revised downward their original ratings on thousands of mortgage securities which were issued during the 2001-2007 time period. As of September 30, 2008, the Company held $16.0 million in fair value of investments that were originally rated “Investment Grade” but have been downgraded to “Below Investment Grade” rated by at least one of three recognized rating agencies. However, 77.6% of the fair value or 76.8% of the portfolio based on amortized cost, of the portfolio remained “AA” rated or higher by all nationally recognized rating agencies rating the securities. As of September 30, 2008, the composition of the Company’s available-for-sale portfolios by credit rating was as follows:


	Amortized
	Cost		Fair Value
September 30, 2008

Agency	$	52,630	$	52,741
AAA		99,887		90,591
AA		87,981		77,904
A		33,990		30,066
BBB		19,960		17,831
Below investment grade		18,658		15,966

	$	313,106	$	285,099

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	Amortized
	Cost		Fair Value
December 31, 2007

Agency	$	69,570	$	69,101
AAA		139,890		138,744
AA		115,084		106,090
A		41,621		34,691
BBB		170		170
Below investment grade		3,960		2,670

	$	370,295	$	351,466

HWFG is not a program originator of sub-prime loans but has invested in investment grade sub-prime securities, most have current ratings of AAA or AA by one or more rating agency, in a portion of its investment portfolio when the Company’s analysis indicated the spreads and return potential of these securities was high relative to the underlying risk. HWFG does not rely solely on the rating agencies’ analysis and ratings of sub-prime securities. Management performs its own independent analysis of the expected cash flows for more extreme delinquency, default, and estimates of losses incurred in the foreclosure and sale process to determine whether credit enhancement is sufficient for the spread to be earned relative to the risk of default. HWFG also reviews the nature of the issuers and their underwriting performance as well as the capabilities and performance of the servicers of the underlying loans and securities. HWFG has not invested in collateralized debt obligations (CDO’s) and does not anticipate doing so. As of September 30, 2008, the composition of the Company’s available-for-sale portfolio by type of security was as follows:


	Amortized
	Cost		Fair Value
September 30, 2008

Agency MBS	$	52,630	$	52,741
Non-agency mortgage securities		85,740		77,596
Subprime mortgage securities		170,836		151,962
Other securities		3,900		2,800

	$	313,106	$	285,099


	Amortized
	Cost		Fair Value
December 31, 2007

Agency MBS	$	69,570	$	69,101
Non-agency mortgage securities		113,412		111,677
Subprime mortgage securities		183,065		166,715
Other securities		4,248		3,973

	$	370,295	$	351,466

HWFG monitors its investments on an on-going basis and, at least quarterly, performs an analysis on certain of its investments in order to ascertain whether any decline in market value is other-than- temporary. In the quarter ended September 30, 2008, the results of this analysis indicated that a

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portion of the decline in market value of eight securities, with a book value of $10.3 million, was other than temporary, and, as a result, the affected securities were written down by $5.6 million on a pre-tax basis. For the nine months ended September 30, 2008, sixteen securities with a book value of $17.0 million were deemed other-than-temporary impaired and written down by $8.1 million on a pre-tax basis.

Loans

The Company’s primary focus with respect to its lending operations has historically been the direct origination of single-family and multi-family residential, commercial real estate, business, and consumer loans. As part of its strategic plan to diversify its loan portfolio, the Company, starting in 2000, has been increasing its emphasis on loans secured by commercial real estate, industrial loans and consumer loans.

The Company recognizes that certain types of loans are inherently riskier than others. For instance, the commercial real estate loans that the Company makes are riskier than home mortgages because they are generally larger, often rely on income from small-business tenants, and historically have produced higher default rates on an industry wide basis. Likewise commercial loans are riskier than consumer and mortgage loans because they are generally larger and depend upon the success of often complex businesses. Furthermore construction loans and land acquisition and development loans present higher credit risk than do other real estate loans due to their speculative nature. Unsecured loans are also inherently riskier than collateralized loans. However, these loans also provide a higher risk-adjusted margin and diversification benefits to the loan portfolio.

Net loans grew $8.8 million in the September 2008 quarter to $811.4 million as prepayments slowed markedly with the adverse credit conditions, while HWFG made selected loans based on its disciplined underwriting policies. HWFG has curtailed land and land development loans until the real estate markets show signs of recovery. The trends and the mix of the loan portfolio are shown in the following table:


							HWFG Net Loan Growth and Mix
							(Dollars in millions)
	September 30, 2008						December 31, 2007						September 30, 2007
				% of												% of
	Total			Total			Total			% of Total			Total			Total
Loan Type
Commercial Real Estate	$	263.6			32.1	%	$	266.3			33.6	%	$	249.4			32.2	%
Multi-family Real Estate		89.2			10.9	%		82.7			10.4	%		79.1			10.2	%
Construction (1)		129.2			15.8	%		126.5			16.0	%		135.9			17.5	%
Single-family Real Estate		137.8			16.8	%		125.5			15.9	%		119.6			15.4	%
Commercial and Industrial Loans		120.7			14.7	%		117.8			14.9	%		114.8			14.8	%
Unimproved Land		48.6			5.9	%		45.3			5.7	%		48.5			6.3	%
Consumer Loans		28.0			3.4	%		24.5			3.1	%		24.6			3.2	%
Other Loans (2)		3.2			0.4	%		2.8			0.4	%		2.8			0.4	%

Total Gross Loans		820.3			100.0	%		791.4			100.0	%		774.7			100.0	%
Allowance for loan loss		(7.0	)					(6.4	)					(6.3	)
Deferred fees		(1.4	)					(1.9	)					(1.9	)
Discounts/Premiums		(0.5	)					(0.5	)					(0.5	)

Net Loans Receivable	$	811.4					$	782.6					$	766.0


(1)		Includes loans secured by residential, land and commercial properties. At September 30, 2008, we had $32.4 million of construction loans secured by single-family residential properties, $70.5 million secured by commercial properties, $25.6 million for land development and $691 thousand secured by multi-family residential properties.

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

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Given the growth in loans and HWFG’s credit risk analysis, $1.6 million was added to the allowance for loan losses in the September 2008 quarter. The allowance for loan losses was $7.0 million at September 30, 2008 or .86% of loan balances compared to $6.4 million, or .82% of loan balances at December 31, 2007.

Deposits

Retail and commercial deposits (net of Brokered CD’s of $132.6 million) were $770.0 million at September 30, 2008 compared to $794.0 million and $775.4 million at June 30, 2008 and September 30, 2007, respectively. Net of brokered CD deposits, retail and commercial deposits declined by $24.0 million in September quarter or 3.0%, as depositors became increasingly concerned about the safety of their deposits with the failure of several banks and thrifts, the worsening credit crisis, and the headline reports of deposit withdrawals by consumers and businesses. HWFG took steps in the quarter to further educate its staff on all aspects of FDIC insurance coverage and related changes, to provide information on HWFG’s well capitalized levels, and to initiate further deposit promotions of its Power-up checking/MMDA relationship account by adding a Certificate of Deposit feature. Also, as a defensive move and to increase its safety net of liquidity, HWFG increased brokered CD’s by a net of $102.4 million in the September 2008 quarter. In October 2008, with the legislatively mandated increase in FDIC insurance levels and HWFG’s deposit promotions, the Bank is experiencing a stabilization of deposit out-flows. HWFG is also focused on developing more low and non-costing deposits through a dual pronged program: (1) a sales development and incentive program throughout its banking centers focused on calling on viable commercial and retail DDA prospects, and (2) an incentive and training program for all business and commercial real estate lenders to gather more core deposits from commercial customers in a team approach with the banking centers. HWFG is also adding remote deposit products to enhance customer convenience. Net of California CD deposits and brokered CD deposits, the cost of retail and commercial deposits decreased 29 bps in the quarter from 3.18% at June 30, 2008 to 2.89% at September 30, 2008.

FHLB Advances

Advances from the Federal Home Loan Bank (“FHLB”) of San Francisco decreased to $203.0 million at September 30, 2008, compared to $236.0 million at September 30, 2007, or 14.0%. For additional information concerning limitations on FHLB advances, see “Liquidity and Capital Resources.”

Stockholders’ Equity

Stockholders’ equity was $52.5 million at September 30, 2008, as compared to $55.0 million at December 31, 2007, a decrease of $2.5 million or 4.6%. Book value per common share, therefore, was $7.52 at September 30, 2008 compared to $9.91 at December 31, 2007. The decrease in stockholders’ equity for the first nine months of 2008 is due to the following factors: a decrease of $5.7 million after-tax on the AFS portfolio due to the extreme widening of spreads, an increase of $290 thousand after-tax in the market value of cash flow hedges due to higher interest rates, a net operating loss of $6.6 million in the first nine months of 2008, $1.1 million of dividends paid in the first nine months of 2008, $10.1 million in capital contributions, $233 thousand of additional paid in capital from options exercised, and $267 thousand from stock compensation expensed.

As previously announced on September 29, 2008, HWFG secured $11.4 million in equity capital in the quarter. This private placement consisted of an offering of common stock at $6.25 per share and non-cumulative, perpetual preferred stock at $25 per share with an 8% annual dividend, convertible into 4 shares of common stock ($6.25 conversion price). Concordia Financial Services Fund, L.P. (Concordia)

- 24 -

has committed to $10 million of this capital by purchasing common and preferred shares in two closings as follows:

	1.		On September 29, Concordia purchased 458,768 shares of common stock and 61,757 of the preferred stock for proceeds of $4.4 million.

	2.		Within 5 days of Concordia receiving regulatory approval and HWFG shareholder approval (expected by mid-December 2008), Concordia will purchase 581,232 shares of common stock and 78,243 shares of preferred stock on the same terms or $5.6 million in proceeds.

An additional 57,000 shares of the preferred stock were purchased on September 29, 2008 by other accredited investors and HWFG Board members for $1.4 million in proceeds.

Liquidity and Capital Resources

Liquidity – The liquidity of Los Padres Bank was within policy limitations at 11.37% at September 30, 2008 as compared to 10.1% at September 30, 2007. Los Padres Bank is a consolidated subsidiary of the Company and 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. At September 30, 2008, Los Padres Bank’s “liquid” assets totaled approximately $120.6 million.

In general, Los Padres Bank’s liquidity is represented by cash and cash equivalents and is a product of its operating, investing and financing activities. The Bank’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. The Bank’s external sources of liquidity consist of borrowings, primarily advances from the FHLB of San Francisco, securities sold under agreements to repurchase and borrowings from the Federal Reserve Bank Discount Window. At September 30, 2008, the Bank had $203.0 million in FHLB advances and had $220.6 million of additional borrowing capacity with the FHLB of San Francisco based on a 35% of total Bank asset limitation. Borrowing capacity from the FHLB is further limited to $93.7 million based on excess collateral pledged at the FHLB as of September 30, 2008. The Bank also had additional borrowing capacity of $72.9 million through the Federal Reserve Bank Discount Window.

A substantial source of the Company’s cash flow from which it services its debt and capital trust securities, pays its obligations, and pays dividends to its shareholders is the receipt of dividends from Los Padres Bank. The availability of dividends from Los Padres Bank is limited by various statutes and regulations. In order to make such dividend payments, Los Padres Bank is required to provide annual advance notice to the Office of Thrift Supervision (“OTS”), at which time the OTS may object to the proposed dividend payments. It is possible, depending upon the financial condition of Los Padres Bank and other factors, 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 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. Under applicable regulations, 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

- 25 -

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 September 30, 2008, Los Padres Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations. At September 30, 2008, the Bank’s Tier 1 (Core) Capital Ratio was 7.28%, Total Risk-Based Capital Ratio was 10.36%, Tier 1 Risk-Based Capital Ratio was 9.71% and Leverage Ratio was 7.28%.

Asset and Liability Management

The Company evaluates the change in its market value of portfolio equity (“MVPE”) to changes in interest rates and seeks to manage these changes to relatively low levels through various risk management techniques. 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 the Company’s 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. In general, financial 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. This factor causes the income and MVPE of these institutions to increase as rates fall and decrease as interest rates rise.

The Company’s management believes that its asset and liability management strategy, as discussed below, provides it with a competitive advantage over other financial institutions. The Company believes that its ability to hedge its interest rate exposure through the use of various interest rate contracts provides it with the flexibility to acquire loans structured to meet its 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, short-term or long-term. Similarly, the Company can choose a cost-effective source of funds and subsequently engage in an interest rate swap or other hedging transactions so that the interest rate sensitivities of its interest-earning assets and interest-bearing liabilities are more closely matched.

The Company’s asset and liability management strategy is formulated and monitored by the board of directors of Los Padres Bank. The Board’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, chief lending officer, president of the Kansas region/chief commercial lending officer, 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.

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

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In the absence of hedging activities, the Company’s MVPE would decline as a result of a general increase in market rates of interest. This decline would be due to the market values of the Company’s assets being more sensitive to interest rate fluctuations than are the market values of its liabilities due to its 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 the Company’s assets is greater than the elasticity of its liabilities.

Accordingly, the primary goal of the Company’s asset and liability management policy is to effectively increase the elasticity of its liabilities and/or effectively contract the elasticity of its assets so that the respective elasticities are matched as closely as possible. This elasticity adjustment can be accomplished internally, by restructuring the balance sheet, or externally by adjusting the elasticities of assets and/or liabilities through the use of interest rate contracts. The Company’s 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 that would effectively be hedged by that interest rate contract.

In selecting the type and amount of interest rate contract to utilize, the Company compares 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.

The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001. SFAS No. 133 as amended requires that an entity recognize all interest rate contracts 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.

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 indexes and asset backed referenced securities 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.

Critical Accounting Policies

Critical accounting policies are discussed within our Form 10-K dated December 31, 2007. There are no changes to these policies as of September 30, 2008.

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Cautionary Statement Regarding Forward-Looking Statements.

Certain statements contained in this Form 10-Q, including, without limitation, statements containing the words “believes”, “anticipates”, “intends”, “expects”, and words of similar import, constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions in those areas in which we operate, demographic changes, competition, fluctuations in interest rates, changes in business strategy or development plans, changes in governmental regulation, credit quality, the availability of capital to fund the expansion of our business, economic, political and global changes arising from the war on terrorism, the conflict with Iraq and its aftermath, and other factors referenced in our 2007 Annual Report as filed on form 10-K, including in “Item 1A. Risk Factors.”

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. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Form 10-Q. 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-Q or to reflect the occurrence of unanticipated events.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

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.

In estimating the market value of mortgage loans and mortgage-backed securities, the Company utilizes various prepayment assumptions, which vary, in accordance with historical experience, based upon the term, interest rate, prepayment penalties, if applicable, and other factors with respect to the underlying loans. At September 30, 2008, these prepayment assumptions varied from 0.0% to 43.0% for fixed-rate mortgages and mortgage-backed securities and varied from 0.0% to 22.0% for adjustable-rate mortgages and mortgage-backed securities.

The following table sets forth at September 30, 2008, the estimated sensitivity of the Bank’s MVPE to parallel yield curve shifts using the Company’s internal market value calculation which was implemented in the September 2008 quarter. The table demonstrates the sensitivity of the Company’s assets and liabilities both before and after the inclusion of its interest rate contracts.

- 28 -


	Change In Interest Rates (In Basis Points) (1)
	-300			-200			-100			Base	+100			+200				+300

Market value gain (loss) in assets	$	31,583		$	20,900		$	11,668			$	(15,855	)	$	(33,632	)		$	(52,193	)
Market value gain (loss) of liabilities		(27,427	)		(16,741	)		(7,813	)			7,197			14,580				22,453


Market value gain (loss) of net assets before interest rate contracts		4,156			4,159			3,855				(8,658	)		(19,052	)			(29,740	)

Market value gain (loss) of interest rate contracts		(10,972	)		(7,158	)		(3,506	)			3,369			6,607				9,719


Total change in MVPE (2)	$	(6,816	)	$	(2,999	)	$	349			$	(5,289	)	$	(12,445	)	$		(20,021	)


Change in MVPE as a percent of:
MVPE (2)		-8.16	%		-3.59	%		0.42	%			-6.33	%		-14.90	%			-23.98	%
Total assets of the Bank (3)		-0.72	%		-0.36	%		-0.04	%			-0.35	%		-0.86	%			-1.42	%


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

(2)		Based on the Company’s pre-tax tangible MVPE of $83.5 million at September 30, 2008.

(3)		Pre-tax tangible MVPE as a percentage of tangible assets.

The table set forth above does not purport to show the impact of interest rate changes on the Company’s equity under generally accepted accounting principles. Market value changes only impact the Company’s 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.

Item 4(T). Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). The evaluation was based on confirmations provided by a number of senior officers. Based upon that evaluation, the Company’s Chief Executive Officer, Chief Operating Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

Changes in Internal Control over Financial Reporting

For the quarter ended September 30, 2008, there have been no significant changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 29 -

Disclosure controls and procedures are Company controls designed to ensure that information required to be disclosed by the Company in the reports that it files or submits 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 the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer, Chief Operating Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures.

PART II — OTHER INFORMATION

Item 1: Legal Proceedings

The Company is involved in various legal proceedings occurring in the ordinary course of business, which, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Company.

Item 1A. Risk Factors

There were no material changes in the third quarter of 2008 to the risk factors discussed in the Company’s 10-K for the year ended December 31, 2007.

Item 2: Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended September 30, 2008, the Company completed a private placement of common and preferred shares to accredited investors and directors of the Company and Bank as follows:


				Number of
		Price		Shares		Amount
Date	Title of Security	Per Share		(In thousands)		(In thousands)

September 29, 2008	Common	$	6.25		459	$	2,867
September 29, 2008	Preferred		25.00		119		2,969

Total					578	$	5,836

This equity capital will support HWFG’s expansion plans and is expected to maintain Los Padres Bank in a well capitalized position. The private placement consists of an offering of common stock at $6.25 per share and non-cumulative, perpetual preferred stock at $25 per share with an 8% annual dividend, convertible into 4 shares of common stock ($6.25 conversion price).

The sale of the shares was completed in reliance on the exemption provided by Section 4(2) and Regulation D of the Securities Act of 1933. A fee of $77 thousand was paid to Concordia Capital Advisors upon the first closing. Concordia Capital Advisors is an affiliated company of Concordia Capital Fund L.P., which was the primary investor in the private placement.

- 30 -

Within 5 days of receiving regulatory approval and HWFG shareholder approval (expected by mid-December 2008), Concordia Capital Fund L.P. will purchase an additional 581,232 shares of common stock and 78,243 shares of preferred stock on the same terms or $5.6 million in proceeds. A consulting fee of approximately $98 thousand will be paid to Concordia Capital Advisors upon the second closing.

Item 3: Defaults Upon Senior Securities

Not applicable.

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

None

Item 5: Other Information

Not applicable.

Item 6: Exhibits


EXHIBIT NO.		DESCRIPTION
31.1		Section 302 Certification by Chief Executive Officer filed herewith.

31.2		Section 302 Certification by Chief Operating Officer filed herewith.

31.3		Section 302 Certification by Chief Financial Officer filed herewith.

32		Section 906 Certification by Chief Executive Officer, Chief Operating Officer and Chief Financial Officer furnished herewith.

- 31 -


	Page
Part I — Financial Information

Item 1. Condensed Consolidated Financial Statements (Unaudited)		2

Condensed Consolidated Statements of Financial Condition as of September 30, 2008 and December 31, 2007		2

Condensed Consolidated Statements of Income (Loss) for the Three and Nine Months Ended September 30, 2008 and 2007		3

Condensed Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) for the Nine Months Ended September 30, 2008 and Year Ended December 31, 2007		4

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007		5

Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		12

Item 3. Quantitative and Qualitative Disclosures about Market Risk		28

Item 4T. Controls and Procedures		29

Part II — Other Information

Item 1. Legal Proceedings		30

Item 1A. Risk Factors		30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		30

Item 3. Defaults upon Senior Securities		31

Item 4. Submission of Matters to a Vote of Security Holders		31

Item 5. Other Information		31

Item 6. Exhibits		31

Signatures		32
EX-31.1
EX-31.2
EX-31.3
EX-32


	HARRINGTON WEST FINANCIAL GROUP, INC.
November 12, 2008	By:	/s/ Craig J. Cerny
		Craig J. Cerny
		Chairman of the Board and Chief Executive Officer (Principal Executive Officer)


November 12, 2008	By:	/s/ William W. Phillips, Jr.
		William W. Phillips, Jr.
		President, Chief Operating Officer (Principal Executive Officer)


November 12, 2008	By:	/s/ KERRIL STEELE
		Kerril Steele
		Sr. Vice-President, Chief Financial Officer (Principle Financial and Accounting Officer)

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