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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K  þ
    ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  OR  o
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  HARRINGTON WEST FINANCIAL GROUP, INC. 
  Delaware
    
    48-1175170(State or other jurisdiction
of incorporation or organization)
    
    (I.R.S. Employer
Identification Number)
 610 Alamo Pintado Road
Solvang, California
    
    93463(Address of Principal
Executive Offices)
    
    (Zip Code)
 
 
 Check whether the registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes þ No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. þ Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act
Rule 12b-2). o þ
 The aggregate value of the 4,368,630 shares of Common Stock of the Registrant issued and
outstanding, which excludes 900,554 shares held by all directors and executive officers of the
Registrant as a group, was approximately $74.9 million based on the last closing sale price of a
share of Common Stock of $17.14 on June 30, 2004. Number of shares of Common Stock outstanding as of March 7, 2005: 5,283,284 DOCUMENTS INCORPORATED BY REFERENCE The registrant hereby incorporates its proxy statement for its 2005 annual meeting of stockholders
in Part III, items 10-14.




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TABLE OF CONTENTS PagePART IItem 1. BusinessGeneral
    
    
    2Principal Products and ServicesLending Activities
    
    
    3Asset Quality
    
    
    10Investment Activities
    
    
    17Sources of Funds
    
    
    25Subsidiaries
    
    
    29Employees
    
    
    29Regulation of Harrington West Financial Group
    
    
    29Regulation of Los Padres Bank
    
    
    30Recent Legislation
    
    
    36Item 2. Properties
    
    
    39Item 3. Legal Proceedings
    
    
    41Item 4. Submission of Matters to a Vote of Security Holders
    
    
    41PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    41Item 6. Selected Financial Data
    
    
    44Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsMission
    
    
    45Multiple Market Strategy
    
    
    45Product Line Diversification
    
    
    46Modern Financial Skills
    
    
    46Control Banking Risks
    
    
    46Profitability Drivers
    
    
    47Critical Accounting Policies
    
    
    51Results of Operation
    
    
    52Changes in Financial Condition
    
    
    59Asset and Liability Management
    
    
    61Liquidity and Capital Resources
    
    
    65Contractual Obligations and Commercial Commitments
    
    
    68Off Balance Sheet Arrangements
    
    
    68Inflation and Changing Prices
    
    
    70Recent Accounting Pronouncements
    
    
    71Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    72Item 8. Financial Statements and Supplementary Data
    
    
    73Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    120Item 9A. Controls and Procedures
    
    
    120Item 9B. Other Information
    
    
    120PART IIIItem 10. Directors and Executive Officer of the Registrant
    
    
    120Item 11. Executive Compensation
    
    
    120Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
    
    
    121Item 13. Certain Relationships and Related Transactions
    
    
    121Item 14. Principal Accountant Fees and Services
    
    
    121PART IVItem 15. Exhibits, Financial Statement Schedules
    
    
    122SIGNATURES
    
    
    124CERTIFICATIONS
    
    
    125EX-23EX-31.1EX-31.2EX-32




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PART I Cautionary Statement Regarding Forward-Looking Statements. This Form 10-K contains and incorporates by reference forward-looking statements about our
financial condition, results of operations and business. These statements may include statements
regarding projected performance for future periods. You can find many of these statements by
looking for words such as believes, expects, anticipates, estimates, intends, will,
plans or similar words or expressions. These forward-looking statements involve substantial
risks and uncertainties. Some of the factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, but are not limited to, the
following:  
    we may experience higher defaults on our loan portfolio than we expect;
    changes in managements estimate of the adequacy of the allowance for loan losses;
    changes in managements valuation of our mortgage-backed and related securities
portfolio and interest rate contracts;
    increases in competitive pressure among financial institutions;
    general economic conditions, either nationally or locally in areas in which we
conduct or will conduct our operations, or conditions in financial markets may be less
favorable than we currently anticipate;
    our net income from operations may be lower than we expect;
    natural disasters;
    we may lose more business or customers than we expect, or our operating costs may be
higher than we expect;
    the availability of capital to fund our growth and expansion;
    changes in the interest rate environment and their impact on customer behavior and
our interest margins;
    political and global changes arising from the war on terrorism;
    the impact of repricing and competitors pricing initiatives on loan and deposit products;
    our ability to adapt successfully to technological changes to meet customers needs
and developments in the market place;
    our ability to access cost-effective funding;
    our ability to successfully complete our strategy to continue to grow our business
in California, Kansas and Arizona;
    our returns from our securities portfolio may be lower than we expect; or 1




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
    legislative or regulatory changes or changes in accounting principles, policies or
guidelines may adversely affect our ability to conduct our business. Because these forward-looking statements are subject to risks and uncertainties, our actual
results may differ materially from those expressed or implied by these statements. You are
cautioned not to place undue reliance on our forward-looking statements, which speak only as of the
date of this Form 10-K. Forward-looking statements are not guarantees of performance. They involve risks,
uncertainties and assumptions. The future results and stockholder values of our common stock may
differ materially from those expressed in these forward-looking statements. Many of the factors
that will determine these results and values are beyond our ability to control or predict. We do not undertake any obligation to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this Form 10-K or to reflect the
occurrence of unanticipated events. 
 Item 1. Business. 
 General We are Harrington West Financial Group, Inc., a Delaware corporation and a diversified,
community-based, financial institution holding company headquartered in Solvang, California, with
executive offices in Overland Park, Kansas. We conduct our operations primarily through our
wholly-owned subsidiary, Los Padres Bank, FSB, a federally chartered savings bank, located in
central California and Scottsdale, Arizona, and its division in the Kansas City metropolitan area,
Harrington Bank. Los Padres Bank provides an array of financial products and services for
businesses and retail customers through its thirteen full-service offices. At December 31, 2004,
we had consolidated total assets of $1.1 billion, total deposits of $598.2 million and
stockholders equity of $52.7 million. We are focused on providing our diversified products and personalized service approach in
three distinct markets: (i) the central coast of California, (ii) the Kansas City metropolitan area
and (iii) the Phoenix/Scottsdale metropolitan area. Los Padres Bank will operate eleven offices on
the central coast of California, when we complete our purchase and assumption in May 2005 of a
banking office in Thousand Oaks, two offices in the Kansas City metropolitan area under the
Harrington Bank brand name, and two banking offices in the Phoenix/Scottsdale, Arizona metropolitan
area, when we open our second office in the Scottsdale Airpark in late March 2005. Each of our
markets has its own local independent management team operating under the Los Padres or Harrington
names. Our loan underwriting, corporate administration, and treasury functions are centralized in
Solvang, California to create operating efficiencies. Our commercial lending operations are
centralized in Mission, Kansas. On February 2, 2005, Los Padres Bank entered into an agreement with Western Financial Bank for
the purchase and assumption of their office in Thousand Oaks, California. In the purchase
agreement, Los Padres Bank has agreed to purchase approximately $51.9 million in deposits and their
associated overdraft protection accounts or line of credits, all furniture and fixtures and assume
the lease for the building. This transaction is subject to regulatory approval and the Bank has
submitted its application to the Office of Thrift Supervision and is awaiting final approval. Los Padres Bank is primarily engaged in attracting deposits from individuals and businesses
and using these deposits, together with borrowed funds, to originate commercial real estate,
commercial business, single-family and multi-family residential and consumer loans. We also
generate fee income from the brokering of mortgage loans, deposit services, early prepayments of
loans, and loan originations. 2




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We maintain a portfolio of highly liquid mortgage-backed and related securities as a means of
managing our excess liquidity and enhancing our profitability. We utilize various interest rate
contracts as a means of managing our interest rate risk. We also operate Harrington Wealth
Management Company, which provides trust and investment management services to individuals and
small institutional clients on a fee basis, by employing a customized asset allocation approach and
investing predominantly in low fee, indexed mutual funds and exchange traded funds. On November 12, 2002, we completed our initial public offering. An aggregate of 1,344,000
shares of common stock were sold to the public at $10.00 per share, comprised of 1,168,338 shares
sold by us and 175,662 shares sold by certain of our stockholders. In connection with the initial
public offering, we raised approximately $10.2 million of net proceeds, which we initially used to
reduce our secured line of credit. 
 Lending Activities General. At December 31, 2004, Los Padres Banks net loan portfolio totaled $598.4 million,
representing approximately 55.3% of our $1.1 billion of total assets at that date. Los Padres
Banks primary focus with respect to its lending operations has historically been the direct
origination of single-family residential, multi-family residential, consumer and commercial real
estate loans. While we continue to emphasize single-family residential loans products that meet
our customers needs, we now generally broker such loans on behalf of third party investors in
order to generate fee income and have been increasing our emphasis on loans secured by commercial
real estate, consumer loans, and commercial and industrial loans. We also offer multi-family
residential loans, land loans, construction loans secured by both residential and commercial
properties and consumer loans. 3




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The following table sets forth the composition of our loan portfolio by type of loan at the
dates indicated. December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Real estate loans:Single-family
    
    $
    100,485
    
    
    
    16.6
    %
    
    $
    93,725
    
    
    
    17.9
    %
    
    $
    116,714
    
    
    
    25.8
    %
    
    $
    156,150
    
    
    
    34.5
    %
    
    $
    200,373
    
    
    
    50.2
    %Multi-family
    
    
    84,937
    
    
    
    14.0
    
    
    
    82,090
    
    
    
    15.7
    
    
    
    71,856
    
    
    
    15.9
    
    
    
    69,584
    
    
    
    15.4
    
    
    
    66,005
    
    
    
    16.6Commercial
    
    
    260,759
    
    
    
    43.1
    
    
    
    234,606
    
    
    
    44.8
    
    
    
    183,264
    
    
    
    40.5
    
    
    
    156,431
    
    
    
    34.5
    
    
    
    108,820
    
    
    
    27.3Construction (1)
    
    
    34,981
    
    
    
    5.8
    
    
    
    30,835
    
    
    
    5.9
    
    
    
    19,666
    
    
    
    4.4
    
    
    
    20,235
    
    
    
    4.5
    
    
    
    13,079
    
    
    
    3.3Land acquisition and development
    
    
    27,460
    
    
    
    4.5
    
    
    
    8,312
    
    
    
    1.6
    
    
    
    14,948
    
    
    
    3.3
    
    
    
    7,889
    
    
    
    1.7
    
    
    
    2,511
    
    
    
    0.6Commercial and industrial loans
    
    
    72,240
    
    
    
    11.9
    
    
    
    56,942
    
    
    
    10.8
    
    
    
    27,676
    
    
    
    6.1
    
    
    
    30,838
    
    
    
    6.8
    
    
    
    3,969
    
    
    
    1.0Consumer loans
    
    
    23,757
    
    
    
    3.9
    
    
    
    16,613
    
    
    
    3.1
    
    
    
    17,565
    
    
    
    3.9
    
    
    
    11,107
    
    
    
    2.5
    
    
    
    3,265
    
    
    
    0.8Other loans (2)
    
    
    1,044
    
    
    
    0.2
    
    
    
    1,035
    
    
    
    0.2
    
    
    
    503
    
    
    
    0.1
    
    
    
    539
    
    
    
    0.1
    
    
    
    753
    
    
    
    0.2Total loans receivable
    
    
    605,663
    
    
    
    100.0
    %
    
    
    524,158
    
    
    
    100.0
    %
    
    
    452,192
    
    
    
    100.0
    %
    
    
    452,773
    
    
    
    100.0
    %
    
    
    398,775
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    (5,228
    )
    
    
    
    
    
    
    (4,587
    )
    
    
    
    
    
    
    (3,797
    )
    
    
    
    
    
    
    (3,736
    )
    
    
    
    
    
    
    (3,150
    )Net deferred loan fees
    
    
    (1,730
    )
    
    
    
    
    
    
    (1,394
    )
    
    
    
    
    
    
    (1,332
    )
    
    
    
    
    
    
    (1,102
    )
    
    
    
    
    
    
    (485
    )Net
(discounts) premiums
    
    
    (263
    )
    
    
    
    
    
    
    319
    
    
    
    
    
    
    
    987
    
    
    
    
    
    
    
    1,774
    
    
    
    
    
    
    
    397(7,221
    )
    
    
    
    
    
    
    (5,662
    )
    
    
    
    
    
    
    (4,142
    )
    
    
    
    
    
    
    (3,064
    )
    
    
    
    
    
    
    (3,238
    )Loans receivable, net
    
    $
    598,442
    
    
    
    
    
    
    $
    518,496
    
    
    
    
    
    
    $
    448,050
    
    
    
    
    
    
    $
    449,709
    
    
    
    
    
    
    $
    395,537
   (1)
    
    Includes loans secured by residential and commercial properties. At December 31, 2004, we
had $22.4 million of construction loans secured by residential properties, $3.2 of land and
development and $9.4 million of construction loans secured by commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans. 4




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The following table sets forth certain information at December 31, 2004, regarding the
dollar amount of loans maturing in our total loan portfolio based on the contractual terms to
maturity or scheduled amortization, but does not include potential prepayments. Loans having no
stated schedule of repayments and no stated maturity are reported as due in one year or less. Due 5 orDue 1-5
    
    
    more yearsyears after
    
    
    afterDue 1 year
    
    
    December 31,
    
    
    December 31,or less
    
    
    2004
    
    
    2004
    
    
    Total(In Thousands)Real estate loans:Single-family residential
    
    $
    53
    
    
    $
    906
    
    
    $
    99,526
    
    
    $
    100,485Multi-family residential
    
    
    899
    
    
    
    16,135
    
    
    
    67,903
    
    
    
    84,937Commercial
    
    
    7,250
    
    
    
    62,919
    
    
    
    190,590
    
    
    
    260,759Construction (1)
    
    
    7,537
    
    
    
    7,528
    
    
    
    19,916
    
    
    
    34,981Land acquisition and development
    
    
    18,067
    
    
    
    5,683
    
    
    
    3,710
    
    
    
    27,460Commercial and industrial loans
    
    
    33,258
    
    
    
    32,198
    
    
    
    6,784
    
    
    
    72,240Consumer loans
    
    
    106
    
    
    
    358
    
    
    
    23,293
    
    
    
    23,757Other loans (2)
    
    
    1,044
    
    
    
    
    
    
    
    
    
    
    
    1,044Total
    
    $
    68,214
    
    
    $
    125,727
    
    
    $
    411,722
    
    
    $
    605,663
   (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of credit loans. Scheduled contractual amortization of loans does not reflect the expected term of our
loan portfolio. The average life of loans is substantially less than their contractual terms
because of prepayments and due-on-sale clauses, which gives us the right to declare a conventional
loan immediately due and payable in the event that the borrower sells the real property subject to
the mortgage and the loan is not repaid. The average life of mortgage loans tends to increase when
current mortgage loan rates are higher than rates on existing mortgage loans and, conversely,
decrease when rates on existing mortgage loans are lower than current mortgage loan rates. Under
the latter circumstance, the weighted average yield on loans decreases as higher-yielding loans are
repaid or refinanced at lower rates. 5




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The following table sets forth the dollar amount of total loans due after one year from
December 31, 2004, as shown in the preceding table, which have fixed interest rates or which have
floating or adjustable interest rates. Floating orFixed rate
    
    
    adjustable-rate
    
    
    Total(In Thousands)Real estate loans:Single-family residential
    
    $
    49,946
    
    
    $
    50,486
    
    
    $
    100,432Multi-family residential
    
    
    53,745
    
    
    
    30,293
    
    
    
    84,038Commercial
    
    
    157,982
    
    
    
    95,527
    
    
    
    253,509Construction (1)
    
    
    10,054
    
    
    
    17,390
    
    
    
    27,444Land acquisition and development
    
    
    675
    
    
    
    8,718
    
    
    
    9,393Commercial and industrial loans
    
    
    23,133
    
    
    
    15,849
    
    
    
    38,982Consumer loans(2)
    
    
    434
    
    
    
    23,217
    
    
    
    23,651Total
    
    $
    295,969
    
    
    $
    241,480
    
    
    $
    537,449
   (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer lines of credit loans. Origination, Purchase and Sale of Loans.The lending activities of Los Padres Bank are
subject to the written, non-discriminatory underwriting standards and loan origination procedures
established by Los Padres Banks board of directors and management. Loan originations are obtained
by a variety of sources, including referrals from real estate brokers, builders, existing
customers, walk-in customers and advertising. In its present marketing efforts, Los Padres Bank
emphasizes its community ties, customized personal service, competitive rates and terms, and its
efficient underwriting and approval process. Loan applications are taken by lending personnel, and
the loan department supervises the obtainment of credit reports, appraisals and other documentation
involved with a loan. Property valuations are performed by independent outside appraisers approved
by Los Padres Banks board of directors. Los Padres Bank requires title, hazard and, to the extent
applicable, flood insurance on all security property. Mortgage loan applications are initially processed by loan officers who do not have approval
authority. All real estate loans which are either at or below the Federal Home Loan Mortgage
Corporations (Freddie Mac), lending limit and which meet all of the banks underwriting
guidelines can be approved by designated senior management of Los Padres Bank. All consumer loans
up to $250,000 may be approved by designated senior management of Los Padres Bank. All loans in
excess of these amounts up to $1.0 million ($500,000 for commercial and industrial loans) require
the approval of two members of Los Padres Banks Executive Loan Committee, which consists of
designated senior management of Los Padres Bank. Loans in excess of $1.0 million ($500,000 for
commercial and industrial loans), but not exceeding $5.0 million, require the approval of a
majority of Los Padres Banks Loan Committee, consisting of designated senior management of Los
Padres Bank. All loans in excess of $5.0 million, up to Los Padres Banks legal lending limit,
must be approved by either Los Padres Banks Loan Oversight Committee, comprised of both designated
senior management and certain members of the Board of Directors, or the Board of Directors of Los
Padres Bank. A savings institution generally may not make loans to any one borrower and related entities in
an amount which exceeds 15% of its unimpaired capital and surplus, although loans in an amount
equal to an additional 10% of unimpaired capital and surplus may be made to a borrower if the loans
are fully secured 6




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by readily marketable securities. At December 31, 2004, Los Padres Banks regulatory limit on
loans-to-one borrower was $11.6 million and its five largest loans or groups of loans-to-one
borrower, including related entities, aggregated $9.6 million, $9.2 million, $9.1 million, $8.8
million and $8.6 million. These five largest loans or loan concentrations were secured by
commercial real estate and development of single family homes. All of these loans or loan
concentrations were performing in accordance with their payment terms at December 31, 2004. The risks associated with lending are well defined. Credit risk is managed through the
adherence, with few exceptions, to specific underwriting guidelines. We rely on our internal
credit approval and administrative process to originate loans as well as our internal asset review
process, which oversees our loan quality in order to ensure that our underwriting standards are
maintained. We believe that the low level of our non-performing assets is evidence of our
adherence to our underwriting guidelines. As a federally chartered savings bank, Los Padres Bank has general authority to originate and
purchase loans secured by real estate located throughout the United States. Despite this
nationwide lending authority, we estimate that at December 31, 2004, the majority of the loans in
Los Padres Banks portfolio are secured by properties located or made to customers residing in each
of our primary market areas located in the California central coast, the Kansas City metropolitan
area, and the Phoenix/Scottsdale metropolitan area. Single-Family Residential Real Estate Loans.Los Padres Bank has historically concentrated
its lending activities on the origination of loans secured by first mortgage liens on existing
single-family residences. The single-family residential loans originated by Los Padres Bank are
generally made on terms, conditions and documentation, which permit the sale of such loans to
Freddie Mac, the Federal National Mortgage Association (Fannie Mae), and other institutional
investors in the secondary market. Since January 2001, as a means of generating additional fee
income and in order to reflect managements decision to emphasize holding higher spread earning
loans in its portfolio, Los Padres Bank has been brokering conforming permanent single-family
residential loans on behalf of third parties in order to generate fee income. During the years
ended December 31, 2004 and 2003, Los Padres Bank brokered $36.5 million and $99.4 million,
respectively, of such single-family residential loans on behalf of third parties. Los Padres Bank still holds a portfolio of single-family residential loans. Los Padres Bank
will retain in its portfolio single-family residential loans that, due to the nature of the
collateral, carry higher risk adjusted spreads. Examples of these types of loans include
construction loans that have converted into permanent loans and non-conforming single-family loans,
whether as a result of a non-owner occupied or rural property, balloon payment or other exception
from agency guidelines. At December 31, 2004, Los Padres Bank had $100.5 million of single-family
residential loans in its portfolio, which amounted to 16.6% of total loans receivable as of such
date. At December 31, 2004, $50.0 million or 49.7% of Los Padres Banks single-family residential
loans had fixed interest rates and $50.5 million or 50.3% had interest rates, which adjust in
accordance with a designated index. Single-family residential loans have terms of up to 30 years
and generally have loan-to-value ratios of 80% or less, or 90% or less to the extent the borrower
carries private mortgage insurance for the balance in excess of the 80% loan-to-value ratio. Multi-Family Residential and Commercial Real Estate Loans.At December 31, 2004, Los Padres
Bank had an aggregate of $84.9 million and $260.8 million invested in multi-family residential and
commercial real estate loans, respectively, or 14.0% and 43.1% of total loans receivable,
respectively. Los Padres Banks multi-family residential loans are secured by multi-family properties of
five units or more, while Los Padres Banks commercial real estate loans are secured by industrial,
warehouse 7




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and self-storage properties, office buildings, office and industrial condominiums, retail
space and strip shopping centers, mixed-use commercial properties, mobile home parks, nursing
homes, hotels and motels. Substantially all of these properties are located in Los Padres Banks
primary market areas. Los Padres Bank typically originates commercial real estate loans for terms
of up to 20 years based upon a 30-year loan amortization period and multi-family residential loans
for terms of up to 20 years based upon up to a 30-year amortization schedule. Los Padres Bank will
originate these loans on both a fixed-rate or adjustable-rate basis, with the latter adjusting on a
periodic basis of up to one year based on the London Interbank Offered Rate (LIBOR), the one-year
U.S. Treasury index of constant comparable maturities, a designated prime rate or the 11th District
Cost of Funds Index. Adjustable-rate loans may have an established ceiling and floor, and the
maximum loan-to-value for these loan products is generally 75%. As part of the criteria for
underwriting commercial real estate loans, Los Padres Bank generally requires a debt coverage ratio
(the ratio of net cash from operations before payment of debt service to debt service) of 1.3:1 or
more. It is also Los Padres Banks general policy to seek additional protection to mitigate any
weaknesses identified in the underwriting process. Additional coverage may be provided through
secondary collateral and personal guarantees from the principals of the borrowers. Commercial real estate lending entails different and significant risks when compared to
single-family residential lending because such loans typically involve large loan balances to
single borrowers and because the payment experience on such loans is typically dependent on the
successful operation of the project or the borrowers business. In addition, the balloon payment
features of these loans may require the borrower to either sell or refinance the underlying
property in order to make the payment. These risks can also be significantly affected by supply
and demand conditions in the local market for apartments, offices, warehouses or other commercial
space. Los Padres Bank attempts to minimize its risk exposure by requiring that the loan does not
exceed established loan-to-value and debt coverage ratios, and by monitoring the operation and
physical condition of the collateral. Construction Loans.Los Padres Bank originates loans to finance the construction of
single-family and multi-family residences and commercial properties located in its primary market
area. At December 31, 2004, Los Padres Banks construction loans amounted to $35.0 million or 5.8%
of total loans receivable, $22.4 million of which were for the construction of residential
properties, $3.2 million of which were for land acquisition and the development of residential
properties, and $9.4 million of which were for the construction of commercial properties. Los Padres Bank primarily provides construction loans to individuals building their primary or
secondary residence as well as to local developers with whom Los Padres Bank is familiar and who
have a record of successfully completing projects. Residential construction loans to developers
generally are made with terms not exceeding two years, have interest rates which are fixed or
adjust, with the latter adjusting on a periodic basis of up to one year based upon a designated
prime rate or LIBOR, and are generally made with loan-to-value ratios of 80% or less. Residential
construction loans to individuals are interest only loans for the term of the construction and then
generally convert to a permanent loan. Los Padres Banks construction/permanent loans have been
successful due to its ability to offer borrowers a single closing and, consequently, reduced costs.
Los Padres Bank also offers adjustable-rate loans based on a designated prime rate or other
indices with terms of up to two years for the construction of commercial properties. Such loans
are generally made at a maximum loan-to-value ratio of 85% of discounted appraised value or less. Construction lending and acquisition and development lending are generally considered to
involve a higher degree of risk of loss than long-term financing on improved, owner-occupied real
estate. Risk of loss on construction loans and acquisition and development loans is dependent
largely upon the accuracy of the initial appraisal of the propertys projected value at completion
of construction as well as the estimated cost, including interest, of construction. During the
construction phase, a number of factors 8




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##### Table of Contents



could result in delays and cost overruns. If either estimate proves to be inaccurate and the
borrower is unable to provide additional funds, the lender may be required to advance funds beyond
the amount originally committed to permit completion of the project and/or be confronted at the
maturity of the construction loan with a project whose value is insufficient to assure full
payment. Los Padres Bank attempts to minimize the foregoing risks primarily by limiting its
construction lending to experienced developers and by limiting the total amount of loans to
builders for speculative construction projects. It is also Los Padres Banks general policy to
obtain regular financial statements and tax returns from builders so that it can monitor their
financial strength and ability to repay. Land acquisition and development.Los Padres Bank has increased its loans for land
acquisition and development from $8.3 million at December 31, 2003 to $27.5 million at December 31,
2004. The increase is caused by the expansion of our products to meet our customer needs. Land
acquisition and development loans are typically issued with short terms, bearing adjustable-rates
of interest based on a designated prime rate or LIBOR and are generally made with loan-to-value
ratios of 70% or less. Commercial and Industrial Loans. Los Padres Bank is placing increased emphasis on the
origination of commercial business loans because of the higher risk-adjusted spreads generally
associated with these types of loans. During the year ended December 31, 2004, Los Padres Bank
originated $108.5 million in loan commitments of commercial and industrial loans, as compared to
$78.3 million and $41.0 million as of December 31, 2003 and 2002, respectively. At December 31,
2004, Los Padres Banks commercial and industrial loans amounted to $72.2 million or 11.9% of total
loans receivable. The commercial and industrial loans that Los Padres Bank is originating include lines of
credit, term loans and letters of credit. These loans are typically secured by collateral and are
used for general business purposes, including working capital financing, equipment financing,
capital investment and general investment. Depending on the collateral pledged to secure the
extension of credit, maximum loan-to-value ratios are 80% or less. Loan terms generally vary from
one to seven years. The interest rates on such loans are generally variable and are indexed to the
Wall Street Journal Prime Rate, plus a margin. Commercial and industrial loans typically have
shorter maturity terms and higher interest spreads than mortgage loans, but generally involve more
credit risk than mortgage loans because of the type and nature of the collateral. Los Padres
Banks business customers are typically small to medium sized, privately-held companies with local
or regional businesses that operate in Los Padres Banks primary markets. Consumer and Other Loans. Los Padres Bank is authorized to make loans for a wide variety of
personal or consumer purposes. Los Padres Bank has been originating consumer loans in recent years
in order to provide a wider range of financial services to its customers and because such loans
generally carry higher interest rates than mortgage loans. The consumer and other loans offered by
Los Padres Bank include home equity lines of credit, home improvement loans, vehicle loans, secured
and unsecured personal lines of credit and deposit account secured loans. At December 31, 2004,
$24.8 million or 4.1% of Los Padres Banks total loans receivable consisted of consumer loans. Home equity lines of credit are originated by Los Padres Bank for up to 90% of the appraised
value, less the amount of any existing prior liens on the property. Los Padres Bank also offers
home improvement loans in amounts up to 80% of the appraised value, less the amount of any existing
prior liens on the property. Home improvement loans have a maximum term of 15 years and carry
fixed or adjustable interest rates. Home equity lines of credit have a maximum repayment term of
15 years and carry interest rates that adjust monthly in accordance with a designated prime rate.
Los Padres Bank will secure each of these types of loans with a mortgage on the property, generally
a second mortgage, and may originate the loan even if another institution holds the first mortgage.
At December 31, 2004, home equity lines of credit and home improvement loans totaled $23.3 million
or 98.1% of Los Padres Banks 9




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##### Table of Contents



total consumer loan portfolio and an aggregate of $33.8 million was committed and undrawn
under these loans and lines of credit. Los Padres Bank currently offers loans secured by deposit accounts, which amounted to $779,000
or 3.2% of Los Padres Banks total consumer and other loan portfolio at December 31, 2004. Such
loans are originated for up to 90% of the deposit account balance, with a hold placed on the
account restricting the withdrawal of the account balance. At December 31, 2004, vehicle and secured and unsecured personal line of credit loans amounted
to $631,000 or 3.9% of Los Padres Banks total consumer and other loan portfolio. Consumer loans generally have shorter terms and higher interest rates than mortgage loans but
generally involve more credit risk than mortgage loans because of the type and nature of the
collateral. In addition, consumer lending collections are dependent on the borrowers continuing
financial stability, and thus are more likely to be adversely affected by job loss, divorce,
illness and personal bankruptcy. Los Padres Bank believes that the generally higher yields earned
on consumer loans compensate for the increased credit risk associated with such loans and Los
Padres Bank intends to continue to offer consumer loans in order to provide a full range of
services to its customers. 
 Asset Quality General. Los Padres Banks Internal Asset Review Committee and the Internal Asset Oversight
Committee, consisting of Los Padres Banks senior executive officers and certain Board of
Directors, monitors the credit quality of Los Padres Banks assets, reviews classified and other
identified loans and determines the proper level of reserves to allocate against Los Padres Banks
loan portfolio, in each case subject to guidelines approved by Los Padres Banks board of
directors. Loan Delinquencies. When a borrower fails to make a required payment on a loan, Los Padres
Bank attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are
generally made following the sixteenth day after a payment is due, at which time a late payment is
assessed. In most cases, deficiencies are cured promptly. If a delinquency extends beyond 16
days, the loan and payment history is reviewed and efforts are made to collect the loan. While Los
Padres Bank generally prefers to work with borrowers to resolve such problems, when the account
becomes 45 days delinquent, Los Padres Bank will institute foreclosure by issuing a Notice of
Intent to Foreclose or other proceedings, as necessary, to minimize any potential loss. After 75
days and the loan is not brought current or no workout agreement has been initiated, a Notice of
Default is recorded. Non-Performing Assets. Los Padres Bank will place loans on non-accrual status when, in the
judgment of management, the probability of collection of interest is deemed to be insufficient to
warrant further accrual. When such a loan is placed on non-accrual status, previously accrued but
unpaid interest is deducted from interest income. Los Padres Bank generally does not accrue
interest on loans past due 60 days or more. 10




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##### Table of Contents



Non-performing loans are defined as non-accrual loans. Non-performing assets are defined as
non-performing loans and real estate acquired by foreclosure or deed-in-lieu thereof. Troubled
debt restructurings are defined as loans, which Los Padres Bank has agreed to modify by accepting
below market terms either by granting interest rate concessions or by deferring principal and/or
interest payments. The following table sets forth the amounts and categories of our non-performing
assets and troubled debt restructurings at the dates indicated. At December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Non-accruing loans:Single-family residential
    
    $
    
    
    
    $
    
    
    
    $
    218
    
    
    $
    56
    
    
    $
    767Multi-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,592Commercial real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    348
    
    
    
    Land acquisition and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial and industrial
    
    
    95
    
    
    
    8
    
    
    
    
    
    
    
    93
    
    
    
    Consumer and other
    
    
    
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    3Total non-accruing loans
    
    
    95
    
    
    
    12
    
    
    
    218
    
    
    
    497
    
    
    
    3,362Total non-performing loans
    
    
    95
    
    
    
    12
    
    
    
    218
    
    
    
    497
    
    
    
    3,362Troubled debt restructurings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate owned, net of reserves
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets and
troubled debt restructurings
    
    $
    95
    
    
    $
    12
    
    
    $
    218
    
    
    $
    497
    
    
    $
    3,362Total non-performing loans
and troubled debt
restructurings as a
percentage of total loans
    
    
    0.02
    %
    
    
    0.00
    %
    
    
    0.05
    %
    
    
    0.11
    %
    
    
    0.84
    %Total non-performing assets
and troubled debt
restructurings as a
percentage of total assets
    
    
    0.01
    %
    
    
    0.00
    %
    
    
    0.03
    %
    
    
    0.07
    %
    
    
    0.69
    %
 At December 31, 2004, we had a $95,000 non-performing loan representing a increase of
$83,000 from December 31, 2003. At December 31, 2004, 2003 and 2002, we had one, two and two
non-performing loans, respectively. At December 31, 2004, we had no real estate owned or troubled
debt restructurings. The interest income that would have been recorded during the years ended December 31, 2004,
2003 and 2002 if Los Padres Banks non-accruing loans at the end of such periods had been current
in accordance with their terms during such periods is $52,269,
$46,437 and $43,496, respectively.
The interest income that was recorded during the years ended December 31, 2004, 2003 and 2002 with
respect to Los Padres Banks non-accruing loans at December 31, 2004, was $3, $3 and $33,
respectively. Classified Assets. Federal regulations require that each insured savings institution classify
its assets on a regular basis. In addition, in connection with examinations of insured
institutions, federal examiners have authority to identify problem assets and, if appropriate,
classify them. Los Padres Bank has established three classifications for potential problem assets:
substandard, doubtful and loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the insured institution will sustain some loss
if the deficiencies are not corrected. Doubtful assets have the weaknesses of substandard assets
with the additional characteristic that the weaknesses make collection or liquidation in full on
the basis of currently existing facts, conditions and values questionable, 11




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##### Table of Contents



and there is a high possibility of loss. An asset classified as loss is considered
uncollectible and of such little value that continuance as an asset of the institution is not
warranted. Los Padres Bank has established another category, designated special mention, for
assets which do not currently expose Los Padres Bank to a sufficient degree of risk to warrant
classification as substandard, doubtful or loss. Assets classified as substandard or doubtful
require Los Padres Bank to establish allowances for loan losses based on the methodology described
below. If an asset or portion thereof is classified as loss, the insured institution must either
establish specific allowances for loan losses in the amount of 100% of the portion of the asset
classified loss, or charge-off such amount. At December 31, 2004, in addition to the
non-performing assets described above, Los Padres Bank had $3.4 million of classified loans, $3.4
million of which was classified as substandard and none were classified as doubtful or loss. As of
December 31, 2004, Los Padres Bank had $13.7 million of loans that were designated special mention.
Our classified and special mention loans, in addition to the non-performing loans discussed above,
are the extent of the loans in our portfolio that give us some repayment concern at this time. Allowance for Loan Losses.The allowance for loan losses reflects managements judgment of
the level of allowance adequate to provide for probable losses inherent in the loan portfolio as of
the balance sheet date. On a quarterly basis, Los Padres Bank assesses the overall adequacy of the
allowance for loan losses, utilizing a consistent and systematic approach which includes the
application of an allocated allowance for specifically identified problem loans, a formula
allowance for non-homogenous loans, a formula allowance for large groups of smaller balance
homogenous loans and an unallocated allowance. Allocated allowance for specifically identified problem loans. A specific reserve is
established for impaired loans in accordance with SFAS No. 114, Accounting by Creditors for
Impairment of a Loan. A loan is impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to the contractual
terms of the loan agreement. The specific reserve is determined based on the present value of
expected future cash flows discounted at the loans effective interest rate, except that as a
practical expedient, we may measure impairment based on a loans observable market price, or the
fair value of the collateral if the loan is collateral dependent. Formula allowance for non-homogenous loans. Los Padres Bank segments its non-homogenous loan
portfolio into pools with similar characteristics based on loan type (collateral driven) and risk
factor (loan grade). Currently, these loans are segmented into four categories by collateral,
further stratified by loan grade (pass, special mention and substandard). The general pool
categories are multi-family residential, commercial real estate, land acquisition and development,
and commercial and industrial. These non-homogenous loans are reviewed individually. The formula allowance is calculated by applying adjusted loss rates to these pools. Pool loss
rates are established by examining historical charge-off data for groups of loans and adjusting
them for a variety of qualitative factors deemed appropriate by management. The analysis of
historical loss data in determining the initial loss rates is based on a average ten-year period.
Where Los Padres Bank has no or nominal actual charge-off data for certain loan types, industry
data and managements judgment is utilized as representative starting loss rates. Formula allowance for large groups of smaller balance homogenous loans. The allocated loan
loss allowance for large groups of smaller balance homogenous loans is focused on loss experience
for the pool rather than on an analysis of individual loans. Large groups of smaller balance
homogenous loans consist of consumer loans and single-family residential loans. The allowance for
groups of performing loans is based on historical losses over a ten year period. 12




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##### Table of Contents



Unallocated Allowance. The unallocated allowance contains amounts that are based on
managements evaluation of conditions that are not directly measured in the determination of the
formula and specific allowances. The evaluation of the inherent loss with respect to these
conditions is subject to a higher degree of uncertainty because they are not identified with
specific problem credits or portfolio segments. The conditions evaluated in connection with the
unallocated allowance include the following, which existed at the balance sheet date:  
    trends in criticized and non-accrual assets;
    the levels and trends in charge-offs, recovery history and loan restructuring;
    changes in volumes and terms of the loan portfolio;
    changes in the effectiveness of the internal asset review process;
    changes in lending policies, procedures and practices;
    changes in the experience, ability and depth of lending management;
    changes in the national and local economic conditions; and
    the trend in local real estate values. Management and the Internal Asset Review Committee review these conditions quarterly in
discussion with our senior credit officers. To the extent that any of these conditions is
evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation
date, managements estimate of the effect of such condition may be reflected as a specific
allowance, applicable to such credit or portfolio segment. Where any of these conditions is not
evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation
date, managements evaluation of the probable loss related to such condition is reflected in the
unallocated allowance. The allowance for loan losses is based upon estimates of probable losses inherent in the loan
portfolio. The actual losses can vary from the estimated amounts. Our methodology includes several
features that are intended to reduce the differences between estimated and actual losses. The loss
migration model that is used to establish the loan loss factors is designed to be self-correcting
by taking into account our loss experience over prescribed periods. Similarly, by basing the loan
loss factors over a period reflective of two business cycles, the methodology is designed to take
our recent loss experience for consumer and commercial and industrial loans into account.
Furthermore, based on managements judgment, our methodology permits adjustments to any loss factor
used in the computation of the formula allowance for significant factors, which affect the
collectibility of the portfolio as of the evaluation date, but are not reflected in the loss
factors. By assessing the probable estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon the most recent
information that has become available. Although our management believes it uses the best information available to establish the level
of the allowance, there can be no assurance that additions to such allowance will not be necessary
in future periods. Furthermore, various regulatory agencies, as an integral part of their
examination process, periodically review our valuation allowance. These agencies may require us to
increase the allowance, based on their judgments of the information available to them at the time
of the examination. 13




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##### Table of Contents



The following table is an allocation of our allowance for loan losses as of the dates
presented: At December 31,2004
    
    
    2003
    
    
    2002(In Thousands)Specific reserve
    
    $
    
    
    
    $
    50
    
    
    $
    50Formula-non homogenous
    
    
    4,477
    
    
    
    3,974
    
    
    
    3,131Formula-homogenous
    
    
    570
    
    
    
    474
    
    
    
    489Unallocated
    
    
    181
    
    
    
    89
    
    
    
    127$
    5,228
    
    
    $
    4,587
    
    
    $
    3,797
 At December 31, 2004, the formula allowance for non-homogeneous loan allowance increased
by $503,000 from December 31, 2003, primarily due to an increase in total non-homogeneous loans
and, to a lesser extent, a decrease in criticized loans related to non-homogeneous loans. The formula allowance for homogeneous loans increased by $96,000 for the year ending 2004 and
decreased by $15,000 for the year ending December 31, 2003, as a result of decreasing single-family
loan balances. Los Padres Bank shifted its strategic focus away from originating single-family
loans for its portfolio and has opted to originate such loans on a brokered basis due to high
competition and the resulting low risk-adjusted spreads. Specific reserves are established for impaired loans in accordance with SFAS No. 114,
Accounting by Creditors for Impairment of a Loan. In 2004, we reclassified the $50,000 in
specific reserves to the general valuation allowance since the loan was no longer impaired as per
SFAS No. 114. From December 31, 2002 to December 31, 2003, the balance in specific reserves has
remained constant at $50,000 and relates to one single-family loan. 14




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##### Table of Contents



The following table sets forth the activity in our allowance for loan losses for the periods
indicated At and For the Year EndedDecember 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000(Dollars in Thousands)Balance at beginning of period
    
    $
    4,587
    
    
    $
    3,797
    
    
    $
    3,736
    
    
    $
    3,150
    
    
    $
    3,112Charge-offs:Real estate loansSingle-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Multi-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    (330
    )
    
    
    
    
    
    
    Consumer and other loans
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    (4
    )Total charge-offs
    
    
    (9
    )
    
    
    
    
    
    
    (330
    )
    
    
    (15
    )
    
    
    (4
    )Recoveries
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net charge-offs
    
    
    (9
    )
    
    
    
    
    
    
    (330
    )
    
    
    (15
    )
    
    
    (4
    )Allowance for loan losses acquired
in connection with branch
purchase (1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    Provision (credit) for losses on loans
    
    
    650
    
    
    
    790
    
    
    
    391
    
    
    
    1
    
    
    
    42Balance at end of period
    
    $
    5,228
    
    
    $
    4,587
    
    
    $
    3,797
    
    
    $
    3,736
    
    
    $
    3,150Allowance for loan losses as a percent of
total net loans outstanding at the end of
the period
    
    
    0.87
    %
    
    
    0.88
    %
    
    
    0.83
    %
    
    
    0.83
    %
    
    

    0.79
    %Ratio of net charge-offs to average loans
outstanding during the period
    
    
    
    %
    
    
    
    %
    
    
    0.07
    %
    
    
    
    %
    
    
    
    %
   (1)
    
    In November 2001, we acquired from Harrington Bank, FSB the Shawnee Mission, Kansas
branch, along with related loans and deposits. 15




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##### Table of Contents



The following table sets forth information concerning the allocation of our allowance for
loan losses by loan category at the dates indicated. December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachCategory to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans(Dollars in Thousands)Real estate loans:Single-family residential
    
    $
    265
    
    
    
    16.6
    %
    
    $
    308
    
    
    
    17.9
    %
    
    $
    390
    
    
    
    25.8
    %
    
    $
    509
    
    
    
    34.5
    %
    
    $
    717
    
    
    
    50.2
    %Multi-family residential
    
    
    554
    
    
    
    14.0
    
    
    
    416
    
    
    
    15.7
    
    
    
    344
    
    
    
    15.9
    
    
    
    437
    
    
    
    15.4
    
    
    
    453
    
    
    
    16.6Commercial
    
    
    1,072
    
    
    
    43.1
    
    
    
    1,400
    
    
    
    44.8
    
    
    
    773
    
    
    
    40.5
    
    
    
    693
    
    
    
    34.4
    
    
    
    679
    
    
    
    27.3Construction
    
    
    564
    
    
    
    5.8
    
    
    
    419
    
    
    
    5.9
    
    
    
    546
    
    
    
    4.4
    
    
    
    612
    
    
    
    4.6
    
    
    
    380
    
    
    
    3.3Land acquisition and development
    
    
    211
    
    
    
    4.5
    
    
    
    123
    
    
    
    1.6
    
    
    
    215
    
    
    
    3.3
    
    
    
    79
    
    
    
    1.7
    
    
    
    25
    
    
    
    0.6Commercial and industrial loans
    

    
    2,076
    
    
    
    11.9
    
    
    
    1,616
    
    
    
    10.8
    
    
    
    1,253
    
    
    
    6.1
    
    
    
    1,172
    
    
    
    6.8
    
    
    
    80
    
    
    
    1.0Consumer and other loans
    
    
    305
    
    
    
    4.1
    
    
    
    216
    
    
    
    3.1
    
    
    
    149
    
    
    
    3.9
    
    
    
    63
    
    
    
    2.6
    
    
    
    69
    
    
    
    1.0Unallocated reserve
    
    
    181
    
    
    
    
    
    
    
    89
    
    
    
    .2
    
    
    
    127
    
    
    
    .1
    
    
    
    171
    
    
    
    
    
    
    
    747
    
    
    
    Total
    
    $
    5,228
    
    
    
    100
    %
    
    $
    4,587
    
    
    
    100
    %
    
    $
    3,797
    
    
    
    100
    %
    
    $
    3,736
    
    
    
    100.0
    %
    
    $
    3,150
    
    
    
    100.0
    %
 16




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##### Table of Contents



Investment Activities General. Our securities portfolio is managed under the direction of our Chief Executive
Officer in accordance with a comprehensive written investment policy which addresses strategies,
types and levels of allowable investments and which are reviewed and approved by Los Padres Banks
board of directors. The management of the securities portfolio is set in accordance with
strategies developed by Los Padres Banks Asset and Liability Committee (ALCO). In addition, Los
Padres Bank has entered into an agreement with Smith Breeden Associates, Inc. (Smith Breeden)
whereby Smith Breeden has been appointed as investment advisor with respect to the management of
Los Padres Banks securities portfolio. With the assistance of Smith Breeden, Los Padres Banks
Chief Executive Officer, in his role as Chief Investment Officer, has the primary responsibility
for managing the investment portfolio in accordance with the policy. The Chief Investment Officers
responsibilities include informing ALCO of the types of investments available, the status and
performance of the portfolio and current market conditions. Designated officers of Los Padres Bank
are authorized to: purchase or sell eligible investments under repurchase or reverse repurchase
agreements; execute hedging strategies approved by the ALCO; pledge securities owned as collateral
for public agency deposits or repurchase accounts or agreements; and lend securities to approved
dealers in government securities or approved commercial banks. The Chief Executive Officer, the
President, Principal Accounting Officer or the Director of Financial Reporting of Los Padres Bank
has the authority to purchase or sell designated instruments up to $5.0 million in any one
transaction and, acting together, any two members of the ALCO have authority to purchase or sell
securities of between $5.0 million and $30.0 million in any one transaction. For purchases or
sales greater than $30.0 million, the prior approval of a majority of the ALCO is required.
Designated officers are also authorized to invest excess liquidity in approved liquid investment
vehicles. In addition, the Board of Directors of Los Padres Bank ratifies all securities purchased
and sold by Los Padres Bank. We invest in a portfolio of mortgage-backed and related securities, interest rate contracts,
U.S. Government agency securities, asset-backed securities, corporate securities and, to a much
lesser extent, equity securities. In selecting securities for our portfolio, we employ
option-adjusted pricing analysis with the assistance of Smith Breeden in order to ascertain the net
risk-adjusted spread expected to be earned with respect to the various investment alternatives.
The nature of this analysis is to quantify the costs embedded in the yield of an investment, such
as the duration-matched funding cost, the costs of the options embedded in the investments cash
flow (such as a borrowers ability to prepay a mortgage) and servicing costs. The objective of our
investment management process is to select investments with the greatest net spreads and actively
manage the underlying risks of these investments. We manage our securities portfolio in order to enhance net interest income and net market
value on a risk-adjusted basis and deploy excess capital until we can reinvest such assets into
loans or other community banking assets. As a result, we monitor the net risk-adjusted spread of
our investments and compare them with the spreads available with respect to other securities in the
market. Accordingly, as market conditions fluctuate (e.g., as risk-adjusted spreads narrow), we
may sell individual securities prior to their maturity and reinvest the proceeds into new
investments, which generally carry wider risk-adjusted spreads. We utilize various interest rate
contracts such as interest rate swaps, caps, floors, options and futures in order to hedge our
interest rate exposure in our securities portfolio, which allows us to respond to changing
prepayment rates on our mortgage-backed and related securities. The investment portfolio, although
hedged for interest rate risk, is still susceptible to adverse changes in the spreads between the
yields on mortgage-backed and related securities and the related Treasury and LIBOR based hedges.
Substantially all of our securities are classified as available for sale securities and, pursuant
to Statement of Financial Accounting Standards (SFAS) No. 115, are reported at fair value with
unrealized gains and losses included in stockholders equity. 17




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##### Table of Contents



Mortgage-Backed and Related Securities. At December 31, 2004, our mortgage-backed and related
securities including pass-through mortgage-backed securities, collateral mortgage obligations and
mortgage related asset-backed securities classified as available for sale and held to maturity
amounted to $431.7 million or 98.1% of our securities portfolio and 39.9% of our total assets. By
investing in mortgage-backed and related securities, our management seeks to achieve a targeted
option-adjusted spread over applicable funding costs. We invest in mortgage-backed and related securities, including mortgage participation
certificates, which are insured or guaranteed by U.S. Government agencies and government sponsored
enterprises or by private issuers which are rated based on the underlying collateral and priority
of cash flows, and investment grade collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs). Mortgage-backed securities, which also are known as
mortgage participation certificates or pass-through certificates, represent a participation
interest in a pool of single-family mortgages. The principal and interest payments on these
securities are passed from the mortgage originators, through intermediaries, generally U.S.
Government agencies and government sponsored enterprises, that pool and repackage the participation
interests in the form of securities, to investors such as us. Such U.S. Government agencies and
government-sponsored enterprises, which guarantee the payment of principal and interest to
investors, primarily include Freddie Mac, Fannie Mae and the Government National Mortgage
Association (Ginnie Mae). Mortgage-backed securities typically are issued with stated principal amounts, and the
securities are backed by pools of mortgages that have loans with interest rates that are within a
range and have varying maturities. The characteristics of the underlying pool of mortgages, i.e.,
fixed-rate or adjustable-rate, as well as prepayment risk, are passed on to the certificate holder.
The term of a mortgage-backed pass-through security thus approximates the terms of the underlying
mortgages. Our mortgage-backed and related securities, including CMOs, include securities issued by
entities which have qualified under the Internal Revenue Code of 1986, as amended (the Code) as
REMICs. CMOs and REMICs, referred to in this document as CMOs, were developed in response to
investor concerns regarding the uncertainty of cash flows associated with the prepayment option of
the underlying mortgagor and are typically issued by governmental agencies, government sponsored
enterprises and special purpose entities, such as trusts, corporations or partnerships, established
by financial institutions or other similar institutions. In contrast to pass-through
mortgage-backed securities, in which cash flow is received pro rata by all security holders, the
cash flow from the mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By allocating the principal and
interest cash flows from the underlying collateral among the separate CMO classes, different
classes of bonds are created, each with its own stated maturity, estimated average life, coupon
rate and prepayment characteristics. Like most fixed-income securities, mortgage-backed and related securities are subject to
interest rate risk. Unlike most fixed-income securities, however, the mortgage loans underlying a
mortgage-backed or related security generally may be prepaid at any time without penalty. The
ability to prepay a mortgage loan generally results in significantly increased price and yield
volatility, with respect to mortgage-backed and related securities, than is the case with
non-callable fixed income securities. Furthermore, mortgage-backed securities often are more
sensitive to changes in interest rates and prepayments than traditional mortgage-backed securities
and are, therefore, even more volatile. Nevertheless, we attempt to hedge against both interest
rate and prepayment risk. No assurance can be made, however, that these hedges will be effective. Although mortgage-backed and related securities often carry lower yields than traditional
mortgage loans, these securities generally increase the quality of our assets by virtue of the
securities 18




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##### Table of Contents



underlying insurance or guarantees or collateral support. These securities also require less
capital under risk-based regulatory capital requirements than non-insured or non-guaranteed
mortgage loans, are more liquid than individual mortgage loans, which enhances our ability to
actively manage our portfolio, and may be used to collateralize borrowings or other obligations.
At December 31, 2004, $197.2 million or 45.6% of our mortgage-backed and related securities were
pledged to secure various obligations (such as Federal Home Loan Bank (FHLB) advances, repurchase
agreements and collateral for interest rate swaps). In addition, as a result of our maintaining a
substantial portion of our assets in mortgage-backed and related securities, we have been able to
maintain a relatively low level of operating expenses. At December 31, 2004, the contractual maturity of substantially all of our mortgage-backed or
related securities was in excess of 10 years. The actual maturity of a mortgage-backed or related
security may be less than its stated maturity due to prepayments of the underlying mortgages.
Prepayments that are faster than anticipated may shorten the life of the security and affect its
yield to maturity. The yield to maturity is based upon the interest income and the amortization of
any premium or discount related to the security. In accordance with generally accepted accounting
principles, premiums and discounts are amortized over the contractual life of the loans, which
decrease and increase interest income, respectively. The prepayment assumptions used to determine
the amortization period of premiums and discounts can significantly affect the yield of the
mortgage-backed or related security, and these assumptions are reviewed periodically to reflect
actual prepayments. Although prepayments of underlying mortgages depends on many factors,
including the type of mortgages, the coupon rate, the age of mortgages, the geographical location
of the underlying real estate collateralizing the mortgages and general levels of market interest
rates, the difference between the interest rates on the underlying mortgages and the prevailing
mortgage interest rates generally is the most significant determinant of the rate of prepayments.
During periods of falling mortgage interest rates, if the coupon rate of the underlying mortgages
exceeds the prevailing market interest rates offered for mortgage loans, refinancing generally
increases and accelerates the prepayment of the underlying mortgages and the related security. At
December 31, 2004, of the $376.5 million of mortgage-backed and related securities held by us, an
aggregate of $61.3 million was secured by fixed-rate mortgage loans and an aggregate of $315.2
million was secured by adjustable-rate mortgage loans. We also invest in investment grade commercial mortgage backed securities (CMBS), which are
securities collateralized by mortgage loans secured by industrial, office, warehouse, retail space
strip shopping centers, motels and other commercial related real estate. The cash flows from these
mortgages are normally paid in a predetermined priority to investors holding the various classes of
securities. The mortgage loans underlying these securities typically have a prepayment lockout for
a period of five to ten years and, as such, have less prepayment risk than single-family mortgage
securities. At December 31, 2004, we held $47.9 million of commercial mortgage-backed securities. Corporate Debt Securities.We plan, from time to time, to invest in corporate investment
grade notes and bonds that are general obligations of the issuing company or backed by specific
equipment or other collateral of the issuing company. These securities are rated by the major
rating agencies based on the financial strength of the issuing company, priority in the debt
structure of the company, and the underlying security, if any. At December 31, 2004, we held $1.7
million of corporate debt securities. Trading Account Assets and Other Securities. At December 31, 2004, we held a variety of
assets classified as trading securities pursuant to SFAS No. 115, including mortgage-backed
securities, which had a carrying value of $388,000, and equity securities (consisting of mutual
funds invested in a variety of corporate fixed income and equity securities) with a carrying value
of $581,000 as of December 31, 2004. 19




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##### Table of Contents



We also have total rate of return interest rate swaps in our trading portfolio with a notional
amount of $120.0 million, with a carrying value of $77,000, which we use to enhance our returns.
As of December 31, 2004, we had CMBS total return swaps with an aggregate notional amount of $95.0
million that mature by the end of June 2005. With regard to the CMBS total return swaps, we
receive the net spread between the yield on the Lehman Brothers AAA CMBS Index or the Lehman 6 -
8.5 year AAA index and the duration matched LIBOR yield (less a spread) plus any market value
changes due to the spread changing between the index and the duration matched LIBOR yield. We also
have one asset backed home equity total return swap with a notional amount of $25.0 million that
expires on February 28, 2005. We receive the net spread between the yield on five referenced A
rated home equity, asset backed securities and one month LIBOR (less a spread) plus the market
value change due to the spread changing between the referenced securities and one month LIBOR
yields. For a 10 basis point change in spreads, the net market value of the total return swap
portfolio would change by $668,000 at December 31, 2004. As spreads tighten, gains are realized,
and as they widen, losses are realized. The purpose of these total return swaps is to create
incremental income for Los Padres Bank. The net interest income relating to our total returns swaps was $ 1.1 million, $820,000 and
$916,000 during the years ended December 31, 2004, 2003 and 2002, respectively. The approximate
net market value of our total return swaps maintained as trading account assets was $77,000,
$166,000 and $(17,000) as of December 31, 2004, 2003 and 2002, respectively. 20




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##### Table of Contents



The following table presents certain information regarding the composition and period to
maturity of our securities classified as available for sale as of the dates indicated below. 2004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in thousands)Mortgage-backed securities
pass throughsDue from one to five years
    
    $
    1,453
    
    
    $
    1,463
    
    
    
    5.71
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    $
    
    
    
    
    
    %Due from five to ten years
    
    
    1,995
    
    
    
    2,013
    
    
    
    5.35
    
    
    
    4,174
    
    
    
    4,349
    
    
    
    6.74
    
    
    
    6,076
    
    
    
    6,163
    
    
    
    6.72Due over ten years
    
    
    110,917
    
    
    
    110,226
    
    
    
    3.65
    
    
    
    125,592
    
    
    
    126,025
    
    
    
    4.68
    
    
    
    155,527
    
    
    
    158,193
    
    
    
    4.97Total mortgage backed
securities  pass-throughs
(1)
    
    
    114,365
    
    
    
    113,702
    
    
    
    3.70
    
    
    
    129,766
    
    
    
    130,374
    
    
    
    4.74
    
    
    
    161,603
    
    
    
    164,356
    
    
    
    5.03Collateralized mortgage
obligationsDue over ten years
    
    
    73,894
    
    
    
    73,399
    
    
    
    3.31
    
    
    
    48,704
    
    
    
    48,581
    
    
    
    3.36
    
    
    
    71,103
    
    
    
    70,690
    
    
    
    3.81Total collateralized
mortgage obligations
    
    
    73,894
    
    
    
    73,399
    
    
    
    3.31
    
    
    
    48,704
    
    
    
    48,581
    
    
    
    3.36
    
    
    
    71,103
    
    
    
    70,690
    
    
    
    3.81Commercial mortgage-backed
securitiesDue from one to five years
    
    
    18,269
    
    
    
    18,597
    
    
    
    5.81
    
    
    
    28,717
    
    
    
    29,489
    
    
    
    2.55
    
    
    
    24,218
    
    
    
    24,486
    
    
    
    2.43Due from five to ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,590
    
    
    
    17,870
    
    
    
    3.06Due over ten years
    
    
    29,276
    
    
    
    29,324
    
    
    
    3.63
    
    
    
    31,210
    
    
    
    31,427
    
    
    
    3.72
    
    
    
    22,380
    
    
    
    22,545
    
    
    
    3.81Total commercial
mortgage-back securities
    
    
    47,545
    
    
    
    47,921
    
    
    
    4.47
    
    
    
    59,927
    
    
    
    60,916
    
    
    
    3.16
    
    
    
    64,188
    
    
    
    64,901
    
    
    
    3.08Asset-backed securities
(underlying securities
mortgages)Due from five to ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,913
    
    
    
    4,961
    
    
    
    2.87
    
    
    
    
    
    
    
    Due over ten years
    
    
    187,949
    
    
    
    189,389
    
    
    
    3.63
    
    
    
    151,908
    
    
    
    152,291
    
    
    
    2.67
    
    
    
    23,736
    
    
    
    23,731
    
    
    
    2.74Total asset backed-securities
    
    
    187,949
    
    
    
    189,389
    
    
    
    3.63
    
    
    
    157,821
    
    
    
    157,252
    
    
    
    2.68
    
    
    
    23,736
    
    
    
    23,731
    
    
    
    2.74Asset-backed securitiesDue from five to ten years
    
    
    5,460
    
    
    
    5,143
    
    
    
    5.13Total asset backed securities
    
    
    5,460
    
    
    
    5,143
    
    
    
    5.13Corporate debt securitiesDue over ten years
    
    
    1,569
    
    
    
    1,652
    
    
    
    15.88
    
    
    
    1,489
    
    
    
    1,568
    
    
    
    15.88
    
    
    
    807
    
    
    
    852
    
    
    
    15.53Total corporate debt
securities
    
    
    1,569
    
    
    
    1,652
    
    
    
    15.88
    
    
    
    1,489
    
    
    
    1,568
    
    
    
    15.88
    
    
    
    807
    
    
    
    852
    
    
    
    15.53Total
    
    $
    430,782
    
    
    $
    431,206
    
    
    
    4.18
    
    
    $
    397,707
    
    
    $
    398,691
    
    
    
    3.56
    
    
    $
    321,437
    
    
    $
    324,530
    
    
    
    4.23
   (1)
    
    The fair value at December 31, 2004, consisted of $16.6 million of Fannie Mae participation
certificates, $22.5 million of Freddie Mac participation certificates and $74.6 million of
Ginnie Mae participation certificates. At December 31, 2003, consisted of $26.4 million of
Fannie Mae participation certificates, $10.2 million of Freddie Mac participation certificates
and $93.8 million of Ginnie Mae participation certificates. At December 31, 2002, consisted
of $16.8 million of Fannie Mae participation certificates and $147.6 million of Ginnie Mae
participation certificates. 21




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##### Table of Contents



The following table presents certain information regarding the composition and period to
maturity of our securities classified as held to maturity as of the dates indicated below. December 312004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities:Due from five to ten years
    
    $
    90
    
    
    $
    96
    
    
    
    7.56
    %Due over ten years
    
    
    3
    
    
    
    3
    
    
    
    7.48
    
    
    $
    222
    
    
    $
    240
    
    
    
    6.99
    %
    
    $
    355
    
    
    $
    380
    
    
    
    7.00
    %Total mortgage-backed
securities (1)
    
    
    93
    
    
    
    99
    
    
    
    7.55
    
    
    
    222
    
    
    
    240
    
    
    
    6.99
    
    
    
    355
    
    
    
    380
    
    
    
    7.00U.S. Government and agency
securities:Due within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,013
    
    
    
    2,087
    
    
    
    5.30Due from one-five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due from five-ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due over ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total U.S. Government
and agency securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,013
    
    
    
    2,087
    
    
    
    5.30Total securities classified
as held
to maturity
    
    $
    93
    
    
    $
    99
    
    
    
    7.55
    
    
    $
    222
    
    
    $
    240
    
    
    
    6.99
    
    
    $
    2,368
    
    
    $
    2,467
    
    
    
    5.56
   (1)
    
    The fair value at December 31, 2004, 2003, and 2002 consisted of $99,000, $240,000 and
$380,000, respectively of Fannie Mae participation certificates. 22




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##### Table of Contents



The following table presents certain information regarding the composition of our trading
account assets as of the dates indicated below. December 312004
    
    
    2003
    
    
    2002Weighted
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    
    Fair
    
    
    Average
    
    
    Amortized
    
    
    
    
    
    
    Average
    
    
    Amortized
    
    
    Fair
    
    
    AverageCost
    
    
    Value
    
    
    Yield
    
    
    Cost
    
    
    Fair Value
    
    
    Yield
    
    
    Cost
    
    
    Value
    
    
    Yield(Dollars in Thousands)Mortgage-backed securities
    
    $
    383
    
    
    $
    388
    
    
    
    3.91
    %
    
    $
    1,447
    
    
    $
    1,495
    
    
    
    5.90
    %
    
    $
    1,696
    
    
    $
    1,809
    
    
    
    6.27
    %U.S. Government and agency
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mutual funds
    
    
    560
    
    
    
    581
    
    
    
    
    
    
    
    441
    
    
    
    450
    
    
    
    
    
    
    
    150
    
    
    
    125
    
    
    
    Other securities (1)
    
    
    
    
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total trading account assets
    
    $
    943
    
    
    $
    1,046
    
    
    
    1.59
    
    
    $
    1,888
    
    
    $
    2,111
    
    
    
    4.52
    
    
    $
    1,846
    
    
    $
    1,934
    
    
    
    5.76
   (1)
    
    The balance at December 31, 2004 and 2003 consisted of total return swaps, which we use
to enhance our returns, and interest rate contracts, which do not qualify for hedge accounting
treatment pursuant to SFAS No. 133 . 23




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##### Table of Contents



The following table sets forth the fair value of our securities activities with respect
to our securities classified as available for sale and held to maturity for the periods indicated. At or For the YearsEnded December 31,2004
    
    
    2003
    
    
    2002(In Thousands)Beginning balance
    
    $
    398,931
    
    
    $
    326,997
    
    
    $
    184,344Mortgage-backed securities pass-throughs purchased-
available for sale
    
    
    43,238
    
    
    
    45,611
    
    
    
    61,024Collateralized mortgage obligations purchased-
available for sale
    
    
    47,165
    
    
    
    55,077
    
    
    
    117,145Commercial mortgage-backed securities purchased-
available for sale
    
    
    62
    
    
    
    9,561
    
    
    
    64,544Asset-backed securities purchased- available for sale
    
    
    64,064
    
    
    
    144,674
    
    
    
    23,735Corporate debt securities purchased- available for sale
    
    
    
    
    
    
    604
    
    
    
    803Total securities purchased
    
    
    154,529
    
    
    
    255,527
    
    
    
    267,251Less:Sale and principal payments of mortgage-backed securities,
pass throughs - available for sale
    
    
    (56,943
    )
    
    
    (76,148
    )
    
    
    (76,014
    )Sale and principal payments of collateralized mortgage
obligations - available for sale
    
    
    (22,073
    )
    
    
    (76,492
    )
    
    
    (44,860
    )Sale and principal payments of commercial
mortgage-backed securities  available for sale
    
    
    (10,982
    )
    
    
    (13,662
    )
    
    
    Sale and principal payments of asset-backed securities
 available for sale
    
    
    (29,797
    )
    
    
    (10,814
    )
    
    
    Sale and principal payments of mortgage-backed
securities, pass throughs - held to maturity
    
    
    (129
    )
    
    
    (133
    )
    
    
    (228
    )Total securities sold
    
    
    (119,924
    )
    
    
    (177,249
    )
    
    
    (121,102
    )Proceeds from maturities of securities
    
    
    
    
    
    
    (2,000
    )
    
    
    Change in net unrealized gain (loss) on
securities available for sale and held to maturity
    
    
    353
    
    
    
    (286
    )
    
    
    1,274Amortization of (premium)/discount
    
    
    (2,584
    )
    
    
    (4,058
    )
    
    
    (4,770
    )Ending balance
    
    $
    431,305
    
    
    $
    398,931
    
    
    $
    326,997
 24




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##### Table of Contents



Sources of Funds General. We consider various sources of funds to fund our investing and lending activities
and we evaluate the available sources of funds in order to reduce our overall funding costs.
Deposits, reverse repurchase agreements, advances from the FHLB of San Francisco, notes payable,
and sales, maturities and principal repayments on loans and securities have been the major sources
of funds for use in our lending and investing activities, and for other general business purposes.
We closely monitor rates and terms of competing sources of funds on a daily basis and utilize the
source that we believe to be cost effective. Deposits. Los Padres Bank attempts to price its deposits in order to promote deposit growth
and offers a wide array of deposit products in order to satisfy our business and retail customers
needs. Los Padres Banks current deposit products include passbook accounts, negotiable order of
withdrawal (NOW) and demand deposit accounts, money market deposit accounts, fixed-rate,
fixed-maturity retail certificates of deposit ranging in terms from one month to five years and
individual retirement accounts. Los Padres Banks retail deposits are generally obtained from residents in each of its primary
market areas. Los Padres Bank is opening a new location in the Scottsdale Airpark in early 2005
and, has a definitive agreement to purchase a banking office and acquire the related deposits in
Thousand Oaks, California in May 2005, and is in the process of finalizing negotiations to open a
third location in Kansas in the latter part of 2005. The principal methods currently used by Los
Padres Bank to attract deposit accounts include offering a variety of products and services and
competitive interest rates. Los Padres Bank utilizes traditional marketing methods to attract new
customers and savings deposits, including various forms of advertising. The following table presents the average balance of each deposit type and the average rate
paid on each deposit type of Los Padres Bank for the periods indicated. 2004
    
    
    2003
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate Paid
    
    
    Balance
    
    
    Rate Paid
    
    
    Balance
    
    
    Rate Paid(Dollars in Thousands)Passbook accounts
    
    $
    22,285
    
    
    
    .53
    %
    
    $
    27,952
    
    
    
    .44
    %
    
    $
    18,710
    
    
    
    1.26
    %Money market accounts
    
    
    69,769
    
    
    
    1.59
    
    
    
    88,569
    
    
    
    1.51
    
    
    
    73,515
    
    
    
    2.30NOW accounts
    
    
    50,584
    
    
    
    .09
    
    
    
    39,909
    
    
    
    .13
    
    
    
    30,840
    
    
    
    .52Certificates of deposit
    
    
    420,394
    
    
    
    2.23
    
    
    
    357,362
    
    
    
    2.48
    
    
    
    371,324
    
    
    
    3.22Total deposits
    
    $
    563,032
    
    
    
    1.89
    
    
    $
    513,792
    
    
    
    2.02
    
    
    $
    494,389
    
    
    
    2.84
 The following table sets forth the maturities of Los Padres Banks certificates of
deposit having principal amounts of $100,000 or more at December 31, 2004. Amount(In Thousands)Certificates of deposit maturing:Three months or less
    
    $
    55,914Over three through six months
    
    
    66,081Over six through twelve months
    
    
    80,971Over twelve months
    
    
    17,719Total
    
    $
    220,685
 25




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##### Table of Contents



The following table sets forth the activity in Los Padres Banks deposits during the
period indicated. Year Ended December 31,2004
    
    
    2003
    
    
    2002(In Thousands)Beginning balance
    
    $
    570,697
    
    
    $
    525,271
    
    
    $
    520,858Net increase (decrease) before interest
Credited
    
    
    18,121
    
    
    
    36,362
    
    
    
    (8,060
    )Interest credited
    
    
    9,383
    
    
    
    9,387
    
    
    
    13,403Amortization of purchase accounting premium
    
    
    (19
    )
    
    
    (323
    )
    
    
    (930
    )Net increase (decrease) in deposits
    
    
    27,485
    
    
    
    45,426
    
    
    
    4,413Ending balance
    
    $
    598,182
    
    
    $
    570,697
    
    
    $
    525,271
 ______________ The following table sets forth by various interest rate categories the certificates of deposit
with Los Padres Bank at the dates indicated. At December 31,2004
    
    
    2003
    
    
    2002(In Thousands)0.00% to 2.99%
    
    $
    366,685
    
    
    $
    334,873
    
    
    $
    272,6883.00% to 3.99%
    
    
    18,389
    
    
    
    12,576
    
    
    
    21,6644.00% to 4.99%
    
    
    29,983
    
    
    
    27,541
    
    
    
    30,4245.00% to 5.99%
    
    
    6,940
    
    
    
    14,314
    
    
    
    18,3906.00% to 6.99%
    
    
    1,158
    
    
    
    4,027
    
    
    
    7,5147.00% and higher
    
    
    887
    
    
    
    1,137
    
    
    
    1,223Total
    
    $
    424,042
    
    
    $
    394,468
    
    
    $
    351,903
 The following table sets forth the amount and remaining maturities of Los Padres Banks
certificates of deposit at December 31, 2004. Over SixMonths
    
    
    Over One
    
    
    Over TwoSix Months
    
    
    Through One
    
    
    Year Through
    
    
    Years Through
    
    
    Over Threeand Less
    
    
    Year
    
    
    Two Years
    
    
    Three Years
    
    
    Years
    
    
    Total(In Thousands)0.00% to 2.99%
    
    $
    213,111
    
    
    $
    142,066
    
    
    $
    9,287
    
    
    $
    1,904
    
    
    $
    317
    
    
    $
    366,6853.00% to 3.99%
    
    
    208
    
    
    
    2,728
    
    
    
    5,314
    
    
    
    3,273
    
    
    
    6,866
    
    
    
    18,3894.00% to 4.99%
    
    
    17,931
    
    
    
    2,618
    
    
    
    5,174
    
    
    
    739
    
    
    
    3,521
    
    
    
    29,9835.00% to 5.99%
    
    
    224
    
    
    
    206
    
    
    
    2,525
    
    
    
    3,827
    
    
    
    158
    
    
    
    6,9406.00% to 6.99%
    
    
    1,155
    
    
    
    3
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    1,1587.00% and higher
    
    
    887
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    887Total
    
    $
    233,516
    
    
    $
    147,621
    
    
    $
    22,300
    
    
    $
    9,743
    
    
    $
    10,862
    
    
    $
    424,042
 26




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##### Table of Contents



Borrowings.We obtain both long-term fixed-rate and short-term variable-rate advances
from the FHLB of San Francisco upon the security of certain of our residential first mortgage loans
and other assets, provided certain standards related to creditworthiness of Los Padres Bank have
been met. FHLB of San Francisco advances are available for general business purposes to expand
lending and investing activities. Borrowings have generally been used to fund the purchase of
mortgage-backed and related securities and lending activities and have been collateralized with a
pledge of loans, securities in our portfolio or any mortgage-backed or related securities
purchased. Advances from the FHLB of San Francisco are made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At December 31, 2004,
we had five advances from the FHLB of San Francisco, which mature between January 2005 and June
2010. At December 31, 2004, we had total FHLB of San Francisco advances of $316.0 million at a
weighted average coupon of 2.52%. Our borrowings from the FHLB of San Francisco are limited to 35%
of Los Padres Banks total assets, or $378.0 million at December 2004 and $340.6 million at
December 31, 2003. During 2003 and 2004, we obtained funds from the sales of securities to investment dealers
under agreements to repurchase, known as reverse repurchase agreements. In a reverse repurchase
agreement transaction, we will generally sell a mortgage-backed security agreeing to repurchase
either the same or a substantially identical security on a specific later date. The difference
between the sale and the purchase price (referred to as the drop) together with the foregone
coupon interest represents the cost of the financing transaction. The mortgage-backed securities
underlying the agreements are delivered to the dealers who arrange the transaction. For agreements
in which we have agreed to repurchase substantially identical securities, the dealers may sell,
loan or otherwise dispose of our securities in the normal course of their operations; however, such
dealers or third party custodians safe-keep the securities which are to be specifically repurchased
by us. In this type of transaction, we are subject to the risk that the lender may default at
maturity and not return the collateral. The amount at risk is the value of the collateral, which
exceeds the balance of the borrowing. In order to minimize this potential risk, we only deal with
large, established dealers when entering into these transactions. Reverse repurchase transactions
are accounted for as financing arrangements rather than as sales of such securities, and the
obligation to repurchase such securities is reflected as a liability in our consolidated financial
statements. At December 31, 2004, we had five repurchase agreements with Citigroup Financial
Services totaling $79.0 million with a weighted average coupon of 2.59% and maturities ranging from
July 2005 to July 2010. At December 31, 2003, we had four repurchase agreements with Citigroup
Financial Services totaling $65.0 million with a weighted average interest coupon of 2.61% and
maturities ranging from July 2005 to July 2010. We are parties to a credit agreement with Harris Trust and Savings Bank and US Bank, N.A.
Under the credit agreement, we have a revolving credit facility that enables us to borrow up to
$15.0 million for general corporate purposes from time to time with a maturity of September 30,
2007. As of December 31, 2004 and December 31, 2003, we had no outstanding borrowings under the
credit agreement. We pay interest on the outstanding amount of our borrowings from time to time under the credit
agreement at an interest rate that adjusts based upon our compliance with certain financial
criteria and our selection of an interest rate formula. At our option, the interest rates per
annum applicable to any particular borrowing under the credit agreement is either (1) adjusted
LIBOR plus a margin ranging from 1.75% to 2.75% or (2) the prime rate announced from time to time
by Harris Trust and Savings Bank minus a margin ranging from 0.5% to 0.0%. In September 2004, the
credit agreement was renegotiated to reduce the LIBOR plus a margin range. The factors that
determine the amount of the margin include our core profitability and our non-performing asset
ratio. We are currently at the most favorable pricing level under the credit agreement. In each
year, we also pay a commitment fee to the lenders equal to 0.25% of the average daily un-drawn
portion of the borrowings available to us under the credit agreement for that year. 27




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##### Table of Contents



The credit agreement contains a number of significant covenants that restrict our ability to
dispose of assets, incur additional indebtedness, invest in mortgage derivative securities above
certain thresholds, create liens on assets, engage in mergers or consolidations or a change-of
control, engage in certain transactions with affiliates, pay cash dividends or repurchase common
stock. The credit agreement also requires us to comply with specified financial ratios and tests,
including causing Los Padres Bank to maintain a ratio of non-performing assets to the sum of Tier 1
risk-based capital plus loan loss reserves of not more than 0.20 to 1, maintaining a ratio of
outstanding loans under the credit agreement to the stockholders equity of Los Padres Bank of less
than 0.50 to 1, maintaining Los Padres Banks status as a well capitalized institution and
complying with minimum core profitability requirements. Management believes that as of December
31, 2004, it was in compliance with all of such covenants and restrictions and does not anticipate
that such covenants and restrictions will significantly limit its operations. On September 27, 2004, we completed a $10.3 million capital trust offering with a newly formed
trust, Harrington West Capital Trust II, in a private transaction. The capital trust securities
bear an interest rate of three-month LIBOR plus 1.90% and will mature on October 7, 2034 and have a
five-year call feature. We used a portion of the proceeds to downstream capital to Los Padres Bank
for the continued expansion of their operations. On September 25, 2003, we completed a $15.5 million capital trust offering. The capital
securities were issued through a newly formed trust, Harrington West Capital Trust I, in a private
transaction. The capital trust securities bear an interest rate of three-month LIBOR plus 2.85%
and will mature on October 8, 2033 and have a five-year call feature. We used $11.3 million to pay
off the secured line of credit with Harris Trust and Savings Bank and US Bank, N.A. The remainder
of the proceeds were used to expand the Los Padres Bank operations in Overland Park, Kansas,
Ventura, California and Scottsdale, Arizona. The following table sets forth certain information regarding our short-term borrowings that
mature in one year or less at or for the dates indicated. At or For the Year EndedDecember 31,2004
    
    
    2003
    
    
    2002(Dollars in Thousands)Securities sold under agreements to repurchase:Average balance outstanding
    
    $
    20,749
    
    
    $
    919
    
    
    $
    1,018Maximum amount outstanding at any month-end
during the period
    
    
    21,245
    
    
    
    1,157
    
    
    
    1,501Balance outstanding at end of period
    
    
    20,689
    
    
    
    728
    
    
    
    517Average interest rate during the period
    
    
    1.47
    %
    
    
    .74
    %
    
    
    1.21
    %Average interest rate at end of period
    
    
    1.48
    %
    
    
    .63
    %
    
    
    1.12
    %Short-term FHLB advances:Average balance outstanding
    
    $
    263,898
    
    
    $
    190,392
    
    
    $
    61,348Maximum amount outstanding at any month-end
during the period
    
    
    298,000
    
    
    
    242,500
    
    
    
    160,000Balance outstanding at end of period
    
    
    297,000
    
    
    
    242,500
    
    
    
    160,000Average interest rate during the period
    
    
    1.46
    %
    
    
    1.22
    %
    
    
    2.03
    %Average interest rate at end of period
    
    
    2.22
    %
    
    
    .96
    %
    
    
    1.43
    %
 28




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##### Table of Contents



Subsidiaries Our primary subsidiary is Los Padres Bank. We were formed for the purpose of acquiring Los
Padres Bank, and we completed the acquisition in 1996. Los Padres Bank is a wholly-owned
subsidiary. In February 1999, we purchased a 49% interest in Harrington Wealth Management Company, (HWM)
which provides trust and investment management services to individuals and small institutional
clients for fee income. In November 2001, we purchased the remaining 51% interest in HWM. HWM
performs management of investment portfolios through knowledge and analysis of the customers
investment needs, risk tolerance, tax situation and investment horizon. At December 31, 2004, HWM
administered approximately 364 accounts and had $134.8 million of assets under management that are
not included on our balance sheet. For the years ended December 31, 2004, 2003 and 2002, HWM
generated revenues of $614,000, $456,000, and $412,000, respectively. HWM is a wholly owned
subsidiary of Los Padres Bank. On September 30, 2004, we decided to terminate our joint venture, Los Padres Mortgage Company,
LLC (LPMC) with Resource Marketing, the holding company for RE/MAX Achievers. LPMC brokered
residential and commercial mortgage loans for fee income. We terminated the LPMC joint venture as
the penetration rates of RE/MAX Achievers clientele for mortgage loans were below the expected
levels, and could broaden loan originations on the Banks platform. The termination of the LPMC
joint venture is also expected to provide economies by eliminating duplication of loan
administration activities within LPMC and the Bank. The Bank retained selected LPMC loan
origination staff and loan officers to continue its loan origination expansion in the Scottsdale,
Arizona market. Valley Oaks Financial Corporation was formed as a wholly owned service corporation of Los
Padres Bank in 1983 and serves as the title-holder with respect to the mortgages we originate. Harrington West Capital Trust I was formed as a deconsolidated subsidiary of Harrington West
Financial Group in 2003 and was created in conjunction with the $15.5 million capital trust
offering. Harrington West Capital Trust II was formed as a deconsolidated subsidiary of Harrington West
Financial Group in 2004 and was created in conjunction with the $10.3 million capital trust
offering. 
 Employees As of December 31, 2004, we had 177 full-time equivalent employees. Our employees are not
subject to any collective bargaining agreements and we believe that our relationship with our
employees is satisfactory. 
 Regulation of Harrington West Financial Group, Inc. General. Savings and loan holding companies and savings associations are extensively
regulated under both federal and state law. This regulation is intended primarily for the
protection of depositors and the Savings Association Insurance Fund (SAIF) and not for the
benefit of our stockholders. The following information describes certain aspects of that
regulation applicable to us, Los Padres Bank and Harrington Wealth Management Company, and does not
purport to be complete. The discussion is qualified in its entirety by reference to all particular
statutory or regulatory provisions. We are a unitary savings and loan holding company subject to
regulatory oversight by the Office of Thrift Supervision (OTS). As such, we are required to
register and file reports with the OTS and are subject to regulation and examination by the OTS.
In addition, the OTS has enforcement authority over us and our 29




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##### Table of Contents



subsidiaries, which also permits the OTS to restrict or prohibit activities that are
determined to be a serious risk to Los Padres Bank. Activities Restriction Test. As a unitary savings and loan holding company, we are generally
not subject to activity restrictions, provided Los Padres Bank satisfies the Qualified Thrift
Lender (QTL), test or meets the definition of a domestic building and loan association pursuant
to the Code. We presently intend to continue to operate as a unitary savings and loan holding
company. Recent legislation terminated the unitary thrift holding company exemption for all
companies that apply to acquire savings associations after May 4, 1999. However, since we are
grandfathered, our unitary holding company powers and authorities were not affected. Despite our
grandfathered status, if we acquire control of another savings association as a separate
subsidiary, we would become a multiple savings and loan holding company, and our activities, and
any activities of our subsidiaries (other than Los Padres Bank or any savings association), would
be restricted generally to activities permissible for financial holding companies and other
activities permitted for multiple savings and loan holding companies under OTS regulations, unless
such other associations each also qualify as a QTL or a domestic building and loan association and
were acquired in a supervisory acquisition. Furthermore, if we were in the future to sell control
of Los Padres Bank to any other company, such company would not succeed to our grandfathered status
and would be subject to the same business activity restrictions. Restrictions on Acquisitions. We must obtain approval from the OTS before acquiring control
of any other savings association. Such acquisitions are generally prohibited if they result in a
multiple savings and loan holding company controlling savings associations in more than one state.
However, such interstate acquisitions are permitted based on specific state authorization or in a
supervisory acquisition of a failing savings association. Federal law generally provides that no person, acting directly or indirectly or through or
in concert with one or more other persons, may acquire control, as that term is defined in OTS
regulations, of a federally insured savings association without giving at least 60 days written
notice to the OTS and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior OTS approval. These
provisions also prohibit, among other things, any director or officer of a savings and loan holding
company, or any individual who owns or controls more than 25% of the voting shares of a savings and
loan holding company, from acquiring control of any savings association not a subsidiary of the
savings and loan holding company, unless the acquisition is approved by the OTS. 
 Regulation of Los Padres Bank General. As a federally chartered, SAIF-insured savings association, Los Padres Bank is
subject to extensive regulation by the OTS and the Federal Deposit Insurance Corporation (FDIC).
Lending activities and other investments of Los Padres Bank must comply with various statutory and
regulatory requirements. Los Padres Bank is also subject to certain reserve requirements
promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines Los Padres Bank and prepares reports
for the consideration of Los Padres Banks Board of Directors on any deficiencies found in the
operations of Los Padres Bank. The relationship between Los Padres Bank and depositors and
borrowers is also regulated by federal and state laws, especially in such matters as the deposit
insurance of savings accounts and the form and content of mortgage documents utilized by Los Padres
Bank. Los Padres Bank must file reports with the OTS and the FDIC concerning its activities and
financial condition, in addition to obtaining regulatory approvals prior to entering into certain
transactions such as mergers with or acquisitions of other financial institutions. This regulation
and supervision 30




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##### Table of Contents



establishes a comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the SAIF and depositors. The regulatory structure also
gives the regulatory authorities extensive discretion in connection with their supervisory and
enforcement activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the Congress could have
a material adverse impact on us, Los Padres Bank, and our operations. Insurance of Deposit Accounts. The SAIF, as administered by the FDIC, insures Los Padres
Banks deposit accounts up to the maximum amount permitted by law. The FDIC may terminate
insurance of deposits upon a finding that Los Padres Bank:  
    has engaged in unsafe or unsound practices;
    is in an unsafe or unsound condition to continue operations; or
    has violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the OTS. The FDIC charges an annual assessment for the insurance of deposits based on the risk a
particular institution poses to its deposit insurance fund. Under this system as of December 31,
2004, SAIF members pay within a range of 0 cents to 27 cents per $100 of domestic deposits,
depending upon the institutions risk classification. This risk classification is based on an
institutions capital group and supervisory subgroup assignment. In addition, all FDIC-insured
institutions are required to pay assessments to the FDIC at an annual rate for the fourth quarter
of 2004 at approximately $0.02 per $100 of assessable deposits to fund interest payments on bonds
issued by the Financing Corporation (FICO), an agency of the Federal government established to
recapitalize the predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017. Proposed Legislation. From time to time, new laws are proposed that, if enacted, could have
an effect on the financial institutions industry. For example, deposit insurance reform
legislation is currently pending in Congress that would:  
    merge the Bank Insurance Fund and the SAIF.
    increase the current deposit insurance coverage limit for insured deposits to
$130,000 and index future coverage limits to inflation.
    replace the current fixed 1.25 designated reserve ratio with a reserve range of
between 1.0 and 1.25, giving the FDIC discretion in determining a level adequate within
this range. While we cannot predict whether such proposals will eventually become law, they could have an
effect on our operations and the way we conduct business. Regulatory Capital Requirements and Prompt Corrective Action. The prompt corrective action
regulation of the OTS, requires certain mandatory actions and authorizes certain other
discretionary actions to be taken by the OTS against a savings association that falls within
certain undercapitalized capital categories specified in the regulation. Under the regulation, an institution is well capitalized if it has a total risk-based capital
ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of
at least 5.0%, with no written agreement, order, capital directive, prompt corrective action
directive or other individual 31




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##### Table of Contents



requirement by the OTS to maintain a specific capital measure. An institution is adequately
capitalized if it has a total risk-based capital ratio of at least 8.0% and a Tier 1 risk-based
capital ratio of at least 4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a composite
rating of 1). The regulation also establishes three categories for institutions with lower
ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At
December 31, 2004, Los Padres Bank met the capital requirements of a well capitalized institution
under applicable OTS regulations. In general, the prompt corrective action regulation prohibits an insured depository
institution from declaring any dividends, making any other capital distribution, or paying a
management fee to a controlling person if, following the distribution or payment, the institution
would be within any of the three undercapitalized categories. In addition, adequately capitalized
institutions may accept brokered deposits only with a waiver from the FDIC and are subject to
restrictions on the interest rates that can be paid on such deposits. Undercapitalized
institutions may not accept, renew, or roll over brokered deposits. If the OTS determines that an institution is in an unsafe or unsound condition, or if the
institution is deemed to be engaging in an unsafe and unsound practice, the OTS may, if the
institution is well capitalized, reclassify it as adequately capitalized; if the institution is
adequately capitalized but not well capitalized, require it to comply with restrictions applicable
to undercapitalized institutions; and, if the institution is undercapitalized, require it to comply
with certain restrictions applicable to significantly undercapitalized institutions. Finally,
pursuant to an interagency agreement, the FDIC can examine any institution that has a substandard
regulatory examination score or is considered undercapitalized without the express permission of
the institutions primary regulator. OTS capital regulations also require savings associations to meet three capital standards:  
    tangible capital equal to at least 1.5% of total adjusted assets,
    leverage capital (core capital) equal to 4% of total adjusted assets, and
    risk-based capital equal to 8.0% of total risk-weighted assets. These capital requirements are viewed as minimum standards by the OTS, and most institutions
are expected to maintain capital levels well above the minimum. Minimum capital levels higher than
those provided in the regulations may be established by the OTS for individual savings
associations, upon a determination that the savings associations capital is or may become
inadequate in view of its circumstances. 32




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##### Table of Contents



The following table reflects as of December 31, 2004, Los Padres Banks actual levels of
regulatory capital and the applicable regulatory capital requirements. Tier 1 LeverageTangible Capital(1)
    
    
    Capital(1)
    
    
    Risk-Based Capital(1)Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Actual regulatory capital
    
    $
    71,787
    
    
    
    6.68
    %
    
    $
    71,787
    
    
    
    6.68
    %
    
    $
    77,015
    
    
    
    11.13
    %Minimum regulatory capital
    
    
    16,116
    
    
    
    1.50
    
    
    
    42,977
    
    
    
    4.00
    
    
    
    55,359
    
    
    
    8.00Excess regulatory capital
    
    $
    55,671
    
    
    
    5.18
    %
    
    $
    28,810
    
    
    
    2.68
    %
    
    $
    21,656
    
    
    
    3.13
    %
   (1)
    
    Tangible capital is computed as a percentage of tangible assets and Tier 1 leverage
capital is computed as a percentage of the adjusted total assets, both of which amounted to
$71.8 million as of December 31, 2004. The Home Owners Loan Act (HOLA) permits savings associations not in compliance with
the OTS capital standards to seek an exemption from certain penalties or sanctions for
noncompliance. Such an exemption will be granted only if certain strict requirements are met, and
must be denied under certain circumstances. If the OTS grants an exemption, the savings
association still may be subject to enforcement actions for other violations of law or unsafe or
unsound practices or conditions. Loans-to-One Borrower Limitations. Savings associations generally are subject to the lending
limits applicable to national banks. With certain limited exceptions, the maximum amount that a
savings association or a national bank may lend to any borrower (including certain related entities
of the borrower) at one time may not exceed 15% of the unimpaired capital and surplus of the
institution, plus an additional 10% of unimpaired capital and surplus for loans fully secured by
readily marketable collateral. Savings associations are additionally authorized to make loans to
one borrower, for any purpose, in an amount not to exceed $500,000 or, by order of the Director of
OTS, in an amount not to exceed the lesser of $30.0 million or 30% of unimpaired capital and
surplus to develop residential housing, provided:  
    the purchase price of each single-family dwelling in the development does not exceed
$500,000;
    the savings association is in compliance with its capital requirements;
    the loans comply with applicable loan-to-value requirements; and
    the aggregate amount of loans made under this authority does not exceed 150% of
unimpaired capital and surplus. At December 31, 2004, Los Padres Banks loans-to-one-borrower limit was $11.6 million based
upon the 15% of unimpaired capital and surplus measurement. At December 31, 2004, Los Padres
Banks largest single lending relationship had an outstanding aggregate balance of $9.6 million,
and consisted of six loans secured by commercial real estate, each of which was performing in
accordance with its terms. Qualified Thrift Lender Test. Savings associations must meet a QTL test, which may be met
either by maintaining a specified level of assets in qualified thrift investments as specified in
HOLA or by meeting the definition of a domestic building and loan association under the Code.
Qualified thrift investments are primarily residential mortgages and related investments, including
certain mortgage related securities. The required percentage of investments under HOLA is 65% of
assets while the Code 33




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##### Table of Contents



requires investments of 60% of assets. An association must be in compliance with the QTL test
or the definition of domestic building and loan association on a monthly basis in nine out of every
12 months. Associations that fail to meet the QTL test will generally be prohibited from engaging
in any activity not permitted for both a national bank and a savings association. As of December
31, 2004, Los Padres Bank was in compliance with its QTL requirement and met the definition of a
domestic building and loan association. Affiliate Transactions. Generally, transactions between a savings association or its
subsidiaries and its affiliates are required to be on terms and under circumstances that are
substantially the same, or at least as favorable to the savings association or its subsidiary, as
transactions with non-affiliates. Certain of these transactions, such as loans or extensions of
credit to an affiliate, are restricted to a percentage of the associations capital and surplus.
In addition, a savings association may not make a loan or other extension of credit to any
affiliate engaged in activities not permissible for a bank holding company or purchase or invest in
securities issued by most affiliates. Affiliates of a savings association include, among other
entities, the savings associations holding company and companies that are under common control
with the savings association. HWFG and HWM are considered to be affiliates of Los Padres Bank. Capital Distribution Limitations. OTS regulations impose limitations upon all capital
distributions by savings associations, like cash dividends, payments to repurchase or otherwise
acquire its shares, payments to stockholders of another institution in a cash-out merger and other
distributions charged against capital. Under the rule, a savings association in some circumstances
may:  
    be required to file an application and await approval from the OTS before it makes a
capital distribution;
    be required to file a notice 30 days before the capital distribution; or
    be permitted to make the capital distribution without notice or application to the OTS. The OTS regulations require a savings association to file an application if:  
    it is not eligible for expedited treatment of its other applications under OTS regulations;
    the total amount of all of capital distributions, including the proposed capital
distribution, for the applicable calendar year exceeds its net income for that year to
date plus retained net income for the preceding two years;
    it would not be at least adequately capitalized, under the prompt corrective action
regulations of the OTS following the distribution; or
    the associations proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation, or agreement between the savings
association and the OTS, or the FDIC, or violate a condition imposed on the savings
association in an OTS-approved application or notice. In addition, a savings association must give the OTS notice of a capital distribution if the
savings association is not required to file an application, but:  
    would not be well capitalized under the prompt corrective action regulations of the
OTS following the distribution; 34




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##### Table of Contents




    the proposed capital distribution would reduce the amount of or retire any part of
the savings associations common or preferred stock or retire any part of debt
instruments like notes or debentures included in capital, other than regular payments
required under a debt instrument approved by the OTS; or
    the savings association is a subsidiary of a savings and loan holding company. If neither the savings association nor the proposed capital distribution meet any of the above
listed criteria, the OTS does not require the savings association to submit an application or give
notice when making the proposed capital distribution. The OTS may prohibit a proposed capital
distribution that would otherwise be permitted if the OTS determines that the distribution would
constitute an unsafe or unsound practice. Community Reinvestment Act and the Fair Lending Laws. Savings associations have a
responsibility under the Community Reinvestment Act and related regulations of the OTS to help meet
the credit needs of their communities, including low- and moderate-income neighborhoods. In
addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics specified in those
statutes. An institutions failure to comply with the provisions of the Community Reinvestment Act
could, at a minimum, result in regulatory restrictions on its activities and the denial of
applications. In addition, an institutions failure to comply with the Equal Credit Opportunity
Act and the Fair Housing Act could result in the OTS, other federal regulatory agencies as well as
the Department of Justice taking enforcement actions. Based on an examination conducted in
November 2004, Los Padres Bank received an outstanding rating with respect to its performance
pursuant to the Community Reinvestment Act. Federal Home Loan Bank System. Los Padres Bank is a member of the FHLB system. Among other
benefits, each FHLB serves as a reserve or central bank for its members within its assigned region.
Each FHLB is financed primarily from the sale of consolidated obligations of the FHLB system.
Each FHLB makes available loans or advances to its members in compliance with the policies and
procedures established by the Board of Directors of the individual FHLB. As an FHLB member, Los
Padres Bank is required to own capital stock in an FHLB in an amount equal to the greater of:  
    1% of its aggregate outstanding principal amount of its residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each calendar year;
or
    5% of its FHLB advances or borrowings. Los Padres Banks required investment in FHLB stock, based on December 31, 2004, financial
data, was $15.1 million. At December 31, 2004, Los Padres Bank had $15.1 million of FHLB stock. Federal Reserve System. The Federal Reserve Board requires all depository institutions to
maintain noninterest-bearing reserves at specified levels against their transaction accounts
(primarily checking, NOW, and Super NOW checking accounts) and non-personal time deposits. At
December 31, 2004, Los Padres Bank was in compliance with these requirements. Activities of Subsidiaries. A savings association seeking to establish a new subsidiary,
acquire control of an existing company or conduct a new activity through a subsidiary must provide
30 days prior notice to the FDIC and the OTS and conduct any activities of the subsidiary in
compliance with regulations and orders of the OTS. The OTS has the power to require a savings
association to divest any subsidiary or terminate any activity conducted by a subsidiary that the
OTS determines to pose a serious threat to the financial safety, soundness or stability of the
savings association or to be otherwise inconsistent with sound banking practices. 35




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##### Table of Contents



Recent Legislation USA Patriot Act of 2001.In October 2001, the USA Patriot Act of 2001 was enacted in response
to the terrorist attacks in New York, Pennsylvania and Washington, D.C. that occurred on September
11, 2001. The Patriot Act is intended to strengthen U.S. law enforcements and the intelligence
communities abilities to work cohesively to combat terrorism on a variety of fronts. The
potential impact of the Patriot Act on financial institutions of all kinds is significant and wide
ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws
and requires various regulations, including standards for verifying customer identification at
account opening, and rules to promote cooperation among financial institutions, regulators, and law
enforcement entities in identifying parties that may be involved in terrorism or money laundering. Financial Services Modernization Legislation.In November 1999, the Gramm-Leach-Bliley Act of
1999 (GLB) was enacted. The GLB repeals provisions of the Glass-Steagall Act which restricted
the affiliation of Federal Reserve member banks with firms engaged principally in specified
securities activities, and which restricted officer, director, or employee interlocks between a
member bank and any company or person primarily engaged in specified securities activities. In addition, the GLB also contains provisions that expressly preempt any state law restricting
the establishment of financial affiliations, primarily related to insurance. The general effect of
the law is to establish a comprehensive framework to permit affiliations among commercial banks,
insurance companies, securities firms, and other financial service providers by revising and
expanding the Bank Holding Company Act framework to permit a holding company to engage in a full
range of financial activities through a new entity known as a financial holding company.
Financial activities is broadly defined to include not only banking, insurance and securities
activities, but also merchant banking and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to be financial in nature, incidental
to such financial activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system generally. The GLB provides that no company may acquire control of an insured savings association unless
that company engages, and continues to engage, only in the financial activities permissible for a
financial holding company, unless the company is grandfathered as a unitary savings and loan
holding company. The Financial Institution Modernization Act grandfathers any company that was a
unitary savings and loan holding company on May 4, 1999 or became a unitary savings and loan
holding company pursuant to an application pending on that date. The GLB also permits national banks to engage in expanded activities through the formation of
financial subsidiaries. A national bank may have a subsidiary engaged in any activity authorized
for national banks directly or any financial activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant banking, which may only be
conducted through a subsidiary of a financial holding company. Financial activities include all
activities permitted under new sections of the Bank Holding Company Act or permitted by regulation. To the extent that the GLB permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation. The GLB is
intended to grant to community banks certain powers as a matter of right that larger institutions
have accumulated on an ad hoc basis and which unitary savings and loan holding companies already
possess. Nevertheless, the GLB may have the result of increasing the amount of competition that we
face from larger institutions and other types of companies offering financial products, many of
which may have substantially more financial resources than we have. 36




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Sarbanes-Oxley Act. In July 2002, President Bush signed into law the Sarbanes-Oxley Act of
2002 (SOA) implementing legislative reforms intended to address corporate and accounting
improprieties. The SOA generally applies to all companies, both U.S. and non-U.S., that file or
are required to file periodic reports with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (the Exchange Act). The SOA includes very specific additional
disclosure requirements and new corporate governance rules, requires the SEC and securities
exchanges to adopt extensive additional disclosure, corporate governance and other related rules
and mandates further studies of certain issues by the SEC and the Comptroller General. The SOA
represents significant federal involvement in matters traditionally left to state regulatory
systems, such as the regulation of the accounting profession, and to state corporate law, such as
the relationship between a board of directors and management and between a board of directors and
its committees. The SOA addresses, among other matters:  
    audit committees;
    certification of financial statements by the chief executive officer and the chief
financial officer;
    the forfeiture of bonuses or other incentive-based compensation and profits from the
sale of an issuers securities by directors and senior officers in the twelve month
period following initial publication of any financial statements that later require
restatement;
    a prohibition on insider trading during pension plan black out periods;
    disclosure of off-balance sheet transactions;
    a prohibition on personal loans to directors and officers; expedited filing
requirements for Forms 4s;
    expedited filing requirements for Forms 4s;
    disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such
code;
    real time filing of periodic reports;
    the formation of a public accounting oversight board;
    new disclosure requirements regarding internal controls;
    auditor independence; and
    various increased criminal penalties for violations of securities laws. As a public reporting company, we are subject to the provisions of the SOA and related rules
and regulations issued by the SEC and Nasdaq. It is anticipated that we will incur additional
expense as a result of the SOA. 37




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##### Table of Contents



Regulation of Non-banking Affiliates Harrington Wealth Management Company is registered with the SEC as an investment advisor.
Harrington Wealth Management Company is subject to various regulations and restrictions imposed by
the SEC, as well as by various state authorities. 38




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##### Table of Contents



Item 2. Properties Office Locations The following table sets forth certain information with respect to our offices at December 31,
2004. Leased/Owned
    
    
    
    Total Deposits atand
    
    Date Office
    
    December 31, 2004Lease Expiration
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Date
    
    Date
    
    thousands)Solvang Branch and Administrative
    
    Lease expires on
    
    June 1983
    
    $
    102,768Offices
    
    1/31/10 with one610 Alamo Pintado Road
    
    option for fiveSolvang, CA 93463
    
    yearsLease expires on
    
    March 1998
    
    
    Loan Center
    
    1/31/10 with one1992 Mission Drive
    
    option for fiveSolvang, CA 93463
    
    yearsLease expires on
    
    May 1988
    
    
    67,157Pismo Branch
    
    2/9/08 with two831 Oak Park Boulevard
    
    options for fivePismo Beach, CA 93449
    
    years eachLease expires on
    
    May 1991
    
    
    42,839Atascadero Branch
    
    4/30/06 with two7315 El Camino Real
    
    options for fiveAtascadero, CA 93422
    
    years eachLease expires on
    
    July 1992
    
    
    57,393Santa Maria Branch
    
    6/30/07 with three402 E. Main Street
    
    options for fiveSanta Maria, CA 93454
    
    years eachLease expires on
    
    December 1997
    
    
    17,737Buellton Branch
    
    11/2/07 with one234 E. Highway 246, Suite 109
    
    option for fiveBuellton, CA 93427
    
    yearsLease expires on
    
    February 1999
    
    
    72,358Goleta Branch
    
    10/31/08 with three197 North Fairview
    
    options for fiveGoleta, CA 93117
    
    years eachLease expires on
    
    January 2001
    
    
    20,241San Luis Branch
    
    12/31/05 with two1322 Madonna Road
    
    options for fiveSan Luis Obispo, CA 93405
    
    years eachLease expires on
    
    July 2001
    
    
    18,403Nipomo Branch
    
    11/30/05 with three542 W. Teft Road
    
    options for fiveNipomo, CA 93444
    
    years each
 39




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##### Table of Contents



Leased/Owned
    
    
    
    Total Deposits atand
    
    Date Office
    
    December 31, 2004Lease Expiration
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Date
    
    Date
    
    thousands)Storage Area
    
    Month-to-month
    
    June 1992
    
    
    1120 Mission Drive
    
    Lease with noSolvang, CA 93463
    
    expiration dateHuman Resources, Compliance &
Training Room
    
    Lease expires on
    
    March 2000
    
    
    Suite A-4 and A-5
    
    1/31/10 with one1984 Old Mission Drive
    
    option for fiveSolvang, CA 93463
    
    years eachLoan Origination Center
    
    Lease expires on
    
    April 2002
    
    
    Suite B-12
    
    1/31/10 with one1988 Old Mission Drive
    
    option for fiveSolvang, CA 93463
    
    years eachLease expires on
    
    November 2001
    
    
    75,436Harrington Bank
    
    12/31/10 with four6300 Nall Avenue
    
    options for fiveKansas City, KS 66208
    
    years eachHarrington West Financial Group,
Inc.
10801 Mastin Boulevard, Suite 740
    
    Lease expires on
    
    March 1999
    
    
    Overland Park, KS 66210
    
    12/31/05Harrington Wealth Management
Company
10150 Lantern Road, Suite 150
    
    Lease expires on
    
    November 2001
    
    
    Fishers, IN 46038
    
    10/31/06Lease expires on
    
    November 2002
    
    
    37,349Scottsdale Branch
    
    9/30/12 with two10555 North 114th Street, Suite 100
    
    options for fiveScottsdale, AZ 85295
    
    years eachLease expires on
    
    May 2004
    
    
    27,367Ventura Branch
    
    6/30/08 with four1171 S. Victoria Ave., Suite A
    
    options for fiveVentura, CA 93003
    
    years eachAcquisition is inThousand Oaks Branch
    
    Lease in the
    
    process and due to2920 Thousand Oaks Blvd, Suite A
    
    process of being
    
    be complete in MayThousand Oaks, CA 91360
    
    renegotiated.
    
    2005.
    
    
    Arizona
14100 N. Northsight Blvd.
    
    
    
    Improvements inScottsdale, AZ 85260
    
    Owned
    
    process
    
    
    
 40




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##### Table of Contents



Leased/Owned
    
    
    
    Total Deposits atand
    
    Date Office
    
    December 31, 2004Lease Expiration
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Date
    
    Date
    

thousands)Ojai Branch
110 South Ventura Street
Ojai, CA 93023
    
    Owned
    
    November 1997
    
    
    41,076Hanalei Bay Condo
5380 Honiki Road
Princeville, Kauai
    
    Owned
    
    July 1994
    
    
    Metcalf Branch
14300 Metcalf
Overland Park, KS 66223
    
    Owned
    
    December 2003
    
    
    18,058$
    598,182
 
 Item 3. Legal Proceedings We are involved in a variety of litigation matters in the ordinary course of our business and
anticipate that we will become involved in new litigation matters from time to time in the future.
Based on the current assessment of these matters, we do not presently believe that any one of them
or all such matters taken as a whole is likely to have a material adverse impact on our financial
condition, results of operations, cash flows or prospects. However, we will incur legal and
related costs concerning litigation and may from time to time determine to settle some or all of
the cases, regardless of our assessment of our legal position. The amount of legal defense costs
and settlements in any period will depend on many factors, including the status of cases, the
number of cases that are in trial or about to be brought to trial, and the opposing parties
aggressiveness in pursuing their cases and their perception of their legal position. 
 Item 4. Submission of Matters to a Vote of Security Holders. None. 
 PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities. Stock Information On November 12, 2002, the initial public offering of 1,344,000 shares of our common stock was
completed, consisting of 1,168,338 shares sold by us and 175,662 shares sold by certain of our
stockholders. As of March 7, 2005, we had 5,285,084 shares of common stock outstanding and
approximately 122 stockholders of record, which does not include the number of persons or entities
holding stock in nominee or street name through various brokers and banks. 41




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##### Table of Contents



The following table sets forth the high and low sale prices of our common stock for each of
the quarters of 2004 and 2003. Our common stock began trading on the Nasdaq National Market on
November 6, 2002 under the stock symbol HWFG. Quarter Ended
    
    High
    
    
    LowMarch 31, 2003
    
    
    11.99
    
    
    
    11.27June 30, 2003
    
    
    12.98
    
    
    
    11.70September 30, 2003
    
    
    16.15
    
    
    
    12.24December 31, 2003
    
    
    17.65
    
    
    
    15.60March 31, 2004
    
    
    17.95
    
    
    
    13.46June 30, 2004
    
    
    17.65
    
    
    
    16.26September 30, 2004
    
    
    17.63
    
    
    
    15.52December 31, 2004
    
    
    19.63
    
    
    
    17.10
 Dividends In the first quarter, we paid a quarterly dividend of $.08 and, in the second, third and
fourth quarters of 2004, we paid a quarterly dividend of $0.10. Also, on June 28, 2004 a special
dividend of $0.50 was declared. In the first and second quarter of 2003, we declared a quarterly
dividend of $0.032 per share. In the third quarter of 2003, we declared a dividend of $0.064 per
share. In the fourth quarter of 2003, a quarterly dividend of $0.08 was declared. The dividend rate on our common stock and the continued payment of dividends is determined by
our board of directors, which takes into account our consolidated earnings, financial condition,
liquidity and capital requirements, applicable governmental regulations and policies, and other
factors deemed relevant by our board of directors. More specifically, Delaware law provides that a
corporation may make a dividend to its stockholders out of the corporations capital surplus or, in
case there shall be no surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. The holders of our common stock are entitled to receive
and share equally in such dividends as may be declared by our board of directors out of funds
legally available therefore. Our ability to pay dividends may also be dependent on our ability to
receive dividends from Los Padres Bank, which is subject to compliance with federal regulatory
requirements. Additionally, under the terms of our revolving line of credit agreement with
unaffiliated lenders, we cannot declare dividends in an amount exceeding the greater of $450,000 or
40% of our consolidated net income during any fiscal quarter or declare dividends at any time an
event of default has occurred under the revolving line of credit. The ability to declare or pay dividends would also be restricted if the Company deferred
quarterly interest payments due for the subordinated debt of $25.8 million. As of December 31,
2004, all interest payments due were paid in full in accordance with the capital trust securities
agreements. On February 11, 2004, we declared a 6 for 5 stock split in the form of a stock dividend
payable on March 11, 2004 to holders of record on February 25, 2004. Fractional shares distributed
in connection with this stock dividend were paid in cash based on the closing market price on the
record date. 42




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##### Table of Contents



Recent Sales of Unregistered Securities In September 2004, our special purpose business trust, Harrington West Capital Trust II,
issued $10.3 million of trust preferred securities in a private placement offering. In connection
with this transaction, we issued certain junior subordinated debentures and guarantees. We and
Harrington West Capital Trust II relied on the exemption from the registration requirement set
forth in Rule 144A of the Securities Act. 43




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##### Table of Contents



Item 6. Selected Financial Data. (Dollars in Thousands, Except Share and Per Share Data) The following summary presents our selected consolidated financial information at or for the
five years ended December 31, 2004. Financial information at or for each of the five years ended
December 31, 2004 is derived from our audited consolidated financial statements. The selected
historical consolidated financial and other data set forth below should be read in conjunction
with, and is qualified in its entirety by, our historical consolidated financial statements,
including the related notes, included in Item 8 herein. At or For the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Selected Financial Condition Data:Total assets
    
    $
    1,081,330
    
    
    $
    974,799
    
    
    $
    824,331
    
    
    $
    670,323
    
    
    $
    484,969Loans receivable, net
    
    
    598,442
    
    
    
    518,496
    
    
    
    448,050
    
    
    
    449,709
    
    
    
    395,537Securities available for sale
    
    
    431,206
    
    
    
    398,691
    
    
    
    324,530
    
    
    
    181,627
    
    
    
    47,438Securities held to maturity
    
    
    93
    
    
    
    222
    
    
    
    2,368
    
    
    
    2,617
    
    
    
    2,687Trading account assets
    
    
    1,046
    
    
    
    2,111
    
    
    
    1,934
    
    
    
    2,751
    
    
    
    3,964Deposits
    
    
    598,182
    
    
    
    570,697
    
    
    
    525,271
    
    
    
    520,858
    
    
    
    355,705Federal Home Loan Bank advances
    
    
    316,000
    
    
    
    262,500
    
    
    
    235,000
    
    
    
    96,403
    
    
    
    91,000Note payable
    
    
    
    
    
    
    
    
    
    
    11,300
    
    
    
    18,000
    
    
    
    9,000Securities sold under repurchase agreements
    
    
    79,689
    
    
    
    65,728
    
    
    
    517
    
    
    
    365
    
    
    
    Other debt
    
    
    25,774
    
    
    
    15,464
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    52,660
    
    
    
    48,076
    
    
    
    42,472
    
    
    
    30,144
    
    
    
    25,557Shares outstanding
    
    
    5,278,934
    
    
    
    5,206,109
    
    
    
    5,193,509
    
    
    
    4,025,171
    
    
    
    3,896,147Selected Income Statement Data:Interest income
    
    $
    52,266
    
    
    $
    46,434
    
    
    $
    43,493
    
    
    $
    41,168
    
    
    $
    39,143Interest expense
    
    
    22,718
    
    
    
    20,308
    
    
    
    21,921
    
    
    
    25,817
    
    
    
    27,245Net interest income
    
    
    29,548
    
    
    
    26,126
    
    
    
    21,572
    
    
    
    15,351
    
    
    
    11,898Provision (credit) for loan losses
    
    
    650
    
    
    
    790
    
    
    
    391
    
    
    
    1
    
    
    
    42Net interest income after provision (credit) for loan losses
    
    
    28,898
    
    
    
    25,336
    
    
    
    21,181
    
    
    
    15,350
    
    
    
    11,856Other income:Income (loss) from trading account assets
    
    
    1,261
    
    
    
    2,647
    
    
    
    (31
    )
    
    
    436
    
    
    
    (2,754
    )Gain on sale of deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,923Gain (loss) on sale of loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    (601
    )(Loss) on extinguishment of debt
    
    
    (189
    )
    
    
    (1,610
    )
    
    
    
    
    
    
    
    
    
    
    Other gain (loss)
    
    
    (57
    )
    
    
    30
    
    
    
    (350
    )
    
    
    (139
    )
    
    
    Banking fee income(1)
    
    
    3,148
    
    
    
    4,108
    
    
    
    2,531
    
    
    
    1,135
    
    
    
    554Other expenses:Salaries and employee benefits
    
    
    10,522
    
    
    
    10,086
    
    
    
    7,847
    
    
    
    5,444
    
    
    
    3,942Premises and equipment
    
    
    3,153
    
    
    
    2,722
    
    
    
    2,197
    
    
    
    1,631
    
    
    
    1,357Other expenses(2)
    
    
    5,741
    
    
    
    5,041
    
    
    
    4,713
    
    
    
    3,242
    
    
    
    3,097Income before income taxes
    
    
    13,645
    
    
    
    12,662
    
    
    
    8,574
    
    
    
    6,534
    
    
    
    4,582Income taxes
    
    
    5,436
    
    
    
    5,249
    
    
    
    3,529
    
    
    
    2,732
    
    
    
    2,001Net income
    
    $
    8,209
    
    
    $
    7,413
    
    
    $
    5,045
    
    
    $
    3,802
    
    
    $
    2,581Common Stock Summary:Diluted earnings per share
    
    $
    1.46
    
    
    $
    1.36
    
    
    $
    1.15
    
    
    $
    0.93
    
    
    $
    0.65Dividends per share
    
    
    0.88
    
    
    
    0.21
    
    
    
    0.08
    
    
    
    0.09
    
    
    
    0.25Stockholders equity per share
    
    
    9.98
    
    
    
    9.23
    
    
    
    8.18
    
    
    
    7.49
    
    
    
    6.56Diluted weighted average shares outstanding
    
    
    5,603,680
    
    
    
    5,455,002
    
    
    
    4,370,021
    
    
    
    4,076,262
    
    
    
    3,998,228Selected Operating Data(3):Performance Ratios and Other Data:Return on average assets
    
    
    0.80
    %
    
    
    0.82
    %
    
    
    0.68
    %
    
    
    0.66
    %
    
    
    0.53
    %Return on average equity
    
    
    16.30
    
    
    
    16.37
    
    
    
    15.36
    
    
    
    13.65
    
    
    
    10.47Equity to assets
    
    
    4.87
    
    
    
    4.93
    
    
    
    5.15
    
    
    
    4.50
    
    
    
    5.27Interest rate spread (4)
    
    
    2.77
    
    
    
    2.90
    
    
    
    2.97
    
    
    
    2.55
    
    
    
    2.02Net interest margin (4)
    
    
    2.93
    
    
    
    3.07
    
    
    
    3.14
    
    
    
    2.81
    
    
    
    2.30Average interest-earning assets to average interest-bearing
liabilities
    
    
    107.09
    
    
    
    107.03
    
    
    
    105.21
    
    
    
    105.51
    
    
    
    105.17Total noninterest expenses to average total assets
    
    
    1.88
    
    
    
    2.04
    
    
    
    1.97
    
    
    
    1.79
    
    
    
    1.54Efficiency ratio(5)
    
    
    59.38
    
    
    
    59.04
    
    
    
    61.22
    
    
    
    62.58
    
    
    
    67.43
 44




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At or For the Year Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Asset Quality Ratios(6):Non-performing assets and troubled debt
restructurings to total assets
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.03
    
    
    
    0.07
    
    
    
    0.69Non-performing loans and troubled debt
restructurings to total loans
    
    
    0.02
    
    
    
    0.00
    
    
    
    0.05
    
    
    
    0.11
    
    
    
    0.84Allowance for loan losses to total loans
    
    
    0.87
    
    
    
    0.88
    
    
    
    0.83
    
    
    
    0.83
    
    
    
    0.79Net charge-offs to average loans outstanding
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.08
    
    
    
    
    
    
    
    Bank Regulatory Capital Ratios:Tier 1 risk-based capital ratio
    
    
    10.37
    
    
    
    10.20
    
    
    
    11.14
    
    
    
    10.76
    
    
    
    10.55Total risk-based capital ratio
    
    
    11.13
    
    
    
    10.99
    
    
    
    11.97
    
    
    
    11.72
    
    
    
    11.56Tier 1 leverage capital ratio
    
    
    6.68
    
    
    
    6.08
    
    
    
    6.11
    
    
    
    6.27
    
    
    
    6.76
   (1)
    
    Consists of service charges, wholesale mortgage banking income, other commissions and fees
and other miscellaneous noninterest income.(2)
    
    Consists of computer services, consulting fees, marketing and other miscellaneous noninterest
expenses.(3)
    
    With the exception of return on average assets and return on average equity, all ratios are
based on average daily balances.(4)
    
    Interest rate spread represents the difference between the weighted average yield on
interest-earning assets and the weighted average rate on interest-bearing liabilities. Net
interest margin represents net interest income as a percentage of average interest-earning
assets.(5)
    
    Efficiency ratio represents noninterest expenses as a percentage of the aggregate of net
interest income before provision for loan losses and noninterest income, excluding gains on
sales of securities, deposits and loans.(6)
    
    Non-performing loans generally consist of non-accrual loans and non-performing assets
generally consist of non-performing loans and real estate acquired by foreclosure or
deed-in-lieu thereof. 
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations. 
 Mission Our mission is to develop diversified and highly profitable community-focused, banking
operations in the markets of the Central Coast of California, the Kansas City metro, and the
Phoenix/Scottsdale metro. Although these markets are geographically dispersed, we have considerable
market knowledge of each of these areas, local management with extensive experience in banking and
the particular market, relationship development potential due to our ties to the communities, and
each market offers favorable demographic and economic characteristics. All of these banking
operations are operated under the Los Padres Bank, FSB charter so that we can gain operating
efficiencies from centralized administration and operating systems. However, each regions banking
operation is distinct to its market and its clientele, and lead by a local management team

responsible for developing and expanding the banking operations on a profitable basis. The Kansas
City banking offices operate under the Harrington Bank (dba) brand name, and the California and
Arizona offices operate under the Los Padres Bank brand name. 
 Multiple Market Strategy We believe this multiple market banking strategy provides the following benefits to our
shareholders: 1. Diversification of the loan portfolio and economic and credit risk. 2. Options to capitalize on the most favorable growth markets. 3. The capability to deploy the Companys diversified product mix and emphasize those
products that are best suited for the market. 45




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4. The ability to price products strategically among the markets in an attempt to maximize
profitability. We plan to grow the banking operations in these markets opportunistically and expect the
opening of two to three banking offices every 18 months through new branching. We evaluate
financial institution acquisition opportunities but are value oriented. Acquisitions are expected
to be accretive to earnings per share within a 12-month period. Since 1997, we have grown from 4 banking offices to 15 banking offices after the completion of
the Thousand Oaks deposit acquisition and the opening of the Scottsdale Airpark office by mid 2005.
We will have 11 full service banking offices on the Central Coast of California from Ventura to
Atascadero along Highway 101, 2 banking offices in Johnson County, Kansas in the fastest growing
area of the Kansas City metro, and 2 offices in Scottsdale, Arizona, when the second office is
completed and opened in the Scottsdale Airpark in early 2005. We are working on additional
expansion opportunities in each market. 
 Product Line Diversification We have broadened our product lines over the last 5 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. 
 Modern Financial Skills We believe we have considerable expertise in investment and asset liability management from
the CEOs background in this field for 20 years, wherein he spent 13 years consulting on risk
management practices with banking institutions and advising on billions of mortgage assets managed
on a short duration basis. We attempt to control interest rate risk to a low level through the use
of interest rate risk management tools, and we utilize excess capital in a low duration and high
credit quality investment portfolio of largely mortgage related securities to enhance our earnings.
Our goal is to produce a pre-tax return on these investments of 1.25% to 1.50% over the related
funding sources. We believe our ability to price loans and investments on an option-adjusted spread
basis and then manage the interest rate risk of longer term, fixed rate loans allows us to compete
effectively against other institutions, who can not offer these products due to their inability to
manage the interest rate risk. 
 Control Banking Risks We seek to control banking risks. We have established a disciplined credit evaluation and
underwriting environment that emphasizes the assessment of collateral support, cash flows,
guarantor support, and stress testing. We manage operational risk through stringent policies,
procedures, and controls and interest rate risk through our modern financial and hedging skills. 46




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Performance Measurement We evaluate our performance based upon the primary measures of return on average equity, which
we are trying to maintain in the mid teens, earnings per share growth, and additional franchise
value creation through the growth of deposits, loans and wealth management assets. 
 Profitability Drivers The factors that we expect to drive our profitability in the future are as follows:  1.
    Changing the mix of our loans to higher risk-adjusted spread earning categories
such as business lending, commercial real estate lending, small tract construction and
construction-to-permanent loan lending, and selected consumer lending activities such
as home equity line of credit loans.The following pie charts illustrate the change in the loan mix to higher spread earning
loan categories from December 31, 2000 to December 31, 2004. At December 31, 2000,
lower margin, single-family loans were 50% of the loan portfolio compared to 17% at
December 31, 2004. Commercial real estate loans are 43% of the loan portfolio as of
December 31, 2004 versus 27% of the loan portfolio in December 31, 2000. Commercial and
industrial loans have increased to 12% of our loan portfolio as of December 31, 2004
from just 1% in December 31, 2000. (PIE CHART)
    
    (PIE CHART)
 47




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2.
    Growing our non-costing consumer and commercial deposits and continuing to change the
mix of deposits to less time based certificates of deposit. This strategy is expected
to lower our deposit cost and increase our net interest margin. We have emphasized the
development of low cost business accounts and our full-service, free checking and money
market accounts for consumers. As such, we have increased these accounts from 16% to
29% of deposits from December 31, 2000 to December 31, 2004.  (PIE CHART)
    
    (PIE CHART)
  3.
    Diversifying and growing our banking fee income through existing and new fee
income sources such as our overdraft protection program and other deposit fees, loan
fee income from mortgage banking, prepayment penalty fees and other loan fees,
Harrington Wealth Management trust and investment fees, and other retail banking fees.The following chart shows the comparison of banking fee income sources for 2004, 2003
and 2002. (Dollars in thousands)December
    
    
    
    December
    
    
    
    
    
    
    
    
    December
    
    
    
    December2004
    
    
    
    2003
    
    
    
    %
    
    
    
    2003
    
    
    
    2002
    
    
    
    %Banking Fee Type
    
    
    YTD
    
    
    
    YTD
    
    
    
    Change
    
    
    
    YTD
    
    
    
    YTD
    
    
    
    ChangeMortgage Brokerage
Fees and Prepayment
Penalties
    
    
    $
    1,290
    
    
    
    $
    2,566
    
    
    
    
    (49.7
    %)
    
    
    $
    2,566
    
    
    
    $
    1,370
    
    
    
    
    87.3
    %Other Loan Fees
    
    
    
    226
    
    
    
    
    223
    
    
    
    
    1.3
    %
    
    
    
    223
    
    
    
    
    137
    
    
    
    
    62.8
    %Deposit, Other
Retail Banking Fee
& Other Income
    
    
    
    1,018
    
    
    
    
    863
    
    
    
    
    18.0
    %
    
    
    
    863
    
    
    
    
    612
    
    
    
    
    41.0
    %Harrington Wealth
Management Fees
    
    
    
    614
    
    
    
    
    456
    
    
    
    
    34.6
    %
    
    
    
    456
    
    
    
    
    412
    
    
    
    
    10.7
    %Total
    
    
    $
    3,148
    
    
    
    $
    4,108
    
    
    
    
    (23.4
    %)
    
    
    $
    4,108
    
    
    
    $
    2,531
    
    
    
    
    62.3
    %
 48




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Over the last three years, we have increased our recurring deposit and retail banking
fee income and Harrington Wealth Management fees. However, mortgage brokerage and
prepayment penalty fees have been very volatile. In 2003, these fees were at record levels
due to the unprecedented decline in interest rates and the surge of mortgage refinancing
activity. Although we will continue to provide mortgage brokerage services, we are
emphasizing purchase mortgage originations though our banking platform. (BAR CHART)  4.
    Achieving a high level of performance on our investment portfolio by earning a
pre-tax total return over one month LIBOR of approximately 1.25% to 1.50% per annum.
With our skills in investment and risk management, we utilize excess equity capital by
investing in a high credit quality, mortgage and related securities portfolio managed
to a short duration of three to six months. From 2001 to 2004, the investment
portfolios performance has exceeded our goals and has contributed to our record profit
performance. The chart below illustrates that the total excess return of the
investment portfolio (the total return over one month LIBOR) over the last five years
with the net returns exceeding 2.0% for the last four years and our goal of 1.25% to
1.50%. 49




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(BAR CHART)  5.
    Controlling interest rate risk of the institution and seeking high credit
quality of the loan and investment portfolios. The company maintains rigorous loan
underwriting standards and credit risk management and review process. As such,
non-performing asset levels have been low with corresponding low loan charge-offs. (BAR CHART)  Together, we believe these factors will contribute to more consistent and growing
profitability. The effect of these factors on our financial results is discussed further in
the following sections. 50




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Critical Accounting Policies General. The following discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, and the notes thereto, which have
been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires us to make a number
of estimates and assumptions that affect the reported amounts and disclosures in the consolidated
financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon
historical experience and various other factors and circumstances. We believe that our estimates
and assumptions are reasonable in the circumstances; however, actual results may differ
significantly from these estimates and assumptions, which could have a material impact on the
carrying value of assets and liabilities at the balance sheet dates and our results of operations
for the reporting periods. The financial information contained in our consolidated financial statements is, to a
significant extent, based on approximate measures of the financial effects of transactions and
events that have already occurred. A variety of factors could affect the ultimate value that is
obtained either when recognizing income or expense, recovering an asset or relieving a liability.
We use historical loss factors to determine the inherent loss that may be present in our loan
portfolio. Actual losses could differ significantly from the historical factors that we use. We
also calculate the fair value of our interest rate contracts and securities based on market prices
and the expected useful lives of our depreciable assets. We enter into interest rate contracts
that are classified as trading account assets or to accommodate our own risk management purposes.
The interest rate contracts are generally interest swaps, caps, floors and futures contracts,
although we could enter into other types of interest rate contracts. We value these contracts at
fair value, using readily available, and market quoted prices. We have not historically entered
into derivative contracts, which relate to credit, equity, commodity, energy or weather-related
indices. Generally accepted accounting principles themselves may change from one previously
acceptable method to another method. Although the economics of our transactions would be the same,
the timing of events that would impact our transactions could change. As of December 31, 2004, we
have not created any special purpose entities to securitize assets or to obtain off-balance sheet
funding. Although we have sold loans in past years, those loans have been sold to third parties
without recourse, subject to customary representations and warranties. Allowance for loan losses.The allowance for loan losses is an estimate of the losses that
may be sustained in our loan portfolio. The allowance is based on two principles of accounting:
(i) Statement of Financial Accounting Standards, or SFAS, No. 5, Accounting for Contingencies,
which requires that losses be accrued when they are probable of occurring and estimable; and (ii)
SFAS No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No. 118, Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures, which requires that losses
be accrued based on the differences between the value of collateral, present value of future cash
flows or values that are observable in the secondary market and the loan balance. Our allowance
for loan losses has four components: (i) an allocated allowance for specifically identified
problem loans, (ii) a formula allowance for non-homogenous loans, (iii) an allocated allowance for
large groups of smaller balance homogenous loans and (iv) an unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the actual events occur.
The formula allowance uses a model based on historical losses as an indicator of future losses and
as a result could differ from the losses incurred in the future; however, since this history is
updated with the most recent loss information, the differences that might otherwise occur may be
mitigated. The specific allowance uses various techniques to arrive at an estimate of loss.
Historical loss information, discounted cash flows, fair market value of collateral and secondary
market information are all used to estimate those losses. The use of these values is inherently
subjective and our actual losses could be greater or less than the estimates. The unallocated
allowance captures losses that are attributable to various economic events, industry or geographic
sectors whose 51




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impact on the portfolio have occurred but have yet to be recognized in either the formula or
specific allowances. Trading and Investment Portfolio. Substantially all of our securities are classified as
available for sale securities and, pursuant to Statement of Financial Accounting Standards (SFAS)
No. 115, are reported at fair value with unrealized gains and losses included in stockholders
equity. We invest in a portfolio of mortgage-backed and related securities, interest rate
contracts, U.S. Government agency securities and, to a much lesser extent, equity securities. The
Company has also entered into various total return swaps in an effort to enhance income, where cash
flows are based on the level and changes in the yield spread on investment grade commercial
mortgage backed security indexes relative to similar duration LIBOR swap rates. These swaps do not

qualify for hedge accounting treatment and are included in the trading account assets and are
reported at fair value with realized and unrealized gains and losses on these instruments
recognized in income (loss) from trading account assets, pursuant to Statement of Financial
Accounting Standards (SFAS) No. 115. Hedging Activity.Accounting for Derivative Instruments and Hedging Activities was
implemented on January 1, 2001. SFAS No. 133 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. 
 Results of Operations Summary of Earnings. We reported net income for the year ended December 31, 2004 of $8.2
million, compared to $7.4 million and $5.0 million for the years ended December 31, 2003 and 2002.
Our net income improved by $796 thousand or 10.7% during 2004 as compared to 2003 and $2.4 million
or 46.9% in 2003 as compared to 2002. On a diluted earnings per share basis, we earned $1.46,
$1.36, and $1.15 for the years ended December 31, 2004, 2003 and 2002, respectively. The Companys earnings performance continues to be driven by growth in net interest income
from relatively stable margins and loan and investment portfolio growth, banking fee income,
trading profits from our investment activities, and operating expense control relative to our
planned expansion of banking offices. Net Interest Income. Net interest income is determined by our interest rate margin, which is
the difference between the yields earned on our interest-earning assets and the rates paid on our
interest-bearing liabilities and the relative amounts of interest-earning assets and
interest-bearing liabilities. Net interest income increased by $3.6 million or 14.1% to $28.9
million during the year ended December 31, 2004 over 2003. The increase in net interest income is
partly due to a $156.6 million or 18.4% increase in the average balance of interest-earning assets,
while the interest rate margin decreased slightly by 14 basis points to 2.93% for 2004 from 3.07%
for 2003. The decline in net interest margin reflects the slight lag in the repricing of floating
rate borrowings and floating rate loans and hedges, and the prepayment of higher rate loans. We
believe our hedging activities will result in our maintaining relatively stable margins over 52




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time (refer to the Asset and Liability Management section of this discussion for a detailed
discussion of what our strategies are for hedging of interest rate exposure and why we believe that
our management of interest rate fluctuations give us a competitive advantage over other financial
institutions). Net interest income increased by $4.2 million or 19.6% to $25.3 million during the year ended
December 31, 2003 over 2002. The increase is partly due to a $164.3 million or 23.9% increase in
the average balance of interest-earning assets, while the interest rate margin decreased slightly
by 7 basis points to 3.07% for 2003 from 3.14% for 2002. The decline in net interest margin
reflects the growth in lower margin investment securities and the lag-time in the repricing of
assets versus liabilities. 53




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Average Balances, Net Interest Income, Yields Earned and Rates Paid The following table sets forth, for the periods indicated, information regarding (i) the
total dollar amount of interest income from interest-earning assets and the resultant average
yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the
resultant average rate; (iii) net interest income; (iv) interest rate spread; and (v) net interest
margin. No tax equivalent adjustments were made during the periods presented. Information is
based on average daily balances during the indicated periods, except noninterest-bearing deposits
information is based on average balances for all periods. Year Ended December 31,2004
    
    
    2003
    
    
    2002Average
    
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    Cost(Dollars in Thousands)Interest-earning assets:Loans receivable(1)
    
    $
    561,665
    
    
    $
    36,166
    
    
    
    6.44
    %
    
    $
    490,174
    
    
    $
    33,147
    
    
    
    6.76
    %
    
    $
    430,087
    
    
    $
    31,500
    
    
    
    7.32
    %Securities and trading account
assets(2)
    
    
    419,716
    
    
    
    15,439
    
    
    
    3.68
    
    
    
    331,437
    
    
    
    12,517
    
    
    
    3.78
    
    
    
    233,053
    
    
    
    11,336
    
    
    
    4.86FHLB stock
    
    
    14,197
    
    
    
    573
    
    
    
    4.04
    
    
    
    12,969
    
    
    
    579
    
    
    
    4.46
    
    
    
    7,622
    
    
    
    422
    
    
    
    5.54Cash and cash equivalents(3)
    
    
    12,318
    
    
    
    88
    
    
    
    0.71
    
    
    
    16,756
    
    
    
    191
    
    

    
    1.14
    
    
    
    16,233
    
    
    
    235
    
    
    
    1.45Total interest-earning assets
    
    
    1,007,896
    
    
    
    52,266
    
    
    
    5.18
    
    
    
    851,336
    
    
    
    46,434
    
    
    
    5.45
    
    
    
    686,995
    
    
    
    43,493
    
    
    
    6.33Noninterest-earning assets
    
    
    24,570
    
    
    
    
    
    
    
    
    
    
    
    22,263
    
    
    
    
    
    
    
    
    
    
    
    19,201Total assets
    
    $
    1,032,466
    
    
    
    
    
    
    
    
    
    
    $
    873,599
    
    
    
    
    
    
    
    
    
    
    $
    706,196Interest-bearing liabilities:Deposits:NOW and money market
accounts
    
    $
    120,353
    
    
    
    1,154
    
    
    
    0.96
    
    
    $
    128,478
    
    
    
    1,392
    
    
    
    1.08
    
    
    $
    104,355
    
    
    
    1,853
    
    
    
    1.78Passbook accounts and
certificates of deposit
    
    
    442,679
    
    
    
    9,475
    
    
    
    2.14
    
    
    
    385,314
    
    
    
    8,985
    
    
    
    2.33
    
    
    
    390,034
    
    
    
    12,178
    
    
    
    3.12Total deposits
    
    
    563,032
    
    
    
    10,629
    
    
    
    1.89
    
    
    
    513,792
    
    
    
    10,377
    
    
    
    2.02
    
    
    
    494,389
    
    
    
    14,031
    
    
    
    2.84FHLB advances(4)
    
    
    284,977
    
    
    
    9,285
    
    
    
    3.26
    
    
    
    233,320
    
    
    
    8,496
    
    
    
    3.64
    
    
    
    140,561
    
    
    
    7,198
    
    
    
    5.12Reverse repurchase agreements
    
    
    75,541
    
    
    
    1,981
    
    
    
    2.62
    
    
    
    35,468
    
    
    
    932
    
    
    
    2.63
    
    
    
    1,017
    
    
    
    12
    
    
    
    1.22Other borrowings(5)
    
    
    17,623
    
    
    
    823
    
    
    
    4.67
    
    
    
    12,856
    
    
    
    503
    
    
    
    3.91
    
    
    
    17,019
    
    
    
    680
    
    
    
    3.99Total interest-bearing liabilities
    
    
    941,173
    
    
    
    22,718
    
    
    
    2.41
    
    
    
    795,436
    
    
    
    20,308
    
    
    
    2.55
    
    
    
    652,986
    
    
    
    21,921
    
    
    
    3.36Noninterest-bearing deposits
    
    
    31,563
    
    
    
    
    
    
    
    
    
    
    
    21,551
    
    
    
    
    
    
    
    
    
    
    
    14,235Noninterest-bearing liabilities
    
    
    9,358
    
    
    
    
    
    
    
    
    
    
    
    11,338
    
    
    
    
    
    
    
    
    
    
    
    2,666Total liabilities
    
    
    982,094
    
    
    
    
    
    
    
    
    
    
    
    828,325
    
    
    
    
    
    
    
    
    
    
    
    669,887Stockholders equity
    
    
    50,372
    
    
    
    
    
    
    
    
    
    
    
    45,274
    
    
    
    
    
    
    
    
    
    
    
    36,309Total liabilities and stockholders
equity
    
    $
    1,032,466
    
    
    
    
    
    
    
    
    
    
    $
    873,599
    
    
    
    
    
    
    
    
    
    
    $
    706,196Net interest-earning assets
(liabilities)
    
    $
    66,723
    
    
    
    
    
    
    
    
    
    
    $
    55,900
    
    
    
    
    
    
    
    
    
    
    $
    34,009Net interest income/interest rate
spread
    
    
    
    
    
    $
    29,548
    
    
    
    2.77
    
    
    
    
    
    
    $
    26,126
    
    
    
    2.90
    
    
    
    
    
    
    $
    21,572
    
    
    
    2.97Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.93
    
    
    
    
    
    
    
    
    
    
    
    3.07
    
    
    
    
    
    
    
    
    
    
    
    3.14Ratio of average interest-earnings
assets to average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    107.09
    
    
    
    
    
    
    
    
    
    
    
    107.03
    
    
    
    
    
    
    
    
    
    
    
    105.21
   (1)
    
    Includes non-accrual loans. Interest income includes fees earned on loans originated.(2)
    
    Consists of securities classified as available for sale and held to maturity and trading
account assets.(3)
    
    Consists of cash and due from banks and federal funds sold.(4)
    
    Interest on FHLB advances is net of hedging costs. We use interest rate swaps to hedge the
short-term repricing characteristics of our floating-rate FHLB advances. See Asset and
Liability Management.(5)
    
    Consists of a note payable under a revolving line of credit and the capital trust offering. 54




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##### Table of Contents



Rate/Volume Analysis The following table sets forth the effects of changing rates and volumes on our net interest
income. Information is provided with respect to (i) effects on interest income attributable to
changes in rate (changes in rate multiplied by prior volume); (ii) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate); and (iii) changes
in rate/volume (change in rate multiplied by change in volume). Year Ended December 31, 2004
    
    
    Year Ended December 31, 2003Compared to Year Ended December 31, 2003
    
    
    Compared to Year Ended December 31, 2002Increase (decrease) due to
    
    
    
    
    
    
    Increase (decrease) due toTotal Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total NetRate/
    
    
    Increase
    
    
    
    
    
    
    
    
    
    
    Rate/
    
    
    IncreaseRate
    
    
    Volume
    
    
    Volume
    
    
    (Decrease)
    
    
    Rate
    
    
    Volume
    
    
    Volume
    
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable
    
    $
    (1,584
    )
    
    $
    4,834
    
    
    $
    (231
    )
    
    $
    3,019
    
    
    $
    (2,416
    )
    
    $
    4,401
    
    
    $
    (338
    )
    
    $
    1,647Securities and trading account
Assets (1)
    
    
    (325
    )
    
    
    3,334
    
    
    
    (87
    )
    
    
    2,922
    
    
    
    (2,534
    )
    
    
    4,786
    
    
    
    (1,071
    )
    
    
    1,181FHLB stock
    
    
    (56
    )
    
    
    55
    
    
    
    (5
    )
    
    
    (6
    )
    
    
    (82
    )
    
    
    297
    
    
    
    (58
    )
    
    
    157Cash and cash equivalents (2)
    
    
    (71
    )
    
    
    (51
    )
    
    
    19
    
    
    
    (103
    )
    
    
    (50
    )
    
    
    9
    
    
    
    (3
    )
    
    
    (44
    )Total net change in income on
interest-earning assets
    
    
    (2,036
    )
    
    
    8,172
    
    
    
    (304
    )
    
    
    5,832
    
    
    
    (5,082
    )
    
    
    9,493
    
    
    
    (1,470
    )
    
    
    2,941Interest-bearing liabilities:DepositsNOW and money market
accounts
    
    
    (160
    )
    
    
    (88
    )
    
    
    10
    
    
    
    (238
    )
    
    
    (722
    )
    
    
    428
    
    
    
    (167
    )
    
    
    (461
    )Passbook accounts and
certificates of deposit
    
    
    (738
    )
    
    
    1,338
    
    
    
    (110
    )
    
    
    490
    
    
    
    (3,083
    )
    
    
    (147
    )
    
    
    37
    
    
    
    (3,193
    )Total deposits
    
    
    (898
    )
    
    
    1,250
    
    
    
    (100
    )
    
    
    252
    
    
    
    (3,805
    )
    
    
    281
    
    
    
    (130
    )
    
    
    (3,654
    )FHLB advances (3)
    
    
    (894
    )
    
    
    1,881
    
    
    
    (198
    )
    
    
    789
    
    
    
    (2,080
    )
    
    
    4,751
    
    
    
    (1,373
    )
    
    
    1,298Reverse repurchase agreements
    
    
    (2
    )
    
    
    1,053
    
    
    
    (2
    )
    
    
    1,049
    
    
    
    14
    
    
    
    421
    
    
    
    485
    
    
    
    920Other borrowings (4)
    
    
    97
    
    
    
    187
    
    
    
    36
    
    
    
    320
    
    
    
    (14
    )
    
    
    (166
    )
    
    
    3
    
    
    
    (177
    )Total net change in expense on
interest-bearing liabilities
    
    
    (1,697
    )
    
    
    4,371
    
    
    
    (264
    )
    
    
    2,410
    
    
    
    (5,885
    )
    
    
    5,287
    
    
    
    (1,015
    )
    
    
    (1,613
    )Change in net interest income
    
    $
    (339
    )
    
    $
    3,801
    
    
    $
    (40
    )
    
    $
    3,422
    
    
    $
    803
    
    
    $
    4,206
    
    
    $
    (455
    )
    
    $
    4,554
   (1)
    
    Consists of securities classified as available for sale and held to maturity and trading
account assets.(2)
    
    Consists of cash and due from banks and federal funds sold.(3)
    
    Interest on FHLB advances is net of cash flow hedging costs. We use interest rate swaps to
hedge the short-term repricing characteristics of our floating-rate FHLB advances. See
Asset and Liability Management.(4)
    
    Consists of a note payable under a revolving line of credit and the capital trust offering. 55




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##### Table of Contents



Interest Income. Total interest income increased by $5.8 million or 12.6% for 2004 over
2003 from $46.4 million to $52.3 million. The increase in the average balance of earning assets
offset a decline in the average yield earned on our loan portfolio and securities portfolio
(including trading account assets), which declined by 32 and 10 basis points, respectively, over
the period, to 6.44% and 3.68%, respectively. Total interest income increased by $2.9 million or
6.8% from $43.5 million to $46.4 million in 2003 over 2002. The increase in the average balance of
earning assets more than offset a decline in the average yield earned on our loan portfolio and
securities portfolio (including trading account assets), which declined by 56 and 108 basis points,
respectively, over the period, to 6.76% and 3.78%, respectively. The Federal Reserve Board
maintained a low federal funds rate during 2003, and since a substantial portion of our earning
assets reprice with the general level of interest rates, our average yield on earning assets
declined. Interest Expense. Total interest expense increased by $2.4 million or 11.9% during the year
ended December 31, 2004 over 2003, from $20.3 million to $22.7 million. During 2004, our average
interest-bearing liabilities increased by $145.7 million or 18.3%, due primarily to the increase in
borrowings and repurchase agreements to support our growth and the growth in deposits in new
offices in Ventura, California and Overland Park, Kansas which collected $45.4 million in deposits
during 2004 while the other offices lost $17.9 million in deposits. The average cost of interest
bearing liabilities declined from 2.55% to 2.41% as deposits continued to reprice lower. Total interest expense decreased by $1.6 million or 7.4% from $21.9 million to $20.3 million
in 2003 over 2002. During 2003, our average interest-bearing liabilities increased by $142.5
million or 21.8%, due primarily to the increase in borrowings to support our growth and the new
deposits in our office in Scottsdale, Arizona, which collected $31.3 million in deposits during
2003 while the other offices gained $14.1 million in deposits. The cost of interest bearing
liabilities declined from 3.36% to 2.55% as market interest rates declined markedly in 2003. Provision for Loan Losses. We established provisions for loan losses of $650,000, $790,000,
and $391,000 during the years ended December 31, 2004, 2003, and 2002, respectively. Provisions
for loan losses are charged to income to bring our allowance for loan losses to a level deemed
appropriate by management. For more detailed information regarding the methodology used to
maintain the allowance for loan losses, refer to the Asset Quality section in Item 1  Business.
Our provision for 2004 was affected by higher levels of commercial real estate and commercial and
industrial loans. Other Income. Total other income has fluctuated over the periods presented, due to our
management of our securities portfolio, which is intended to enhance both net interest income as
well as other income by capitalizing on changes in option-adjusted spreads. Other income includes
net gains and losses from our trading activities, extinguishment of debt and other gains and losses
plus banking fee income. 56




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##### Table of Contents



The following table sets forth information regarding other income for the periods shown. Year Ended December 31,2004
    
    
    2003
    
    
    2002(In Thousands)Income (loss) from trading account assets
    
    $
    1,261
    
    
    $
    2,647
    
    
    $
    (31
    )(Loss) on extinguishment of debt
    
    
    (189
    )
    
    
    (1,610
    )
    
    
    Other gain (loss)
    
    
    (57
    )
    
    
    30
    
    
    
    (350
    )Banking fee income (1)
    
    
    3,148
    
    
    
    4,108
    
    
    
    2,531Total other income
    
    $
    4,163
    
    
    $
    5,175
    
    
    $
    2,150
   (1)
    
    Consists primarily of banking fee income such as service charges and fees on deposit
accounts, fees from our trust and investment management services, and other
miscellaneous fees. For the year ended December 31, 2004, total other income amounted to $4.2 million, a
decrease of $1.0 million or 19.6% over the prior year. The decrease in other income in 2004 was
due primarily to the decline in banking fee income related to mortgage brokerage fees of $942,000
and a decrease of prepayment penalties on commercial and multi-family loans of $334,000.
Prepayment penalties and refinancings were lower in 2004 as rates increased over the lows in 2003,
and refinancing activity slowed markedly. Banking fee income did improve for the collection of
deposit fees, which increased by $155,000 or 18.0%, and HWM fees increased by $158,000 or 34.6%
when comparing 2004 to 2003. The $1.3 million of trading gains in 2004 were due to the gains on
the CMBS and asset-backed total return swaps of $603,000 and the realized gain on sale of mortgage
securities of $690,000, which was partially offset by losses of $189,000 related to early
extinguishment of long-term, high-interest FHLB debt with a similar duration to the securities
sold. For the year ended December 31, 2003, total other income amounted to $5.2 million, an increase
of $3.0 million or 140.7% over the prior year. The increase in other income was due primarily to
the increase in banking fee income related to mortgage brokerage fees of $2.0 million and
prepayment penalties on commercial and multi-family loans of $591,000. Banking fee income also
improved in the collection of deposit fees, which increased by $251,000 or 41.0%, and HWM fees
increased by $44,000 or 10.7%, when comparing 2003 to 2002. The $2.6 million of net trading gain
in 2003 were due to the gains on the CMBS total return swaps and fixed-rate mortgage securities,
which was partially offset by losses of $1.6 million related to early extinguishment of long-term,
high-interest FHLB debt with a similar duration of the securities sold. 57




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##### Table of Contents



Other Expenses. The following table sets forth certain information regarding other expenses
for the periods shown. Year Ended December 31,2004
    
    
    2003
    
    
    2002(In Thousands)Salaries and employee benefits
    
    $
    10,522
    
    
    $
    10,086
    
    
    $
    7,847Premises and equipment
    
    
    3,153
    
    
    
    2,722
    
    
    
    2,197Insurance premiums
    
    
    486
    
    
    
    520
    
    
    
    255Marketing
    
    
    427
    
    
    
    320
    
    
    
    260Computer services
    
    
    696
    
    
    
    640
    
    
    
    542Consulting fees
    
    
    1,188
    
    
    
    1,011
    
    
    
    733Office expenses and supplies
    
    
    824
    
    
    
    762
    
    
    
    694Other (1)
    
    
    2,120
    
    
    
    1,788
    
    
    
    2,229Total other expenses
    
    $
    19,416
    
    
    $
    17,849
    
    
    $
    14,757
   (1)
    
    Consists primarily of professional fees, and other miscellaneous expenses. Total other expenses increased by $1.6 million or 8.8% to 19.4 million during the year
ended December 31, 2004 over the prior year ended December 31, 2003, and increased by $3.1 million
to $17.8 million or 21.0% during the year ended December 31, 2003 over 2002. The growth in other
operating expenses has been largely attributed to the expenses required to support the growth of
our banking offices. Over the last year, we have opened banking offices in Ventura, California and
in Overland Park, Kansas. We have also made expenditures in administration and systems to support
its growth and have increased consulting and internal support to implement new corporate governance
regulations, such as the Sarbanes Oxley Act (SOA). Included in other expenses for 2004 $185,000 of
additional consulting expenses related to the implementation of SOA. The principal category of our other expenses is salaries and employee benefits, which
increased by $436,000 or 4.3% during the year ended December 31, 2004, as compared to the prior
year. Salaries and employee benefits increased by $2.2 million or 28.5% during 2003. The
increases during periods ended December 31, 2004 and 2003 over the prior years were primarily due
to the hiring of additional employees in connection with the opening of new branch offices in
Overland Park, Kansas in the end of 2003 and the Ventura, California location in the middle of
2004, together with our general growth in operations. In 2003, commission expense to loan officers
increased by $746,000 or 66.2% in 2003 over 2002 due to the strong loan origination volumes in
2003. Premises and equipment expenses increased by $431,000 or 15.8% during the year ended December
31, 2004, as compared to the prior year, and increased by $525,000 or 23.9% during 2003. The
increase in premises and equipment expense during the year ended December 31, 2004 and 2003 was
primarily due to the banking office openings and general growth in operations. We have contracted with Smith Breeden to provide investment advisory services and interest
rate risk analysis. Certain of our directors are also principals of Smith Breeden. The consulting
fees paid by us to Smith Breeden during the years ended December 31, 2004, 2003 and 2002, amounted
to $412,000, $365,000 and $325,000. 58




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##### Table of Contents



The increases in miscellaneous other expenses since 2002, primarily reflects our growth in our
number of offices over the periods as well as expenses associated with our public company status
and new corporate governance regulations. Income Taxes. We incurred income tax expense of $5.4 million, $5.3 million and $3.5 million
during the years ended December 31, 2004, 2003 and 2002. The amount of our income tax expense is a
function of the amount of our income before income taxes during the periods presented. Our
effective tax rate amounted to 39.8%, 41.5% and 41. 2%, the years ended December 31, 2004, 2003 and
2002. The companys overall tax rate declined in 2004 due to the apportioning of state income tax
to states with lower income tax rates. 
 Changes in Financial Condition General. At December 31, 2004, our total assets amounted to $1.1 billion, compared to $974.8
million at December 31, 2003. The increase in total assets was primarily attributable to an
increase in net loans receivable and securities classified as available for sale. At December 31,
2004, our total liabilities amounted to $1.0 billion, compared to $926.7 million at December 31,
2003. Cash and Cash Equivalents. Cash and cash equivalents, consisting of cash and due from banks
and federal funds sold, amounted to $13.2 million at December 31, 2004, and $22.9 million at
December 31, 2003. We manage our cash and cash equivalents based upon our operating, investing and
financing activities. We generally attempt to invest our excess liquidity into higher yielding
assets such as loans or securities. See Liquidity and Capital Resources. Securities. In order to limit our credit risk exposure and to earn an incremental income, we
maintain a significant portion of our assets in various types of securities, consisting primarily
of investment grade mortgage-backed securities and CMOs, and REMICs, which we collectively refer to
as mortgage-backed and related securities. Our securities portfolio also includes, to a lesser
extent, U.S. Government securities. At December 31, 2004, our securities portfolio, which is
comprised of securities classified as available for sale and held to maturity, amounted to $431.3
million or 39.9% of our total assets. Mortgage-backed and related securities, which are the
principal components of our securities portfolio, often carry lower yields than traditional
mortgage loans. These types of securities, however, generally increase the quality of our assets
by virtue of the securities underlying insurance or guarantees, require less capital under
risk-based regulatory capital requirements than non-insured or non-guaranteed mortgage loans, are
more liquid than individual mortgage loans, which enhances our ability to actively manage our
portfolio, and may be used to collateralize borrowings or other obligations we incur. Securities classified as available for sale, which consist of mortgage-backed and related
securities, amounted to $431.2 million at December 31, 2004 and $398.7 million at December 31,
2003. The $32.5 million or 8.2% increase during the year ended December 31, 2004 was primarily due
to favorable market opportunities for these securities. Securities classified as held to maturity,
consisting of mortgage-backed and U.S. Government and agency securities, remained relatively stable
at the end of the periods presented, amounting to $93,000 at December 31, 2004 and $222,000 at
December 31, 2003. The decrease of $129,000 was due primarily to the maturity of a government
security. Trading Account Assets.We also classify certain mortgage-backed and related securities and
equity securities as trading securities in accordance with SFAS No. 115 and enter into interest
rate contracts that do not qualify for hedge accounting treatment. These assets are collectively
referred to as trading account assets. Trading account assets amounted to $1.0 million at December
31, 2004 and $2.1 million at December 31, 2003. At December 31, 2004, of the $1.0 million of
trading account assets, $388,000 consisted of mortgage-
backed securities, $581,000 consisted of equity securities and $77,000 of unrealized gains
associated with the $120.0 million notional amount of CMBS total return swaps. At December 31,
2003, of the $2.1 million of 59




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##### Table of Contents



trading account assets, $1.5 million consisted of mortgage-backed and
related securities, $450,000 consisted of equity securities and $166,000 of unrealized gains
associated with the $100.0 million notional amount of CMBS total return swaps. Loans Receivable.At December 31, 2004, loans receivable, net of our allowance for loan
losses, amounted to $598.4 million or 55.3% of total assets, as compared to $518.5 million or 53.2%
of total assets at December 31, 2003. The $79.9 million or 15.4% increase in the loan portfolio
during 2004, and the related loan mix change to higher spread earning loans was due to our emphasis
on commercial real estate, commercial and industrial, and multifamily mortgage loans and Los Padres
Banks strategy to broker for third parties substantially all new single-family mortgage
originations in order to generate fee income. Allowance for Loan Losses.At December 31, 2004, our allowance for loan losses totaled $5.2
million, compared to $4.6 million at December 31, 2003. At December 31, 2004, our allowance for
loan losses represented approximately 0.87% of the total loan portfolio as compared to 0.88% at
December 31, 2003. The increase in our allowance for loan losses during the periods reflects the
growth of our loan portfolio and the mix change to business and commercial mortgage loans. We
establish reserves for loan losses based on the nature of the risk of the comparable historical
loss exposure. Prepaid expenses and other assets.At December 31, 2004, prepaid expenses and other assets
amounted to $3.7 million, as compared to $1.9 million as of December 31, 2003. The $1.9 million or
100.6% increase in prepaid expenses and other assets since December 31, 2003 reflected the increase
in accounts receivable and prepaid expenses due to the additional banking office locations and
expanded operations of the Company. Deposits.At December 31, 2004, deposits totaled $598.2 million, as compared to $570.7
million as of December 31, 2003. The $27.5 million or 4.8% increase in total deposits during the
year ended December 31, 2003 was due to the deposit growth of $45.3 million in our new banking
offices in Ventura, California and Overland Park, Kansas, while we lost deposits in other offices
as we decided not to match competition on high cost, rate sensitive deposits above our borrowing
cost. We attempt to manage our overall funding costs by evaluating all potential sources of funds,
including retail deposits and short and long-term borrowings, and identifying which particular
source will result in an all-in cost to us that meets our funding benchmark. At the same time, Los
Padres Bank has attempted to price the deposits offered through its branch system in order to
promote retail deposit growth and offer a wide array of deposit products to satisfy its customers.
In addition to providing a cost-efficient funding source, these retail deposits provide a source of
fee income and the ability to cross-sell other products or services. Borrowings.Advances from the FHLB of San Francisco amounted to $316.0 million at December
31, 2004 and $262.5 million at December 31, 2003. The increase in FHLB advances in 2004 was due to
our increased utilization of such borrowings to fund our growth in loans and securities. At
December 31, 2004, our FHLB advances had a weighted average interest rate of 2.54%, as compared to
1.49% at December 31, 2003. Our outstanding FHLB advances have maturities ranging from 2005 to
2010. Trust preferred securities amounted to $25.8 at December 31, 2004 compared to $15.5 million at
December 31, 2003. In September 2004, our newly created special purpose business trust, Harrington
West Capital Trust II, issued $10.3 million of trust-preferred securities. The trust preferred
securities bear an interest rate of three month LIBOR plus 1.90%, will mature on October 7, 2034
and have a five-year call feature. A portion of the proceeds from the offering were used to
downstream capital to Los Padres Bank to support its growth in operations and the remaining funds
will be used to support future expansion opportunities. In September 2003, we created a special
purpose business trust, Harrington West Capital Trust
I and issued $15.5 million of trust-preferred securities. The trust preferred securities
issued in September 2003 bear an interest rate of three month LIBOR plus 2.85%, will mature on
October 8, 2033 and have a five- 60




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##### Table of Contents



year call feature. A portion of the proceeds from the offering
were used to pay down our outstanding line of credit. Stockholders Equity. Our stockholders equity amounted to $52.7 million at December 31,
2004, an increase of $4.6 million from December 31, 2003. Net income earned during 2004 largely
contributed to the increase in stockholders equity. Moreover, our stockholders equity was also
affected by unrealized gains and losses on securities and interest rate contracts, dividends paid
on our common stock, and the exercise of stock options. 
 Asset and Liability Management In general, savings institutions are negatively affected by an increase in interest rates to
the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning
assets. The lending activities of savings institutions have historically emphasized the
origination of long-term, fixed-rate loans secured by single-family residences, and the primary
source of funds of such institutions has been deposits, which largely mature or are subject to
repricing within a shorter period of time. This factor has historically caused the income and
market value of portfolio equity (MVPE) of savings institutions to be more volatile than other
financial institutions. MVPE is defined as the net present value of the cash flows from an institutions existing
assets, liabilities and off-balance sheet instruments. The MVPE is estimated by valuing our
assets, liabilities and off-balance sheet instruments under various interest rate scenarios. The
extent to which assets gain or lose value in relation to the gains or losses of liabilities
determines the appreciation or depreciation in equity on a market value basis. MVPE analysis is
intended to evaluate the impact of immediate and sustained interest rate shifts of the current
yield curve upon the market value of the current balance sheet. While having liabilities that
reprice more frequently than assets is generally beneficial to net interest income and MVPE in
times of declining interest rates, such an asset/liability mismatch is generally detrimental during
periods of rising interest rates. Our management believes that its asset and liability management strategy, as discussed below,
provides us with a competitive advantage over other financial institutions. We believe that our
ability to hedge our interest rate exposure through the use of various interest rate contracts
provides us with the flexibility to acquire loans structured to meet our customers preferences and
investments that provide attractive net risk-adjusted spreads, regardless of whether the customers
loan or our investment is fixed-rate or adjustable-rate or short-term or long-term. Similarly, we
can choose a cost-effective source of funds and subsequently engage in an interest rate swap or
other hedging transaction so that the interest rate sensitivities of our interest-earning assets
and interest-bearing liabilities are more closely matched. Our asset and liability management strategy is formulated and monitored by the board of
directors of Los Padres Bank. The board of directors written policies and procedures are
implemented by the Asset and Liability Committee of Los Padres Bank (ALCO), which is comprised of
Los Padres Banks chief executive officer, president/chief financial officer, principal accounting
officer, director of financial reporting 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. 61




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Smith Breeden provides consulting services to us regarding, among other things, the selection
of our investments and borrowings, the pricing of loans and deposits, and the use of various
interest rate contracts to reduce interest rate risk. Smith Breeden is a consulting firm, which
renders investment advice and asset and liability management service to financial institutions and
management services to corporations, endowments and funds. Two of our directors are minority
stockholders in and one is an officer of Smith Breeden. The ALCO regularly reviews interest rate risk by utilizing analyses prepared by Smith Breeden
with respect to the impact of alternative interest rate scenarios on net interest income and on Los
Padres Banks MVPE. The ALCO also reviews analyses prepared by Smith Breeden concerning the impact
of changing market volatility, prepayment forecast error, and changes in option-adjusted spreads
and non-parallel yield curve shifts. In the absence of our hedging activities, our MVPE would decline as a result of a general
increase in market rates of interest. This decline would be due to the market values of our assets
being more sensitive to interest rate fluctuations than are the market values of our liabilities
due to our investment in and origination of generally longer-term assets which are funded with
shorter-term liabilities. Consequently, the elasticity (i.e.,the change in the market value of an
asset or liability as a result of a change in interest rates) of our assets is greater than the
elasticity of our liabilities. Accordingly, the primary goal of our asset and liability management policy is to effectively
increase the elasticity of our liabilities and/or effectively contract the elasticity of our assets
so that the respective elasticities are matched as closely as possible. This elasticity adjustment
can be accomplished internally by restructuring our balance sheet or externally by adjusting the
elasticities of our assets and/or liabilities through the use of interest rate contracts. Our
strategy is to hedge either internally through the use of longer-term certificates of deposit or
less sensitive transaction deposits and FHLB advances or externally through the use of various
interest rate contracts. External hedging generally involves the use of interest rate swaps, caps, floors, options and
futures. The notional amount of interest rate contracts represents the underlying amount on which
periodic cash flows are calculated and exchanged between counterparties. However, this notional
amount does not necessarily represent the principal amount of securities, which would effectively
be hedged by that interest rate contract. In selecting the type and amount of interest rate contract to utilize, we compare the
elasticity of a particular contract to that of the securities to be hedged. An interest rate
contract with the appropriate offsetting elasticity could have a notional amount much greater than
the face amount of the securities being hedged. We adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,on
January 1, 2001. SFAS No. 133 requires that an entity recognize all interest rate contracts as
either assets or liabilities in the statement of financial condition and measure those instruments
at fair value. If certain conditions are met, an interest rate contract may be specifically
designated as a fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure. The
accounting for changes in the fair value of an interest rate contract (that is, gains and losses)
depends on the intended use of the interest rate contract and the resulting designation. To
qualify for hedge accounting, we must show that, at the inception of the interest rate contracts
and on an ongoing basis, the changes in the fair value of the interest rate contracts are expected
to be highly effective in offsetting related changes in the cash flows of the hedged liabilities.
We have entered into various interest rate swaps for the purpose of hedging certain of our
short-term liabilities. These interest rate swaps qualify for hedge accounting. Accordingly, the
effective portion of the accumulated change in the fair
value of the cash flow hedges is recorded in a separate component of stockholders equity, net
of tax, while the ineffective portion is recognized in earnings immediately. We have also entered
into various interest rate swaps which hedge a portion of our securities portfolio. These swaps do
not qualify for hedge accounting 62




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treatment and are included in the trading account assets and are
reported at fair value with realized and unrealized gains and losses on these instruments
recognized in income (loss) from trading account assets. An interest rate swap is an agreement where one party agrees to pay a fixed rate of interest
on a notional principal amount to a second party in exchange for receiving from the second party a
variable rate of interest on the same notional amount for a predetermined period of time. No
actual assets are exchanged in a swap of this type and interest payments are generally netted.
These swaps are generally utilized by us to synthetically convert floating-rate deposits and
borrowings into fixed-rate liabilities or convert fixed-rate assets into adjustable-rate
instruments, in either case without having to sell or transfer the underlying liabilities or
assets. At December 31, 2004, we held interest rate swaps, which are utilized to hedge liabilities and
which qualify for hedge accounting pursuant to SFAS No. 133 and are included in other assets or
other liabilities. These swap agreements had an aggregate notional amount of $152.0 million and
maturities from January 2006 to October 2014. With respect to these agreements, we make fixed-rate
payments ranging from 2.7% to 6.3% and receive payments based upon three-month LIBOR. These
fixed-pay swaps are used to effectively modify the interest rate sensitivity of a portion of Los
Padres Banks short-term LIBOR correlated borrowings which include short-term deposits, securities
sold under agreements to repurchase and FHLB advances. The interest expense relating to these swaps was $4.1 million, $3.7 million, and $2.0 million
during the years ended December 31, 2004, 2003 and 2002, respectively. This expense is included in
interest expense on FHLB advances in our consolidated statements of earnings. The approximate
market value of these interest rate swaps was an unrealized loss of $4.3 million and $5.9 million
as of December 31, 2004 and 2003, respectively. Effective as of January 1, 2001, these gains and
losses are reflected as a separate component in stockholders equity. Prior to such date, these
gains and losses were not reflected on our statement of financial condition. At December 31, 2004, we did not hold any interest rate swaps as trading account assets,
except for certain interest rate swaps that we utilize in order to enhance our returns and not for
the purpose of interest rate risk management. An interest rate cap or an interest rate floor consists of a guarantee given by the issuer
(i.e., a broker) to the purchaser (i.e., us), in exchange for the payment of a premium. This
guarantee states that if interest rates rise above (in the case of a cap) or fall below (in the
case of a floor) a specified rate on a specified interest rate index, the issuer will pay to the
purchaser the difference between the then current market rate and the specified rate on a notional
principal amount. No funds are actually borrowed or repaid. At December 31, 2004, we did not have any interest rate caps or floors which qualify for hedge
accounting pursuant to SFAS No. 133. Such caps are sometimes used to effectively modify the
interest rate sensitivity of a portion of Los Padres Banks short-term LIBOR correlated
liabilities, which include short-term deposits, securities sold under agreements to repurchase and
FHLB advances. Interest rate futures are commitments to either purchase or sell designated instruments at a
future date for a specified price. Futures contracts are generally traded on an exchange are
marked-to-market daily and are subject to initial and maintenance margin requirements. We
generally use 91-day Eurodollar certificates of deposit contracts (Eurodollar futures contracts)
which are priced off LIBOR as well as Treasury Note and Bond futures contracts. We will from time
to time agree to sell a specified number of contracts at a specified date. To close out a
contract, we will enter into an offsetting position to the original transaction. If interest rates rise, the value of our short futures positions increase. Consequently,
sales of futures contracts serve as a hedge against rising interest rates. At December 31, 2004
and 2003, we did not have any 63




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futures contracts. We had total losses on our futures contracts of
$97,000 for the year ended December 31, 2002. Options are contracts, which grant the purchaser the right to buy or sell the underlying asset
by a certain date for a specified price. Generally, we will purchase options on financial futures
to hedge the changing elasticity exhibited by mortgage loans and mortgage-backed securities. The
changing elasticity results from the ability of a borrower to prepay a mortgage or caps and floors
on the underlying loans. As market interest rates decline, borrowers are more likely to prepay
their mortgages, shortening the elasticity of the mortgages. Consequently, where interest rates
are declining, the value of mortgage loans or mortgage-backed securities will increase at a slower
rate than would be expected if borrowers did not have the ability to prepay their mortgage. We are subject to the risk that our counterparties with respect to various interest rate
contracts may default at or prior to maturity of a particular instrument. In such a case, we might
be unable to recover any unrealized gains with respect to a particular contract. To reduce this
potential risk, we generally deal with large, established investment brokerage firms when entering
into these transactions. In addition, we have a policy whereby we limit our unsecured exposure to
any one counterparty to 25% of Los Padres Banks equity during any two-month period and 35% of Los
Padres Banks equity during any one-month period. The OTS requires each thrift institution to calculate the estimated change in the
institutions MVPE assuming an instantaneous, parallel shift in the Treasury yield curve of 100 to
300 basis points either up or down in 100 basis point increments. The OTS permits institutions to
perform this MVPE analysis using their own internal model based upon reasonable assumptions. Smith
Breeden assists us in performing the required calculation of the sensitivity of our market value to
changes in interest rates. In estimating the market value of mortgage loans and mortgage-backed securities, we utilize
various prepayment assumptions, which vary, in accordance with historical experience, based upon
the term, interest rate and other factors with respect to the underlying loans. At December 31,
2004, these prepayment assumptions varied from 7.2% to 54.3% for fixed-rate mortgages and
mortgage-backed securities and varied from 6.9 to 33.0% for adjustable-rate mortgages and
mortgage-backed securities. 64




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The following table sets forth at December 31, 2004, the estimated sensitivity of Los Padres
Banks MVPE to parallel yield curve shifts using our internal market value calculation. The table
demonstrates the sensitivity of our assets and liabilities both before and after the inclusion of
our interest rate contracts. Change In Interest Rates (In Basis Points)(1)-300
    
    
    -200
    
    
    -100
    
    
    -
    
    
    +100
    
    
    +200
    
    
    +300(Dollars in Thousands)Market value gain (loss) in assets
    
    $
    36,710
    
    
    $
    25,860
    
    
    $
    14,340
    
    
    
    
    
    
    $
    (17,588
    )
    
    $
    (37,716
    )
    
    $
    (59,409
    )Market value gain (loss) of liabilities
    
    
    (24,016
    )
    
    
    (16,604
    )
    
    
    (8,508
    )
    
    
    
    
    
    
    8,805
    
    
    
    17,691
    
    
    
    26,571Market value gain (loss) of net assets
before interest rate contracts
    
    
    12,694
    
    
    
    9,256
    
    
    
    5,832
    
    
    
    
    
    
    
    (8,783
    )
    
    
    (20,025
    )
    
    
    (32,838
    )Market value gain (loss) of interest
rate contracts
    
    
    (19,324
    )
    
    
    (12,414
    )
    
    
    (6,020
    )
    
    
    
    
    
    
    5,653
    
    
    
    10,985
    
    
    
    16,009Total change in MVPE(2)
    
    $
    (6,630
    )
    
    $
    (3,158
    )
    
    $
    (188
    )
    
    
    
    
    
    $
    (3,130
    )
    
    $
    (9,040
    )
    
    $
    (16,829
    )Change in MVPE as a percent of:MVPE(2)
    
    
    -7.07
    %
    
    
    -3.37
    %
    
    
    -0.20
    %
    
    
    
    
    
    
    -3.34
    %
    
    
    -9.63
    %
    
    
    -17.93
    %Total assets of Los Padres Bank
    
    
    -0.86
    %
    
    
    -0.48
    %
    
    
    -0.13
    %
    
    
    
    
    
    
    -0.15
    %
    
    
    -0.55
    %
    
    
    -1.14
    %
   (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on our pre-tax MVPE of $93.8 million at December 31, 2004. The table set forth above does not purport to show the impact of interest rate changes on
our equity under generally accepted accounting principles. Market value changes only impact our
income statement or the balance sheet to the extent the affected instruments are marked to market,
and over the life of the instruments, as an impact on recorded yields. 
 Liquidity and Capital Resources Liquidity.The liquidity of Los Padres Bank, a consolidated subsidiary of the Company is
monitored closely for regulatory purposes at the Bank level by calculating the ratio of cash, cash
equivalents (not committed, pledged or required to liquidate specific liabilities), investments and
qualifying mortgage-backed securities to the sum of total deposits plus borrowings payable within
one year, was 26.3% at December 31, 2004. At December 31, 2004, Los Padres Banks liquid assets
totaled approximately $161.2 million. In general, the Banks liquidity, represented by cash and cash equivalents, is a product of
our operating, investing and financing activities. The Companys primary sources of internal
liquidity consist of deposits, prepayments and maturities of outstanding loans and mortgage-backed
and related securities, maturities of short-term investments, sales of mortgage-backed and related
securities and funds provided from operations. While scheduled loan and mortgage-backed and
related securities amortization and maturing short-term investments are relatively predictable
sources of funds, deposit flows and loan prepayments are greatly influenced by general interest
rates, economic conditions and competition. The Companys external sources of liquidity consist
of borrowings, primarily advances from the FHLB of San Francisco and a revolving line of credit
loan facility, which we maintain with two banks. At December 31, 2004, we had $316.0 million in
FHLB advances and we had $27.1 million of additional borrowing capacity with the FHLB of San
Francisco. At December 31, 2004, our note payable under our revolving line of credit amounted to
$0.0 million and we had $15.0 million of additional borrowing capacity under this loan facility. On September 16, 2004, we entered into an amendment to our credit agreement, which reduced the
LIBOR margin range from 2.0% to 3.0% to 1.75% to 2.75%. We pay interest on the outstanding amount
of our borrowings from time to time under the credit agreement at an interest rate that adjusts
based upon our compliance with certain financial criteria and our selection of an interest rate
formula. At our option, the 65




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interest rates per annum applicable to any particular borrowing under the credit agreement is
either (1) adjusted LIBOR plus a margin ranging from 1.75% to 2.75% or (2) the prime rate announced
from time to time by Harris Trust and Savings Bank minus a margin ranging from 0.5% to 0.0%. The
factors that determine the amount of the margin include our core profitability and our
non-performing asset ratio. We are currently at the most favorable pricing level under the credit
agreement. In each year, we also pay a commitment fee to the lenders equal to 0.25% of the average
daily un-drawn portion of the borrowings available to us under the credit agreement for that year.
All of the covenants remain in place and are unchanged. Management believes that as of December
31, 2004, it was in compliance with all of such covenants and restrictions and does not anticipate
that such covenants and restrictions will limit our operations. Liquidity management is both a daily and long-term function of business management. Excess
liquidity is generally used to pay down short-term borrowings. On a longer-term basis, we maintain
a strategy of investing in various mortgage-backed and related securities and loans. We use our
sources of funds primarily to meet our ongoing commitments, to pay maturing savings certificates
and savings withdrawals, fund loan commitments and maintain a portfolio of mortgage-backed and
related securities as well as certain other investments. At December 31, 2004, the total approved
loan commitments outstanding amounted to $130.8 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 2004 totaled $381.1 million and FHLB borrowings and
repurchase agreements that are scheduled to mature within the same period amounted to $317.0
million. Management believes that we have adequate resources to fund all of our commitments and
the Company could either adjust the rate of certificates of deposit in order to retain deposits in
changing interest rate environments or replace such deposits with advances from the FHLB of San
Francisco if it proved to be cost-effective to do so. A substantial source of our income from which we service our debt, pay our obligations and
from which we can pay dividends is the receipt of dividends from Los Padres Bank. The availability
of dividends from Los Padres Bank is limited by various statutes and regulations. At December 31,
2004, Los Padres Bank was permitted to pay up to $6.0 million of dividends to us. In order to make
such dividend payment, Los Padres Bank is required to provide 30 days advance notice to the OTS,
during which time the OTS may object to such dividend payment. It is possible, depending upon the
financial condition of Los Padres Bank, and other factors, that the OTS could object to the payment
of dividends by Los Padres Bank on the basis that the payment of such dividends is an unsafe or
unsound practice. In addition, we are also subject to restrictions on our ability to pay dividends
under our revolving loan facility and capital securities financings. In the event Los Padres Bank
is unable to pay dividends to us, we may not be able to service our debt, pay our obligations or
pay dividends on our common stock. The Company has a revolving line of credit with a maximum borrowing capacity of $15.0 million
with a maturity of September 30, 2007. We anticipate to utilize this line of credit as growth
opportunities develop and to provide working capital. At December 31, 2004 and 2003, the Company
was not indebted under its revolving line of credit. The Company also has the ability to enter
into Trust Preferred Securities to provide working capital to fund our continued expansion. Capital Resources.Federally insured savings institutions such as Los Padres Bank are
required to maintain minimum levels of regulatory capital. Los Padres Banks failure to comply
could also impact its overall assessment by the OTS in future regulatory examinations, which, if
adverse, could also impact its FDIC insurance assessment. The following table reflects as of December 31, 2004, Los Padres Banks actual levels of
regulatory capital and the applicable regulatory capital requirements. 66




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Tangible Capital(1)
    
    
    Tier 1 Leverage Capital(1)
    
    
    Risk-Based Capital(1)Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent(Dollars in Thousands)Actual regulatory capital
    
    $
    71,787
    
    
    
    6.68
    %
    
    $
    71,787
    
    
    
    6.68
    %
    
    $
    77,015
    
    
    
    11.13
    %Minimum regulatory capital
    
    
    16,116
    
    
    
    1.50
    
    
    
    42,977
    
    
    
    4.00
    
    
    
    55,359
    
    
    
    8.00Excess regulatory capital
    
    $
    55,671
    
    
    
    5.18
    %
    
    $
    28,810
    
    
    
    2.68
    %
    
    $
    21,656
    
    
    
    3.13
    %
   (1)
    
    The tangible capital is computed as a percentage of tangible assets and Tier 1 leverage
capital is computed as a percentage of the adjusted total assets, both of which are $71.8
million as of December 31, 2004. 67




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Contractual Obligations and Commercial Commitments The following tables present our contractual obligations and commercial commitments as of
December 31, 2004. Payment due periodLess than
    
    
    One to
    
    
    Three to
    
    
    More thanTotal
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)Contractual obligations:Certificates of deposit
    
    $
    424,042
    
    
    $
    381,137
    
    
    $
    32,043
    
    
    $
    10,704
    
    
    $
    158FHLB advances
    
    
    316,000
    
    
    
    297,000
    
    
    
    
    
    
    
    
    
    
    
    19,000Reverse repurchase
agreements
    
    
    79,689
    
    
    
    20,689
    
    
    
    14,000
    
    
    
    45,000
    
    
    
    Leases
    
    
    20,177
    
    
    
    1,268
    
    
    
    2,536
    
    
    
    2,444
    
    
    
    13,929Other debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Due to broker
    
    
    972
    
    
    
    972
    
    
    
    
    
    
    
    
    
    
    
    Interest expense (1)
    
    
    48,802
    
    
    
    4,543
    
    
    
    8,419
    
    
    
    6,554
    
    
    
    29,286Total contractual
obligations
    
    $
    915,456
    
    
    $
    705,609
    
    
    $
    56,998
    
    
    $
    64,702
    
    
    $
    88,147
   (1)
    
    Includes interest expense associated with the commitments for our FHLB Advances, Reverse
Repurchase Agreements and Other Debt at the current interest rate. Amount of Commitment Expiration Per PeriodUnfunded
    
    
    Less than
    
    
    One to
    
    
    Three to
    
    
    AfterCommitments
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)Commitments:Commercial lines of credit
    
    $
    26,146
    
    
    $
    22,390
    
    
    $
    2,986
    
    
    $
    661
    
    
    $
    109Consumer lines of credit (1)
    
    
    35,898
    
    
    
    1,665
    
    
    
    
    
    
    
    402
    
    
    
    33,831Undisbursed portion of loans in process
    
    
    44,642
    
    
    
    27,299
    
    
    
    17,150
    
    
    
    
    
    
    
    193Approved but, not funded mortgage
loans
    
    
    19,735
    
    
    
    19,735
    
    
    
    
    
    
    
    
    
    
    
    Approved but, not funded commercial
loans
    
    
    1,790
    
    
    
    1,790
    
    
    
    
    
    
    
    
    
    
    
    Approved but not funded consumer
loans
    
    
    1,158
    
    
    
    1,158
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    1,439
    
    
    
    1,439
    
    
    
    
    
    
    
    
    
    
    
    Total commitments
    
    $
    130,808
    
    
    $
    75,476
    
    
    $
    20,136
    
    
    $
    1,063
    
    
    $
    34,133
   (1)
    
    Lines of credit with no stated maturity date are included in commitments for less than one
year. 
 Off-Balance Sheet Arrangements As discussed in the Asset and Liability Management section above, we utilize external hedging
transactions to effectively increase the elasticity of our liabilities and/or effectively contract
the elasticity of our assets so that the respective elasticities are matched as closely as possible
with the use of external hedging. External hedging generally involves the use of interest rate
swaps, caps, floors, options and futures, which are off-balance sheet arrangements. We use
interest rate swap instruments to effectuate our external hedging strategy. At December 31, 2004,
we held interest rate swaps, which are utilized to hedge liabilities and which qualify for hedge
accounting pursuant to SFAS No. 133 and are included in other assets or other 68




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liabilities. These swap agreements had an aggregate notional amount of $152.0 million and
maturities from January 2006 to October 2014. The notional amount of interest rate contracts
represents the underlying amount on which periodic cash flows are calculated and exchanged between
counterparties. However, this notional amount does not necessarily represent the principal amount
of securities, which would effectively be hedged by that interest rate contract. Our interest
rate swap instruments require that we make fixed-rate payments ranging from 2.7% to 6.3% and
receive payments based upon three-month LIBOR. These fixed-pay swaps are used to effectively
modify the interest rate sensitivity of a portion of Los Padres Banks short-term LIBOR correlated
borrowings which include short-term deposits, securities sold under agreements to repurchase and
FHLB advances. At December 31, 2004 and 2003, the interest rate swaps listed below are hedging the interest
rate risk of cash flows associated with short-term FHLB advances and certificates of deposit with
terms between six and twelve months. These swaps qualify as cash flow hedges. Contract or
    
    
    
    
    
    
    Weighted-AverageNotional
    
    
    Estimated
    
    
    Interest RateAmount
    
    
    Fair Value
    
    
    Receivable
    
    
    PayableDecember 31, 2004 -Interest rate swaps  pay fixedreceive 3-month LIBOR
    
    $
    152,000
    
    
    $
    (4,134
    )
    
    
    2.35
    %
    
    
    4.42
    %December 31, 2003 -Interest rate swaps  pay fixedreceive 3-month LIBOR
    
    $
    137,000
    
    
    $
    (5,904
    )
    
    
    1.17
    %
    
    
    4.40
    %
 The following table sets forth the maturity distribution and weighted-average interest rates
of the interest rate swaps used to limit the repricing risk of deposits and short-term borrowings
as of December 31, 2004: Maturities
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    
    
    
    $
    23,000
    
    
    $
    52,000
    
    
    $
    4,000
    
    
    $
    25,000
    
    
    $
    48,000Weighted-average
payable rate
    
    
    
    
    
    
    2.92
    %
    
    
    3.80
    %
    
    
    3.78
    %
    
    
    5.77
    %
    
    
    5.15
    %Weighted-average
receivable rate
    
    
    
    
    
    
    2.30
    %
    
    
    2.39
    %
    
    
    2.08
    %
    
    
    2.39
    %
    
    
    2.33
    %
 69




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##### Table of Contents



At December 31, 2004, we did not hold any interest rate swaps as trading account assets,
except for certain interest rate swaps that we utilize in order to enhance our returns and not for
the purpose of interest rate risk management. The following table sets forth the interest rate swaps held to enhance our returns. Contract or
    
    
    Estimated
    
    
    Weighted AverageNotional
    
    
    Fair Value
    
    
    Interest RateAmount
    
    
    Asset
    
    
    Liability
    
    
    Payable
    
    
    Receivable2004Total return swaps  receive total return
CMBS investment grade total return,
pay LIBOR
    
    $
    95,000
    
    
    $
    32
    
    
    $
    18
    
    
    Bank receives the
spread on Lehman Brothers
AAA CMBS Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps  receive total return
on one month LIBOR based ABS
securities
    
    $
    25,000
    
    
    $
    63
    
    
    $
    
    
    
    Bank receives the
spread on five specific
-A floating ABS
securities plus a spread
of 12 basis points and
receives or pays the
market value change at
maturity2003Total return swaps  receive total return
CMBS investment grade total return,
pay LIBOR
    
    $
    100,000
    
    
    $
    166
    
    
    $
    
    
    
    Bank receives the
spread on Lehman Brothers
AAA CMBS Index Plus a
spread and receives or
pays the market value
change of index
 The Interest Rate Agreements used have an active secondary market and are included in
trading account assets at fair value. The realized and unrealized gains and losses on these
instruments are recognized immediately in other income. Los Padres Banks exposure to credit risk from derivative financial instruments is represented
by the fair value of the instruments. Credit risk amounts represent the replacement cost Los
Padres Bank could incur should counterparties with contracts in a gain position completely fail to
perform under the terms of those contracts. Counterparties are subject to the credit approval and
credit monitoring policies and procedures of Los Padres Bank. Los Padres Bank limits its credit
exposure by entering into International Swap Dealer Association (ISDA) Master Agreements with
each counterparty. ISDA Master Agreements set the legal framework for transactions with
counterparties in over the counter derivative markets. Los Padres Bank only deals with
counterparties that are investment grade. Los Padres Bank has unfunded loan commitments and letters of credit which are also considered
off-balance sheet arrangements. A summary of these commitments is presented in the Contractual
Obligations and Commercial Commitments section above. 
 Inflation and Changing Prices Our consolidated financial statements and related data presented in this prospectus have been
prepared in accordance with accounting principles generally accepted in the U.S., which require the
measurement of financial position and operating results in terms of historical dollars (except with
respect to securities which are carried at market value), without considering changes in the
relative purchasing power of 70




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money over time due to inflation. Unlike most industrial companies,
substantially all of our assets and liabilities are monetary in nature. As a result, interest
rates have a more significant impact on our performance than the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or in the same magnitude
as the prices of goods and services. 
 Recent Accounting Pronouncements In December 2003, the FASB issued FASB Interpretation No. 46R (FIN 46R) which revised the
January 2003 Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,an
interpretation of Accounting Research Bulletin No. 51. The revision clarifies how variable
interest entities should be identified and evaluated for consolidation purposes. The Company
adopted FIN46R to its interests in special purpose entities (SPEs) as of December 31, 2003.
Adoption of this new method of accounting for SPEs did not and is not expected to have a material
impact on the Companys consolidated results of operation and financial position. In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement
of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans of Debt Securities Acquired in a
Transfer.SOP 03-3 addresses the accounting for differences between contractual cash flows and the
cash flows expected to be collected from purchased loans or debt securities if those differences
are attributable, in part, to credit quality, SOP 03-3 requires purchased loans and debt securities
to be recorded initially at fair value based on the present value of the cash flows expected to be
collected with no carryover of any valuation allowance previously recognized by the seller.
Interest income should be recognized based on the effective yield from the cash flows to be
collected. To the extent that the purchased loans or debt securities experience subsequent
deterioration in credit quality, a valuation allowance would be established for any additional cash
flows that are not expected to be received. However, if more cash flows subsequently are expected
to be received than originally estimated, the effective yield would be adjusted on a prospective
basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004.
Management does not expect the adoption of this statement to have a material impact on the
Companys consolidated results of operation and financial position. In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 105 (SAB 105) was issued, which provides guidance regarding loan commitments that are
accounted for as derivative instruments under FASB No. 133 (as amended), Accounting for Derivative
Instruments and Hedging Activities.In SAB 105, the SEC ruled that the amount of the expected
servicing rights should not be included when determining the fair value of derivative interest rate
lock commitments. This guidance must be applied to rate locks initiated after March 31, 2004.
Management does not anticipate the issuance of this Bulletin to have a material impact on the
Companys consolidated results of operation and financial position. In March 2004, the Emerging Issues Task Force (EITF) reached consensus on the guidance
provided in EITF Issue No. 03-1, The Meaning of Other Than Temporary Impairment and its
Application to Certain Investments(EITF 03-1), as applicable to debt and equity securities that
are within the scope of
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and equity
securities that are accounted for using the cost method specified in Accounting Policy Board
Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock.An investment is
impaired if the fair value of the investment is less than its cost. EITF 03-1 outlines that an
impairment would be considered other-than-temporary unless: a) the investor has the ability and
intent to hold an investment for a reasonable period of time sufficient for the recovery of the
fair value up to (or beyond) the cost of the investment, and b) evidence indicating that the cost
of the investment is recoverable within a reasonable period of time outweighs evidence to the
contrary. Although not presumptive, a pattern of selling investments prior to the forecasted
recovery of fair value may call into question the investors intent. In addition, the severity and
duration of the impairment should also be considered in determining whether the impairment is
other-than-temporary. 71




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In September 2004, the FASB issued a proposed Board-directed FASB Staff
Position, FSP EITF Issue 03-1-a, Implementation Guidance of the Application of Paragraph 16 of EITF
Issue No. 03-1.The proposed FSP would provide implementation guidance with respect to debt
securities that are impaired solely due to interest rates and/or sector spreads and analyzed for
other-than-temporary impairment under paragraph 16 of Issue 03-1. The Board also issued FSP EITF
Issue 03-1-b which delays the effective date for the measurement and recognition guidance contained
in paragraphs 10-20 of EITF 03-1. The delay does not suspend the requirement to recognize
other-than temporary impairments as required by existing authoritative literature. Adoption of
this standard may cause the Company to recognize under current guidance or to recognize such losses
in earlier periods, especially those due to increases in interest rates. Since fluctuations in
fair value for available-for-sale securities are already recorded in accumulative other
comprehensive (income) loss, adoption of this standard is not expected to have a significant impact
on stockholders equity. In December 2004, the FASB revised SFAS No. 123 (R) (SFAS 123 (R)), Share Based Payment.
SFAS 123 (R) replaced existing requirements under SFAS No. 123 and APB 25. SFAS 123 (R) requires
companies to measure and recognize compensation expense equal to the fair value of stock options or
other shares based payments. SFAS 123 (R)is effective for all interim and annual periods beginning
after June 15, 2005 and, thus, will be effective for the Company beginning with the third quarter
and calendar year 2005. The Company is in the process of evaluating the impact of this standard on
its consolidated results of operation and financial position. In December 2004, the FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets,
an amendment of APB 29, Accounting for Nonmonetary Transactions. This statement amends the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets
that do not have commercial substance. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Management does not anticipate the
issuance of this standard to have a material impact on the Companys consolidated results of
operation and financial position. 
 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See Managements Discussion and Analysis of Financial Condition and Results of Operations 
Asset and Liability Management in Item 7 hereof. 72




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##### Table of Contents



Item 8. Financial Statements and Supplementary Data. Audited consolidated financial statements and related documents required by this item are
included in this Annual Report on Form 10-K on the pages indicated: PageREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
    
    
    75CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Statements of Financial Condition -
December 31, 2004 and 2003
    
    
    76Consolidated Statements of Earnings for the
Years Ended December 31, 2004, 2003 and 2002
    
    
    77Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2004, 2003 and 2002
    
    
    78Consolidated Statements of Cash Flows for the
Years Ended December 31, 2004, 2003 and 2002
    
    
    80Notes to Consolidated Financial Statements
    
    
    81
 73




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of
Harrington West Financial Group, Inc.
Solvang, California We have audited the accompanying consolidated statements of financial condition of Harrington West Financial Group,
Inc. (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of
earnings, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2004. These financial statements are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material
respects, the financial position of Harrington West Financial Group, Inc. as of
December 31, 2004 and 2003, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in the United States of America. /s/ DELOITTE & TOUCHE LLP Los Angeles, California
March 25, 2005 74




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)  December 31,2004
    
    
    2003ASSETSCash and cash equivalents
    
    $
    13,238
    
    
    $
    22,856Trading account assets
    
    
    1,046
    
    
    
    2,111Securities available for sale
    
    
    431,206
    
    
    
    398,691Securities held to maturity
    
    
    93
    
    
    
    222Loans receivable, net
    
    
    598,442
    
    
    
    518,496Accrued interest receivable
    
    
    3,322
    
    
    
    2,928Premises and equipment, net
    
    
    8,886
    
    
    
    6,454Prepaid expenses and other assets
    
    
    3,745
    
    
    
    1,867Investment in FHLB stock, at cost
    
    
    15,134
    
    
    
    13,425Deferred tax asset
    
    
    1,314
    
    
    
    2,651Goodwill
    
    
    3,981
    
    
    
    3,981Core deposit intangible, net
    
    
    923
    
    
    
    1,117TOTAL
    
    $
    1,081,330
    
    
    $
    974,799LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Interest bearing
    
    $
    564,552
    
    
    $
    541,426Noninterest bearing
    
    
    33,630
    
    
    
    29,271Total deposits
    
    
    598,182
    
    
    
    570,697FHLB advances
    
    
    316,000
    
    
    
    262,500Securities sold under repurchase agreements
    
    
    79,689
    
    
    
    65,728Other debt
    
    
    25,774
    
    
    
    15,464Accounts payable and accrued expenses
    
    
    8,563
    
    
    
    11,623Income taxes payable
    
    
    462
    
    
    
    711Total liabilities
    
    
    1,028,670
    
    
    
    926,723COMMITMENTS AND CONTINGENCIES (Notes 2 and 14)STOCKHOLDERS EQUITY:Preferred stock, $.01 par value; 1,200,000 shares authorized; none issued
and outstandingCommon stock, $.01 par value; 10,800,000 shares authorized;
5,278,934 shares issued and outstanding as of December 31, 2004
and 5,206,109 shares issued and outstanding December 31, 2003
    
    
    53
    
    
    
    52Additional paid-in capital
    
    
    31,225
    
    
    
    30,710Retained earnings
    
    
    23,637
    
    
    
    20,073Accumulated other comprehensive income, net of tax of $285
and $849 at December 31, 2004 and December 31, 2003, respectively
    
    
    (2,255
    )
    
    
    (2,759
    )Total stockholders equity
    
    
    52,660
    
    
    
    48,076TOTAL
    
    $
    1,081,330
    
    
    $
    974,799
 See notes to consolidated financial statements. 75




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share and per share data)  Year EndedDecember 31,2004
    
    
    2003
    
    
    2002INTEREST INCOME:Interest on loans
    
    $
    36,166
    
    
    $
    33,147
    
    
    $
    31,500Interest and dividends on securities
    
    
    16,100
    
    
    
    13,287
    
    
    
    11,993Total interest income
    
    
    52,266
    
    
    
    46,434
    
    
    
    43,493INTEREST EXPENSE:Interest on deposits
    
    
    10,629
    
    
    
    10,377
    
    
    
    14,031Interest on FHLB advances and other borrowings
    
    
    12,089
    
    
    
    9,931
    
    
    
    7,890Total interest expense
    
    
    22,718
    
    
    
    20,308
    
    
    
    21,921NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    
    
    29,548
    
    
    
    26,126
    
    
    
    21,572PROVISION FOR LOAN LOSSES
    
    
    650
    
    
    
    790
    
    
    
    391NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    28,898
    
    
    
    25,336
    
    
    
    21,181OTHER INCOME (LOSS):(Loss) income from trading assets
    
    
    1,261
    
    
    
    2,647
    
    
    
    (31
    )Loss on extinguishment of debt
    
    
    (189
    )
    
    
    (1,610
    )
    
    
    Other gain (loss)
    
    
    (57
    )
    
    
    30
    
    
    
    (350
    )Banking fee income
    
    
    3,148
    
    
    
    4,108
    
    
    
    2,531Total other income
    
    
    4,163
    
    
    
    5,175
    
    
    
    2,150OTHER EXPENSES:Salaries and employee benefits
    
    
    10,522
    
    
    
    10,086
    
    
    
    7,847Premises and equipment
    
    
    3,153
    
    
    
    2,722
    
    
    
    2,197Insurance premiums
    
    
    486
    
    
    
    520
    
    
    
    255Marketing
    
    
    427
    
    
    
    320
    
    
    
    260Computer services
    
    
    696
    
    
    
    640
    
    
    
    542Consulting fees
    
    
    1,188
    
    
    
    1,011
    
    
    
    733Office expenses and supplies
    
    
    824
    
    
    
    762
    
    
    
    694Other
    
    
    2,120
    
    
    
    1,788
    
    
    
    2,229Total other expenses
    
    
    19,416
    
    
    
    17,849
    
    
    
    14,757INCOME BEFORE INCOME TAXES
    
    
    13,645
    
    
    
    12,662
    
    
    
    8,574INCOME TAXES
    
    
    5,436
    
    
    
    5,249
    
    
    
    3,529NET INCOME
    
    $
    8,209
    
    
    $
    7,413
    
    
    $
    5,045BASIC EARNINGS PER SHARE
    
    $
    1.56
    
    
    $
    1.43
    
    
    $
    1.20DILUTED EARNINGS PER SHARE
    
    $
    1.46
    
    
    $
    1.36
    
    
    $
    1.15BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING
    
    
    5,256,030
    
    
    
    5,197,008
    
    
    
    4,204,456DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING
    
    
    5,603,680
    
    
    
    5,455,002
    
    
    
    4,370,021
 See notes to consolidated financial statements. 76




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)  AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Income
    
    
    EquityBALANCE, DECEMBER 31, 2001
    
    
    4,025,171
    
    
    $
    40
    
    
    $
    20,305
    
    
    $
    9,169
    
    
    
    
    
    
    $
    630
    
    
    $
    30,144Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,045
    
    
    $
    5,045
    
    
    
    
    
    
    
    5,045Other comprehensive income,
net of taxUnrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    671
    
    
    
    671
    
    
    
    671Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,308
    )
    
    
    (3,308
    )
    
    
    (3,308
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,408Initial public offering
    
    
    1,168,338
    
    
    
    12
    
    
    
    10,212
    
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    10,221Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (425
    )
    
    
    
    
    
    
    
    
    
    
    (425
    )Stock options
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124BALANCE, DECEMBER 31, 2002
    
    
    5,193,509
    
    
    
    52
    
    
    
    30,641
    
    
    
    13,786
    
    
    
    
    
    
    
    (2,007
    )
    
    
    42,472Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,413
    
    
    $
    7,413
    
    
    
    
    
    
    
    7,413Other comprehensive income,
net of taxUnrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,245
    )
    
    
    (1,245
    )
    
    
    (1,245
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    493
    
    
    
    493
    
    
    
    493Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,661Stock Options
    
    
    12,600
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,126
    )
    
    
    
    
    
    
    
    
    
    
    (1,126
    )BALANCE, DECEMBER 31, 2003
    
    
    5,206,109
    
    
    
    52
    
    
    
    30,710
    
    
    
    20,073
    
    
    
    
    
    
    
    (2,759
    )
    
    
    48,076Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,209
    
    
    $
    8,209
    
    
    
    
    
    
    
    8,209Other comprehensive income,
net of taxUnrealized (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (324
    )
    
    
    (324
    )
    
    
    (324
    )Effective portion of change in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    828
    
    
    
    828Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,713Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,645
    )
    
    
    
    
    
    
    
    
    
    
    (4,645
    )Stock Options
    
    
    72,825
    
    
    
    1
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516BALANCE, DECEMBER 31, 2004
    
    
    5,278,934
    
    
    $
    53
    
    
    $
    31,225
    
    
    $
    23,637
    
    
    
    
    
    
    $
    (2,255
    )
    
    $
    52,660
 (Continued) See notes to consolidated financial statements. 77




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HARRINGTON WEST FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)  Year EndedDecember 31,2004
    
    
    2003
    
    
    2002DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding (losses) gains arising during the period,
net of tax (benefit) expense of ($504), ($1,500)
and $529 for 2004, 2003 and 2002, respectively
    
    $
    (733
    )
    
    $
    (2,115
    )
    
    $
    756Less: Reclassification adjustment for gains (losses) included in
net income, net of tax expense (benefit) of $281, $617 and
($60) for 2004, 2003 and 2002, respectively
    
    
    409
    
    
    
    870
    
    
    
    (85
    )Net unrealized (loss) gain on securities, net of tax (benefit)
expense of ($223), ($883) and $469 for 2004, 2003
and 2002, respectively
    
    $
    (324
    )
    
    $
    (1,245
    )
    
    $
    671Unrealized net gains (losses) on cash flow hedges, net of tax expense
(benefit) of $506, $380 and ($2,399) for 2004, 2003
and 2002, respectively
    
    $
    737
    
    
    $
    535
    
    
    $
    (3,313
    )Less: reclassification adjustment for net gains (losses) on
cash flow hedges included in net income, net of
tax expense (benefit) of $63, ($30) and $4 for 2004, 2003
and 2004, respectively
    
    
    91
    
    
    
    (42
    )
    
    
    5Net unrealized gain (loss) on cash flow hedges, net of tax (benefit)
expense of $569, $350 and $(2,395) for 2004, 2003
and 2002, respectively
    
    $
    828
    
    
    $
    493
    
    
    $
    (3,308
    )
 78




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)  Year EndedDecember 31,2004
    
    
    2003
    
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    8,209
    
    
    $
    7,413
    
    
    $
    5,045Adjustments to reconcile net income to net cash provided by
operating activities:Accretion of deferred loan fees and costs
    
    
    338
    
    
    
    (2,006
    )
    
    
    (680
    )Depreciation and amortization
    
    
    1,204
    
    
    
    1,076
    
    
    
    918Amortization of premiums and discounts
    
    
    3,171
    
    
    
    4,198
    
    
    
    4,594Deferred income taxes
    
    
    781
    
    
    
    (943
    )
    
    
    111Provision for loan losses
    
    
    650
    
    
    
    790
    
    
    
    391Activity in securities held for trading
    
    
    1,059
    
    
    
    (180
    )
    
    
    803Loss on sale of real estate acquired through foreclosure
    
    
    
    
    
    
    
    
    
    
    8Gain on sale of investment securities
    
    
    (690
    )
    
    
    (1,487
    )
    
    
    (145
    )Stock-based compensation
    
    
    
    
    
    
    
    
    
    
    124FHLB stock dividend
    
    
    (557
    )
    
    
    (573
    )
    
    
    (386
    )(Decrease) increase in accrued interest receivable
    
    
    (394
    )
    
    
    598
    
    
    
    41(Increase) decrease in income taxes (payable) receivable
    
    
    (250
    )
    
    
    963
    
    
    
    (591
    )(Increase) decrease in prepaid expenses
    
    
    (1,877
    )
    
    
    (106
    )
    
    
    176(Decrease) Increase in accounts payable
    
    
    (1,684
    )
    
    
    2,270
    
    
    
    507Net cash provided by operating activities
    
    
    9,960
    
    
    
    12,013
    
    
    
    10,916CASH FLOWS FROM INVESTING ACTIVITIES:Net (increase) decrease in loans receivable
    
    
    (81,505
    )
    
    
    (69,688
    )
    
    
    520Proceeds from matured and called securities held to maturity
    
    
    
    
    
    
    2,000
    
    
    
    Proceeds from sales of securities available for sale
    
    
    28,316
    
    
    
    34,033
    
    
    
    2,378Purchases of securities available for sale
    
    
    (154,529
    )
    
    
    (255,527
    )
    
    
    (267,251
    )Principal paydowns on securities available for sale
    
    
    91,479
    
    
    
    143,083
    
    
    
    118,496Principal paydowns on securities held to maturity
    
    
    129
    
    
    
    133
    
    
    
    228Proceeds from sale of real estate acquired through foreclosure
    
    
    
    
    
    
    
    
    
    
    665Purchase of premises and equipment
    
    
    (3,463
    )
    
    
    (2,867
    )
    
    
    (1,505
    )Purchase of FHLB stock
    
    
    (1,152
    )
    
    
    (1,102
    )
    
    
    (3,530
    )Net cash used in investing activities
    
    
    (120,725
    )
    
    
    (149,935
    )
    
    
    (149,999
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    27,504
    
    
    
    45,745
    
    
    
    5,343Increase in securities sold under agreements to repurchase
    
    
    13,962
    
    
    
    65,215
    
    
    
    152Increase in FHLB advances
    
    
    53,500
    
    
    
    27,500
    
    
    
    138,597(Repayments) advances on note payable
    
    
    
    
    
    
    (11,300
    )
    
    
    (6,700
    )Increase in other debt
    
    
    10,310
    
    
    
    15,464
    
    
    
    Exercise of stock options on common stock
    
    
    516
    
    
    
    69
    
    
    
    Proceeds from initial public offering
    
    
    
    
    
    
    
    
    
    
    10,221Dividends paid on common stock
    
    
    (4,645
    )
    
    
    (1,127
    )
    
    
    (425
    )Net cash provided by financing activities
    
    
    101,147
    
    
    
    141,566
    
    
    
    147,188NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    (9,618
    )
    
    
    3,644
    
    
    
    8,105CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    22,856
    
    
    
    19,212
    
    
    
    11,107CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    13,238
    
    
    $
    22,856
    
    
    $
    19,212
 (Continued) 79




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HARRINGTON WEST FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)  Year EndedDecember 31,2004
    
    
    2003
    
    
    2002SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -Cash paid during the year for:Interest
    
    $
    18,803
    
    
    $
    16,443
    
    
    $
    21,155Income taxes
    
    $
    5,522
    
    
    $
    5,234
    
    
    $
    3,996SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES -Net unrealized gain on available for sale securities
    
    $
    (324
    )
    
    $
    1,245
    
    
    $
    671
 See notes to consolidated financial statements
    
    (Concluded)
 80




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)   1.
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBusiness of the Company- Harrington West Financial Group, Inc. (the Company) is a savings
and loan holding company incorporated on August 29, 1995 to acquire and hold all of the
outstanding common stock of Los Padres Bank (the Bank), a federally chartered savings bank
which operates 13 branches serving individuals and small to medium-sized businesses. Ten
banking facilities are operated on the California Central Coast, two banking facilities are
located in Kansas, and operated as a division under the Harrington Bank brand, and one banking
facility is located in Scottsdale, Arizona.On February 1, 1999, the Bank purchased a 49% interest in Harrington Wealth Management Company
(HWMC). HWMC offers trust and investment management services to the customers of the Bank.
On October 31, 2001, the Bank purchased the remaining 51% interest in HWMC. Beginning in
November 2001, HWMC became a wholly owned subsidiary of the Bank and is consolidated into the
Bank.On November 3, 2001, the Bank purchased from Harrington Bank, FSB, its $75 million bank
located in Shawnee Mission, Kansas, in the heart of the Kansas City metropolis.On November 12, 2002, the Company completed its initial public offering. An aggregate of
1,344,000 shares of common stock were sold to the public at $10.00 per share, comprised of
1,168,338 shares sold by the company and 175,662 shares sold by certain stockholders. In
connection with the initial public offering, the Company raised approximately $10.2 million.On September 25, 2003, we completed a $15.5 million capital trust offering. The capital
securities were issued through a newly formed trust, Harrington West Capital Trust I, in a
private transaction. The capital trust securities bear an interest rate of three-month LIBOR
plus 2.85% and will mature on October 8, 2033 and have a five-year call feature. We used
$11.3 million to pay off the secured line of credit with Harris Trust and Savings Bank and US
Bank, N.A. The remainder of the proceeds were used to expand the Los Padres Bank operations
in Overland park, Kansas, Ventura, California and Scottsdale, Arizona.On September 30, 2004, HWFG decided to terminate its joint venture with Resource Marketing,
Los Padres Mortgage Company, LLC (LPMC) because the penetration levels with the RE/MAX
Achievers clientele were below the expected levels and HWFG believed that it could broaden
loan originations on the Banks platform. LPMC. was organized in August 2002 and was
brokering single-family residential and commercial real estate loans to third party investors.
This strategy is also expected to provide economies by eliminating duplication of loan
administration at LPMC and at the Bank. The Bank retained selected LPMC loan origination
staff and loan officers to continue its loan origination expansion in the Scottsdale, Arizona
market.On September 27, 2004, we completed a $10.3 million capital trust offering that was completed
with a newly formed trust, Harrington West Capital Trust II, in a private transaction. The
capital trust securities bear an interest rate of three-month LIBOR plus 1.90% and will mature
on October 81




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##### Table of Contents



7, 2034 and have a five-year call feature. We used a portion of the proceeds to downstream
capital to Los Padres Bank for the continued expansion of their operations.Basis of Presentation- The consolidated financial statements include the accounts of the
Company, the Bank and its subsidiaries since their acquisition dates. All significant
inter-company accounts and transactions have been eliminated.Use of Estimates- The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and with prevailing
practices in the banking industry. In preparing such financial statements, management is
required to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change relate to the
determination of the allowance for loan losses.Segments- The Company has a single operating segment, banking operations.Cash and Cash Equivalents- For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds
are purchased and sold for one-day periods.Securities Sold under Agreements to Repurchase- Transactions involving sales of securities
under agreements to repurchase are accounted for as collateralized financings except where the
Bank does not have an arrangement to purchase the same or substantially the same securities
before maturity at a fixed or determinable price.Trading Securities- Trading securities are debt and equity securities that are bought and
held principally for the purpose of active management. These securities are reported at fair
value and included in trading account assets on the balance sheet. Realized and unrealized
gains and losses are included in income from trading account assets.Available for Sale Securities- Debt and equity securities not classified as either held to
maturity or trading securities are classified as securities available for sale and recorded at
fair value, with unrealized gains and losses, after applicable taxes, excluded from earnings
and reported as a separate component of stockholders equity. Declines in the value of debt
securities and marketable equity securities that are considered to be other than temporary are
recorded as a permanent impairment of securities available for sale in the statement of
earnings. Gains and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.Held to Maturity Securities- Held to maturity securities represent investments that the Bank
has the positive intent and ability to hold to maturity and are reported at amortized cost.Loans Receivable- Loans receivable are carried at the principal amount outstanding, net of
deferred loan fees, costs, premiums and allowance for loan losses.Loan Interest Income and Fees- Interest on loans is accrued as earned, except non-accrual
loans on which interest is normally discontinued whenever the payment of principal or interest
is considered to be in doubt. When a loan is placed on non-accrual, all previously accrued
but uncollected interest is reversed against current period income. Interest income is
subsequently recognized only to the extent cash payments are received. 82




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Loan origination fees and certain direct loan origination costs are deferred and recognized
over the lives of the related loans as an adjustment to yield using a method that approximates
the level-yield method. Calculation of the yield is done on a loan-by-loan basis.
Unamortized fees are recognized in income in the year the related loans are sold or paid off.
Other loan fees and charges representing service costs for the repayment of loans, delinquent
payments or miscellaneous loan services are recorded as income when collected.Discounts and premiums on loans are amortized into interest income, using a method that
approximates the level-yield method over the estimated life of the related loans.Allowance for Loan Losses- Allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries).The allowance is maintained at a level believed by management to be sufficient to absorb
estimated probable 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 consumer loans and residential mortgages, and general amounts for historical loss
experience, economic conditions, uncertainties in estimating losses and inherent risks in the
various credit portfolios, all of which may be susceptible to significant change.In determining the adequacy of the allowance for loan losses, the Company makes specific
allocations to impaired loans in accordance with Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan. 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.Management believes the level of the allowance as of December 31, 2004 is adequate to absorb
losses inherent in the loan portfolio.Servicing- Servicing assets are recognized as separate assets when rights are acquired
through purchase or through sale of financial assets. Capitalized servicing rights are
reported in prepaid expenses and other assets and are amortized into other income in
proportion to, and over the period of, the estimated future net servicing income of the
underlying financial assets. Servicing assets are evaluated for impairment based upon the
fair value of the rights as compared to amortized cost. Impairment is determined by
stratifying rights by predominant characteristics, such as interest rates and terms. Fair
value is determined using prices for similar assets with similar characteristics, when
available, or based upon discounted cash flows using market-based assumptions. Impairment is 83




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recognized through a valuation allowance for an individual stratum, to the extent that fair
value is less than the capitalized amount for the stratum.Loans serviced for others are not included in the accompanying consolidated balance sheets.
The unpaid principal balances of mortgage and other loans serviced for others were $5.7
million and $8.7 million at December 31, 2004 and 2003, respectively.The balance of capitalized servicing rights, net of valuation allowances, included in other
assets at December 31, 2004 and 2003, was $33 and $44, respectively. The fair values of these
rights were $33 and $44, respectively. The fair value of servicing rights was determined
using discount rates ranging from 6.1% to 12.6% and prepayment speeds
ranging from 16.4% to
21.5%, depending upon the stratification of the specific right.The following summarizes mortgage servicing rights capitalized and amortized, along with the
aggregate activity in related valuation allowances for the years ended December 31: Beginning balance of capitalized mortgage servicing rights
    
    $
    306
    
    
    $
    369Mortgage servicing rights amortized
    
    
    (11
    )
    
    
    (63
    )Ending balance of capitalized mortgage servicing rights
    
    $
    295
    
    
    $
    306Valuation allowances:Balance, beginning of year
    
    $
    262
    
    
    $
    224Additions
    
    
    
    
    
    
    38Balance, end of year
    
    $
    262
    
    
    $
    262
  Real Estate Acquired through Foreclosure- Real estate acquired through foreclosure is carried
at estimated fair value at the time of foreclosure. Any subsequent operating expense or
income, reduction in estimated values, and gains or losses on disposition of such properties
are included in current operations.Income Taxes- Deferred tax assets or liabilities shown on the balance sheet are adjusted to
reflect differences between the tax bases of assets and liabilities and their reported amounts
in the financial statements.Premises and Equipment- Premises and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are computed on the straight-line method over the
estimated useful lives of the assets. The depreciable lives range from 3 to 20 years for
leasehold improvements, 5 to 20 years for furniture, fixtures and equipment and 30 years for
the office building.Impairment of Long Lived Assets- The Bank reviews its long-lived assets for impairment
annually or when events or circumstances indicate that the carrying amount of these assets may
not be recoverable. An asset is considered impaired when the expected undiscounted cash flows
over the remaining useful life is less than the net book value. When impairment is indicated
for an asset, the amount of impairment loss is the excess of the net book value over its fair
value.Core Deposit Intangibles- Core deposit intangibles are established in connection with
purchase business combinations of banking or thrift institutions. The intangible asset
represents the fair 84




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market value of acquiring the long-term depositor relationship. Core
deposit intangibles have a finite useful life and it is the Companys policy to amortize the
intangible on a straight-line basis over the estimated useful life of the deposit base
acquired, currently 10 years. At December 31, 2004 and 2003, the gross balance of core
deposit intangibles was $1,937, and the accumulated amortization was $1,014 and $820,
respectively. The amortization expense was $194 for each of the years ended December 31, 2004
and 2003, respectively. Estimated future amortization of core deposit intangibles is $194 for
December 31, 2005 and 2006 and, $177 for December 31, 2007 and $94 for December 31, 2008 and
2009. Thereafter December 31, 2009, there will be an estimated future amortization of $172.Goodwill Goodwill is no longer amortized in accordance with SFAS No. 142 but, instead is
tested for impairment at least annually. A goodwill impairment test was completed on
September 30, 2004. No impairment loss was recorded by the Company.Derivatives Held for Asset and Liability Management Purposes- The Company adopted SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended which
establishes accounting and reporting standards for derivative instruments and for hedging
activities. They require that an entity recognize all derivatives as either assets or
liabilities in the statement of financial condition and measure those instruments at fair
value. If certain conditions are met, a derivative may be specifically designated as a fair
value hedge, a cash flow hedge or a hedge of foreign currency exposure. The accounting for
changes in the fair value of a derivative (that is, gains and losses) depends on the intended
use of the derivative and the resulting designation.In accordance with the standards, the Company has identified certain types of short-term
interest-bearing liabilities as a source of interest rate risk to be hedged in connection with
the Companys overall asset-liability management process. Although these liabilities have
contractually fixed rates of interest, their short-term maturities, together with the
expectation that they will be continually refinanced or replaced with similar products, give
rise to the risk of fluctuations in interest expense as interest rates rise and fall in future
periods. In response to this identified risk, the Company uses interest rate swaps as cash
flow hedges to hedge the interest rate risk associated with the cash flows of the specifically
identified short-term liabilities.To qualify for hedge accounting, the Company must show that, at the inception of the hedges
and on an ongoing basis, the changes in the fair value of the hedging instruments are expected
to be highly effective in offsetting related changes in the cash flows of the hedged
liabilities. These interest rate swaps have been shown to be effective in hedging the
exposure to the short-term liability variability in cash flows and, therefore, qualify for
hedge accounting. 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. During the next
twelve months, the Company expects to expense $1,488, net of tax, from the amount recorded in
the separate component of stockholders equity.Stock-Based Compensation- The Company issues stock-based compensation to certain employees,
officers, and Directors. SFAS No. 123, Accounting for Stock-based Compensation, encourages,
but does not require, companies to account for stock-based compensation using the fair value
method, which generally results in compensation expense recognition. As permitted by SFAS No.
123, the Company continues to account for its fixed stock options using the intrinsic-value
method, prescribed in APB Opinion No. 25, Accounting for Stock Issued to Employees, and its
related
interpretations, which generally does not result in compensation expense recognition. Under
the intrinsic value method, compensation cost for stock options is measured at the date of
grant as the 85




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excess, if any, of the quoted market price of our stock over the exercise price
of the options. Had compensation cost for these plans been determined based on the fair value
at the grant dates of options consistent with the method defined in SFAS No. 123, the
Companys net income and earnings per share would have been reduced to the pro forma amounts
indicated below for the years ended December 31, 2004, 2003 and 2002: Year Ended December 31,2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    8,209
    
    
    $
    7,413
    
    
    $
    5,045Deduct:Total stock-based compensation
expense determined under the fair
value based method for all awards,
net of related tax effect
    
    
    151
    
    
    
    79
    
    
    
    61Pro forma net income
    
    $
    8,058
    
    
    $
    7,334
    
    
    $
    4,984Earnings per share:Basic earnings per share:As reported
    
    $
    1.56
    
    
    $
    1.43
    
    
    $
    1.20Pro forma
    
    $
    1.46
    
    
    $
    1.41
    
    
    $
    1.18Diluted earnings per share:As reported
    
    $
    1.46
    
    
    $
    1.36
    
    
    $
    1.15Pro forma
    
    $
    1.44
    
    
    $
    1.35
    
    
    $
    1.14
 86




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The weighted average fair value for options granted during 2004, 2003 and 2002 was $5.93,
$3.61 and $3.74, respectively. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following assumptions: Year Ended December 31,2004
    
    
    2003
    
    
    2002Risk-free interest rate
    
    
    4.07
    %
    
    
    3.94
    %
    
    
    4.89
    %Expected volatility
    
    
    36.37
    %
    
    
    29.03
    %
    
    
    27.58
    %Expected lives
    
    9 years
    
    9 years
    
    9 years
  Recent Accounting Pronouncements -In December 2003, the FASB issued FASB Interpretation No.
46R (FIN 46R) which revised the January 2003 Interpretation No. 46 (FIN 46), Consolidation
of Variable Interest Entities,an interpretation of Accounting Research Bulletin No. 51. The
revision clarifies how variable interest entities should be identified and evaluated for
consolidation purposes. The Company adopted FIN46R to its interests in special purpose
entities (SPEs) as of December 31, 2003. Adoption of this new method of accounting for SPEs
did not and is not expected to have a material impact on the Companys consolidated results of
operation and financial position.In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement
of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans of Debt Securities Acquired in
a Transfer.SOP 03-3 addresses the accounting for differences between contractual cash flows
and the cash flows expected to be collected from purchased loans or debt securities if those
differences are attributable, in part, to credit quality, SOP 03-3 requires purchased loans
and debt securities to be recorded initially at fair value based on the present value of the
cash flows expected to be collected with no carryover of any valuation allowance previously
recognized by the seller. Interest income should be recognized based on the effective yield
from the cash flows to be collected. To the extent that the purchased loans or debt
securities experience subsequent deterioration in credit quality, a valuation allowance would
be established for any additional cash flows that are not expected to be received. However,
if more cash flows subsequently are expected to be received than originally estimated, the
effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for
loans and debt securities acquired after December 31, 2004. Management does not expect the
adoption of this statement to have a material impact on the Companys consolidated results of
operation and financial position.In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 105 (SAB 105) was issued, which provides guidance regarding loan commitments that are
accounted for as derivative instruments under FASB No. 133 (as amended), Accounting for
Derivative Instruments and Hedging Activities.In SAB 105, the SEC ruled that the amount of
the expected servicing rights should not be included when determining the fair value of
derivative interest rate lock commitments. This guidance must be applied to rate locks
initiated after March 31, 2004. Management does not anticipate the issuance of this Bulletin
to have a material impact on the Companys consolidated results of operation and financial
position. 87




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In March 2004, the Emerging Issues Task Force (EITF) reached consensus on the guidance
provided in EITF Issue No. 03-1, The Meaning of Other Than Temporary Impairment and its
Application to Certain Investments(EITF 03-1), as applicable to debt and equity securities
that are within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and equity securities that are accounted for using the cost method
specified in Accounting Policy Board Opinion No. 18, The Equity Method of Accounting for
Investments in Common Stock.An investment is impaired if the fair value of the investment is
less than its cost. EITF 03-1 outlines that an impairment would be considered
other-than-temporary unless: a) the investor has the ability and intent to hold an investment
for a reasonable period of time sufficient for the recovery of the fair value up to (or
beyond) the cost of the investment, and b) evidence indicating that the cost of the investment
is recoverable within a reasonable period of time outweighs evidence to the contrary.
Although not presumptive, a pattern of selling investments prior to the forecasted recovery of
fair value may call into question the investors intent. In addition, the severity and
duration of the impairment should also be considered in determining whether the impairment is
other-than-temporary. In September 2004, the FASB issued a proposed Board-directed FASB Staff
Position, FSP EITF Issue 03-1-a, Implementation Guidance of the Application of Paragraph 16 of
EITF Issue No. 03-1.The proposed FSP would provide implementation guidance with respect to
debt securities that are impaired solely due to interest rates and/or sector spreads and
analyzed for other-than-temporary impairment under paragraph 16 of Issue 03-1. The Board also
issued FSP EITF Issue 03-1-b which delays the effective date for the measurement and
recognition guidance contained in paragraphs 10-20 of EITF 03-1. The delay does not suspend
the requirement to recognize other-than temporary impairments as required by existing
authoritative literature. Adoption of this standard may cause the Company to recognize under
current guidance or to recognize such losses in earlier periods, especially those due to
increases in interest rates. Since fluctuations in fair value for available-for-sale
securities are already recorded in accumulative other comprehensive (income) loss, adoption of
this standard is not expected to have a significant impact on stockholders equity.In December 2004, the FASB revised SFAS No. 123 (R) (SFAS 123 (R)), Share Based Payment.
SFAS 123 (R) replaced existing requirements under SFAS No. 123 and APB 25. SFAS 123 (R)
requires companies to measure and recognize compensation expense equal to the fair value of
stock options or other shares based payments. SFAS 123 (R)is effective for all interim and
annual periods beginning after June 15, 2005 and, thus, will be effective for the Company
beginning with the third quarter and calendar year 2005. The Company is in the process of
evaluating the impact of this standard on its consolidated results of operation and financial
position.In December 2004, the FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets,
an amendment of APB 29, Accounting for Nonmonetary Transactions. This statement amends the
principle that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged and more broadly provides for exceptions regarding exchanges of
nonmonetary assets that do not have commercial substance. This Statement is effective for
nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005.
Management does not anticipate the issuance of this standard to have a material impact on the
Companys consolidated results of operation and financial position.Reclassifications- Certain reclassifications have been made to the prior financial statements
to conform to the current year presentation.Stock Split The accompanying consolidated financial statements of the Company reflect the 6
for 5 stock split in the form of a stock dividend payable on March 11, 2004 to holders of
record on 88




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February 25, 2004. Fractional shares distributed in connection with this stock dividend were
paid in cash based on the closing market price on the record date. The accompanying
consolidated financial statements also reflect a 3-for-1 split of the Companys common stock,
distributed in the form of a stock dividend on September 25, 2002 to shareholders of record on
September 11, 2002. All share and per share information herein has been retroactively
restated to reflect these stock splits. The accompanying consolidated financial statements
also reflect an increase in its authorized capital shares from 3,000,000 to 12,000,000, which
occurred contemporaneously with the stock split. Of the 12,000,000 shares authorized,
1,200,000 shares is reserved for preferred stock. 89




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2.
    LOANS RECEIVABLEThe Banks loan portfolio as of December 31 is summarized as follows: 2004
    
    
    2003Real estate loans:Residential property - one to four units
    
    $
    100,485
    
    
    $
    93,725Residential property - more than four units
    
    
    84,937
    
    
    
    82,090Residential property - construction
    
    
    22,379
    
    
    
    14,376Nonresidential property - construction
    
    
    12,602
    
    
    
    16,459Commercial and other income - producing properties
    
    
    260,759
    
    
    
    234,606Loans for the acquisition and development of land
    
    
    27,460
    
    
    
    8,312Total real estate loans
    
    
    508,622
    
    
    
    449,568Commercial and industrial loans
    
    
    72,240
    
    
    
    56,942Consumer loans
    
    
    23,757
    
    
    
    16,613Loans collateralized by deposit accounts
    
    
    864
    
    
    
    895Consumer line-of-credit loans
    
    
    180
    
    
    
    140605,663
    
    
    
    524,158Net deferred loan fees
    
    
    (1,730
    )
    
    
    (1,394
    )Net (discounts) premiums
    
    
    (263
    )
    
    
    319Allowance for loan losses
    
    
    (5,228
    )
    
    
    (4,587
    )Loans receivable, net
    
    $
    598,442
    
    
    $
    518,496
  The Banks lending is concentrated in Californias Central Coast, Kansas City and the
Scottsdale, Arizona metropolitan area. A deterioration in the economic conditions of these
markets could adversely affect our business, financial condition and profitability. Such
deterioration could give rise to increased loan delinquencies, increased problem asset and
foreclosures, decreased loan demand and a decline in real estate values.At December 31, 2004, Los Padres Banks regulatory limit on loans-to-one borrower was $11.6
million and its five largest loans or groups of loans-to-one borrower, including related
entities, aggregated $9.6 million, $9.2 million, $9.1 million, $8.8 million and $8.6 million.
These five largest loans or loan concentrations were secured by commercial real estate and
development of single family residences. All of these loans or loan concentrations were
performing in accordance with their payment terms at December 31, 2004.Activity in the allowance for loan losses is summarized as follows for the years ended
December 31: 2004
    
    
    2003
    
    
    2002Balance, beginning of year
    
    $
    4,587
    
    
    $
    3,797
    
    
    $
    3,736Charge-offs
    
    
    (9
    )
    
    
    
    
    
    
    (330
    )Recoveries
    
    
    
    
    
    
    
    
    
    
    Provision for loan losses
    
    
    650
    
    
    
    790
    
    
    
    391Balance, end of year
    
    $
    5,228
    
    
    $
    4,587
    
    
    $
    3,979
 90




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Loans for which impairment has been recognized are as follows at December 31: 2004
    
    
    2003Impaired loans with a valuation allowance
    
    $
    
    
    
    $
    723Impaired loans without a valuation allowance
    
    
    157
    
    
    
    Total impaired loans
    
    
    157
    
    
    
    723Valuation allowance related to impaired loans
    
    $
    
    
    
    $
    50
 Year ended December 31,2004
    
    
    2003
    
    
    2002Average recorded investment in impaired loans
    
    $
    440
    
    
    $
    596
    
    
    $
    429Interest income recognized on impaired loans
    
    
    14
    
    
    
    44
    
    
    
    52
  At December 31, 2004 and 2003, the Bank had the following outstanding loan commitments: Unfunded Loan
Commitments as of December 31,  (In Thousands)
 2004
    
    
    2003Commercial lines of credit
    
    $
    26,146
    
    
    $
    27,635Consumer lines of credit
    
    
    35,898
    
    
    
    22,568Undisbursed portion of loans in process
    
    
    44,642
    
    
    
    17,050Approved but, not funded mortgage
loans
    
    
    19,735
    
    
    
    34,381Approved but, not funded commercial
loans
    
    
    1,790
    
    
    
    13,589Approved but not funded consumer
loans
    
    
    1,158
    
    
    
    416Letters of credit
    
    
    1,439
    
    
    
    861Total commitments
    
    $
    130,808
    
    
    $
    116,500
 91




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3.
    SECURITIESThe amortized cost and estimated fair values of securities available for sale are summarized
as follows:Securities Available for Sale: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004Mortgage-backed securities  pass throughs
    
    $
    114,365
    
    
    $
    294
    
    
    $
    (957
    )
    
    $
    113,702Collateralized mortgage obligations
    
    
    73,894
    
    
    
    
    
    
    
    (495
    )
    
    
    73,399Commercial mortgage-backed securities
    
    
    47,545
    
    
    
    472
    
    
    
    (96
    )
    
    
    47,921Asset-backed securities (underlying securities mortgages)
    
    
    187,949
    
    
    
    1,504
    
    
    
    (64
    )
    
    
    189,389Asset-backed securities
    
    
    5,460
    
    
    
    34
    
    
    
    (351
    )
    
    
    5,143Corporate debt securities
    
    
    1,569
    
    
    
    83
    
    
    
    
    
    
    
    1,652$
    430,782
    
    
    $
    2,387
    
    
    $
    (1,963
    )
    
    $
    431,206
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2003Mortgage-backed securities  pass throughs
    
    $
    129,766
    
    
    $
    915
    
    
    $
    (307
    )
    
    $
    130,374Collateralized mortgage obligations
    
    
    48,704
    
    
    
    
    
    
    
    (123
    )
    
    
    48,581Commercial mortgage-backed securities
    
    
    59,927
    
    
    
    1,022
    
    
    
    (33
    )
    
    
    60,916Asset-backed securities (underlying securities mortgages)
    
    
    151,909
    
    
    
    404
    
    
    
    (22
    )
    
    
    152,291Asset-backed securities
    
    
    5,912
    
    
    
    
    
    
    
    (951
    )
    
    
    4,961Corporate debt securities
    
    
    1,489
    
    
    
    79
    
    
    
    
    
    
    
    1,568$
    397,707
    
    
    $
    2,420
    
    
    $
    (1,436
    )
    
    $
    398,691
  The fair values and unrealized losses of the securities classified as available-for-sale or
held-to-maturity with unrealized losses as of December 31, 2004 and 2003 segregated by investments
that have been in a continuous unrealized loss position for less than 12 months and investments
that have been in a continuous unrealized loss position for 12 months or longer are summarized
below: 92




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Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesDecember 31, 2004Mortgage-backed securities -
pass throughs
    
    $
    54,582
    
    
    $
    (350
    )
    
    $
    29,319
    
    
    $
    (607
    )
    
    $
    83,901
    
    
    $
    (957
    )Collateralized mortgage obligations
    
    
    61,773
    
    
    
    (271
    )
    
    
    11,626
    
    
    
    (224
    )
    
    
    73,399
    
    
    
    (495
    )Commercial mortgage-backed
securities
    
    
    7,090
    
    
    
    (70
    )
    
    
    832
    
    
    
    (26
    )
    
    
    7,922
    
    
    
    (96
    )Asset-backed securities -
(underlying securities mortgages)
    
    
    18,711
    
    
    
    (64
    )
    
    
    1,302
    
    
    
    
    
    
    
    20,013
    
    
    
    (64
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    4,216
    
    
    
    (351
    )
    
    
    4,216
    
    
    
    (351
    )$
    142,156
    
    
    $
    (755
    )
    
    $
    47,295
    
    
    $
    (1,208
    )
    
    $
    189,451
    
    
    $
    (1,963
    )
 Less than 12 Months
    
    
    12 Months or More
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesDecember 31, 2003Mortgage-backed securities -
pass throughs
    
    $
    49,450
    
    
    $
    (307
    )
    
    $
    
    
    
    $
    
    
    
    $
    49,450
    
    
    $
    (307
    )Collateralized mortgage obligations
    
    
    48,581
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    48,581
    
    
    
    (123
    )Commercial mortgage-backed
securities
    
    
    2,766
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    2,766
    
    
    
    (33
    )Asset-backed securities
(underlying securities mortgage)
    
    
    24,131
    
    
    
    (22
    )
    
    
    
    
    
    
    
    
    
    
    24,131
    
    
    
    (22
    )Asset-backed securities
    
    
    4,961
    
    
    
    (951
    )
    
    
    
    
    
    
    
    
    
    
    4,961
    
    
    
    (951
    )$
    129,889
    
    
    $
    (1,436
    )
    
    
    
    
    
    
    
    
    
    $
    129,889
    
    
    $
    (1,436
    )
  Our mortgage-backed securities are issued by U.S. Government agencies and government sponsored
enterprise, which primarily include Freddie Mac, Fannie Mae and the Government National Mortgage
Association (Ginnie Mae). As of December 31, 2004, there are 58 mortgage-backed securities that
are in an unrealized loss position with 25 of the mortgage-backed securities in an unrealized loss
position for over twelve months. In December 31, 2003, there were 26 mortgage-backed securities in
a unrealized loss position and no securities in a loss position for over twelve months. Management
believes that the unrealized losses associated with these investments are attributable to changes
in interest rates and spreads, and accordingly, the unrealized losses are not other-than-temporary
impairments. Management intends to hold these securities until recovery.Our collateralized mortgage obligations are issued by private entities or trusts and, as of
December 31, 2004, are all rated AAA by a nationally recognized rating agency. As of December 31,
2004 and December 31, 2003, there are nine and eight, respectively collateralized mortgage
obligation securities that are in an unrealized loss position. Of the nine securities in an
unrealized loss position as of December 31, 2004, four of the securities have been in an unrealized
loss position for over twelve months and in December 31, 2003 there were no securities in an
unrealized loss position for over twelve months. Due to the AAA ratings noted above, Management
believes that the unrealized losses associated with these investments are attributable to changes
in interest rates and spreads, and accordingly, the unrealized 93




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losses are not other-than-temporary
impairments. Management intends to hold these securities until recovery.Our commercial mortgaged-backed securities are issued by various entities or trusts and, as of
December 31, 2004, all are rated as investment grade by a nationally recognized rating agency. As
of December 31, 2004, there are four commercial mortgage-backed securities that are in an
unrealized loss position with one security in an unrealized loss position for over twelve months.
As of December 31, 2003, there were three commercial mortgage-backed securities that were in an
unrealized loss position with no securities in an unrealized loss position for over twelve months.
Due to the investment grade ratings noted above,
management believes that the unrealized losses associated with these investments are attributable
to changes in interest rates and spreads, and accordingly, the unrealized
losses are not
other-than-temporary impairments. Management intends to hold these securities until recovery.All but one of our asset-backed securities are issued by private entities or trusts and, as of
December 31, 2004, are all rated as investment grade by a nationally recognized rating agency. With
the exception of the security discussed in the next paragraph, the underlying collateral of these
investments are single-family mortgages. As of December 31, 2004, there are seven asset-backed
securities that are in an unrealized loss position and as of December 31, 2003, there are nine
asset-backed securities that are in an unrealized loss position, for both periods, there are no
securities in an unrealized loss position for over twelve months. As to the mortgage-related asset
backed securities, management believes that the unrealized losses associated with these investments
are attributable to changes in interest rates and spreads, and accordingly, the unrealized losses
are not other-than-temporary impairments. Management intends to hold these securities until
recovery.The asset-backed securities are collateralized by a pool of loans and leases on medical equipment
and medical business loans and they have a fair value of $5,143 and $4,961 as of December 31, 2004
and 2003, respectively. The securities are of the senior tranches with priority cash flow rights.
This medical equipment, asset-backed security is rated CCC by Moodys and B1 by Fitch, as of
December 31, 2004. Management believes the improvement in the unrealized loss from $952,000 as of
December 31, 2003 to $351,000 as of December 31, 2004 is attributed to the decrease in
delinquencies and default rates of the underlying loans. The delinquencies on the underlying loans
of these securities have dropped from 28.1% as of the December 2003 servicers report to 13.4% per
the December 2004 servicer report. Furthermore, management performs a stress test of the cash
flows based on conservative delinquency, default and recovery rates on the underlying loans. Based
on this analysis, all payments can be made on our DVI security and, as such, the current unrealized
loss associated with this investment is not an other-than-temporary impairment. Management
intends to hold these securities until recovery. 94




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The amortized cost and fair value of the available for sale debt securities by
contractual maturity at December 31, 2004 are as follows: Amortized
    
    
    FairCost
    
    
    ValueMortgage-backed
securities - pass throughsDue from one to five years
    
    $
    1,453
    
    
    $
    1,463Due from five to ten years
    
    
    1,995
    
    
    
    2,013Due over ten years
    
    
    110,917
    
    
    
    110,226Total
mortgage backed securities - pass throughs
    
    
    114,365
    
    
    
    113,702Collateralized mortgage obligationsDue over ten years
    
    
    73,894
    
    
    
    73,399Total collateralized mortgage obligations
    
    
    73,894
    
    
    
    73,399Commercial mortgage-backed securitiesDue from one to five years
    
    
    18,269
    
    
    
    18,597Due over ten years
    
    
    29,276
    
    
    
    29,324Total commercial mortgage-back securities
    
    
    47,545
    
    
    
    47,921Asset-backed securities (underlying securities
mortgages)Due over ten years
    
    
    187,949
    
    
    
    189,389Total asset backed-securities
    
    
    187,949
    
    
    
    189,389Asset-backed securitiesDue from five to ten years
    
    
    5,460
    
    
    
    5,143Total asset backed-securities
    
    
    5,460
    
    
    
    5,143Corporate debt securitiesDue over ten years
    
    
    1,569
    
    
    
    1,652Total corporate debt securities
    
    
    1,569
    
    
    
    1,652Total
    
    $
    430,782
    
    
    $
    431,206
 95




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##### Table of Contents



Proceeds from sales of available for sale securities were $28,316, $34,033 and $2,378, with
related gross realized gains of $690,000, $1.5 million and $145,000 for 2004, 2003 and 2002,
respectively. Securities Held to Maturity: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004Mortgage-backed securities
    
    $
    93
    
    
    $
    6
    
    
    
    
    
    
    $
    99Total
    
    $
    93
    
    
    $
    6
    
    
    
    
    
    
    $
    99
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2003Mortgage-backed securities
    
    $
    222
    
    
    $
    18
    
    
    
    
    
    
    $
    240Total
    
    $
    222
    
    
    $
    18
    
    
    
    
    
    
    $
    240
 The amortized cost and fair value of held to maturity debt securities by contractual maturity
at December 31, 2004 are as follows: Amortized
    
    
    FairCost
    
    
    ValueMortgage-backed securities -Due from five to ten years
    
    $
    90
    
    
    $
    95Due over 10 years
    
    
    3
    
    
    
    4Total
    
    $
    93
    
    
    $
    99
 96




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4. PREMISES AND EQUIPMENT Premises and equipment consist of the following at December 31: DepreciableLives (years)
    
    
    2004
    
    
    2003Land
    
    
    
    
    
    $
    1,281
    
    
    $
    756Office building
    
    
    15-30
    
    
    
    2,974
    
    
    
    1,314Leasehold improvements
    
    
    3 to 25
    
    
    
    3,512
    
    
    
    3,014Furniture, fixtures and equipment
    
    
    3 to 20
    
    
    
    5,883
    
    
    
    5,238Total
    
    
    
    
    
    
    13,650
    
    
    
    10,322Less: accumulated depreciation and amortization
    
    
    
    
    
    
    4,764
    
    
    
    3,868Premises and equipment, net
    
    
    
    
    
    $
    8,886
    
    
    $
    6,454
 5. DEPOSITS A summary of deposits by type of account as of December 31 is as follows: 2004
    
    
    2003Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    AverageAmount
    
    
    Interest Rate (1)
    
    
    Amount
    
    
    Interest Rate(1)Noninterest bearing:Noninterest bearing
    
    $
    22,235
    
    
    
    
    
    
    $
    25,456
    
    
    
    Commercial noninterest bearing
    
    
    11,395
    
    
    
    
    
    
    
    3,815
    
    
    
    Total noninterest bearing
    
    
    33,630
    
    
    
    
    
    
    
    29,271
    
    
    
    Interest bearing:Passbook
    
    
    22,324
    
    
    
    0.53
    %
    
    
    19,868
    
    
    
    0.45
    %NOW accounts
    
    
    33,876
    
    
    
    0.06
    %
    
    
    35,022
    
    
    
    0.06
    %Money Market
    
    
    75,743
    
    
    
    1.64
    %
    
    
    85,593
    
    
    
    1.36
    %Commercial Money Market
    
    
    8,567
    
    
    
    1.07
    %
    
    
    6,475
    
    
    
    0.50
    %Total interest bearing
    
    
    140,510
    
    
    
    1.05
    %
    
    
    146,958
    
    
    
    0.89
    %Total
    
    
    174,140
    
    
    
    0.85
    %
    
    
    176,229
    
    
    
    0.74
    %Certificates of deposits:Over $100
    
    
    220,685
    
    
    
    2.37
    %
    
    
    202,767
    
    
    
    2.16
    %Under $100
    
    
    203,357
    
    
    
    2.42
    %
    
    
    191,701
    
    
    
    2.28
    %Total certificates of deposits
    
    
    424,042
    
    
    
    
    
    
    
    394,468Total deposits
    
    $
    598,182
    
    
    
    1.93
    %
    
    $
    570,697
    
    
    
    1.76
    %
   (1)
    
    Weighted Average interest
rate as of the end of the period.97




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As of December 31, 2004, certificates of deposits are scheduled to mature as follows: $100,000 or
    
    
    Less thanDecember 31
    
    Greater
    
    
    $100,000
    
    
    Total2005
    
    $
    202,966
    
    
    $
    178,171
    
    
    $
    381,1372006
    
    
    9,921
    
    
    
    12,380
    
    
    
    22,3012007
    
    
    3,940
    
    
    
    5,803
    
    
    
    9,7432008
    
    
    538
    
    
    
    2,056
    
    
    
    2,5942009 and beyond


    
    
    3,320

    
    
    
    4,947
    
    
    
    8,267$
    220,685
    
    
    $
    203,357
    
    
    $
    424,042
  6.
    FEDERAL HOME LOAN BANK ADVANCESWe obtain both long-term fixed-rate and short-term variable-rate advances from the FHLB of San
Francisco upon the security of certain of our residential first mortgage loans,
mortgage-backed securities or FHLB stock. FHLB of San Francisco advances are available for
general business purposes to expand lending and investing activities. Advances from the FHLB
of San Francisco are made pursuant to several different credit programs, each of which has its
own interest rate and range of maturities. Our advances are limited to 35% of our total Bank
assets, or $377,975 and $340,589 at December 31, 2004 and 2003, respectively.FHLB advances are collateralized by the investment in the stock of the FHLB and certain
mortgage loans aggregating $282,765 and $262,298 at December 31, 2004 and 2003, respectively,
and mortgage-backed securities aggregating $176,712 and $119,629, current par value, at
December 31, 2004 and 2003, respectively. The weighted-average interest rate on these
advances was 2.52% and 1.49% at December 31, 2004 and 2003 respectively.The maturities of FHLB advances at December 31 are as follows: 20042005
    
    $
    297,0002010
    
    
    19,000$
    316,000
 98




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7.
    NOTE PAYABLEAt December 31, 2004 and 2003, the Company has a loan facility from two banks consisting of a
revolving line of credit of $15.0 million, and we have not made any draws on the line of
credit since we paid off the outstanding balance of $11.3 million in 2003.On September 16, 2004, we entered into an amendment to our credit agreement, which reduced the
LIBOR margin range from 2.0% to 3.0% to 1.75% to 2.75%. Under the new terms, interest is
payable quarterly and the rate is based on three defined performance-based levels determined
from quarterly operating results related to core profitability and nonperforming asset ratios:
Level 1 allows for the choice of London Interbank Offered Rate (LIBOR) plus 175 basis
points (in maturities of 30, 60 or 90 days) or prime rate less 50 basis points; Level 2 allows
for the choice of LIBOR plus 225 basis points or prime rate less 50 basis points; Level 3
allows for the choice of LIBOR plus 275 basis points or prime rate. At December 31, 2004, the
Company qualified for Level 1 loan pricing. A .25% commitment fee on the unused portion of
the line is payable quarterly.The credit agreement contains a number of significant covenants that restrict our ability to
dispose of assets, incur additional indebtedness, invest in mortgage derivative securities
above certain thresholds, create liens on assets, engage in mergers or consolidations or a
change-of control, engage in certain transactions with affiliates, pay cash dividends or
repurchase common stock. The credit agreement also requires us to comply with specified
financial ratios and tests, including causing Los Padres Bank to maintain a ratio of
non-performing assets to the sum of Tier 1 risk-based capital plus loan loss reserves of not
more than 0.20 to 1, maintaining a ratio of outstanding loans under the credit agreement to
the stockholders equity of Los Padres Bank of less than 0.50 to 1, maintaining the Los Padres
Bank status as a well capitalized institution and complying with minimum core profitability
requirements. The covenant that restricts payment of cash dividends in an aggregate amount
not to exceed the greater of (a) $450,000 during any fiscal quarter, or (b) 40% of our
consolidated net income during any fiscal quarter or declare dividends at any time an event of
default has occurred under the revolving line of credit. Los Padres Banks status as a well
capitalized institution and complying with minimum core profitability requirements is also a
covenant associated with the credit agreement. Management believes that as of December 31,
2004, it was in compliance with all of such covenants and restrictions and does not anticipate
that such covenants and restrictions will significantly limit its operations.8.
    OTHER DEBTOn September 27, 2004, the Company completed a $10.3 million capital trust offering. The
capital trust securities bear interest at LIBOR plus 1.90% and will mature on October 7, 2034.
The capital securities were issued through a newly formed trust, Harrington West Capital
Trust II, in a private transaction. Interest is payable quarterly.On September 25, 2003, the Company completed a $15.5 million capital trust offering. The
capital trust securities bear interest at LIBOR plus 2.85% and will mature on October 8, 2033.
The capital securities were issued through a newly formed trust, Harrington West Capital
Trust I, in a private transaction. Interest is payable quarterly. 99




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9.
    SECURITIES SOLD UNDER REPURCHASE AGREEMENTSWe obtain funds from the sales of securities to investment dealers under agreements to
repurchase, known as reverse repurchase agreements. In a reverse repurchase agreement
transaction, we will generally sell a mortgage-backed security agreeing to repurchase either the
same or a substantially identical security on a specific later date. For agreements in which we
have agreed to repurchase substantially identical securities, the dealers may sell, loan or
otherwise dispose of our securities in the normal course of their operations; however, such
dealers or third party custodians safe-keep the securities which are to be specifically
repurchased by us. At December 31, 2004 and 2003, the Company had a fair value of $86.5 million
and $71.9 million of mortgage-backed securities from the available-for-sale portfolio, which
were pledged as collateral for our repurchase agreements. Reverse repurchase transactions are
accounted for as financing arrangements rather than as sales of such securities, and the
obligation to repurchase such securities is reflected as a liability in our consolidated
financial statements.At December 31, 2004 and 2003, we had five wholesale repurchase agreements with Citigroup
Financial Services totaling $79.0 million and $65.0 million with a weighted average coupon of
2.59% and 2.61% and maturities ranging from July 2005 to July 2010. We also had retail
repurchase agreements with our customers of $689 and $728 at December 31, 2004 and 2003,
respectively. The retail repurchase agreements mature daily and have a weighted-average interest
rate of .93% and .63% at December 31, 2004 and 2003, respectively. During the year ended
December 31, 2004, 2003 and 2002, the maximum balance of our repurchase agreements at any
month-end was $80.6 million, $65.6 million and $2.0 million, respectively and our average
balance was $75.5, $35.5 and $1.0 million, respectively.10.
    INCOME TAXESThe provision for taxes on income consists of the following components for the years ended
December 31: 2004
    
    
    2003
    
    
    2002Current tax expense:Federal
    
    $
    3,737
    
    
    $
    4,799
    
    
    $
    2,495State
    
    
    918
    
    
    
    1,393
    
    
    
    9234,655
    
    
    
    6,192
    
    
    
    3,418Deferred tax expense (benefit):Federal
    
    
    606
    
    
    
    (663
    )
    
    
    165State
    
    
    175
    
    
    
    (280
    )
    
    
    (54
    )781
    
    
    
    (943
    )
    
    
    111$
    5,436
    
    
    $
    5,249
    
    
    $
    3,529
 100




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The actual tax rates differed from the statutory rates as follows for the years ended December
31: 2004
    
    
    2003
    
    
    2002Federal income taxes at statutory rates
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase resulting from:State tax, net of federal benefit
    
    
    5.2
    
    
    
    5.7
    
    
    
    6.5Other, net
    
    
    (0.4
    )
    
    
    0.8
    
    
    
    (0.3
    )39.8
    %
    
    
    41.5
    %
    
    
    41.2
    %
  The following is a summary of the components of the net deferred tax asset at December 31: 2004
    
    
    2003Deferred tax asset:Unrealized hedging loss on cash flow hedges
    
    $
    1,719
    
    
    $
    2,518Allowance for loan losses
    
    
    2,237
    
    
    
    1,923State tax
    
    
    432
    
    
    
    455Other
    
    
    83
    
    
    
    Depreciation
    
    
    89
    
    
    
    177Gross deferred tax asset
    
    
    4,560
    
    
    
    5,073Deferred tax liabilities:Net loan fees/costs
    
    
    1,829
    
    
    
    1,329FHLB stock dividends
    
    
    998
    
    
    
    624Unrealized gain on available for sale securities
    
    
    171
    
    
    
    408Other
    
    
    248
    
    
    
    61Gross deferred tax liability
    
    
    3,246
    
    
    
    2,422Net deferred tax asset
    
    $
    1,314
    
    
    $
    2,651
 101




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11.
    STOCKHOLDERS EQUITYRetained earnings are restricted to the extent that earnings deducted for tax purposes as bad
debt deductions are not available for payment of cash dividends or other distributions to
stockholders without payment of federal income taxes by the Bank at the then-prevailing
corporate tax rates. At December 31, 2004, this restricted amount was $671.Qualified Stock Option Plan- The Company has a qualified stock option plan that provides for
the granting of stock options to key employees of the Bank. Options granted under the plan
are vested ratably over a four-year period. The option price is based on a determination of a
price that is not less than the fair value of the shares at the date of grant by the
Compensation Committee and ratified by the Board of Directors.During 1996, the Company granted 180,000 options with a stock price of $4.86 per share and an
expiration date of April 14, 2001. Such options were granted to Smith Breeden Associates
(SBA) for financial advisory services provided in connection with the Companys acquisition
of the Bank. The estimated value of such options as of the date granted was considered as
part of the purchase price of the Bank. During 2001, 129,056 of the options were exercised
and the balance of 50,944 options was extended to expire on June 30, 2003.During 2002, the maturity of the 50,944 options was extended two years from June 30, 2003 to
June 30, 2005. A $124 pre-tax charge to earnings was recorded in 2002, which was equal to the
change in the fair value of the underlying stock since the last extension, applied to the
number of options extended. Specifically, the $124 pre-tax charge was calculated by taking
the difference between the fair values of the underlying stock at the extension date (i.e.,
$9.00) and the fair value of the stock at the previous extension date (i.e., $6.66) multiplied
by 50,944. The offsetting entry was recorded to paid-in capital in the stockholders equity
section. 102




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A summary of the status of the Companys stock options as of December 31 and changes during
the years are presented below: 2004
    
    
    2003
    
    
    2002Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceIncentive stock options:Outstanding, beginning of year
    
    
    572,730
    
    
    $
    6.88
    
    
    
    508,590
    
    
    $
    6.46
    
    
    
    447,660
    
    
    $
    6.25Granted
    
    
    181,250
    
    
    $
    15.98
    
    
    
    76,740
    
    
    $
    9.40
    
    
    
    72,630
    
    
    $
    7.88Expired unexercised
    
    
    (3,030
    )
    
    $
    12.78
    
    
    
    
    
    
    
    
    
    
    
    (11,700
    )
    
    $
    7.13Options exercised
    
    
    (72,825
    )
    
    $
    7.03
    
    
    
    (12,600
    )
    
    $
    5.52Outstanding, end of year
    
    
    678,125
    
    
    $
    9.27
    
    
    
    572,730
    
    
    $
    6.88
    
    
    
    508,590
    
    
    $
    6.46Stock options granted to SBA
    
    
    50,944
    
    
    $
    4.86
    
    
    
    50,944
    
    
    $
    4.86
    
    
    
    50,944
    
    
    $
    4.86Outstanding, end of year
    
    
    729,069
    
    
    $
    8.95
    
    
    
    623,674
    
    
    $
    6.71
    
    
    
    559,534
    
    
    $
    6.32Exercisable, end of year
    
    
    458,913
    
    
    $
    6.29
    
    
    
    401,400
    
    
    $
    6.17
    
    
    
    381,466
    
    
    $
    6.13
  The outstanding options have prices ranging from $4.86 to $18.18. Remaining available
options to be issued under the stock option plan were 22,889 and 190,190 for December 31, 2004
and 2003, respectively. Options Outstanding
    
    
    Options ExercisableRange of
    
    
    
    
    
    
    RemainingExercise
    
    
    Number
    
    
    Contractual
    
    Exercise
    
    
    Number
    
    
    ExercisePrices
    
    
    Options
    
    
    Life (years)
    
    Price
    
    
    Options
    
    
    Price$
    4.86
    
    
    
    124,744
    
    
    
    1.1
    
    
    $
    4.86
    
    
    
    124,744
    
    
    $
    4.86$
    5.69
    
    
    
    84,600
    
    
    
    2.5
    
    
    $
    5.69
    
    
    
    84,600
    
    
    $
    5.69$
    6.94
    
    
    
    212,445
    
    
    
    4.9
    
    
    $
    6.94
    
    
    
    204,030
    
    
    $
    6.94$
    7.78
    
    
    
    55,350
    
    
    
    7.0
    
    
    $
    7.78
    
    
    
    26,234
    
    
    $
    7.78$
    8.75
    
    
    
    7,200
    
    
    
    7.5
    
    
    $
    8.75
    
    
    
    3,600
    
    
    $
    8.75$
    9.38
    
    
    
    62,880
    
    
    
    8.0
    
    
    $
    9.38
    
    
    
    14,505
    
    
    $
    9.38$
    9.58
    
    
    
    4,800
    
    
    
    8.1
    
    
    $
    9.58
    
    
    
    1,200
    
    
    $
    9.58$
    10.22
    
    
    
    900
    
    
    
    8.5
    
    
    $
    10.22$
    13.68
    
    
    
    82,200
    
    
    
    9.0
    
    
    $
    13.68$
    15.98
    
    
    
    1,200
    
    
    
    9.2
    
    
    $
    15.98$
    16.95
    
    
    
    2,000
    
    
    
    9.2
    
    
    $
    16.95$
    18.18
    
    
    
    90,750
    
    
    
    10.0
    
    
    $
    18.18Total
    
    
    729,069
    
    
    
    5.6
    
    
    $
    8.95
    
    
    
    458,913
    
    
    $
    6.29
 103




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##### Table of Contents



12.
    REGULATORY CAPITAL REQUIREMENTSThe Bank is subject to various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Banks financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Banks assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The Banks
capital amounts and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.Quantitative measures that have been established by regulation to ensure capital adequacy
require the Bank to maintain minimum capital amounts and ratios (set forth in the table
below). The Banks primary regulatory agency, the Office of Thrift Supervision (OTS),
currently requires that the Bank maintain minimum ratios of tangible capital (as defined in
the regulations) to tangible assets of 1.5%, core capital (as defined) to adjusted tangible
assets of 4%, and total capital (as defined) to risk-weighted assets of 8%. These capital
requirements are viewed as minimum standards by the OTS, and most institutions are expected to
maintain capital levels well above the minimum. Minimum capital levels higher than those
provided in the regulations may be established by the OTS for individual savings associations,
upon a determination that the savings associations capital is or may become inadequate in
view of its circumstances.During 2002, due to our business strategy which was concentrated on growth, a shift in our
lending focus to more commercial lending and the size of our securities portfolios, we agreed
with the OTS that we would maintain a total risk-based capital ratio and a leverage capital
ratio of at least 11.0% and 6.0%, respectively, which was in excess of the OTS minimum
requirements. During 2003, the OTS agreed to remove the 11.0% and 6.0% requirement noted
above.As of December 31, 2004 and 2003, the most recent notification from the OTS categorized the
Bank as well capitalized under the regulatory framework for prompt corrective action. To be

categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or
events since that notification which management believes have changed the institutions
category.Federal regulations place certain restrictions on dividends paid by the Bank to the Company.
The total amount of dividends that may be paid at any date is generally limited to the
retained earnings of the Bank. At December 31, 2004, the Banks retained earnings available
for the payment of dividends were $12,694. Accordingly, $39,966 of the Companys equity in
the net assets of the Bank was restricted at December 31, 2004. In addition, dividends paid
by the Bank to the Company would be prohibited if the effect thereof would cause the Banks
capital to be reduced below applicable minimum capital requirements. 104




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REGULATORY CAPITAL
FINANCIAL STATEMENT FOOTNOTE To Be WellCapitalized UnderFor Capital
    
    
    Minimum Required
    
    
    Prompt CorrectiveActual
    
    
    Adequacy Purposes
    
    
    by OTS Agreement
    
    
    Actions ProvisionsAmount
    
    
    Ratio
    
    
    Amount
    
    
    
    
    
    
    Ratio
    
    
    Amount
    
    
    
    
    
    
    Ratio
    
    
    Amount
    
    
    
    
    
    
    RatioAs of December 31, 2004:Total Capital(to risk weighted assets)
    
    $
    77,015
    
    
    
    11.13
    %
    
    $
    55,359
    
    
    
    3
    
    
    
    8.00
    %
    
    $
    72,659
    
    
    
    3
    
    
    
    10.50
    %
    
    $
    69,199
    
    
    
    3
    
    
    
    10.00
    %Core capital(to adjusted tangible assets)
    
    $
    71,787
    
    
    
    6.68
    %
    
    
    42,977
    
    
    
    3
    
    
    
    4.00
    %
    
    
    59,093
    
    
    
    3
    
    
    
    5.50
    %
    
    
    53,721
    
    
    
    3
    
    
    
    5.00
    %Tangible capital(to tangible assets)
    
    $
    71,787
    
    
    
    6.68
    %
    
    
    16,116
    
    
    
    3
    

    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital(to risk weighted assets)
    
    $
    71,787
    
    
    
    10.37
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    41,519
    
    
    
    3
    
    
    
    6.00
    %As of December 31, 2003:Total Capital(to risk weighted assets)
    
    $
    63,461
    
    
    
    10.99
    %
    
    $
    46,209
    
    
    
    3
    
    
    
    8.00
    %
    
    $
    60,649
    
    
    
    3
    
    
    
    10.50
    %
    
    $
    57,761
    
    
    
    3
    
    
    
    10.00
    %Core capital(to adjusted tangible assets)
    
    $
    58,924
    
    
    
    6.08
    %
    
    
    38,757
    
    
    
    3
    
    
    
    4.00
    %
    
    
    53,290
    
    
    
    3
    
    
    
    5.50
    %
    
    
    48,446
    
    
    
    3
    
    
    
    5.00
    %Tangible capital(to tangible assets)
    
    $
    58,924
    
    
    
    6.08
    %
    
    
    14,534
    
    
    
    3
    
    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital(to risk weighted assets)
    
    $
    58,924
    
    
    
    10.20
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    34,657
    
    
    
    3
    
    
    
    6.00
    %
 105




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13. EARNINGS PER SHARE The following tables represent the calculations of earnings per share (EPS) for the periods
presented. Year Ended December 31, 2004Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    8,209
    
    
    
    5,256,030
    
    
    $
    1.56Effect of dilutive stock options
    
    
    
    
    
    
    347,650
    
    
    
    (0.10
    )Diluted EPS
    
    $
    8,209
    
    
    
    5,603,680
    
    
    $
    1.46
 Year Ended December 31, 2003Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    7,413
    
    
    
    5,197,008
    
    
    $
    1.43Effect of dilutive stock options
    
    
    
    
    
    
    257,994
    
    
    
    (0.07
    )Diluted EPS
    
    $
    7,413
    
    
    
    5,455,002
    
    
    $
    1.36
 Year Ended December 31, 2002Income
    
    
    Shares
    
    
    Per-Share(Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPS
    
    $
    5,045
    
    
    
    4,204,456
    
    
    $
    1.20Effect of dilutive stock options
    
    
    
    
    
    
    165,565
    
    
    
    (0.05
    )Diluted EPS
    
    $
    5,045
    
    
    
    4,370,021
    
    
    $
    1.15
 14. COMMITMENTS AND CONTINGENCIES Aggregate minimum lease commitments under long-term operating leases as of December 31, 2004
are as follows: 2005
    
    $
    1,2682006
    
    
    1,2812007
    
    
    1,2552008
    
    
    1,2212009
    
    
    1,2232010 and thereafter
    
    
    13,929$
    20,177
 Minimum lease payments for the Banks premises are adjusted annually based upon the Consumer
Price Index. The leases also provide for option renewal periods. Rental expense was $1,164,
$1,055 and $840 for the years ended December 31, 2004, 2003 and 2002, respectively. 106




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15.
    TRADING ACCOUNT ASSETSDerivative Instruments Not Receiving Hedge Treatment- The Bank is a party to a variety of
interest rate contracts such as interest rate swaps, caps, floors, futures, options and total
return swaps (Interest Rate Agreements), which are recorded in the financial statements at
fair value with changes in fair value and periodic payments recorded in earnings.  Interest rate swapsare contracts in which the parties agree to exchange fixed and floating
rate payments for a specified period of time on a specified (notional) amount. The
notional amount is only used to calculate the amount of the periodic interest payments to be
exchanged and does not represent the amount at risk. As of December 31, 2004 the Bank held
$95.0 million notional amount of Commercial Mortgage Backed Securities (CMBS) swaps and
$25.0 million notional amount of Asset Backed Securities (ABS) swaps whereby the Bank
receives the spread on the Lehman Brothers CMBS Index and specific ABS securities plus a
constant spread and receives or pays the market value change of the index.Interest rate futures contractsare commitments to either purchase or sell designated
instruments at a future date for a specified price. Initial margin requirements are met in
cash or other instruments, and changes in the contract values are settled in cash daily.
The Bank maintained $0 at December 31, 2004 and 2003, respectively, in agency securities as
a deposit with a broker for its futures activities. The Company did not have any interest
rate futures contracts outstanding at December 31, 2004 and 2003. 107




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##### Table of Contents



The following is a summary of the Interest Rate Agreements as of December 31: Contract or
    
    Estimated
    
    Weighted AverageNotional
    
    Fair Value
    
    Interest RateAmount
    
    Asset
    
    Liability
    
    Payable
    
    Receivable2004Total return swaps - receive total return
CMBS investment grade total return,
   pay LIBOR
    
    $
    95,000
    
    
    $
    32
    
    
    $
    18
    
    
    Bank receives the
spread on Lehman Brothers
AAA CMBS Index Plus a
spread and receives or
pays the market value
change of indexTotal return swaps - receive total return
on one month LIBOR based ABS
securities
    
    $
    25,000
    
    
    $
    63
    
    
    $
    0
    
    
    Bank receives the
spread on five specific
-A ABS securities plus a
spread of 12 basis points
and receives or pays the
market value change at
maturity.2003Total return swaps - receive total return
CMBS investment grade total return,
   pay LIBOR
    
    $
    100,000
    
    
    $
    166
    
    
    $
    0
    
    
    Bank receives the
spread on Lehman Brothers
AAA CMBS Index Plus a
spread and receives or
pays the market value
change of index
 The Interest Rate Agreements used have an active secondary market and are included in
trading account assets at fair value with realized and unrealized gains and losses on these
instruments recognized immediately in other income. The Banks exposure to credit risk from derivative financial instruments is represented by the
fair value of the instruments. Credit risk amounts represent the replacement cost the Bank
could incur should counterparties with contracts in a gain position completely fail to perform
under the terms of those contracts. Counterparties are subject to the credit approval and
credit monitoring policies and procedures of the Bank. The Bank limits its credit exposure by
entering into International Swap Dealer Association (ISDA) Master Agreements with each
counterparty. ISDA Master Agreements set the legal framework for transactions with
counterparties in over the counter derivative markets. The Bank only deals with
counterparties that are investment grade. 108




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##### Table of Contents



The following table shows the various components of the Companys recorded net gain (loss) on
its trading assets for the years ended December 31. IncomeRealized
    
    
    Unrealized
    
    
    fromGains
    
    
    Gains
    
    
    Trading(Losses)
    
    
    (Losses)
    
    
    AssetsDecember 31, 2004Interest rate contracts:Swaps
    
    $
    674
    
    
    $
    (71
    )
    
    $
    603MBS and other trading assets
    
    
    690
    
    
    
    (32
    )
    
    
    658Total trading portfolio
    
    $
    1,364
    
    
    $
    (103
    )
    
    $
    1,261December 31, 2003Interest rate contracts:Swaps
    
    $
    1,009
    
    
    $
    182
    
    
    $
    1,191MBS and other trading assets
    
    
    1,488
    
    
    
    (32
    )
    
    
    1,456Total trading portfolio
    
    $
    2,497
    
    
    $
    150
    
    
    $
    2,647December 31, 2002Interest rate contracts:Swaps
    
    $
    (206
    )
    
    $
    99
    
    
    $
    (107
    )CapsFutures
    
    
    (97
    )
    
    
    
    
    
    
    (97
    )Total
    
    
    (303
    )
    
    
    99
    
    
    
    (204
    )MBS and other trading assets
    
    
    149
    
    
    
    24
    
    
    
    173Total trading portfolio
    
    $
    (154
    )
    
    $
    123
    
    
    $
    (31
    )
 109




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##### Table of Contents



The following table shows the Companys trading securities included in trading account
assets as of December 31: Securities Held for Trading: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2004Mortgage-backed securities and other -
    
    $
    383
    
    
    $
    6
    
    
    $
    (1
    )
    
    $
    388Mutual funds
    
    
    560
    
    
    
    21
    
    
    
    
    
    
    
    581CMBS total return swaps
    
    
    
    
    
    
    95
    
    
    
    (18
    )
    
    
    77Trading assets
    
    $
    943
    
    
    $
    122
    
    
    $
    (19
    )
    
    $
    1,046
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    ValueDecember 31, 2003Mortgage-backed securities and other -
    
    $
    1,447
    
    
    $
    49
    
    
    $
    (1
    )
    
    $
    1,495Mutual funds
    
    
    441
    
    
    
    10
    
    
    
    
    
    
    
    451CMBS total return swaps
    
    
    
    
    
    
    165
    
    
    
    
    
    
    
    165Trading assets
    
    $
    1,888
    
    
    $
    224
    
    
    $
    (1
    )
    
    $
    2,111
  16.
    DERIVATIVES HELD FOR ASSET AND LIABILITY MANAGEMENTAt December 31, 2004, the swaps listed below are hedging the interest rate risk of cash flows
associated with short-term FHLB advances and certificates of deposit with terms between six
and twelve months. These swaps qualify as cash flow hedges. During 2004, the ineffective
portion of the change in fair value of the cash flow hedges was $155. Contract orNotional
    
    
    Estimated
    
    
    Weighted-AverageAmount
    
    
    Fair Value
    
    
    Interest RateReceivable
    
    
    PayableDecember 31, 2004 -Interest
rate swaps - pay fixed
receive 3-month LIBOR
    
    $
    152,000
    
    
    $
    (4,134
    )
    
    
    2.35
    %
    
    
    4.42
    %December 31, 2003 -Interest
rate swaps - pay fixed
receive 3-month LIBOR
    
    $
    137,000
    
    
    $
    (5,904
    )
    
    
    1.17
    %
    
    
    4.40
    %
 110




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##### Table of Contents



The following table sets forth the maturity distribution and weighted-average interest rates
of the interest rate swaps used to limit the repricing risk of deposits and short-term
borrowings as of December 31, 2004: Maturities
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    0
    
    
    $
    23,000
    
    
    $
    52,000
    
    
    $
    4,000
    
    
    $
    25,000
    
    
    $
    48,000Weighted-average
payable rate
    
    
    0.00
    %
    
    
    2.92
    %
    
    
    3.80
    %
    
    
    3.78
    %
    
    
    5.77
    %
    
    
    5.15
    %Weighted-average
receivable rate
    
    
    0.00
    %
    
    
    2.30
    %
    
    
    2.39
    %
    
    
    2.08
    %
    
    
    2.39
    %
    
    
    2.33
    %
  The Bank is dedicated to managing credit risks associated with investment and interest
rate risk management activities. The Bank maintains positions with a variety of
counterparties or obligors (counterparties). To limit credit exposure arising from such
transactions, the Bank evaluates the credit standing of counterparties, establishes limits for
the total exposure to any one counterparty, monitors exposure against the established limits,
and monitors investment portfolio composition to manage concentrations.17.
    FAIR VALUES OF FINANCIAL INSTRUMENTSSFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires that the Bank
disclose estimated fair values for its financial instruments. The estimated fair value
amounts have been determined by the Bank using available market information and appropriate
valuation methodologies; however, considerable judgment is required to interpret market data
to develop estimates of fair value. 111




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##### Table of Contents



Accordingly, the estimates presented herein are not necessarily indicative of the amounts
the Bank could realize in a current market exchange. The use of different market assumptions
and/or estimation methodologies may have a material effect on the estimated fair value amounts
at December 31: 2004
    
    
    2003Carrying
    
    
    Estimated
    
    
    Carrying
    
    
    EstimatedAmount
    
    
    Fair Value
    
    
    Amount
    
    
    Fair ValueAssets:Cash and cash equivalents
    
    $
    13,238
    
    
    $
    13,238
    
    
    $
    22,856
    
    
    $
    22,856Trading account assets
    
    
    1,046
    
    
    
    1,046
    
    
    
    2,111
    
    
    
    2,111Securities, available for sale
    
    
    431,206
    
    
    
    431,206
    
    
    
    398,691
    
    
    
    398,691Securities, held to maturity
    
    
    93
    
    
    
    99
    
    
    
    222
    
    
    
    240Loans receivable, net
    
    
    598,442
    
    
    
    615,198
    
    
    
    518,496
    
    
    
    536,969FHLB stock
    
    
    15,134
    
    
    
    15,134
    
    
    
    13,425
    
    
    
    13,425Accrued interest receivable
    
    
    3,322
    
    
    
    3,322
    
    
    
    2,928
    
    
    
    2,928Liabilities:Demand deposits
    
    
    174,140
    
    
    
    174,140
    
    
    
    176,229
    
    
    
    176,229Certificates of deposits
    
    
    424,042
    
    
    
    423,364
    
    
    
    394,468
    
    
    
    397,378FHLB advances
    
    
    316,000
    
    
    
    317,043
    
    
    
    262,500
    
    
    
    264,627Securities sold under
repurchase agreements
    
    
    79,689
    
    
    
    79,952
    
    
    
    65,728
    
    
    
    66,260Other debt
    
    
    25,774
    
    
    
    25,774
    
    
    
    15,464
    
    
    
    15,464Note payable
    
    
    
    
    
    
    0
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    765
    
    
    
    765
    
    
    
    629
    
    
    
    629Hedging Instruments -
Interest rate swaps
    
    
    (4,134
    )
    
    
    (4,134
    )
    
    
    (5,904
    )
    
    
    (5,904
    )
 The methods and assumptions used to estimate the fair value of each class of financial
statements for which it is practicable to estimate that value are explained below: Cash and Cash Equivalents- The carrying amounts approximate fair values due to the
short-term nature of these instruments. Securities- The fair values of securities are generally obtained from market bids for
similar or identical securities or are obtained from independent security brokers or
dealers. Securities Sold under Repurchase Agreements- The carrying amounts approximate fair values
due to the short-term nature of these instruments. Trading Account Assets- The fair values of trading securities included in trading account
assets are obtained from market bids or from independent securities brokers or dealers.
Fair values of interest rate contracts are based on quoted market price or dealer quotes. Loans- Fair values are estimated for portfolios of loans with similar financial
characteristics, primarily fixed and adjustable rate interest terms. The fair values of
mortgage loans are based upon discounted cash flows utilizing applicable risk-adjusted
discount rates relative to available mortgage-backed securities having similar rate and
repricing characteristics, as well as anticipated 112




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##### Table of Contents



prepayment schedules. No adjustments have
been made for changes in credit within the loan portfolio. It is managements opinion that
the allowance for estimated loan losses pertaining to performing and nonperforming loans
results in a fair valuation of such loans. FHLB Stock- The carrying amounts approximate fair values, as the stock may be sold back to
the FHLB at cost. Deposits- The fair values of deposits are estimated based upon the type of deposit product.
Demand accounts, which include passbooks and transaction accounts, are presumed to have
equal book and fair values, since the interest rates paid on these accounts are based on
prevailing market rates and the amounts are payable upon demand. The estimated fair values
of time deposits are determined by discounting the cash flows of settlements of deposits
having similar maturities and current rates, utilizing a LIBOR swap curve adjusted for
Federal Deposit Insurance Corporation (FDIC) insurance that approximates the prevailing
rates offered on the Companys term borrowings less the cost of FDIC insurance as of the
reporting date. FHLB Advances- The fair values of FHLB advances are based upon discounted cash flows
utilizing applicable risk-adjusted spreads relative to the current pricing for similar
advances. Notes Payable- The carrying amount approximates fair value, as the rate is based on current
market rates. Hedging instrumentsconsist of interest rate swaps used to modify the interest rate
sensitivity of certain short-term certificates of deposit, a portion of the Banks
securities sold under agreements to repurchase and the short-term FHLB advances. Fair
values are based on quoted market prices or dealer quotes. Where such quotes are not
available, fair value is estimated by using quoted market prices for similar securities or
by discounting future cash flows at a risk-adjusted spread to the LIBOR-based swap curve. Commitments to Extend Credit, and Standby and Commercial Letters of Credit- The fair values
of commitments to extend credit and standby letters of credit were not significant at either
December 31, 2004 or 2003, as these instruments predominantly have adjustable terms and are
of a short-term nature. The fair value estimates presented herein are based on pertinent information available to
management as of each reporting date. Although management is not aware of any factors that
would significantly affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that date, and
therefore, current estimates of fair value may differ significantly from the amounts
presented herein. 18. RELATED-PARTY TRANSACTIONS The Bank has contracted with Smith Breeden Associates (SBA) to provide investment advisory
services and interest rate risk analysis. A principal of SBA is a director for the Company
and the Bank. Several principals and employees of SBA are stockholders of the Company. The
amount of consulting expense relating to SBA for the years ended December 31, 2004, 2003 and
2002 was $412,000, $365,000 and $325,000, respectively. 113




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##### Table of Contents



In the ordinary course of business, the Bank has granted loans to principal officers and
directors and their affiliates amounting to $0 and $891 at December 31, 2004 and 2003,
respectively. The following table is a rollforward of the related party loan activity. 2004
    
    
    2003Beginning balance
    
    $
    7,597
    
    
    $
    4,636Additions
    
    
    30
    
    
    
    3,575Repayments
    
    
    (1,195
    )
    
    
    (350
    )Change in related party status
    
    
    (1,050
    )
    
    
    (264
    )Ending balance
    
    $
    5,382
    
    
    $
    7,597
 19. EMPLOYEE BENEFIT PLAN The Company sponsors a defined contribution plan for the benefit of its employees. The
Companys contributions to the plan are determined annually by the Board of Directors in
accordance with plan requirements. For tax purposes, eligible participants may contribute up
to a maximum of 15% of their compensation, not to exceed the dollar limit imposed by the
Internal Revenue Service. The expense associated with the employee benefit plan is included
in salary and employee benefits in the consolidated statements of earnings. For the plan
years ended December 31, 2004, 2003 and 2002, the Company contributed $473,000, $405,000 and
$332,000, respectively. 114




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##### Table of Contents



20. PARENT COMPANY ONLY FINANCIAL INFORMATION Condensed Statements of Financial Condition December 31,2004
    
    
    2003ASSETSCash and cash equivalents
    
    $
    2,580
    
    
    $
    1,040Trading account assets
    
    
    163
    
    
    
    864Investment in subsidiaries
    
    
    75,225
    
    
    
    61,719Other assets
    
    
    1,029
    
    
    
    359TOTAL
    
    $
    78,997
    
    
    $
    63,982LIABILITIES AND STOCKHOLDERS EQUITYLiabilities:Other debt
    
    $
    25,774
    
    
    $
    15,464Accounts payable and other liabilities
    
    
    563
    
    
    
    442Total liabilities
    
    
    26,337
    
    
    
    15,906Stockholders Equity:Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued and outstandingCommon stock, $.01 par value; 9,000,000 shares authorized;
5,278,934 shares issued and outstanding as of December 31,
2004 and 5,206,109 shares as of December 31, 2003
    
    
    53
    
    
    
    43Additional paid-in capital
    
    
    31,225
    
    
    
    30,710Retained earnings
    
    
    23,637
    
    
    
    20,082Accumulated other comprehensive income, net of tax
    
    
    (2,255
    )
    
    
    (2,759
    )Total stockholders equity
    
    
    52,660
    
    
    
    48,076TOTAL
    
    $
    78,997
    
    
    $
    63,982
 115




---



##### Table of Contents



Condensed Statements of Earnings Year Ended December 31,2004
    
    
    2003
    
    
    2002Interest income
    
    $
    23
    
    
    $
    3
    
    
    $
    Interest expense
    
    
    822
    
    
    
    (500
    )
    
    
    (680
    )Net interest income
    
    
    (799
    )
    
    
    (497
    )
    
    
    (680
    )Other income
    
    
    (15
    )
    
    
    56
    
    
    
    22Other expense
    
    
    (1,002
    )
    
    
    (867
    )
    
    
    (722
    )Loss before income taxes and equity in subsidiaries
    
    
    (1,816
    )
    
    
    (1,308
    )
    
    
    (1,380
    )Income tax benefit
    
    
    740
    
    
    
    543
    
    
    
    568Loss before equity in subsidiary
    
    
    (1,076
    )
    
    
    (765
    )
    
    
    (812
    )Equity in net earnings of subsidiary
    
    
    9,285
    
    
    
    8,178
    
    
    
    5,857Net income
    
    $
    8,209
    
    
    $
    7,413
    
    
    $
    5,045
 116




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##### Table of Contents



Condensed Statements of Cash Flows 2004
    
    
    2003
    
    
    2002Cash Flows from Operating Activities:Net income
    
    $
    8,209
    
    
    $
    7,413
    
    
    $
    5,045Adjustments:Equity in net undistributed earnings of subsidiary
    
    
    (9,299
    )
    
    
    (8,178
    )
    
    
    (5,857
    )Sale of trading assets
    
    
    
    
    
    
    
    
    
    
    (Increase) decrease in unrealized gain in trading assets
    
    
    (17
    )
    
    
    (20
    )
    
    
    14Amortization and depreciation
    
    
    (3
    )
    
    
    2
    
    
    
    (1
    )(Increase) decrease in other assets
    
    
    11
    
    
    
    47
    
    
    
    (91
    )(Decrease) increase in accounts payable and
other liabilities
    
    
    (454
    )
    
    
    16
    
    
    
    182Other
    
    
    
    
    
    
    
    
    
    
    124Net cash used in operating activities
    
    
    (1,553
    )
    
    
    (720
    )
    
    
    (584
    )Cash Flows from Investing Activities:Net (increase) decrease in investment securities
    
    
    714
    
    
    
    (1,471
    )
    
    
    Investment in subsidiary
    
    
    (303
    )
    
    
    (460
    )Purchase of furniture, fixtures and equipment
    
    
    (99
    )
    
    
    
    
    
    
    Net cash used in investing activities
    
    
    312
    
    
    
    (1,931
    )
    
    
    Cash Flows from Financing Activities:Net proceeds from initial public offering
    
    
    
    
    
    
    
    
    
    
    10,221Net proceeds from exercise of stock options
    
    
    516
    
    
    
    69
    
    
    
    Cash contribution to subsidiary
    
    
    (7,400
    )
    
    
    
    
    
    
    (5,400
    )Cash dividends received from Bank
    
    
    4,000
    
    
    
    
    
    
    
    3,000Cash dividends paid
    
    
    (4,645
    )
    
    
    (1,127
    )
    
    
    (425
    )Increase/(decrease) in other debt
    
    
    10,310
    
    
    
    15,464
    
    
    
    (Decrease) increase in notes payable
    
    
    
    
    
    
    (11,300
    )
    
    
    (6,700
    )Net cash provided by financing activities
    
    
    2,781
    
    
    
    3,106
    
    
    
    696Net (decrease) increase in cash and cash equivalents
    
    
    1,540
    
    
    
    455
    
    
    
    112Cash and cash equivalents, beginning of year
    
    
    1,040
    
    
    
    585
    
    
    
    473Cash and cash equivalents, end of year
    
    $
    2,580
    
    
    $
    1,040
    
    
    $
    585Supplemental DisclosuresNon-cash investing and financing activities:Dividend in kind
    
    $
    
    
    
    $
    (757
    )
    
    $
    
 117




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##### Table of Contents



21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Quarters EndedDecember 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2004Interest income
    
    $
    14,021
    
    
    $
    13,271
    
    
    $
    12,727
    
    
    $
    12,247Interest expense
    
    
    6,432
    
    
    
    5,846
    
    
    
    5,232
    
    
    
    5,208Net interest income
    
    
    7,589
    
    
    
    7,425
    
    
    
    7,495
    
    
    
    7,039Provision for loan losses
    
    
    100
    
    
    
    230
    
    
    
    230
    
    
    
    90Net interest income after provision for loan loss
    
    
    7,489
    
    
    
    7,195
    
    
    
    7,265
    
    
    
    6,949Noninterest income
    
    
    1,182
    
    
    
    963
    
    
    
    930
    
    
    
    1,088Noninterest expense
    
    
    4,979
    
    
    
    4,828
    
    
    
    4,870
    
    
    
    4,739Income before provision for income taxes
    
    
    3,692
    
    
    
    3,330
    
    
    
    3,325
    
    
    
    3,298Provision for income taxes
    
    
    1,501
    
    
    
    1,351
    
    
    
    1,345
    
    
    
    1,239Net income
    
    $
    2,191
    
    
    $
    1,979
    
    
    $
    1,980
    
    
    $
    2,059Basic earnings per share
    
    $
    0.42
    
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    0.40Diluted earnings per share
    
    $
    0.39
    
    
    $
    0.35
    
    
    $
    0.35
    
    
    $
    0.372003Interest income
    
    $
    11,919
    
    
    $
    11,851
    
    
    $
    11,306
    
    
    $
    11,358Interest expense
    
    
    5,173
    
    
    
    4,965
    
    
    
    5,049
    
    
    
    5,121Net interest income
    
    
    6,746
    
    
    
    6,886
    
    
    
    6,257
    
    
    
    6,237Provision for loan losses
    
    
    80
    
    
    
    100
    
    
    
    250
    
    
    
    360Net interest income after provision for loan loss
    
    
    6,666
    
    
    
    6,786
    
    
    
    6,007
    
    
    
    5,877Noninterest income
    
    
    1,228
    
    
    
    1,227
    
    
    
    1,562
    
    
    
    1,158Noninterest expense
    
    
    4,505
    
    
    
    4,579
    
    
    
    4,472
    
    
    
    4,293Income before provision for income taxes
    
    
    3,389
    
    
    
    3,434
    
    
    
    3,097
    
    
    
    2,742Provision for income taxes
    
    
    1,389
    
    
    
    1,436
    
    
    
    1,286
    
    
    
    1,138Net income
    
    $
    2,000
    
    
    $
    1,998
    
    
    $
    1,811
    
    
    $
    1,604Basic earnings per share
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    0.35
    
    
    $
    0.31Diluted earnings per share
    
    $
    0.36
    
    
    $
    0.37
    
    
    $
    0.33
    
    
    $
    0.30
 118




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22. SUBSEQUENT EVENTS On February 2, 2005, Los Padres Bank entered into an agreement with Western Financial Bank
for the purchase and assumption of their office in Thousand Oaks, California. In the
purchase agreement, Los Padres Bank has agreed to purchase approximately $51.9 million in
deposits and their associated overdraft protection accounts or line of credits, all
furniture and fixtures and assume the lease for the building. This transaction is subject
to regulatory approval and the Bank has submitted its application to the Office of Thrift
Supervision and is awaiting final approval. ****** 119




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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 
 Item 9a. Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief Executive Officer
along with our Senior Vice President and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to the Exchange Act Rule
13a-15(b). Based upon that evaluation, our Chief Executive Officer along with the our Senior Vice
President and Chief Financial Officer concluded that our disclosure controls and procedures are
effective in timely alerting us to material information relating to us (including our consolidated
subsidiaries) required to be included in our periodic SEC filings. There have been no significant
changes in our internal control over financial reporting during our most recent quarter that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting. Disclosure controls and procedures are controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the SECs rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be disclosed by us in the
reports that we file under the Exchange Act is accumulated and communicated to our management,
including our Chief Executive Officer and President and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure. 
 Item 9B. Other Information Not applicable. 
 PART III 
 Item 10. Directors and Executive Officer of the Registrant. This information is incorporated by reference from our definitive proxy statement for our 2005
Annual Meeting of Stockholders (Proxy Statement) which will be filed pursuant to Regulation 14A. As of March 10, 2004, our board of directors formally adopted the Companys Code of Ethics, a copy
of which was filed as Exhibit 14 to the 2003 Annual Report on Form 10-K. 
 Item 11. Executive Compensation. This information is incorporated by reference from our Proxy Statement which will be filed
pursuant to Regulation 14A. 120




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Item 12.
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters. This information with respect to beneficial ownership by beneficial owners and management is
incorporated by reference from our Proxy Statement which will be filed pursuant to Regulation 14A. EQUITY COMPENSATION PLAN INFORMATION The following table presents information for all equity compensation plans with
individual compensation arrangements (whether with employees or non-employees such as directors),
in effect as of December 31, 2004. Number of
    
    
    
    
    
    
    Number of securitiessecurities to be
    
    
    
    
    
    
    remaining available forissued upon
    
    
    Weighted-average
    
    
    future issuance underexercise of
    
    
    exercise price of
    
    
    equity compensationoutstanding
    
    
    outstanding
    
    
    plans (excludingoptions, warrants
    
    
    options, warrants
    
    
    securities reflected inand rights
    
    
    and rights
    
    
    column (a))Plan category
    
    (a)
    
    
    (b)
    
    
    (c)Equity compensation
plans approved by
security holders
    
    
    678,125
    
    
    $
    9.27
    
    
    
    22,889Equity compensation
plans not approved
by security holders
(1)
    
    
    50,944
    
    
    
    4.86
    
    
    
    Total
    
    
    729,069
    
    
    $
    8.95
    
    
    
    22,889
   (1)
    
    During 1996, we granted 180,000 options to Smith Breeden Associates for financial advisory
services provided to us in connection with our acquisition of Los Padres Bank. For further
information regarding these options refer to footnote No. 11 of our Financial Statements in
Item 8 hereof. 
 Item 13. Certain Relationships and Related Transactions. This information is incorporated by reference from our Proxy Statement which will be filed
pursuant to Regulation 14A. 
 Item 14. Principal Accountant Fees and Services The information is incorporated by reference from our Proxy Statement which will be filed
pursuant to Regulation 14A. 121




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Part IV 
 Item 15. Exhibits and Financial Statement Schedules. (a) Documents filed as part of this report. (1) The following documents are filed as part of this Annual Report on Form 10-K and are
incorporated herein by reference to Item 8 hereof: Report of Independent Registered Public Accounting Firm Consolidated Statements of Financial Condition as of December 31, 2004 and 2003. Consolidated Statements of Earnings for the Years Ended December 31, 2004, 2003 and 2002. Consolidated Statements of Stockholders Equity for the Years Ended December 31, 2004, 2003
and 2002. Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002. Notes to Consolidated Financial Statements. (2) All schedules for which provision is made in the applicable accounting regulation of the
SEC are omitted because they are not applicable or the required information is included in the
Consolidated Financial Statements or notes thereto. (b) The following exhibits are filed as part of this Form 10-K, and this list includes the Exhibit
Index. EXHIBIT NO.
    
    DESCRIPTION3.1
    
    Certificate of Incorporation of Harrington West Financial Group, Inc. (1)3.1.1
    
    Certificate of Amendment to Certificate of Incorporation. (1)3.1.2
    
    Second Certificate of Amendment to Certificate of Incorporation. (1)3.2
    
    Bylaws of Harrington West Financial Group, Inc. (1)3.2.1
    
    Amendment to Bylaws. (1)4.0
    
    Specimen stock certificate of Harrington West Financial Group, Inc. (1)4.1
    
    Indenture Agreement dated September 25, 2003. (2)4.2
    
    Amended and Restated Declaration of Trust of Harrington West Capital Trust I
dated September 25, 2003 (2)4.3
    
    Preferred Securities Guarantee Agreement dated September 25, 2003 (2)4.4
    
    Indenture Agreement dated September 27, 2004.4.5
    
    Amended and Restated Declaration of Trust of Harrington West Capital Trust II
dated September 27, 20044.6
    
    Guarantee Agreement dated September 27, 200410.1
    
    Harrington West Financial Group 1996 Stock Option Plan, as amended. (1)10.2
    
    Amended and Restated Credit Agreement dated as of October 30, 1997 among
Harrington West Financial Group, Inc., the lenders party thereto and Harris Trust and
Savings Bank, as amended on October 1, 1999, May 2, 2000 and November 1, 2001. (1)
 122




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##### Table of Contents



EXHIBIT NO.
    
    DESCRIPTION10.2.1
    
    Fourth Amendment to Amended and Restated Credit Agreement dated September 17, 2002.
(1)10.2.2
    
    Fifth Amendment to Amended and Restated Credit Agreement dated February 24, 2003. (2)10.2.3
    
    Sixth Amendment to Amended and Restated Credit Agreement dated October 30, 2003. (2)10.2.4
    
    Seventh Amendment to Amended and Restate Credit Agreement dated September 16, 2004.10.3
    
    Investment and Interest Rate Advisory Agreement between Los Padres Savings
Bank, FSB and Smith Breeden Associates, Inc., dated February 3, 1997. (1)10.4
    
    Purchase and Assumption Agreement by and between Los Padres Bank, FSB and
Harrington Bank, FSB dated as of May 30, 2001. (1)10.5
    
    Los Padres Mortgage Company, LLC Operating Agreement by and between Resource
Marketing Group, Inc. and Los Padres Bank FSB dated June 13, 2002. (1)10.6
    
    Option Agreement, dated as of April 4, 1996 by and between Smith Breeden
Associates, Inc. and Harrington West Financial Group, Inc. Assignment of Option, dated
as of January 19, 2001, by and between Craig Cerny and Smith Breeden Associates, Inc..
(1)10.7
    
    Stock Purchase Agreement by and between Harrington Bank, FSB and Los Padres
Bank, FSB dated as of May 30, 2001. (1)11
    
    Statement re computation of per share earnings  Reference is made to Item 8.
Financial Statements and Supplementary Data for the required information.14
    
    Code of Ethics (3)23
    
    Consent of Deloitte and Touche, LLP31.1
    
    Section 302 Certification by Chief Executive Officer filed herewith.31.2
    
    Section 302 Certification by Chief Financial Officer filed herewith.32
    
    Section 906 Certification by Chief Executive Officer and Chief Financial
Officer furnished herewith.
   (1)
    
    Incorporated by reference to the Registrants Form S-1 (File No. 333-99031)
filed with the Securities and Exchange Commission (the SEC) on August 30, 2002, as
amended.(2)
    
    Incorporated by reference to the Registrants Form 10-Q for the quarter ending
September 30, 2003 filed with the SEC on November 11, 2003.(3)
    
    Previously filed. 123




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized. HARRINGTON WEST FINANCIAL GROUP, INC.March 22, 2005
    
    By:
    
    /s/ Craig J. CernyCraig J. CernyChairman of the Boardand Chief Executive OfficerMarch 22, 2005
    
    By:
    
    /s/ William W. Phillips, jr.William W. Phillips, Jr.President, Chief Operating Officerand Chief Financial Officer
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated. NAME
    

TITLE
    
    DATE/s/ Craig J. Cerny
    
    Chairman of the Board and
    
    March 22, 2005Craig J. Cerny
    
    Chief Executive Officer/s/ William W. Phillips
    
    Director, President, Chief
    
    March 22, 2005William W. Phillips, Jr.
    
    Operating Officer and Chief
Financial Officer/s/ Stanley J. Kon
    
    Director
    
    March 22, 2005Stanley J. Kon/s/ John J. McConnell
    
    Director
    
    March 22, 2005John J. McConnell/s/ Paul O. Halme
    
    Director
    
    March 22, 2005Paul O. Halme/s/ William D. Ross
    
    Director
    
    March 22, 2005William D. Ross
 124