##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

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

FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2002


OR

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

Commission File No.: 000-50066


HARRINGTON WEST FINANCIAL GROUP, INC.

(Name of Registrant as Specified in Its Charter)


|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 48-1175170                             
|                                                               |  |                                        
|(State or other jurisdiction
of incorporation or organization) |  | (I.R.S. Employer
Identification Number)
|                                                               |  |                                        
|610 Alamo Pintado Road
Solvang, California                     |  | 93463                                  
|                                                               |  |                                        
|(Address of Principal
Executive Offices)                       |  | (Zip Code)                             

Issuers telephone number, including area code: (805) 688-6644


Securities registered under Section 12(b) of the Exchange Act:

NOT APPLICABLE

Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK (PAR VALUE $0.01 PER SHARE)

(Title of Class)

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.

YesþNoo

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).
YesoNoþ

The aggregate value of the 3,573,106 shares of Common Stock of the Registrant
issued and outstanding, which excludes 754,845 shares held by all directors and
executive officers of the Registrant as a group, was approximately $40.2
million based on the last closing sale price of a share of Common Stock of
$11.251 on December 31, 2002.

Number of shares of Common Stock outstanding as of March 10, 2003: 4,327,951

DOCUMENTS INCORPORATED BY REFERENCE

The registrant hereby incorporates its proxy statement for its 2003 annual
meeting of stockholders in Part III, items 10-13.





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TABLE OF CONTENTS



|                              |                                                                                                |  |  |  |  |  |  | 
|----------------------------- | ---------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                       
|                              | Item 1. Business.                                                                             
|                              | Item 2. Properties                                                                            
|                              | Item 3. Legal Proceedings                                                                     
|                              | Item 4. Submission of Matters to a Vote of Security Holders.                                  
|PART II                      
|                              | Item 5. Market for Registrants Common Equity and Related Stockholder Matters.                
|                              | Item 6. Selected Financial Data.                                                              
|                              | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
|                              | Item 7A. Quantitative and Qualitative Disclosures About Market Risk.                          
|                              | Item 8. Financial Statements and Supplementary Data.                                          
|INDEX TO FINANCIAL STATEMENTS
|SIGNATURES                   



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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;                                                                                                                                                  
|
| |  |  | we may lose more business or customers than we expect, or our
operating costs may be higher than we expect;                                                                                                  
|
| |  |  | changes in the interest rate environment and their impact on
customer behavior and our interest margins;                                                                                                     
|
| |  |  | 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                                                                                                                                    
|
| |  |  | 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

1



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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, 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 eleven full-service offices. At December 31,
2002, we had consolidated total assets of $824.3 million, total deposits of
$525.3 million and stockholders equity of $42.5 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 has nine offices on the
central coast of California, one office in Mission, Kansas and a new community
banking office in the Phoenix/Scottsdale, Arizona metropolitan area which
opened in November 2002. We also established in the September 2002 quarter,
Los Padres Mortgage, LLC, a mortgage banking company, which is engaged in a
joint venture with the largest RE/MAX franchise in Arizona, to originate
single-family residential and commercial real estate loans in the
Phoenix/Scottsdale metropolitan area. Los Padres Bank will open a second
office in the Kansas City metropolitan area in the latter half of 2003. Each
of our markets has its own local independent management team operating under
the Los Padres or Harrington names. Our loan underwriting, corporate
administration, and treasury functions are centralized in Solvang, California
to create operating efficiencies. Our commercial lending operations are
centralized in Mission, Kansas.

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

On November 12, 2002, we completed our initial public offering. An
aggregate of 1,120,000 shares of common stock were sold to the public at $12.00
per share, comprised of 973,615 shares sold by us and 146,385 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.

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Our goal is to continue to enhance our franchise value and earnings
through controlled growth in our banking operations, while maintaining the
combination of community-oriented customer service and sophisticated
centralized financial management that have characterized our success to date.
Our strategy for achieving this goal is:



| |  |  | Hiring Experienced Employees With A Customer Service Focus.
We provide personalized service and relationship banking to our
customers. Our ability to continue to attract and retain banking
professionals with significant experience in and knowledge of our
markets who share our customer service philosophy is key to our
success. By offering quick decision making in the delivery of
banking products and services, offering customized products where
appropriate, and providing customer access to our senior managers,
we distinguish ourselves from larger, regional banks operating in
our market areas, while our larger capital base and product mix
enable us to compete effectively against smaller community banks.                                                                                                                                                                                                                                                                                                                                                                               
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Expanding Our Product Offerings. We intend to diversify our
loan portfolio by continuing to grow our commercial and industrial
business lines, while still providing high quality loan products for
single-family and multi-family residential borrowers. We also
intend to selectively add additional products to provide
diversification of revenue sources and to capture our customers
full relationship. As part of this strategy, we are focused on
increasing our deposit and loan fees and further developing our
wholesale banking activities that provide single-family loan
originations for other lenders. We intend to continue to expand the
wealth management area of our business by cross selling our trust
and investment products and services to our customers through
Harrington Wealth Management Company (HWM). HWM offers a wide range
of financial instruments and services, including low fee indexed
mutual funds, personal trusts, investment management, custody,
estates, guardianships, land trusts, and retirement plan services.                                                  
|
| |  |  | Strategic Expansion. We intend to continue to expand our
branch network through de novo office openings in all of our
markets. We expect to open a second office in the Kansas City
metropolitan area in the latter half of 2003. This opening is
intended to capitalize on the opportunity this market presents to us
with a view to continued growth in this market. We believe that our
centralized underwriting, administration and treasury functions
should enable us to increase operating efficiencies over time.
Acquisitions have played an integral role in our past growth. We
are committed to exploring opportunistic controlled expansion of our
franchise through strategic acquisitions designed to increase our
market share and branch office locations. We believe that continued
development of the Los Padres and Harrington franchises will provide
us with additional profits over time and enhance our market and
franchise value.                                                                                                                                                         
|
| |  |  | Using Financial Management Techniques to Manage Our Interest
Rate Risk and Enhance our Profitability. We deploy our excess
capital in a portfolio of highly liquid mortgage- backed and related
securities until we are able to reinvest these assets into loans or
other community banking assets. Our securities portfolio is funded
primarily by deposits and borrowings and is managed to a short
duration with the intention of creating additional income and
improving our return on equity. The interest rate sensitivity of
our investments, loans, and funding sources is reduced using various
interest rate contracts, including interest rate swaps, caps and
floors and exchange-traded futures and options. In selecting
mortgage-backed and related securities for our portfolio and in
pricing our loans, we employ option-adjusted spread pricing analysis
to ascertain the net risk-adjusted spread expected to be earned on
the various investments and loans. This analysis considers the
interest rate, prepayment, credit and liquidity risks in an
investment or loan, and we seek to select

3



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| |  |  | securities and loans with the highest spread over funding costs after
covering the expected costs of the embedded risks. In this manner,
our portfolio can enhance our profitability through interest earned on
these securities over our funding costs and through possible gains as
a result of price changes net of hedging activities.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Lending Activities

General. At December 31, 2002, Los Padres Banks net loan portfolio
totaled $448.1 million, representing approximately 54.4% of our $824.3 million
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, construction loans secured by both residential
and commercial properties and consumer loans.

The risks associated with mortgage lending are well-defined and
controllable. Credit risk is controlled through the adherence, with few
exceptions, to secondary market 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. Market risk is controlled by our approach to pricing
and by regular monitoring and management of the institutions overall
sensitivity to interest rate changes.

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, 2002, substantially all 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.

4



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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,          
|                                |                                  |                        |        |                       
|                                |                                  |                        |        | 2002                   |         | 2001    |     | 2000  
|                                |                                  |                        |        |                        |         |         |     |       
|                                |                                  |                        |        | Amount                 |         | Percent |     | Amount |       | Percent |        | Amount  |         | Percent
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |        
|                                |                                  |                        |        | (Dollars in Thousands)
|Real estate loans:              |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |         |     |      |       |   |        |         |         |  |     |     
|                                | Single-family                    |                        | $      | 116,714                |         |         |     | 25.8   | %     |         | $      | 156,150 |         |         |     | 34.5 | %     |   | $      | 200,373 |         |  |     | 50.2 | %    
|                                | Multi-family                     |                        |        | 71,856                 |         |         |     | 15.9   |       |         |        | 69,584  |         |         |     | 15.4 |       |   |        | 66,005  |         |  |     | 16.6 |      
|                                | Commercial                       |                        |        | 183,264                |         |         |     | 40.5   |       |         |        | 156,431 |         |         |     | 34.5 |       |   |        | 108,820 |         |  |     | 27.3 |      
|                                | Construction(1)                  |                        |        | 19,666                 |         |         |     | 4.4    |       |         |        | 20,235  |         |         |     | 4.5  |       |   |        | 13,079  |         |  |     | 3.3  |      
|                                | Land acquisition and development |                        |        | 14,948                 |         |         |     | 3.3    |       |         |        | 7,889   |         |         |     | 1.7  |       |   |        | 2,511   |         |  |     | 0.6  |      
|Commercial and industrial loans |                                  |                        | 27,676 |                        |         |         | 6.1 |        |       |         | 30,838 |         |         |         | 6.8 |      |       |   | 3,969  |         |         |  | 1.0 |     
|Consumer loans                  |                                  |                        | 17,565 |                        |         |         | 3.9 |        |       |         | 11,107 |         |         |         | 2.5 |      |       |   | 3,265  |         |         |  | 0.8 |     
|Other loans (2)                 |                                  |                        | 503    |                        |         |         | 0.1 |        |       |         | 539    |         |         |         | 0.1 |      |       |   | 753    |         |         |  | 0.2 |     
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |         |     |      |       |   |        |         |         |  |     |     
|                                |                                  | Total loans receivable |        |                        | 452,192 |         |     |        | 100.0 | %       |        |         | 452,773 |         |     |      | 100.0 | % |        |         | 398,775 |  |     |      | 100.0 | %
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |         |     |      |       |   |        |         |         |  |     |     
|Less:                           |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |         |     |      |       |   |        |         |         |  |     |     
|                                | Allowance for loan losses        |                        |        | (3,797                 | )       |         |     |        |       |         |        | (3,736  | )       |         |     |      |       |   |        | (3,150  | )       |  |     |      |      
|                                | Net deferred loan fees           |                        |        | (1,332                 | )       |         |     |        |       |         |        | (1,102  | )       |         |     |      |       |   |        | (485    | )       |  |     |      |      
|                                | Net premiums                     |                        |        | 987                    |         |         |     |        |       |         |        | 1,774   |         |         |     |      |       |   |        | 397     |         |  |     |      |      
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |         |     |      |       |   |        |         |         |  |     |     
|                                |                                  |                        | (4,142 | )                      |         |         |     |        |       |         | (3,064 | )       |         |         |     |      |       |   | (3,238 | )       |         |  |     |     
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |         |     |      |       |   |        |         |         |  |     |     
|                                | Loans receivable, net            |                        | $      | 448,050                |         |         |     |        |       |         | $      | 449,709 |         |         |     |      |       |   | $      | 395,537 |         |  |     |      |      
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |         |     |      |       |   |        |         |         |  |     |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |  |     |      |       |  
|------------------------------- | -------------------------------- | ---------------------- | ------ | ---------------------- | ------- | ------- | --- | ------ | ----- | ------- | ------ | ------- | ------- |  | --- | ---- | ----- | -
|                                |                                  |                        |        | December 31,          
|                                |                                  |                        |        |                       
|                                |                                  |                        |        | 1999                   |         | 1998   
|                                |                                  |                        |        |                        |         |        
|                                |                                  |                        |        | Amount                 |         | Percent |     | Amount |       | Percent
|                                |                                  |                        |        |                        |         |         |     |        |       |        
|                                |                                  |                        |        | (Dollars in Thousands)
|Real estate loans:              |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |  |     |     
|                                | Single-family                    |                        | $      | 206,572                |         |         |     | 53.4   | %     |         | $      | 199,161 |         |  |     | 59.1 | %    
|                                | Multi-family                     |                        |        | 60,746                 |         |         |     | 15.7   |       |         |        | 51,675  |         |  |     | 15.3 |      
|                                | Commercial                       |                        |        | 93,803                 |         |         |     | 24.2   |       |         |        | 71,374  |         |  |     | 21.2 |      
|                                | Construction(1)                  |                        |        | 20,814                 |         |         |     | 5.4    |       |         |        | 8,792   |         |  |     | 2.6  |      
|                                | Land acquisition and development |                        |        | 3,525                  |         |         |     | 0.9    |       |         |        | 4,477   |         |  |     | 1.3  |      
|Commercial and industrial loans |                                  |                        |       |                        |         |         |    |        |       |         |       |         |         |  |    |     
|Consumer loans                  |                                  |                        | 1,088  |                        |         |         | 0.3 |        |       |         | 1,135  |         |         |  | 0.3 |     
|Other loans (2)                 |                                  |                        | 502    |                        |         |         | 0.1 |        |       |         | 694    |         |         |  | 0.2 |     
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |  |     |     
|                                |                                  | Total loans receivable |        |                        | 387,050 |         |     |        | 100.0 | %       |        |         | 337,308 |  |     |      | 100.0 | %
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |  |     |     
|Less:                           |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |  |     |     
|                                | Allowance for loan losses        |                        |        | (3,112                 | )       |         |     |        |       |         |        | (2,975  | )       |  |     |      |      
|                                | Net deferred loan fees           |                        |        | (258                   | )       |         |     |        |       |         |        | 164     |         |  |     |      |      
|                                | Net premiums                     |                        |        | 543                    |         |         |     |        |       |         |        | 772     |         |  |     |      |      
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |  |     |     
|                                |                                  |                        | (2,827 | )                      |         |         |     |        |       |         | (2,039 | )       |         |  |     |     
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |  |     |     
|                                | Loans receivable, net            |                        | $      | 384,223                |         |         |     |        |       |         | $      | 335,269 |         |  |     |      |      
|                                |                                  |                        |        |                        |         |         |     |        |       |         |        |         |         |  |     |     



---

|(1) |  | Includes loans secured by residential and commercial properties. At
December 30, 2002, we had $14.7 million of construction loans secured by
residential properties and $5.0 million of construction loans secured by
commercial properties.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Includes loans collateralized by deposit accounts and consumer line of
credit loans.                                                                                                                                                        

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The following table sets forth certain information at December 31, 2002,
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 or |         |  |        |        
|                                |       |                                  |        |                |        |              |       | Due 1-5      |        | more years |        |          |         | 
|                                |       |                                  |        |                |        |              |       | years after  |        | after      |        |          |         | 
|                                |       |                                  |        | Due 1 year     |        | December 31, |       | December 31, |        |            |        |         
|                                |       |                                  |        | or less        |        | 2002         |       | 2002         |        | Total     
|                                |       |                                  |        |                |        |              |       |              |        |           
|                                |       |                                  |        | (In Thousands)
|Real estate loans:              |       |                                  |        |                |        |              |       |              |        |            |        |          |         |  |        |        
|                                |       | Single-family residential        |        | $              | 18     |              |       | $            | 159    |            |        | $        | 116,537 |  |        | $       | 116,714 | 
|                                |       | Multi-family residential         |        |                | 4      |              |       |              | 103    |            |        |          | 71,749  |  |        |         | 71,856  | 
|                                |       | Commercial                       |        |                | 8,062  |              |       |              | 17,382 |            |        |          | 157,820 |  |        |         | 183,264 | 
|                                |       | Construction(1)                  |        |                | 5,695  |              |       |              | 2,350  |            |        |          | 11,621  |  |        |         | 19,666  | 
|                                |       | Land acquisition and development |        |                | 13,917 |              |       |              | 553    |            |        |          | 478     |  |        |         | 14,948  | 
|Commercial and industrial loans |       |                                  | 15,344 |                |        |              | 9,761 |              |        |            | 2,571  |          |         |  | 27,676 |        
|Consumer loans                  |       |                                  | 437    |                |        |              | 5,205 |              |        |            | 11,923 |          |         |  | 17,565 |        
|Other loans (2)                 |       |                                  | 503    |                |        |              |      |              |        |            |       |          |         |  | 503    |        
|                                |       |                                  |        |                |        |              |       |              |        |            |        |          |         |  |        |         |         | 
|                                | Total |                                  | $      | 43,980         |        |              | $     | 35,513       |        |            | $      | 372,699  |         |  | $      | 452,192 |        
|                                |       |                                  |        |                |        |              |       |              |        |            |        |          |         |  |        |         |         | 



---

|(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-sales 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.

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The following table sets forth the dollar amount of total loans due after
one year from December 31, 2002, as shown in the preceding table, which have
fixed interest rates or which have floating or adjustable interest rates.

|                                |       |                                  |       |                |        |      |        |             |        |  |        |         |         | 
|------------------------------- | ----- | -------------------------------- | ----- | -------------- | ------ | ---- | ------ | ----------- | ------ |  | ------ | ------- | ------- | 
|                                |       |                                  |       |                |        |      |        | Floating or |        |  |        |        
|                                |       |                                  |       |                |        |      |        | adjustable- |        |  |        |        
|                                |       |                                  |       | Fixed rate     |        | rate |        | Total      
|                                |       |                                  |       |                |        |      |        |            
|                                |       |                                  |       | (In Thousands)
|Real estate loans:              |       |                                  |       |                |        |      |        |             |        |  |        |        
|                                |       | Single-family residential        |       | $              | 67,592 |      |        | $           | 49,104 |  |        | $       | 116,696 | 
|                                |       | Multi-family residential         |       |                | 31,339 |      |        |             | 40,513 |  |        |         | 71,852  | 
|                                |       | Commercial                       |       |                | 79,824 |      |        |             | 95,378 |  |        |         | 175,202 | 
|                                |       | Construction(1)                  |       |                | 10,555 |      |        |             | 3,416  |  |        |         | 13,971  | 
|                                |       | Land acquisition and development |       |                | 478    |      |        |             | 553    |  |        |         | 1,031   | 
|Commercial and industrial loans |       |                                  | 7,619 |                |        |      | 4,713  |             |        |  | 12,332 |        
|Consumer loans                  |       |                                  | 6,849 |                |        |      | 10,279 |             |        |  | 17,128 |        
|Other loans                     |       |                                  |      |                |        |      |       |             |        |  |       |        
|                                |       |                                  |       |                |        |      |        |             |        |  |        |         |         | 
|                                | Total |                                  | $     | 204,256        |        |      | $      | 203,956     |        |  | $      | 408,212 |        
|                                |       |                                  |       |                |        |      |        |             |        |  |        |         |         | 



---

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

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 current Freddie Mac underwriting guidelines can
be approved by designated senior management of Los Padres Bank. All consumer
loans up to $25,000 may be approved by designated senior management of Los
Padres Bank. All loans in excess of these amounts up to $1.0 million 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, but not exceeding $3.0 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 $3.0 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. In addition, the board of directors of Los Padres Bank ratifies
all loans originated and purchased by 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

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by readily marketable securities. At December 31, 2002, Los Padres Banks
regulatory limit on loans-to-one borrower was $8.0 million and its five largest
loans or groups of loans-to-one borrower, including related entities,
aggregated $5.9 million, $5.8 million, $5.7 million, $5.6 million and $5.5
million. These five largest loans or loan concentrations were secured by
commercial real estate and business assets. All of these loans or loan
concentrations were performing in accordance with their payment terms at
December 31, 2002.

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 yielding 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, 2002 and 2001, Los Padres Bank
brokered $86.1 million and $39.8 million 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, 2002, Los Padres Bank had
$116.7 million of single-family residential loans in its portfolio, which
amounted to 25.8% of total loans receivable as of such date. At December 31,
2002, $67.6 million or 57.9% of Los Padres Banks single-family residential
loans had fixed interest rates and $49.1 million or 42.1% 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, 2002, Los Padres Bank had an aggregate of $71.9 million and $183.3 million
invested in multi-family residential and commercial real estate loans,
respectively, or 15.9% and 40.5% of total loans receivable, respectively. Los
Padres Bank has generally targeted smaller commercial real estate loans with
principal balances of up to its legal lending limit.

Los Padres Banks multi-family residential loans are secured by
multi-family properties of five units or more, while Los Padres Banks
commercial real estate loans are secured by industrial, warehouse and
self-storage properties, office buildings, office and industrial condominiums,
retail space and strip shopping centers, mixed-use commercial properties,
mobile home parks, nursing homes, hotels and motels. Substantially all of
these properties are located in Los Padres Banks primary market areas. Los
Padres Bank typically originates commercial real estate loans for terms of up
to 10 years based upon a 30-year loan amortization period and multi-family
residential loans for terms of up to 15 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)

8



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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 loan-to-value and debt
coverage ratios, and by monitoring the operation and physical condition of the
collateral.

Construction Loans.Los Padres Bank also originates loans to finance the
construction of single-family residences and commercial properties located in
its primary market area. At December 31, 2002, Los Padres Banks construction
loans amounted to $19.7 million or 4.4% of total loans receivable, $14.7
million of which were for the construction of residential properties and $5.0
million of which were for the construction of commercial properties. Los
Padres Bank also originates land acquisition and development loans which are
loans for the acquisition of land and the development of residential
properties. At December 31, 2002, Los Padres Banks land acquisition and
development loans amounted to $14.9 million of 3.3% of total loans receivable.

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 at market rates. 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 loan-to-value ratio of 85% of
discounted appraised value or less. Land acquisition and development loans are
typically issued with one year terms, bearing adjustable-rates of interest
based on a designated prime rate or LIBOR and are generally made with
loan-to-value ratios of 75% or less.

Construction lending and acquisition and development lending are generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, owner-occupied real estate. Risk of loss on construction loans
and acquisition and development loans is dependent largely upon the accuracy of
the initial appraisal of the propertys projected value at completion of
construction as well as the estimated cost, including interest, of
construction. During the construction phase, a number of factors could result
in delays and cost overruns. If either estimate proves to be inaccurate 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.

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Commercial and Industrial Loans. Los Padres Bank is placing increased
emphasis on the origination of commercial business loans. During the year
ended December 31, 2002, Los Padres Bank originated $41.0 million of commercial
and industrial loans, as compared to $13.6 million and $9.5 million as of
December 31, 2001 and 2000, respectively. At December 31, 2002, Los Padres
Banks commercial and industrial loans amounted to $27.7 million or 6.1% of
total loans receivable. Los Padres Banks commercial loan portfolio increased
significantly in connection with the acquisition of the Kansas operations of
Harrington Bank, FSB in November 2001.

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
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, automobile loans, secured and unsecured personal lines of
credit and deposit account secured loans. At December 31, 2002, $18.1 million
or 4.0% 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
80% 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 10 years and carry interest rates which adjust monthly in
accordance with a designated prime rate or floating LIBOR 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, 2002, home equity lines
of credit and home improvement loans totaled $16.6 million or 91.6% of Los
Padres Banks total consumer and other loan portfolio and an aggregate of $11.7
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 $372,000 or 2.1% of Los Padres Banks total consumer and other loan
portfolio at December 31, 2002. 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, 2002, automobile and secured and unsecured personal line
of credit loans amounted to $1.1 million or 6.3% 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

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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, consisting of
Los Padres Banks senior executive officers, 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 90 days
delinquent, Los Padres Bank will institute foreclosure or other proceedings, as
necessary, to minimize any potential loss.

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.

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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,       
|                                                             |                                  |                                                                                              |     |                       
|                                                             |                                  |                                                                                              |     | 2002                   |      | 2001 |     | 2000 |      | 1999 |       | 1998 
|                                                             |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |      
|                                                             |                                  |                                                                                              |     | (Dollars in Thousands)
|Non-accruing loans:                                          |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |       |       |   |       |     |      |   |       |    
|                                                             | Single-family residential        |                                                                                              | $   | 218                    |      |      | $   | 56   |      |      | $     | 767   |       |   | $     | 99  |      |   | $     | 966 |     
|                                                             | Multi-family residential         |                                                                                              |     |                       |      |      |     |     |      |      |       | 2,592 |       |   |       |    |      |   |       |    |     
|                                                             | Commercial real estate           |                                                                                              |     |                       |      |      |     | 348  |      |      |       |      |       |   |       |    |      |   |       |    |     
|                                                             | Land acquisition and development |                                                                                              |     |                       |      |      |     |     |      |      |       |      |       |   |       | 689 |      |   |       |    |     
|                                                             | Commercial and industrial        |                                                                                              |     |                       |      |      |     | 93   |      |      |       |      |       |   |       |    |      |   |       |    |     
|                                                             | Consumer and other               |                                                                                              |     |                       |      |      |     |     |      |      |       | 3     |       |   |       |    |      |   |       |    |     
|                                                             |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |       |       |   |       |     |      |   |       |     |     
|                                                             |                                  | Total non-accruing loans                                                                     |     |                        | 218  |      |     |      | 497  |      |       |       | 3,362 |   |       |     | 788  |   |       |     | 966  |  
|                                                             |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |       |       |   |       |     |      |   |       |     |     
|                                                             |                                  | Total non-performing loans                                                                   |     |                        | 218  |      |     |      | 497  |      |       |       | 3,362 |   |       |     | 788  |   |       |     | 966  |  
|                                                             |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |       |       |   |       |     |      |   |       |     |     
|Troubled debt restructurings                                 |                                  |                                                                                              |    |                        |      |      |    |      |      |      |      |       |       |   | 700   |     |      |   | 1,787 |    
|Real estate owned, net of reserves                           |                                  |                                                                                              |    |                        |      |      |    |      |      |      |      |       |       |   |      |     |      |   | 691   |    
|                                                             |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |       |       |   |       |     |      |   |       |     |     
|Total non-performing assets and
troubled debt restructurings |                                  | $                                                                                            | 218 |                        |      | $    | 497 |      |      | $    | 3,362 |       |       | $ | 1,488 |     |      | $ | 3,444 |    
|                                                             |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |       |       |   |       |     |      |   |       |     |     
|                                                             |                                  | Total non-performing loans
and troubled debt
restructurings as a
percentage of total loans   |     |                        | 0.05 | %    |     |      | 0.11 | %    |       |       | 0.84  | % |       |     | 0.38 | % |       |     | 1.02 | %
|                                                             |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |       |       |   |       |     |      |   |       |     |     
|                                                             |                                  | Total non-performing assets
and troubled debt
restructurings as a
percentage of total assets |     |                        | 0.03 | %    |     |      | 0.07 | %    |       |       | 0.69  | % |       |     | 0.30 | % |       |     | 0.70 | %
|                                                             |                                  |                                                                                              |     |                        |      |      |     |      |      |      |       |       |       |   |       |     |      |   |       |     |     

At December 31, 2002, we had $218,000 in non-performing loans, both 60-89
days delinquent, representing a decrease of $279,000 or 56.1% from December 31,
2001. At December 31, 2002, 2001 and 2000, we had two, three and two
non-performing loans, respectively. At December 31, 2002, we had no real
estate owned or troubled debt restructurings.

The interest income that would have been recorded during the years ended
December 31, 2002, 2001 and 2000 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 $43,496, $41,195 and $39,256, respectively. The interest income
that was recorded during the years ended December 31, 2002, 2001 and 2000 with
respect to Los Padres Banks non-accruing loans was $33, $18 and $300,
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,

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and there is a high possibility of loss. An asset classified 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
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, 2002, in addition to the
non-performing assets described above, Los Padres Bank had $1.8 million of
classified loans, $1.8 million of which was classified as substandard and
$50,000 of which was classified loss (as to which Los Padres Bank had
established a specific reserve). As of December 31, 2002, Los Padres Bank had
$10.4 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 which give us some
repayment concern.

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 average balances over a ten
year period. Management believes this period is conservative since it includes
the severe economic recession of the early 1990s and the current recession,
which started in the third quarter of 2001. 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

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loans consist of consumer loans and single-family residential loans. The
allowance for groups of performing loans is based on historical losses over a
ten year period.

Unallocated Allowance. The unallocated allowance contains amounts that
are based on managements evaluation of conditions that are not directly
measured in the determination of the formula and specific allowances. The
evaluation of the inherent loss with respect to these conditions is subject to
a higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments. The conditions evaluated in connection
with the unallocated allowance include the following, which existed at the
balance sheet date:



| |  |  | trends in criticized and non-accrual assets;                                  
| | - |  | ------------------------------------------------------------------------------
|
| |  |  | the levels and trends in charge-offs, recovery history and loan restructuring;
|
| |  |  | changes in volumes and terms of the loan portfolio;                           
|
| |  |  | changes in the effectiveness of the internal asset review process;            
|
| |  |  | changes in lending policies, procedures and practices;                        
|
| |  |  | changes in the experience, ability and depth of lending management;           
|
| |  |  | changes in the national and local economic conditions; and                    
|
| |  |  | the trend in local real estate values.                                        

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

The allowance for loan losses is based upon estimates of probable 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,

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periodically review our valuation allowance. These agencies may require
us to increase the allowance, based on their judgments of the information
available to them at the time of the examination.

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

|                       |  |                 |  |      |  |      |       |  |  |   |       |  |  |   |       | 
|---------------------- |  | --------------- |  | ---- |  | ---- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                       |  | At December 31,
|                       |  |                
|                       |  | 2002            |  | 2001 |  | 2000
|                       |  |                 |  |      |  |     
|                       |  | (In Thousands) 
|Specific reserve       |  |                 |  |      |  | $    | 50    |  |  | $ | 50    |  |  | $ | 50    | 
|Formula-non homogenous |  |                 |  |      |  |      | 3,131 |  |  |   | 2,993 |  |  |   | 1,617 | 
|Formula-homogenous     |  |                 |  |      |  |      | 489   |  |  |   | 522   |  |  |   | 736   | 
|Unallocated            |  |                 |  |      |  |      | 127   |  |  |   | 171   |  |  |   | 747   | 
|                       |  |                 |  |      |  |      |       |  |  |   |       |  |  |   |       | 
|                       |  |                 |  |      |  | $    | 3,797 |  |  | $ | 3,736 |  |  | $ | 3,150 | 
|                       |  |                 |  |      |  |      |       |  |  |   |       |  |  |   |       | 

At December 31, 2002, the formula allowance for non-homogeneous loans
increased by $138,000 from December 31, 2001, 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 decreased by $33,000 and
$214,000 for the years ending December 31, 2002 and 2001, respectively, 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. In addition, Los Padres Bank sold
$27.6 million such loans in 2001, for the same reason.

Specific reserves are established for impaired loans in accordance with
SFAS No. 114, Accounting by Creditors for Impairment of a Loan. From
December 31, 2000 to December 31, 2002, the balance in specific reserves has
remained constant at $50,000 and relates to one single-family loan.

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

|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |     |      |  
|------------------------------------------------------------------------ | ------------------------ | ------------------------- | ----- | ------------------------- | ---- | ---- | ----- | ---- | --- | ---- | ----- | ---- | -- | - | ----- | -- | --- | - | ----- | --- | ---- | -
|                                                                         |                          |                           |       | At and For the Year Ended
|                                                                         |                          |                           |       | December 31,             
|                                                                         |                          |                           |       |                          
|                                                                         |                          |                           |       | 2002                      |      | 2001 |       | 2000 |     | 1999 |       | 1998
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |     
|                                                                         |                          |                           |       | (Dollars in Thousands)   
|Balance at beginning of period                                           |                          | $                         | 3,736 |                           |      | $    | 3,150 |      |     | $    | 3,112 |      |    | $ | 2,975 |    |     | $ | 3,324 |    
|Charge-offs:                                                             |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    
|                                                                         | Real estate loans        |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |     |     
|                                                                         |                          | Single-family residential |       |                           |     |      |       |      |    |      |       |      |   |   |       |    | (13 | ) |       |     | (11  | )
|                                                                         |                          | Multi-family residential  |       |                           |     |      |       |      |    |      |       |      |   |   |       |    |    |   |       |     | (109 | )
|                                                                         |                          | Commercial                |       |                           | (330 | )    |       |      |    |      |       |      |   |   |       |    |    |   |       |     | (185 | )
|                                                                         | Consumer and other loans |                           |       |                          |      |      |       | (15  | )   |      |       | (4   | )  |   |       | (5 | )   |   |       | (12 | )   
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    
|                                                                         |                          | Total charge-offs         |       |                           | (330 | )    |       |      | (15 | )    |       |      | (4 | ) |       |    | (18 | ) |       |     | (317 | )
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    
|Net charge-offs                                                          |                          |                           | (330  | )                         |      |      | (15   | )    |     |      | (4    | )    |    |   | (18   | )  |     |   | (317  | )  
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    
|Allowance for loan losses acquired
in connection with branch
purchase(1) |                          |                           |      |                           |      |      | 600   |      |     |      |      |      |    |   |      |    |     |   |      |    
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    
|Provision (credit) for losses on loans                                   |                          |                           | 391   |                           |      |      | 1     |      |     |      | 42    |      |    |   | 155   |    |     |   | (32   | )  
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    
|Balance at end of period                                                 |                          | $                         | 3,797 |                           |      | $    | 3,736 |      |     | $    | 3,150 |      |    | $ | 3,112 |    |     | $ | 2,975 |    
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    
|Allowance for loan losses as a percent of
total loans outstanding        |                          |                           | 0.83  | %                         |      |      | 0.83  | %    |     |      | 0.79  | %    |    |   | 0.80  | %  |     |   | 0.88  | %  
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    
|Ratio of net charge-offs to average loans
outstanding                    |                          |                           | 0.07  | %                         |      |      |      | %    |     |      |      | %    |    |   | 0.01  | %  |     |   | 0.10  | %  
|                                                                         |                          |                           |       |                           |      |      |       |      |     |      |       |      |    |   |       |    |     |   |       |    



---

|(1) |  | In November 2001, we acquired from Harrington Bank, FSB the Shawnee
Mission, Kansas branch, along with related loans and deposits.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

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



|                                |                                  |   |                        |     |             |  |             |      |             |   |        |     |             |  |       |      |   |   |             |     |  |  |       |      |  
|------------------------------- | -------------------------------- | - | ---------------------- | --- | ----------- |  | ----------- | ---- | ----------- | - | ------ | --- | ----------- |  | ----- | ---- | - | - | ----------- | --- |  |  | ----- | ---- | -
|                                |                                  |   | December 31,          
|                                |                                  |   |                       
|                                |                                  |   | 2002                   |     | 2001        |  | 2000       
|                                |                                  |   |                        |     |             |  |            
|                                |                                  |   |                        |     |             |  | Percent of  |      |             |   |        |     | Percent of  |  |       |      |   |   | Percent of 
|                                |                                  |   |                        |     |             |  | Loans in    |      |             |   |        |     | Loans in    |  |       |      |   |   | Loans in   
|                                |                                  |   |                        |     |             |  | Each        |      |             |   |        |     | Each        |  |       |      |   |   | Each       
|                                |                                  |   |                        |     |             |  | Category to |      |             |   |        |     | Category to |  |       |      |   |   | Category to
|                                |                                  |   | Amount                 |     | Total Loans |  | Amount      |      | Total Loans |   | Amount |     | Total Loans
|                                |                                  |   |                        |     |             |  |             |      |             |   |        |     |            
|                                |                                  |   | (Dollars in Thousands)
|Real estate loans:              |                                  |   |                        |     |             |  |             |      |             |   |        |     |             |  |       |      |   |   |             |     |  |  |       |     
|                                | Single-family residential        |   | $                      | 390 |             |  |             | 25.8 | %           |   | $      | 509 |             |  |       | 34.5 | % |   | $           | 717 |  |  |       | 50.2 | %
|                                | Multi-family residential         |   |                        | 344 |             |  |             | 15.9 |             |   |        | 437 |             |  |       | 15.4 |   |   |             | 453 |  |  |       | 16.6 |  
|                                | Commercial                       |   |                        | 773 |             |  |             | 40.5 |             |   |        | 693 |             |  |       | 34.4 |   |   |             | 679 |  |  |       | 27.3 |  
|                                | Construction                     |   |                        | 546 |             |  |             | 4.4  |             |   |        | 612 |             |  |       | 4.6  |   |   |             | 380 |  |  |       | 3.3  |  
|                                | Land acquisition and development |   |                        | 215 |             |  |             | 3.3  |             |   |        | 79  |             |  |       | 1.7  |   |   |             | 25  |  |  |       | 0.6  |  
|Commercial and industrial loans |                                  |   | 1,253                  |     |             |  | 6.1         |      |             |   | 1,172  |     |             |  | 6.8   |      |   |   | 80          |     |  |  | 1.0   |     
|Consumer and other loans        |                                  |   | 149                    |     |             |  | 3.9         |      |             |   | 63     |     |             |  | 2.6   |      |   |   | 69          |     |  |  | 1.0   |     
|Unallocated reserve             |                                  |   | 127                    |     |             |  | .1          |      |             |   | 171    |     |             |  |      |      |   |   | 747         |     |  |  |      |     
|                                |                                  |   |                        |     |             |  |             |      |             |   |        |     |             |  |       |      |   |   |             |     |  |  |       |      |  
|Total                           |                                  | $ | 3,797                  |     |             |  | 100         | %    |             | $ | 3,736  |     |             |  | 100.0 | %    |   | $ | 3,150       |     |  |  | 100.0 | %   
|                                |                                  |   |                        |     |             |  |             |      |             |   |        |     |             |  |       |      |   |   |             |     |  |  |       |      |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                |                                  |   |                        |     |             |  |             |      |             |   |       |     |             |  |       |      |  
|------------------------------- | -------------------------------- | - | ---------------------- | --- | ----------- |  | ----------- | ---- | ----------- | - | ----- | --- | ----------- |  | ----- | ---- | -
|                                |                                  |   | December 31,          
|                                |                                  |   |                       
|                                |                                  |   | 1999                   |     | 1998       
|                                |                                  |   |                        |     |            
|                                |                                  |   |                        |     |             |  | Percent of  |      |             |   |       |     | Percent of 
|                                |                                  |   |                        |     |             |  | Loans in    |      |             |   |       |     | Loans in   
|                                |                                  |   |                        |     |             |  | Each        |      |             |   |       |     | Each       
|                                |                                  |   |                        |     |             |  | Category to |      |             |   |       |     | Category to
|                                |                                  |   | Amount                 |     | Total Loans |  | Amount      |      | Total Loans
|                                |                                  |   |                        |     |             |  |             |      |            
|                                |                                  |   | (Dollars in Thousands)
|Real estate loans:              |                                  |   |                        |     |             |  |             |      |             |   |       |     |             |  |       |     
|                                | Single-family residential        |   | $                      | 804 |             |  |             | 53.4 | %           |   | $     | 963 |             |  |       | 59.1 | %
|                                | Multi-family residential         |   |                        | 424 |             |  |             | 15.7 |             |   |       | 399 |             |  |       | 15.3 |  
|                                | Commercial                       |   |                        | 994 |             |  |             | 24.2 |             |   |       | 783 |             |  |       | 21.2 |  
|                                | Construction                     |   |                        | 331 |             |  |             | 5.4  |             |   |       | 309 |             |  |       | 2.6  |  
|                                | Land acquisition and development |   |                        | 72  |             |  |             | 0.9  |             |   |       | 90  |             |  |       | 1.3  |  
|Commercial and industrial loans |                                  |   |                       |     |             |  |            |      |             |   |      |     |             |  |      |     
|Consumer and other loans        |                                  |   | 28                     |     |             |  | 0.4         |      |             |   | 29    |     |             |  | 0.5   |     
|Unallocated reserve             |                                  |   | 459                    |     |             |  |            |      |             |   | 402   |     |             |  |      |     
|                                |                                  |   |                        |     |             |  |             |      |             |   |       |     |             |  |       |      |  
|Total                           |                                  | $ | 3,112                  |     |             |  | 100.0       | %    |             | $ | 2,975 |     |             |  | 100.0 | %   
|                                |                                  |   |                        |     |             |  |             |      |             |   |       |     |             |  |       |      |  

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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, President and Chief Financial Officer execute various
transactions with respect to the portfolio and are responsible for informing
ALCO of the types of investments available, the status and performance of the
portfolio and current market conditions. Such officers 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. Any of the Chief Executive Officer, the President
or the Chief Financial Officer 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 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.

Mortgage-Backed and Related Securities. At December 31, 2002, our
mortgage-backed and related securities including pass-through mortgage-backed
securities, collateral mortgage obligations and

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mortgage related asset-backed securities classified as available for sale
and held to maturity amounted to $259.1 million or 79.3% of our securities
portfolio and 31.4% 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 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 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

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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, 2002, $222.7 million or 94.6% of our
mortgage-backed and related securities were pledged to secure various
obligations (such as Federal Home Loan Bank (FHLB) advances and 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, 2002, 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 estimated 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, 2002, of the
$259.1 million of mortgage-backed and related securities held by us, an
aggregate of $110.3 million were secured by fixed-rate mortgage loans and an
aggregate of $148.8 million were 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, 2002, we held $64.9 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,
2002, we held $852,000 of corporate debt securities.

Trading Account Assets and Other Securities. At December 31, 2002, 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 $1.8
million as of December 31, 2002, and equity securities (consisting of mutual
funds invested in a variety of corporate fixed income and equity securities),
which had a carrying value of $126,000 as of December 31, 2002. We also have
asset-based (i.e., total return) interest rate swaps which we use to enhance
our returns, and certain other interest rate contracts which do not receive
hedge accounting treatment pursuant to SFAS No. 133. Other securities owned by
us at December 31, 2002 and held in our held to maturity portfolio consisted of
U.S. Government and agency securities, which had a carrying value of $2.4
million as of December 31, 2002.

20



---



##### Table of Contents



At December 31, 2002, we were a party to various interest rate swap
agreements which we hold as trading account assets and which we refer to as
total return swaps. As of December 31, 2002, we had CMBS total return swaps
with an aggregate notional amount of $60.0 million which mature on or near July
31, 2003. Pursuant to the CMBS total return swaps, we receive the spread on
Lehman Brothers AAA CMBS Index at the engagement of the swap plus any change in
the market values of the index from spread changes. We pay a short term LIBOR
rate minus a specified spread, usually 25 to 50 basis points depending on
market conditions. Additionally, at December 31, 2002, we had Ginnie Mae total
return swaps, which utilize a basket of adjustable-rate Ginnie Mae securities
with an aggregate notional amount of $14.5 million, a payable rate of 1.84%, a
receivable rate of 5.72% and a maturity date of October 2003. The purpose of
these total return swaps is to create incremental income for Los Padres Bank.

The net interest expense (income) relating to our total returns swaps was
$916,000, $432,000 and $(117,000) during the years ended December 31, 2002,
2001 and 2000. The approximate net market value of our total returns swaps
maintained as trading account assets was $(17,000), $60,000 and $(653,000) as
of December 31, 2002, 2001 and 2000, respectively.

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.



|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |      |  
|--------------------------------------------------------- | -------------------------- | - | ---------------------- | ------- | ----- | - | ------- | ------- |  |  | -------- | ----- | --------- |  | ----- |  | ------- | - | ------- | ------- |  | - | ------- | ------- | -------- |  | ---- | ---- | -
|                                                          |                            |   | 2002                   |         | 2001 
|                                                          |                            |   |                        |         |      
|                                                          |                            |   |                        |         |       |   |         |         |  |  | Weighted |       |           |  |       |  |         |   |         |         |  |   |         |         | Weighted
|                                                          |                            |   | Amortized              |         | Fair  |   | Average |         |  |  |          |       | Amortized |  | Fair  |  | Average
|                                                          |                            |   | Cost                   |         | Value |   | Yield   |         |  |  |          |       | Cost      |  | Value |  | Yield  
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |        
|                                                          |                            |   | (Dollars in thousands)
|Mortgage-backed securitiespass throughs                  |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          | Due from five to ten years |   | $                      | 6,076   |       |   | $       | 6,163   |  |  |          | 6.72  | %         |  |       |  |         |   | $       | 8,494   |  |   | $       | 8,693   |          |  |      | 6.24 | %
|                                                          | Due over ten years         |   |                        | 155,527 |       |   |         | 158,193 |  |  |          | 4.97  |           |  |       |  |         |   |         | 171,153 |  |   |         | 172,934 |          |  |      | 5.80 |  
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Total mortgage backed
securities-pass throughs            |                            | $ | 161,603                |         |       | $ | 164,356 | (1)     |  |  | 5.03     |       |           |  |       |  |         | $ | 179,647 |         |  | $ | 181,627 |         |          |  | 5.82 |     
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Collateralized mortgage
obligations                       |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          | Due over ten years         |   |                        | 71,103  |       |   |         | 70,690  |  |  |          | 3.81  |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |      |  
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Total collateralized mortgage
obligations                 |                            |   | 71,103                 |         |       |   | 70,690  |         |  |  | 3.81     |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Commercial mortgage-backed
securities                     |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          | Due from one to five years |   |                        | 24,218  |       |   |         | 24,486  |  |  |          | 2.43  |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |      |  
|                                                          | Due from five to ten years |   |                        | 17,590  |       |   |         | 17,870  |  |  |          | 3.06  |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |      |  
|                                                          | Due over ten years         |   |                        | 22,380  |       |   |         | 22,545  |  |  |          | 3.81  |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |      |  
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Total commercial mortgage-back
Securities                 |                            |   | 64,188                 |         |       |   | 64,901  |         |  |  | 3.08     |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Asset-backed securities
(underlying securities
mortgages) |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          | Due over ten years         |   |                        | 23,736  |       |   |         | 23,731  |  |  |          | 2.74  |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |      |  
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Total asset backed-securities                             |                            |   | 23,736                 |         |       |   | 23,731  |         |  |  | 2.74     |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Corporate debt securities                                 |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          | Due over ten years         |   |                        | 807     |       |   |         | 852     |  |  |          | 15.53 |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |      |  
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Total corporate debt securities                           |                            |   | 807                    |         |       |   | 852     |         |  |  | 15.53    |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|Total                                                     |                            | $ | 321,437                |         |       | $ | 324,530 |         |  |  | 4.23     |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     
|                                                          |                            |   |                        |         |       |   |         |         |  |  |          |       |           |  |       |  |         |   |         |         |  |   |         |         |          |  |      |     

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |      |  
|--------------------------------------------------------- | -------------------------- | - | ---------------------- | ------ | ----- | - | ------- | ------ |  |  | -------- | ---- | -
|                                                          |                            |   | 2000                  
|                                                          |                            |   |                       
|                                                          |                            |   |                        |        |       |   |         |        |  |  | Weighted
|                                                          |                            |   | Amortized              |        | Fair  |   | Average
|                                                          |                            |   | Cost                   |        | Value |   | Yield  
|                                                          |                            |   |                        |        |       |   |        
|                                                          |                            |   | (Dollars in thousands)
|Mortgage-backed securities
-pass throughs                 |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          | Due from five to ten years |   | $                      |       |       |   | $       |       |  |  |          |      |  
|                                                          | Due over ten years         |   |                        | 47,051 |       |   |         | 47,438 |  |  |          | 7.36 | %
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Total mortgage backed
securities-pass throughs            |                            | $ | 47,051                 |        |       | $ | 47,438  |        |  |  | 7.36     |     
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Collateralized mortgage
obligations                       |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          | Due over ten years         |   |                        |        |       |   |         |        |  |  |          |      |  
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Total collateralized mortgage
obligations                 |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Commercial mortgage-backed
securities                     |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          | Due from one to five years |   |                        |        |       |   |         |        |  |  |          |      |  
|                                                          | Due from five to ten years |   |                        |        |       |   |         |        |  |  |          |      |  
|                                                          | Due over ten years         |   |                        |        |       |   |         |        |  |  |          |      |  
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Total commercial mortgage-back
Securities                 |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Asset-backed securities
(underlying securities
mortgages) |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          | Due over ten years         |   |                        |        |       |   |         |        |  |  |          |      |  
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Total asset backed-securities                             |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Corporate debt securities                                 |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          | Due over ten years         |   |                        |        |       |   |         |        |  |  |          |      |  
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Total corporate debt securities                           |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     
|Total                                                     |                            |   |                        |        |       |   |         |        |  |  |          |     
|                                                          |                            |   |                        |        |       |   |         |        |  |  |          |     



---

|(1) |  | At December 31, 2002, consisted of $16.8 million of Fannie Mae
participation certificates and $147.6 million of Ginnie Mae participation
certificates.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------

21



---



##### 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 31 |       |            |       |      
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |      
|                                                |                         |                                             |  |                        |  |   |       | 2002        |       |            |       |       |       | 2001    |      |          |      |     
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |     
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      | Weighted |      |      |  |            |  |       |       |       |       |         |       |       |       | Weighted |      |      |      | 
|                                                |                         |                                             |  |                        |  |   |       | Amortized   |       |            |       |       |       | Average |      |          |      |      |  | Amortized  |  |       |       |       |       | Average |       |       |       |         
|                                                |                         |                                             |  |                        |  |   |       | Cost        |       | Fair Value |       | Yield |       |         |      |          |      | Cost |  | Fair Value |  | Yield |       |       |       |        
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |      |  |            |  |       |       |       |       |        
|                                                |                         |                                             |  | (Dollars in Thousands)
|Mortgage-backed securities:                     |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |      |  |            |  |       |       |       |       |         |       |       |       |          |      |      |      |  |  | 
|                                                | Due over ten years      |                                             |  |                        |  |   | $     | 355         |       |            | $     | 380   |       |         |      | 7.00     | %    |      |  |            |  |       | $     | 583   |       |         | $     | 604   |       |          |      | 7.00 | %    |  |  |  | 
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |      |  |            |  |       |       |       |       |         |       |       |       |          |      |      |      |  |  | 
|                                                |                         | Total mortgage-backed
securities            |  |                        |  |   |       |             | 355   |            |       |       | 380   | (1)     |      |          | 7.00 |      |  |            |  |       |       |       | 583   |         |       |       | 604   |          |      |      | 7.00 |  |  |  |  | 
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |      |  |            |  |       |       |       |       |         |       |       |       |          |      |      |      |  |  | 
|U.S. Government and agency
securities:          |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |      |  |            |  |       |       |       |       |         |       |       |       |          |      |      |      |  |  | 
|                                                | Due within one year     |                                             |  |                        |  |   |       | 2,013       |       |            |       | 2,087 |       |         |      | 5.30     |      |      |  |            |  |       |       |      |       |         |       |      |       |          |      |     |      |  |  |  | 
|                                                | Due from one-five years |                                             |  |                        |  |   |       |            |       |            |       |      |       |         |      |          |      |      |  |            |  |       |       | 2,034 |       |         |       | 2,113 |       |          |      | 5.30 |      |  |  |  | 
|                                                | Due from five-ten years |                                             |  |                        |  |   |       |            |       |            |       |      |       |         |      |          |      |      |  |            |  |       |       |      |       |         |       |      |       |          |      |     |      |  |  |  | 
|                                                | Due over ten years      |                                             |  |                        |  |   |       |            |       |            |       |      |       |         |      |          |      |      |  |            |  |       |       |      |       |         |       |      |       |          |      |     |      |  |  |  | 
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |      |  |            |  |       |       |       |       |         |       |       |       |          |      |      |      |  |  | 
|                                                |                         | Total U.S. Government
and agency securities |  |                        |  |   |       |             | 2,013 |            |       |       | 2,087 |         |      |          | 5.30 |      |  |            |  |       |       |       | 2,034 |         |       |       | 2,113 |          |      |      | 5.30 |  |  |  |  | 
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |      |  |            |  |       |       |       |       |         |       |       |       |          |      |      |      |  |  | 
|Total securities classified as held
to maturity |                         |                                             |  |                        |  | $ | 2,368 |             |       | $          | 2,467 |       |       |         | 5.56 |          |      |      |  |            |  | $     | 2,617 |       |       | $       | 2,717 |       |       |          | 5.68 |      |      |  |  | 
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      |      |  |            |  |       |       |       |       |         |       |       |       |          |      |      |      |  |  | 

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |          |      | 
|----------------------------------------------- | ----------------------- | ------------------------------------------- |  | ---------------------- |  | - | ----- | ----------- | ----- | ---------- | ----- | ----- | ----- | ------- | ---- | -------- | ---- | 
|                                                |                         |                                             |  |                        |  |   |       | December 31
|                                                |                         |                                             |  |                        |  |   |       |            
|                                                |                         |                                             |  |                        |  |   |       | 2000       
|                                                |                         |                                             |  |                        |  |   |       |            
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      | Weighted
|                                                |                         |                                             |  |                        |  |   |       | Amortized   |       |            |       |       |       | Average
|                                                |                         |                                             |  |                        |  |   |       | Cost        |       | Fair Value |       | Yield
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |      
|                                                |                         |                                             |  | (Dollars in Thousands)
|Mortgage-backed securities:                     |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |         
|                                                | Due over ten years      |                                             |  |                        |  |   | $     | 687         |       |            | $     | 695   |       |         |      | 7.00     | %   
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |         
|                                                |                         | Total mortgage-backed
securities            |  |                        |  |   |       |             | 687   |            |       |       | 695   |         |      |          | 7.00 | 
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |         
|U.S. Government and agency
securities:          |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |         
|                                                | Due within one year     |                                             |  |                        |  |   |       | 2,000       |       |            |       | 2,000 |       |         |      | 6.77     |     
|                                                | Due from one-five years |                                             |  |                        |  |   |       |            |       |            |       |      |       |         |      |         |     
|                                                | Due from five-ten years |                                             |  |                        |  |   |       |            |       |            |       |      |       |         |      |         |     
|                                                | Due over ten years      |                                             |  |                        |  |   |       |            |       |            |       |      |       |         |      |         |     
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |         
|                                                |                         | Total U.S. Government
and agency securities |  |                        |  |   |       |             | 2,000 |            |       |       | 2,000 |         |      |          | 6.77 | 
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |         
|Total securities classified as held
to maturity |                         |                                             |  |                        |  | $ | 2,687 |             |       | $          | 2,695 |       |       |         | 6.83 |         
|                                                |                         |                                             |  |                        |  |   |       |             |       |            |       |       |       |         |      |         



---

|(1) |  | At December 31, 2002, consisted of $380,000 of Fannie Mae participation
certificates.
|--- |  | -------------------------------------------------------------------------------------

22



---



##### Table of Contents



The following table presents certain information regarding the composition
of our trading account assets as of the dates indicated below.



|                                      |  |                        |       |            |  |       |       |         |  |            |      |       |  |   |       |         |  |   |       |          |  |  |      |  
|------------------------------------- |  | ---------------------- | ----- | ---------- |  | ----- | ----- | ------- |  | ---------- | ---- | ----- |  | - | ----- | ------- |  | - | ----- | -------- |  |  | ---- | -
|                                      |  | December 31,          
|                                      |  |                       
|                                      |  | 2002                   |       | 2001      
|                                      |  |                        |       |           
|                                      |  |                        |       |            |  |       |       |         |  | Weighted   |      |       |  |   |       |         |  |   |       | Weighted
|                                      |  | Amortized              |       |            |  |       |       | Average |  | Amortized  |      |       |  |   |       | Average
|                                      |  | Cost                   |       | Fair Value |  | Yield |       | Cost    |  | Fair Value |      | Yield
|                                      |  |                        |       |            |  |       |       |         |  |            |      |      
|                                      |  | (Dollars in Thousands)
|Mortgage-backed securities            |  | $                      | 1,696 |            |  | $     | 1,809 | (1)     |  |            | 6.27 | %     |  | $ | 2,258 |         |  | $ | 2,333 |          |  |  | 6.49 | %
|U.S. Government and agency
securities |  |                        |      |            |  |       |      |         |  |            |      |       |  |   |      |         |  |   |      |          |  |  |     |  
|Equity securities(2)                  |  |                        | 150   |            |  |       | 125   |         |  |            |      |       |  |   | 150   |         |  |   | 140   |          |  |  |     |  
|Other securities(3)                   |  |                        |      |            |  |       |      |         |  |            |      |       |  |   |      |         |  |   | 278   |          |  |  |     |  
|                                      |  |                        |       |            |  |       |       |         |  |            |      |       |  |   |       |         |  |   |       |          |  |  |      |  
|Total trading account assets          |  | $                      | 1,846 |            |  | $     | 1,934 |         |  |            | 5.76 |       |  | $ | 2,408 |         |  | $ | 2,751 |          |  |  | 6.08 |  
|                                      |  |                        |       |            |  |       |       |         |  |            |      |       |  |   |       |         |  |   |       |          |  |  |      |  

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                      |  |                        |       |            |  |       |       |         |  |          |      |  
|------------------------------------- |  | ---------------------- | ----- | ---------- |  | ----- | ----- | ------- |  | -------- | ---- | -
|                                      |  | December 31,          
|                                      |  |                       
|                                      |  | 2000                  
|                                      |  |                       
|                                      |  |                        |       |            |  |       |       |         |  | Weighted
|                                      |  | Amortized              |       |            |  |       |       | Average
|                                      |  | Cost                   |       | Fair Value |  | Yield
|                                      |  |                        |       |            |  |      
|                                      |  | (Dollars in Thousands)
|Mortgage-backed securities            |  | $                      | 3,345 |            |  | $     | 3,372 |         |  |          | 6.66 | %
|U.S. Government and agency
securities |  |                        |      |            |  |       |      |         |  |          |     |  
|Equity securities(2)                  |  |                        | 481   |            |  |       | 393   |         |  |          |     |  
|Other securities(3)                   |  |                        |      |            |  |       | 199   |         |  |          |     |  
|                                      |  |                        |       |            |  |       |       |         |  |          |      |  
|Total trading account assets          |  | $                      | 3,826 |            |  | $     | 3,964 |         |  |          | 5.82 |  
|                                      |  |                        |       |            |  |       |       |         |  |          |      |  



---

|(1) |  | At December 31, 2002, consisted of $4,000 of Freddie Mac participation
certificates, $1.0 million of Fannie Mae participation certificates and
$772,000 of Ginnie Mae participation certificates.   
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | At December 31, 2002, equity securities consisted of mutual funds
invested in a variety of fixed income and equity securities.                                                                      
|   
|(3) |  | At December 31, 2002, 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.

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

|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |         |         | 
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------------- |  | -------------- |  | - | ------- | ------------------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                            |                                                                                            |                            |  |                |  |   |         | At or For the Years
|                                                                                            |                                                                                            |                            |  |                |  |   |         | Ended December 31, 
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                    
|                                                                                            |                                                                                            |                            |  |                |  |   |         | 2002                |         | 2001 |         | 2000   
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |        
|                                                                                            |                                                                                            |                            |  | (In Thousands)
|Beginning balance                                                                           |                                                                                            |                            |  |                |  | $ | 184,344 |                     |         | $    | 50,133  |         |         | $ | 733     |        
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        
|Mortgage-backed securities pass-throughs
purchased-available for sale                       |                                                                                            |                            |  |                |  |   | 61,024  |                     |         |      | 189,437 |         |         |   | 100,757 |        
|Collateralized mortgage obligations
purchased-available for sale                            |                                                                                            |                            |  |                |  |   | 117,145 |                     |         |      |         |         |         |   |         |        
|Commercial mortgage-backed securities
purchased-available for sale                          |                                                                                            |                            |  |                |  |   | 64,544  |                     |         |      |         |         |         |   |         |        
|Asset-backed securities purchased-available for sale                                        |                                                                                            |                            |  |                |  |   | 23,735  |                     |         |      |         |         |         |   |         |        
|Corporate debt securities purchased-available for sale                                      |                                                                                            |                            |  |                |  |   | 803     |                     |         |      |         |         |         |   |         |        
|Agency
securities purchased - held to maturity                                              |                                                                                            |                            |  |                |  |   |        |                     |         |      | 2,055   |         |         |   | 2,000   |        
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        
|                                                                                            |                                                                                            | Total securities purchased |  |                |  |   |         |                     | 267,251 |      |         |         | 191,492 |   |         |         | 102,757 | 
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        
|Less:                                                                                       |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        
|Sale and principal payments of mortgage-backed
securities, pass throughs-available for sale |                                                                                            |                            |  |                |  |   | (76,014 | )                   |         |      | (54,750 | )       |         |   | (53,682 | )      
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        
|Sale and principal payments of collateralized mortgage
obligations-available for sale       |                                                                                            |                            |  |                |  |   | (44,860 | )                   |         |      |         |         |         |   |         |        
|Sale and principal payments of mortgage-backed
securities, pass throughs - held to maturity |                                                                                            |                            |  |                |  |   | (228    | )                   |         |      |         |         |         |   |         |        
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        
|                                                                                            | Total securities sold                                                                      |                            |  |                |  |   |         | (121,102            | )       |      |         | (54,750 | )       |   |         | (53,682 | )      
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        
|                                                                                            | Proceeds from maturities of securities                                                     |                            |  |                |  |   |         |                    |         |      |         | (2,000  | )       |   |         |        |        
|                                                                                            | Change in net unrealized gain (loss) on
securities available for sale and held to
maturity |                            |  |                |  |   |         | 1,274               |         |      |         | 1,685   |         |   |         | 403     |        
|                                                                                            | Amortization of (premium)/discount                                                         |                            |  |                |  |   |         | (4,770              | )       |      |         | (2,216  | )       |   |         | (78     | )      
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        
|Ending balance                                                                              |                                                                                            |                            |  |                |  | $ | 326,997 |                     |         | $    | 184,344 |         |         | $ | 50,133  |        
|                                                                                            |                                                                                            |                            |  |                |  |   |         |                     |         |      |         |         |         |   |         |        

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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 which 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 also intends to open a new
branch in the Kansas City metropolitan area in the latter half of 2003. 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.

25



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##### Table of Contents



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.

|                        |                |   |                        |         |           |  |      |      |  |  |         |  |           |   |         |         |  |  |         |  |           |  |      |      |  |  |  |  |  |   |         |         |  |  |      |      | 
|----------------------- | -------------- | - | ---------------------- | ------- | --------- |  | ---- | ---- |  |  | ------- |  | --------- | - | ------- | ------- |  |  | ------- |  | --------- |  | ---- | ---- |  |  |  |  |  | - | ------- | ------- |  |  | ---- | ---- | 
|                        |                |   | 2002                   |         | 2001      |  | 2000
|                        |                |   |                        |         |           |  |     
|                        |                |   | Average                |         | Average   |  |      |      |  |  | Average |  | Average   |   |         |         |  |  | Average |  | Average  
|                        |                |   | Balance                |         | Rate Paid |  |      |      |  |  | Balance |  | Rate Paid |   |         |         |  |  | Balance |  | Rate Paid
|                        |                |   |                        |         |           |  |      |      |  |  |         |  |           |   |         |         |  |  |         |  |          
|                        |                |   | (Dollars in Thousands)
|Passbook accounts       |                | $ | 18,710                 |         |           |  | 1.26 | %    |  |  |         |  |           | $ | 13,429  |         |  |  |         |  |           |  | 1.93 | %    |  |  |  |  |  | $ | 11,688  |         |  |  | 2.59 | %   
|Money market accounts   |                |   | 73,515                 |         |           |  | 2.30 |      |  |  |         |  |           |   | 25,409  |         |  |  |         |  |           |  | 3.11 |      |  |  |  |  |  |   | 22,609  |         |  |  | 4.24 |     
|NOW accounts            |                |   | 30,840                 |         |           |  | .52  |      |  |  |         |  |           |   | 19,825  |         |  |  |         |  |           |  | 0.95 |      |  |  |  |  |  |   | 17,995  |         |  |  | 1.34 |     
|Certificates of deposit |                |   | 371,324                |         |           |  | 3.22 |      |  |  |         |  |           |   | 341,444 |         |  |  |         |  |           |  | 5.26 |      |  |  |  |  |  |   | 283,582 |         |  |  | 5.67 |     
|                        |                |   |                        |         |           |  |      |      |  |  |         |  |           |   |         |         |  |  |         |  |           |  |      |      |  |  |  |  |  |   |         |         |  |  |      |     
|                        | Total deposits |   | $                      | 494,389 |           |  |      | 2.84 |  |  |         |  |           |   | $       | 400,107 |  |  |         |  |           |  |      | 4.79 |  |  |  |  |  |   | $       | 335,874 |  |  |      | 5.24 | 
|                        |                |   |                        |         |           |  |      |      |  |  |         |  |           |   |         |         |  |  |         |  |           |  |      |      |  |  |  |  |  |   |         |         |  |  |      |     

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, 2002.

|                                  |                                |       |   |                |         | 
|--------------------------------- | ------------------------------ | ----- | - | -------------- | ------- | 
|                                  |                                |       |   | Amount        
|                                  |                                |       |   |               
|                                  |                                |       |   | (In Thousands)
|Certificates of deposit maturing: |                                |       |   |               
|                                  | Three months or less           |       | $ | 57,525         |        
|                                  | Over three through six months  |       |   | 41,147         |        
|                                  | Over six through twelve months |       |   | 39,849         |        
|                                  | Over twelve months             |       |   | 19,080         |        
|                                  |                                |       |   |               
|                                  |                                | Total |   | $              | 157,601 | 
|                                  |                                |       |   |               

The following table sets forth the activity in Los Padres Banks deposits
during the period indicated.

|                                                 |                                             |   |                         |      |      |   |         |       |   |   |         |        |  
|------------------------------------------------ | ------------------------------------------- | - | ----------------------- | ---- | ---- | - | ------- | ----- | - | - | ------- | ------ | -
|                                                 |                                             |   | Year Ended December 31,
|                                                 |                                             |   |                        
|                                                 |                                             |   | 2002                    |      | 2001 |   | 2000   
|                                                 |                                             |   |                         |      |      |   |        
|                                                 |                                             |   | (In Thousands)         
|Beginning balance                                |                                             | $ | 520,858                 |      |      | $ | 355,705 |       |   | $ | 379,839 |       
|                                                 |                                             |   |                         |      |      |   |         |       |   |   |         |       
|Net increase (decrease) before interest
credited |                                             |   | (8,060                  | )    |      |   | 71,633  |       |   |   | 30,483  |       
|Interest credited                                |                                             |   | 13,403                  |      |      |   | 16,895  |       |   |   | 14,713  |       
|Deposit acquisitions (dispositions)              |                                             |   |                        |      |      |   | 75,410  | (1)   |   |   | (65,407 | )(2)  
|                                                 | Gain on sale of deposits                    |   |                         |     |      |   |         |      |   |   |         | (3,923 | )
|                                                 | Purchase accounting premium                 |   |                         |     |      |   |         | 1,365 |   |   |         |       |  
|                                                 | Amortization of purchase accounting premium |   |                         | (930 | )    |   |         | (150  | ) |   |         |       |  
|                                                 |                                             |   |                         |      |      |   |         |       |   |   |         |       
|Net increase (decrease) in deposits              |                                             |   | 4,413                   |      |      |   | 165,153 |       |   |   | (24,134 | )     
|                                                 |                                             |   |                         |      |      |   |         |       |   |   |         |       
|Ending balance                                   |                                             | $ | 525,271                 |      |      | $ | 520,858 |       |   | $ | 355,705 |       
|                                                 |                                             |   |                         |      |      |   |         |       |   |   |         |       



---

|(1) |  | In November 2001, we acquired from Harrington Bank, FSB its Shawnee
Mission, Kansas branch along with related deposits and loans.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In February 2000, we sold two branches and the related deposits that we
had acquired in 1997.                                    

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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,
|                 |       |   |                
|                 |       |   | 2002            |         | 2001 |   | 2000   
|                 |       |   |                 |         |      |   |        
|                 |       |   | (In Thousands) 
|0.00% to 2.99%   |       | $ | 272,688         |         |      | $ | 59,511  |         |  | $ | 37      |        
|3.00% to 3.99%   |       |   | 21,664          |         |      |   | 61,181  |         |  |   |        |        
|4.00% to 4.99%   |       |   | 30,424          |         |      |   | 203,718 |         |  |   | 4,582   |        
|5.00% to 5.99%   |       |   | 18,390          |         |      |   | 61,108  |         |  |   | 136,624 |        
|6.00% to 6.99%   |       |   | 7,514           |         |      |   | 39,866  |         |  |   | 155,378 |        
|7.00% and higher |       |   | 1,223           |         |      |   | 1,183   |         |  |   | 216     |        
|                 |       |   |                 |         |      |   |         |         |  |   |         |        
|                 | Total |   | $               | 351,903 |      |   | $       | 426,567 |  |   | $       | 296,837 | 
|                 |       |   |                 |         |      |   |         |         |  |   |         |        

The following table sets forth the amount and remaining maturities of Los
Padres Banks certificates of deposit at December 31, 2002.

|                 |       |   |                |         |             |   |              |        |               |   |            |        |       |   |        |        |  |   |       |        |  |   |         |         | 
|---------------- | ----- | - | -------------- | ------- | ----------- | - | ------------ | ------ | ------------- | - | ---------- | ------ | ----- | - | ------ | ------ |  | - | ----- | ------ |  | - | ------- | ------- | 
|                 |       |   |                |         |             |   | Over Six     |        |               |   |            |        |       |   |        |        |  |   |       |        |  |   |        
|                 |       |   |                |         |             |   | Months       |        | Over One      |   | Over Two   |        |       |   |        |        |  |   |      
|                 |       |   | Six Months     |         | Through One |   | Year Through |        | Years Through |   | Over Three |        |       |   |       
|                 |       |   | and Less       |         | Year        |   | Two Years    |        | Three Years   |   | Years      |        | Total
|                 |       |   |                |         |             |   |              |        |               |   |            |        |      
|                 |       |   | (In Thousands)
|0.00% to 2.99%   |       | $ | 181,104        |         |             | $ | 87,641       |        |               | $ | 3,426      |        |       | $ | 367    |        |  | $ | 150   |        |  | $ | 272,688 |        
|3.00% to 3.99%   |       |   | 9,686          |         |             |   | 2,195        |        |               |   | 4,852      |        |       |   | 2,889  |        |  |   | 2,042 |        |  |   | 21,664  |        
|4.00% to 4.99%   |       |   | 2,873          |         |             |   | 618          |        |               |   | 1,803      |        |       |   | 19,127 |        |  |   | 6,003 |        |  |   | 30,424  |        
|5.00% to 5.99%   |       |   | 2,194          |         |             |   | 2,221        |        |               |   | 7,189      |        |       |   | 432    |        |  |   | 6,354 |        |  |   | 18,390  |        
|6.00% to 6.99%   |       |   | 2,835          |         |             |   | 824          |        |               |   | 2,792      |        |       |   | 1,063  |        |  |   |      |        |  |   | 7,514   |        
|7.00% and higher |       |   | 131            |         |             |   |             |        |               |   | 273        |        |       |   | 819    |        |  |   |      |        |  |   | 1,223   |        
|                 |       |   |                |         |             |   |              |        |               |   |            |        |       |   |        |        |  |   |       |        |  |   |         |        
|                 | Total |   | $              | 198,823 |             |   | $            | 93,499 |               |   | $          | 20,335 |       |   | $      | 24,697 |  |   | $     | 14,549 |  |   | $       | 351,903 | 
|                 |       |   |                |         |             |   |              |        |               |   |            |        |       |   |        |        |  |   |       |        |  |   |         |        

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, 2002, we had seven advances from the FHLB of San Francisco which
mature between January 2003 and June 2010. At December 31, 2002, we had total
FHLB of San Francisco advances of $235.0 million at a weighted average coupon
of 2.73%. Our borrowings from the FHLB of San Francisco are limited to 35% of
Los Padres Banks total assets, or $288.5 million at December 31, 2002, $234.4
million at December 31, 2001, and $169.5 million at December 31, 2000.

While not presently utilizing this funding source, we also have in the
past 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, generally not more than 90 days, at a price
less than the original sales price. The difference between the

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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 in a liability in our consolidated
financial statements.

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 $25 million for general corporate
purposes from time to time prior to September 17, 2005, up to $21.875 million
from September 17, 2005 to September 17, 2006 and up to $18.75 million from
September 17, 2006 through September 30, 2007, in each case subject to
customary borrowing conditions. As of December 31, 2002, we had outstanding
borrowings of $11.3 million under the credit agreement. Our payment
obligations under the credit agreement are secured by a first priority security
interest in the capital stock of Los Padres Bank.

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 2.0% to 3.0% 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 undrawn
portion of the borrowings available to us under the credit agreement for that
year.

The credit agreement contains a number of significant covenants that
restrict our ability to dispose of assets, incur additional indebtedness,
invest in mortgage derivative securities above certain thresholds, create liens
on assets, engage in mergers or consolidations or a change-of control, engage
in certain transactions with affiliates, pay cash dividends or repurchase
common stock. The credit agreement also requires us to comply with specified
financial ratios and tests, including causing Los Padres Bank to maintain a
ratio of non-performing assets to the sum of Tier 1 risk-based capital plus
loan loss reserves of not more than 0.20 to 1, maintaining a ratio of
outstanding loans under the credit agreement to the stockholders equity of Los
Padres Bank of less than 0.50 to 1, maintaining Los Padres Banks status as a
well capitalized institution and complying with minimum core profitability
requirements. Management believes that as of December 31, 2002, it was in
compliance with all of such covenants and restrictions and does not anticipate
that such covenants and restrictions will limit its operations.

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The following table sets forth certain information regarding our
short-term borrowings at or for the dates indicated.

|                                                |                                                               |  |                          |  |      |  |      |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------- | ------------------------------------------------------------- |  | ------------------------ |  | ---- |  | ---- | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                |                                                               |  | At or For the Year Ended
|                                                |                                                               |  | December 31,            
|                                                |                                                               |  |                         
|                                                |                                                               |  | 2002                     |  | 2001 |  | 2000
|                                                |                                                               |  |                          |  |      |  |     
|                                                |                                                               |  | (Dollars in Thousands)  
|Securities sold under agreements to repurchase: |                                                               |  |                          |  |      |  |      |         |   |  |   |        |   |  |   |        
|                                                | Average balance outstanding                                   |  |                          |  |      |  | $    | 1,018   |   |  | $ | 108    |   |  | $ | 42,027  |  
|                                                | Maximum amount outstanding at any month-end
during the period |  |                          |  |      |  |      | 1,501   |   |  |   | 613    |   |  |   | 104,278 |  
|                                                | Balance outstanding at end of period                          |  |                          |  |      |  |      | 517     |   |  |   | 365    |   |  |   |        |  
|                                                | Average interest rate during the period                       |  |                          |  |      |  |      | 1.21    | % |  |   | 1.24   | % |  |   | 5.97    | %
|                                                | Average interest rate at end of period                        |  |                          |  |      |  |      | 1.12    | % |  |   | 1.00   | % |  |   |        | %
|Short-term FHLB advances:                       |                                                               |  |                          |  |      |  |      |         |   |  |   |        |   |  |   |        
|                                                | Average balance outstanding                                   |  |                          |  |      |  | $    | 61,348  |   |  | $ | 47,959 |   |  | $ | 38,461  |  
|                                                | Maximum amount outstanding at any month-end
during the period |  |                          |  |      |  |      | 160,000 |   |  |   | 85,403 |   |  |   | 63,000  |  
|                                                | Balance outstanding at end of period                          |  |                          |  |      |  |      | 160,000 |   |  |   | 21,403 |   |  |   | 36,000  |  
|                                                | Average interest rate during the period                       |  |                          |  |      |  |      | 2.03    | % |  |   | 4.05   | % |  |   | 6.36    | %
|                                                | Average interest rate at end of period                        |  |                          |  |      |  |      | 1.43    | % |  |   | 4.07   | % |  |   | 6.58    | %

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, which provides trust and investment management services to
individuals and small institutional clients. In November 2001, we purchased
the remaining 51% interest in Harrington Wealth Management Company. Harrington
Wealth Management Company emphasizes the management of expected risk and return
through personal knowledge and analysis of each customers investment needs,
risk tolerance, tax situation and investment horizon. At December 31, 2002,
Harrington Wealth Management Company administered approximately 483 accounts
and had $112.4 million of assets under management which are not included on our
balance sheet. For the years ended December 31, 2002, 2001 and 2000,
Harrington Wealth Management Company generated revenues of $412,000, $348,000
and $261,000, respectively. Harrington Wealth Management Company is a
wholly-owned subsidiary of Los Padres Bank.

In August 2002, we established Los Padres Mortgage as a 51%-owned mortgage
banking subsidiary of Los Padres Bank. Los Padres Mortgage has a non-exclusive
joint venture agreement with Market Resources Inc., the owner of numerous
RE/MAX brokerage agencies in the Phoenix/Scottsdale metropolitan area, which
owns 49% of Los Padres Mortgage. Based on RE/MAX network referrals, Los Padres
Mortgage originates single-family residential and commercial real estate loans
primarily for sale to third party investors. Los Padres Bank has the ability
to engage in similar relationships with other brokerage agencies in the
Phoenix/Scottsdale metropolitan area, subject to a right of first refusal in
favor of Los Padres Mortgage. Los Padres Bank has the opportunity to purchase
select single-family and commercial real estate loans from Los Padres Mortgage
for its portfolio.

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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.

Employees

As of December 31, 2002, we had 157 full-time equivalent
employees. Our
employees are not subject to any collective bargaining agreements and we
believe that our relationship with our employees is satisfactory.

Regulation of Harrington West Financial Group, Inc.

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

Activities Restriction Test. As a unitary savings and
loan holding
company, we are generally not subject to activity restrictions, provided Los
Padres Bank satisfies the Qualified Thrift Lender (QTL), test or meets the
definition of a domestic building and loan association pursuant to the Code.
We presently intend to continue to operate as a unitary savings and loan
holding company. Recent legislation terminated the unitary thrift holding
company exemption for all companies that apply to acquire savings associations
after May 4, 1999. However, since we are grandfathered, our unitary holding
company powers and authorities were not affected. Despite our grandfathered
status, if we acquire control of another savings association as a separate
subsidiary, we would become a multiple savings and loan holding company, and
our activities and any 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

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or controls more than 25% of the voting shares of a savings and loan
holding company, from acquiring control of any savings association not a
subsidiary of the savings and loan holding company, unless the acquisition is
approved by the OTS.

Regulation of Los Padres Bank

General. As a federally chartered, SAIF-insured savings

association, Los
Padres Bank is subject to extensive regulation by the OTS and the Federal
Deposit Insurance Corporation (FDIC). Lending activities and other
investments of Los Padres Bank must comply with various statutory and
regulatory requirements. Los Padres Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board.

The OTS, in conjunction with the FDIC, regularly examines Los

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

Los Padres Bank must file reports with the OTS and the FDIC

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

Insurance of Deposit Accounts. 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, 2002, 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 2002 at approximately $0.017 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.

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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 has recently been introduced 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.                                
|
| |  |  | increase deposit insurance coverage limits for municipal deposits.                                                                                                   
|
| |  |  | double deposit insurance coverage limits for individual retirement accounts.                                                                                         
|
| |  |  | replace the current fixed 1.25 designated reserve ratio with
a reserve range of 1-1.5%, 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 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, 2002, 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.

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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.

In addition to minimum capital requirements and the prompt

corrective
action requirements set forth above, due to our business strategy which has
concentrated on growth, a shift in our lending focus to more commercial lending
and the size and character of our available for sale securities and trading
account assets, we have informally agreed with the OTS that Los Padres Bank
will maintain a total risk-based capital ratio and a leverage capital ratio of
at least 11% and 6%, respectively, which is in excess of both the OTS minimum
regulatory requirement as well as the OTS prompt corrective action
requirements. Management does not believe that Los Padres Banks agreement
with the OTS to maintain increased ratios of total risk-based and leverage
capital will limit or restrict our operations. However, to the extent that Los
Padres Bank fails to comply with these additional increased capital ratios, the
OTS could take such failure to comply into consideration in connection with
further requests to have Los Padres Bank pay dividends to us and in additional
future branch applications. Los Padres Banks failure to comply could also
impact its overall assessment by the OTS in future regulatory examinations,
which, if adverse, could also impact its FDIC insurance assessment.

The following table reflects as of December 31, 2002, Los

Padres Banks
actual levels of regulatory capital and both the applicable regulatory capital
requirements as well as the increased capital requirements that Los Padres Bank
has informally agreed with the OTS that it will maintain.

|                                      |  |                     |        |            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  
|------------------------------------- |  | ------------------- | ------ | ---------- |  | --------------------- | ---- | ------- |  | ---------------------- | ------ | ------- |  |  | ---- | - |  | - | ------ |  |  |  | ----- | -
|                                      |  |                     |        |            |  |                       |      |         |  | Tier 1 Leverage        |        |         |  |  |      |   |  |  
|                                      |  | Tangible Capital(1) |        | Capital(1) |  | Risk-Based Capital(1)
|                                      |  |                     |        |            |  |                      
|                                      |  | Amount              |        | Percent    |  | Amount                |      | Percent |  | Amount                 |        | Percent
|                                      |  |                     |        |            |  |                       |      |         |  |                        |        |        
|                                      |  |                     |        |            |  |                       |      |         |  | (Dollars in Thousands) |        |         |  |  |      |   |  |  
|Actual regulatory capital             |  |                     | N/A    |            |  |                       | N/A  |         |  | $                      | 49,836 |         |  |  | 6.11 | % |  | $ | 53,583 |  |  |  | 11.97 | %
|Minimum required by OTS
Agreement (2) |  |                     | N/A    |            |  |                       | N/A  |         |  |                        | 48,945 |         |  |  | 6.00 |   |  |   | 49,230 |  |  |  | 11.00 |  
|                                      |  |                     |        |            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  
|Excess regulatory capital             |  |                     | N/A    |            |  |                       | N/A  |         |  | $                      | 891    |         |  |  | 0.11 | % |  | $ | 4,353  |  |  |  | 0.97  | %
|                                      |  |                     |        |            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  
|Actual regulatory capital             |  | $                   | 49,836 |            |  |                       | 6.11 | %       |  | $                      | 49,836 |         |  |  | 6.11 | % |  | $ | 53,583 |  |  |  | 11.97 | %
|Minimum regulatory capital            |  |                     | 12,236 |            |  |                       | 1.50 |         |  |                        | 32,630 |         |  |  | 4.00 |   |  |   | 35,804 |  |  |  | 8.00  |  
|                                      |  |                     |        |            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  
|Excess regulatory capital             |  | $                   | 37,600 |            |  |                       | 4.61 | %       |  | $                      | 17,206 |         |  |  | 2.11 | % |  | $ | 17,779 |  |  |  | 3.97  | %
|                                      |  |                     |        |            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  



---

|(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 $817.7 million as of December 31, 2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Although applicable OTS regulations require Los Padres Bank to maintain
Tier 1 leverage capital equal to 4.00% of adjusted total assets and
risk-based capital equal to 8.00% of adjusted risk-weighted assets, Los    

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| | Padres Bank has informally agreed with the OTS that it will maintain Tier
1 leverage capital equal to 6.00% of adjusted total assets and risk-based
capital equal to 11.00% of adjusted risk-weighted assets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 an exemption is granted by the OTS, 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, 2002, Los Padres Banks
loans-to-one-borrower limit was
$8.0 million based upon the 15% of unimpaired capital and surplus measurement.
At December 31, 2002, Los Padres Banks largest single lending relationship had
an outstanding aggregate balance of $5.9 million, and consisted of two loans
secured by residential real estate and a letter of credit, each of which was
performing in accordance with its terms.

Qualified Thrift Lender Test. Savings associations must
meet a QTL test,
which test may be met either by maintaining a specified level of assets in
qualified thrift investments as specified in HOLA or by meeting the definition
of a domestic building and loan association under the Code. Qualified thrift
investments are primarily residential mortgages and related investments,
including certain mortgage related securities. The required percentage of
investments under HOLA is 65% of assets while the Code requires investments of
60% of assets. An association must be in compliance with the QTL test or the
definition of domestic building and loan association on a monthly basis in nine
out of every 12 months. Associations that fail to meet the QTL test will
generally be prohibited from engaging in any activity not permitted for both a
national bank and a savings association. As of December 31, 2002, Los Padres
Bank was in compliance with its QTL requirement and met the definition of a
domestic building and loan association.

Affiliate Transactions. Transactions between a savings
association and
its affiliates are quantitatively and qualitatively restricted under the
Federal Reserve Act and pursuant to Regulation W promulgated thereunder as
interpreted by the OTS with respect to federal savings associations and their
holding companies. Affiliates of a savings association include, among other
entities, the savings

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associations holding company and companies that are under common control
with the savings association. We and Harrington Wealth Management Company are
both considered to be affiliates of Los Padres Bank. In general, a savings
association or its subsidiaries are limited in their ability to engage in
covered transactions with affiliates:



| |  |  | to an amount equal to 10% of the associations capital and
surplus, in the case of covered transactions with any one affiliate;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | to an amount equal to 20% of the associations capital and
surplus, in the case of covered transactions with all affiliates.       

In addition, a savings association and its subsidiaries may

engage in
covered transactions and other specified transactions only on terms and under
circumstances that are substantially the same, or at least as favorable to the
savings association or its subsidiary, as those prevailing at the time for
comparable transactions with nonaffiliated companies. A covered transaction
includes:



| |  |  | a loan or extension of credit to an affiliate;                                                                      
| | - |  | --------------------------------------------------------------------------------------------------------------------
|
| |  |  | a purchase of assets from an affiliate, with some exceptions;                                                       
|
| |  |  | the acceptance of securities issued by an affiliate as
collateral for a loan or extension of credit to any party; or
|
| |  |  | the issuance of a guarantee, acceptance or letter of credit
on behalf of an affiliate.                              

In addition, under the OTS regulations:



| |  |  | a savings association may not make a loan or extension of
credit to an affiliate unless the affiliate is engaged only in
activities permissible for bank holding companies;                                                                                        
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a savings association may not purchase or invest in
securities of an affiliate other than shares of a subsidiary;                                                                                                                                                  
|
| |  |  | a savings association and its subsidiaries may not purchase a
low-quality asset from an affiliate;                                                                                                                                                                 
|
| |  |  | covered transactions and other specified transactions between
a savings association or its subsidiaries and an affiliate must be
on terms and conditions that are consistent with safe and sound
banking practices; and                                            
|
| |  |  | with some exceptions, each loan or extension of credit by a
savings association to an affiliate must be secured by collateral
with a market value ranging from 100% to 130%, depending on the type
of collateral, of the amount of the loan or extension of credit.

The OTS regulation generally excludes all non-bank and

non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or the Federal Reserve Board decides to treat
these subsidiaries as affiliates. The regulation also requires savings
associations to make and retain records that reflect affiliate transactions in
reasonable detail and provides that specified classes of savings associations
may be required to give the OTS prior notice of affiliate transactions.

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Capital Distribution Limitations. OTS regulations impose

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



| |  |  | be required to file an application and await approval from
the OTS before it makes a capital distribution;
| | - |  | ----------------------------------------------------------------------------------------------------------
|
| |  |  | be required to file a notice 30 days before the capital distribution; or                                  
|
| |  |  | be permitted to make the capital distribution without notice or application to the

OTS.                  

The OTS regulations require a

savings association to file an application if:



| |  |  | it is not eligible for expedited treatment of its other applications under OTS

regulations;                                                                                                                                                                                                           
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the total amount of all of capital distributions, including
the proposed capital distribution, for the applicable calendar year
exceeds its net income for that year to date plus retained net
income for the preceding two years;                                                                     
|
| |  |  | it would not be at least adequately capitalized, under the
prompt corrective action regulations of the OTS following the
distribution; or                                                                                                                                                              
|
| |  |  | the associations proposed capital distribution would violate
a prohibition contained in any applicable statute, regulation, or
agreement between the savings association and the OTS, or the FDIC,
or violate a condition imposed on the savings association in an
OTS-approved application or notice.

In addition, a savings association

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



| |  |  | would not be well capitalized under the prompt corrective
action regulations of the OTS following the distribution;                                                                                                                                                                                             
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | the proposed capital distribution would reduce the amount of
or retire any part of the savings associations common or preferred
stock or retire any part of debt instruments like notes or
debentures included in capital, other than regular payments required
under a debt instrument approved by the OTS; or
|
| |  |  | the savings association is a subsidiary of a savings and loan
holding company.                                                                                                                                                                                                                                  

If neither the savings association nor the proposed capital

distribution
meet any of the above listed criteria, the OTS does not require the savings
association to submit an application or give notice when making the proposed
capital distribution. The OTS may prohibit a proposed capital distribution
that would otherwise be permitted if the OTS determines that the distribution
would constitute an unsafe or unsound practice.

Community Reinvestment Act and the Fair Lending Laws.

Savings
associations have a responsibility under the Community Reinvestment Act and
related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their

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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 July 2001, Los Padres Bank received a satisfactory
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,
2002, financial data, was $11.8 million. At December 31, 2002, Los Padres Bank
had $11.8 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, 2002, 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.

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. which occurred on September 11, 2001. The Patriot Act is
intended is 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

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activities, and which restricted officer, director, or employee interlocks
between a member bank and any company or person primarily engaged in
specified securities activities.

In addition, the GLB also contains provisions that expressly

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

The GLB provides that no company may acquire control of an

insured savings
association unless that company engages, and continues to engage, only in the
financial activities permissible for a financial holding company, unless the
company is grandfathered as a unitary savings and loan holding company. The
Financial Institution Modernization Act grandfathers any company that was a
unitary savings and loan holding company on May 4, 1999 or became a unitary
savings and loan holding company pursuant to an application pending on that
date.

The GLB also permits national banks to engage in expanded

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

To the extent that the GLB permits banks, securities firms, and

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

Sarbanes-Oxley Act. On July 30, 2002, President Bush

signed into law the
Sarbanes-Oxley Act of 2002 (SOA). The stated goals of the SOA are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws.

The SOA is the most far-reaching U.S. securities legislation

enacted in
some time. 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). Given the extensive SEC role in implementing rules relating
to many of the SOAs new requirements, the final scope of these requirements
remains to be determined.

The SOA includes very specific additional disclosure

requirements and new
corporate governance rules, requires the SEC and securities exchanges to adopt
extensive additional disclosure,

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##### Table of Contents



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;                                                                                                                                                                   
|
| |  |  | 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;                                                                                                                                                                                                                    
|
| |  |  | auditor independence; and                                                                                                                                                                                                                                                
|
| |  |  | various increased criminal penalties for violations of securities laws.                                                                                                                                                                                                  

The SOA contains provisions which became effective upon

enactment on July
30, 2002 and provisions which will become effective from within 30 days to one
year from enactment. The SEC has been delegated the task of enacting rules to
implement various of the provisions with respect to, among other matters,
disclosure in periodic filings pursuant to the Exchange Act.

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 those entities, as well as by various
state authorities.

39



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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, 2002.

|                                                                                     |  |                                                                  |  |                    |  |                   |        | 
|------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------- |  | ------------------ |  | ----------------- | ------ | 
|                                                                                     |  | Leased/Owned                                                     |  | Date Office        |  |                   |        | 
|                                                                                     |  | and                                                              |  | Opened or Purchase |  | Total Deposits at
|Office Location                                                                      |  | Lease Expiration Date                                            |  | Date               |  | December 31, 2002
|                                                                                     |  |                                                                  |  |                    |  |                  
|Solvang Branch and Administrative
Offices 
610 Alamo Pintado Road 
Solvang, CA 93463 |  | Lease expires on
1/31/05 with two
options for five
years each    |  | June 1983          |  | $                 | 94,978 | 
|                                                                                    
|Loan Center
1992 Mission Drive
Solvang, CA 93463                                     |  | Lease expires on
1/31/05 with two
options for five
years each    |  | March 1998         |  |                   |       | 
|                                                                                    
|Pismo Branch
831 Oak Park Boulevard 
Pismo Beach, CA 93449                           |  | Lease expires on
2/9/08 with two
options for five
years each     |  | May 1988           |  |                   | 75,313 | 
|                                                                                    
|Atascadero Branch 
7315 El Camino Real
Atascadero, CA 93422                          |  | Lease expires on
4/30/06 with two
options for five
years each    |  | May 1991           |  |                   | 46,875 | 
|                                                                                    
|Santa Maria Branch
402 E. Main Street 
Santa Maria, CA 93454                         |  | Lease expires on
6/30/07 with three
options for five
years each  |  | July 1992          |  |                   | 59,003 | 
|                                                                                    
|Buellton Branch 
234 E. Highway 246, Suite 109 
Buellton, CA 93427                   |  | Lease expires on
11/2/07 with one
option for five
years          |  | December 1997      |  |                   | 17,126 | 
|                                                                                    
|Goleta Branch 
197 North Fairview 
Goleta, CA 93117                                  |  | Lease expires on
12/31/03 with four
options for five
years each  |  | February 1999      |  |                   | 71,885 | 
|                                                                                    
|San Luis Branch
1322 Madonna Road 
San Luis Obispo, CA 93405                         |  | Lease expires on
12/31/05 with two
options for five
years each   |  | January 2001       |  |                   | 15,697 | 
|                                                                                    
|Nipomo Branch 
542 W. Teft Road
Nipomo, CA 93444                                     |  | Lease expires on
11/30/05 with three
options for five
years each |  | July 2001          |  |                   | 11,028 | 

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|                                                                                                           |  |                                                                 |  |                    |  |                   |       
|---------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------- |  | ------------------ |  | ----------------- | ------
|                                                                                                           |  | Leased/Owned                                                    |  | Date Office        |  |                   |       
|                                                                                                           |  | and                                                             |  | Opened or Purchase |  | Total Deposits at
|Office Location                                                                                            |  | Lease Expiration Date                                           |  | Date               |  | December 31, 2002
|                                                                                                           |  |                                                                 |  |                    |  |                  
|Storage Area
1120 Mission Drive 
Solvang, CA 93463                                                         |  | Month-to-month
Lease with no
expiration date                    |  | June 1992          |  |                   |      
|                                                                                                          
|Human Resources and Compliance
Training Room 
Suite A-4 and A-5 
1984 Old Mission Drive 
Solvang, CA 93463 |  | Lease expires on
1/31/05 with two
options for five
years each   |  | March 2000         |  |                   |      
|                                                                                                          
|Loan Origination Center 
Suite B-12 
1988 Old Mission Drive 
Solvang, CA 93463                             |  | Lease expires on
1/31/05 with two
options for five
years each   |  | April 2002         |  |                   |      
|                                                                                                          
|Harrington Bank 
6300 Nall Avenue 
Kansas City, KS 66208                                                   |  | Lease expires on
12/31/10 with four
options for five
years each |  | November 2001      |  |                   | 77,621
|                                                                                                          
|Harrington West Financial Group,
Inc.
10801 Mastin Boulevard, Suite 740 
Overland Park, KS 66210           |  | Lease expires on
3/31/04                                        |  | January 2002       |  |                   |      
|                                                                                                          
|Harrington Wealth Management
Company
10150 Lantern Road, Suite 150 
Fishers, IN 46038                      |  | Lease expires on
10/31/06                                       |  | November 2001      |  |                   |      
|                                                                                                          
|Scottsdale Branch 
10555 North 114th Street, Suite 100
Scottsdale, AZ 85295                                |  | Lease expires on
9/30/12 with two
options for five
years each   |  | November, 2002     |  |                   | 17,511
|                                                                                                          
|Los Padres Mortgage Company 
6424 E. Greenway Parkway 
Scottsdale, A AZ 85295                              |  | Lease expires on
4/30/10 with one
five year option              |  | October, 2002      |  |                   |      
|                                                                                                          
|Los Padres Mortgage Company
3939 E. Ray Road, Suite 100 
Phoenix, AZ 85044                                 |  | Lease expires on
9/14/07 with one
five year option              |  | October, 2002      |  |                   |      
|                                                                                                          
|Los Padres Mortgage Company
12211-12213 West Bell Road 
Surprise, AZ 85374                                 |  | Lease expires on
4/30/07                                        |  | October, 2002      |  |                   |      
|                                                                                                          
|Los Padres Mortgage Company
10720 W. Indian School Road, Ste. 45
Phoenix, AZ 85037                         |  | Lease expires on
5/31/03                                        |  | October, 2002      |  |                   |      

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|                                                                      |  |                       |  |                    |  |                   |        | 
|--------------------------------------------------------------------- |  | --------------------- |  | ------------------ |  | ----------------- | ------ | 
|                                                                      |  | Leased/Owned          |  | Date Office        |  |                   |        | 
|                                                                      |  | and                   |  | Opened or Purchase |  | Total Deposits at
|Office Location                                                       |  | Lease Expiration Date |  | Date               |  | December 31, 2002
|                                                                      |  |                       |  |                    |  |                  
|Ojai Branch
110 South Ventura Street
Ojai, CA 93023                   |  | Owned                 |  | November 1997      |  |                   | 38,234 | 
|                                                                     
|Hanalei Bay Condo
5380 Honiki Road
Princeville, Kauai                 |  | Owned                 |  | July 1994          |  |                   |       | 
|                                                                     
|Additonal Kansas Branch
143rd and Metcalf
Overland Park, KS 66223 (1) |  | Owned                 |  | January 2003       |  |                   |       | 



---

|(1) |  | Land purchased January 2003. Office is under construction and completion
scheduled for latter part of 2003.
|--- |  | -----------------------------------------------------------------------------------------------------------




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 and Related Stockholder
Matters.

Stock Information

On November 12, 2002, the initial public offering of
1,120,000 shares of
our common stock was completed, consisting of 973,615 shares sold by us and
146,385 shares sold by certain of our stockholders. As of March 10, 2003, we
had 4,327,951 shares of common stock outstanding and approximately 182
stockholders of record which does not include the number of persons or entities
holding stock in nominee or street name through various brokers and banks.

The following table sets forth the high and low stock prices of
our common
stock for the fourth quarter of 2002. Our common stock began trading on the
Nasdaq National Market on November 6, 2002 under the stock symbol HWFG.

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|                  |  |      |       |     |  |   |       | 
|----------------- |  | ---- | ----- | --- |  | - | ----- | 
|Quarter Ended     |  | High |       | Low
|                  |  |      |       |    
|December 31, 2002 |  | $    | 12.24 |     |  | $ | 10.75 | 

Dividends

We paid a special dividend on our common stock in the second

quarter of
2000 of $0.250 per share. Commencing in the third quarter of 2000 and
continuing through the second quarter of 2002, we paid a quarterly dividend of
$0.027. In the third quarter of 2002, we declared an increase in the quarterly
dividend to $0.033 per share, and in the first quarter of 2003, we declared a
further increase in the quarterly dividend to $0.04 per share.

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 therefor. 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 $300,000 or 25% 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.

Recent Sales of Unregistered Securities

During 2002, we granted stock options to purchase 60,525 shares

of our
common stock with exercise prices ranging between $9.33 and $10.50 to our
directors and employees in reliance upon an exemption under the Securities Act
of 1933, as amended (the Securities Act), pursuant to Rule 701. No shares of
common stock were issued to our employees and directors pursuant to the
exercise of options during 2002.

On September 25, 2002, we effected a split of our common

stock. In
connection with the stock split, each share of our common stock was converted
into three shares of common stock. We issued the new shares in exchange for
shares held by our existing stockholders. No commissions or remuneration was
paid or given directly or indirectly in connection with the stock split.
Accordingly, this transaction was exempt from registration under Section
3(A)(9) 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, 2002. Financial
information at or for each of the five years ended December 31, 2002, 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,
|                                                                         |                                            |   |                                      
|                                                                         |                                            |   | 2002                                  |       | 2001 |   | 2000      |       | 1999 |   | 1998     
|                                                                         |                                            |   |                                       |       |      |   |           |       |      |   |          
|Selected Financial Condition

Data:                                      |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Total assets                                                             |                                            | $ | 824,331                               |       |      | $ | 670,323   |       |      | $ | 484,969   |        |   | $ | 495,191   |       |   | $ | 495,179   |       
|Loans receivable, net                                                    |                                            |   | 448,050                               |       |      |   | 449,709   |       |      |   | 395,537   |        |   |   | 384,223   |       |   |   | 335,269   |       
|Securities available for

sale                                           |                                            |   | 324,530                               |       |      |   | 181,627   |       |      |   | 47,438    |        |   |   |          |       |   |   |          |       
|Securities held to

maturity                                             |                                            |   | 2,368                                 |       |      |   | 2,617     |       |      |   | 2,687     |        |   |   | 741       |       |   |   |          |       
|Trading account assets                                                   |                                            |   | 1,934                                 |       |      |   | 2,751     |       |      |   | 3,964     |        |   |   | 86,174    |       |   |   | 128,730   |       
|Deposits                                                                 |                                            |   | 525,271                               |       |      |   | 520,858   |       |      |   | 355,705   |        |   |   | 379,839   |       |   |   | 327,681   |       
|Federal Home Loan Bank

advances                                         |                                            |   | 235,000                               |       |      |   | 96,403    |       |      |   | 91,000    |        |   |   | 71,000    |       |   |   | 134,029   |       
|Note payable                                                             |                                            |   | 11,300                                |       |      |   | 18,000    |       |      |   | 9,000     |        |   |   | 7,665     |       |   |   | 8,200     |       
|Stockholders

equity                                                    |                                            |   | 42,472                                |       |      |   | 30,144    |       |      |   | 25,557    |        |   |   | 23,736    |       |   |   | 21,376    |       
|                                                                        
|Selected Income Statement

Data:                                         |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Interest income                                                          |                                            | $ | 43,493                                |       |      | $ | 41,168    |       |      | $ | 39,143    |        |   | $ | 36,941    |       |   | $ | 32,903    |       
|Interest expense                                                         |                                            |   | 21,921                                |       |      |   | 25,817    |       |      |   | 27,245    |        |   |   | 24,546    |       |   |   | 23,500    |       
|                                                                         |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Net interest income                                                      |                                            |   | 21,572                                |       |      |   | 15,351    |       |      |   | 11,898    |        |   |   | 12,395    |       |   |   | 9,403     |       
|Provision (credit) for loan

losses                                      |                                            |   | 391                                   |       |      |   | 1         |       |      |   | 42        |        |   |   | 155       |       |   |   | (32       | )     
|                                                                         |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Net interest income after provision

(credit) for loan losses            |                                            |   | 21,181                                |       |      |   | 15,350    |       |      |   | 11,856    |        |   |   | 12,240    |       |   |   | 9,435     |       
|Other income:                                                            |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|                                                                         | Income (loss) from trading account

assets |   |                                       | (31   | )    |   |           | 436   |      |   |           | (2,754 | ) |   |           | (555  | ) |   |           | (1,822 | )
|                                                                         | Gain on sale of deposits                   |   |                                       |      |      |   |           |      |      |   |           | 3,923  |   |   |           |      |   |   |           |       |  
|                                                                         | Gain (loss) on sale of loans               |   |                                       |      |      |   |           | 69    |      |   |           | (601   | ) |   |           |      |   |   |           |       |  
|                                                                         | Other income(1)                            |   |                                       | 2,181 |      |   |           | 996   |      |   |           | 554    |   |   |           | 1,023 |   |   |           | 685    |  
|Other expenses:                                                          |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|                                                                         | Salaries and employee benefits             |   |                                       | 7,847 |      |   |           | 5,444 |      |   |           | 3,942  |   |   |           | 4,064 |   |   |           | 3,281  |  
|                                                                         | Premises and equipment                     |   |                                       | 2,197 |      |   |           | 1,631 |      |   |           | 1,357  |   |   |           | 1,503 |   |   |           | 1,105  |  
|                                                                         | Other expenses(2)                          |   |                                       | 4,713 |      |   |           | 3,242 |      |   |           | 3,097  |   |   |           | 3,002 |   |   |           | 2,874  |  
|                                                                         |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Income before income

taxes                                              |                                            |   | 8,574                                 |       |      |   | 6,534     |       |      |   | 4,582     |        |   |   | 4,139     |       |   |   | 1,038     |       
|Income taxes                                                             |                                            |   | 3,529                                 |       |      |   | 2,732     |       |      |   | 2,001     |        |   |   | 1,779     |       |   |   | 436       |       
|                                                                         |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Net income                                                               |                                            | $ | 5,045                                 |       |      | $ | 3,802     |       |      | $ | 2,581     |        |   | $ | 2,360     |       |   | $ | 602       |       
|                                                                         |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Common Stock

Summary:                                                   |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Diluted earnings per

share                                              |                                            | $ | 1.39                                  |       |      | $ | 1.12      |       |      | $ | 0.77      |        |   | $ | 0.71      |       |   | $ | 0.20      |       
|Dividends per share                                                      |                                            |   | 0.12                                  |       |      |   | 0.11      |       |      |   | 0.30      |        |   |   |          |       |   |   |          |       
|Stockholders equity per

share                                          |                                            |   | 9.81                                  |       |      |   | 8.99      |       |      |   | 7.87      |        |   |   | 7.31      |       |   |   | 6.58      |       
|Diluted weighted average shares

outstanding                             |                                            |   | 3,641,684                             |       |      |   | 3,396,885 |       |      |   | 3,331,857 |        |   |   | 3,313,938 |       |   |   | 3,027,519 |       
|Selected Operating

Data(3):                                             |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Performance Ratios and Other

Data:                                      |                                            |   |                                       |       |      |   |           |       |      |   |           |        |   |   |           |       |   |   |           |       
|Return on average

assets                                                |                                            |   | 0.68                                  | %     |      |   | 0.66      | %     |      |   | 0.53      | %      |   |   | 0.48      | %     |   |   | 0.13      | %     
|Return on average

equity                                                |                                            |   | 15.36                                 |       |      |   | 13.65     |       |      |   | 10.47     |        |   |   | 10.46     |       |   |   | 3.16      |       
|Equity to assets                                                         |                                            |   | 5.15                                  |       |      |   | 4.50      |       |      |   | 5.27      |        |   |   | 4.79      |       |   |   | 4.32      |       
|Interest rate spread(4)                                                  |                                            |   | 2.97                                  |       |      |   | 2.55      |       |      |   | 2.02      |        |   |   | 2.20      |       |   |   | 1.89      |       
|Net interest margin(4)                                                   |                                            |   | 3.14                                  |       |      |   | 2.81      |       |      |   | 2.30      |        |   |   | 2.41      |       |   |   | 2.06      |       
|Average interest-earning assets to

average interest-bearing
liabilities |                                            |   | 105.21                                |       |      |   | 105.51    |       |      |   | 105.17    |        |   |   | 104.53    |       |   |   | 103.27    |       
|Total noninterest expenses to average

total assets                      |                                            |   | 1.97                                  |       |      |   | 1.79      |       |      |   | 1.54      |        |   |   | 1.58      |       |   |   | 1.55      |       
|Efficiency ratio(5)                                                      |                                            |   | 63.17                                 |       |      |   | 63.12     |       |      |   | 67.66     |        |   |   | 64.61     |       |   |   | 71.74     |       

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|                                                                                         |  |                                       |          |      |  |      |        |      |  |      |       |  |  |  |        |  |  |  |       | 
|---------------------------------------------------------------------------------------- |  | ------------------------------------- | -------- | ---- |  | ---- | ------ | ---- |  | ---- | ----- |  |  |  | ------ |  |  |  | ----- | 
|                                                                                         |  | At or For the Year Ended December 31,
|                                                                                         |  |                                      
|                                                                                         |  | 2002                                  |          | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                                                         |  |                                       |          |      |  |      |        |      |  |     
|Asset Quality Ratios(6):                                                                 |  |                                       |          |      |  |      |        |      |  |      |       |  |  |  |        |  |  |  |       | 
|Non-performing assets and troubled debt
restructurings to total assets                   |  |                                       | 0.03     |      |  |      | 0.07   |      |  |      | 0.69  |  |  |  | 0.30   |  |  |  | 0.70  | 
|Non-performing loans and troubled debt
restructurings to total loans                     |  |                                       | 0.05     |      |  |      | 0.11   |      |  |      | 0.84  |  |  |  | 0.38   |  |  |  | 1.02  | 
|Allowance for loan losses to total

loans                                                |  |                                       | 0.83     |      |  |      | 0.83   |      |  |      | 0.79  |  |  |  | 0.80   |  |  |  | 0.88  | 
|Allowance for loan losses to total
non-performing loans and troubled debt
restructurings |  |                                       | 1,739.45 |      |  |      | 751.71 |      |  |      | 93.69 |  |  |  | 209.14 |  |  |  | 86.38 | 
|Net charge-offs to average loans

outstanding                                            |  |                                       | 0.08     |      |  |      |       |      |  |      |      |  |  |  | 0.01   |  |  |  | 0.10  | 
|Bank Regulatory Capital

Ratios:                                                         |  |                                       |          |      |  |      |        |      |  |      |       |  |  |  |        |  |  |  |       | 
|Tier 1 risk-based capital ratio                                                          |  |                                       | 11.14    |      |  |      | 10.76  |      |  |      | 10.55 |  |  |  | 9.48   |  |  |  | 10.41 | 
|Total risk-based capital ratio                                                           |  |                                       | 11.97    |      |  |      | 11.72  |      |  |      | 11.56 |  |  |  | 10.38  |  |  |  | 11.41 | 
|Tier 1 leverage capital ratio                                                            |  |                                       | 6.11     |      |  |      | 6.27   |      |  |      | 6.76  |  |  |  | 6.09   |  |  |  | 5.74  | 



---

|(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 calculated subsequent to March 31, 1999 are based on
average daily balances while all ratios calculated prior to March 31, 1999
are based on average month-end 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 after 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.

General

We attempt to enhance our profitability with prudent levels of

credit,
interest rate and liquidity risk by managing our interest-earning assets and
funding sources to generate favorable interest rate spreads. We invest in
loans secured by single-family and multi-family residences and commercial
properties, as well as commercial and industrial loans and consumer loans. We
utilize excess capital balances through the management of an investment
portfolio that is primarily comprised of short duration mortgage-backed
securities and other investments. We also attempt to increase our retail
banking fee income from deposit fees, loan origination fees and revenue from
Harrington Wealth Management Company. Our funding strategy focuses on
accessing cost-efficient funding sources, including retail deposits, FHLB
advances, securities sold under agreements to repurchase and a revolving line
of credit we have with three unaffiliated financial institutions. We seek to
reduce our exposure to interest rate risk by hedging either internally through
the use of longer term certificates of deposit, less interest rate sensitive
transaction deposits and FHLB advances or externally through the use of
interest rate contracts.

Our strategy has been to build a community-oriented banking

operation in
each of the markets in which we operate in order to sustain loan origination
and deposit growth and generate additional fee income. Our growth is designed
to be achieved internally, although we have pursued, and will continue to
pursue, acquisition opportunities when appropriate. Our overall goal is to
increase stockholders value from earnings and the growth of our franchise.

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

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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, 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, 2002, we have
not created any special purpose entities to securitize assets or to obtain
off-balance sheet funding. Although we have sold loans in the past two 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 impact on the portfolio have occurred but
have yet to be recognized in either the formula or specific allowances.

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Results of Operations

Summary of Earnings. We reported net income for the year

ended December
31, 2002 of $5.0 million, compared to $3.8 million and $2.6 million for the
years ended December 31, 2001 and 2000. Our net income improved by $1.2
million or 32.7% during 2002, as compared to 2001 and $1.2 million or 47.3%
during 2001 as compared to 2000. On a diluted earnings per share basis, we
earned $1.39, $1.12 and $0.77 for the years ended December 31, 2002, 2001 and
2000.

Our income is dependent on loan growth, growth in our securities
portfolio, fee income results, controlling costs and our continued efforts to
prevent any unexpected loan losses that would require additions to our
allowance for loan losses. During the periods presented, our profitability has
been primarily attributable to the growth of our core banking income. We
define core banking income as net interest income after the provision for loan
losses plus fee income from banking services less our operating expenses. We
have expanded our franchise during the periods presented, through internal
growth, de novo branching and a branch acquisition, which has resulted in an
increase in our operating expenses. Notwithstanding increased operating costs,
core banking income has increased over the periods.

The following table presents selected information on our core

banking
income over the periods presented as well as a reconciliation of our core
banking income to income before income taxes (computed in accordance with
generally accepted accounting principles):

|                                                               |                   |                            |        |                        |       |      |        |        |       |   |        |        |       | 
|-------------------------------------------------------------- | ----------------- | -------------------------- | ------ | ---------------------- | ----- | ---- | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                               |                   |                            |        | For the Year Ended    
|                                                               |                   |                            |        | December 31,          
|                                                               |                   |                            |        |                       
|                                                               |                   |                            |        | 2002                   |       | 2001 |        | 2000  
|                                                               |                   |                            |        |                        |       |      |        |       
|                                                               |                   |                            |        | (Dollars in Thousands)
|Net interest income after provision
for loan losses            |                   | $                          | 21,181 |                        |       | $    | 15,350 |        |       | $ | 11,856 |       
|Retail banking fees and other

income                          |                   |                            | 2,181  |                        |       |      | 996    |        |       |   | 554    |       
|                                                               |                   |                            |        |                        |       |      |        |        |       |   |        |       
|                                                               | Total net revenue |                            |        | 23,362                 |       |      |        | 16,346 |       |   |        | 12,410 |      
|                                                               | Other expenses    |                            |        | 14,757                 |       |      |        | 10,317 |       |   |        | 8,396  |      
|                                                               |                   |                            |        |                        |       |      |        |        |       |   |        |       
|                                                               |                   | Core banking income        |        |                        | 8,605 |      |        |        | 6,029 |   |        |        | 4,014 | 
|Other noninterest income

(1)                                  |                   |                            | (31    | )                      |       |      | 505    |        |       |   | 568    |       
|                                                               |                   |                            |        |                        |       |      |        |        |       |   |        |       
|                                                               |                   | Income before income taxes |        | $                      | 8,574 |      |        | $      | 6,534 |   |        | $      | 4,582 | 
|                                                               |                   |                            |        |                        |       |      |        |        |       |   |        |       
|Core banking income as a percent of
income before income
taxes |                   |                            | 100.36 | %                      |       |      | 92.27  | %      |       |   | 87.60  | %     



---

|(1) |  | Consists of income (loss) from trading assets, gain on sale of deposits
and gain (loss) on sale of loans.
|--- |  | ---------------------------------------------------------------------------------------------------------

To a lesser extent during the periods presented, our results of

operations
have been impacted by realized and unrealized gains and losses incurred in
trading account assets, and as a result of gains on our sale of loans and
deposits.

Net Interest Income. Net interest income is determined by

our interest
rate spread, 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 $5.8 million or 38.0% to

$21.2 million
during the year ended December 31, 2002, over 2001, due to a $140.8 million or
25.8% increase in the average balance of interest-earning assets. The overall
increase in the average balance of interest-earning assets was enhanced by a 42
basis point increase in the interest rate spread, attributable to a greater
decline in average rates paid on deposits than on the yields earned on earning
assets. The increased interest rate spread was due to an increase in the
percentage of commercial loans we hold in our loan portfolio, which

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carry higher interest rates, as well as the fact that our deposits and
borrowings generally reprice more quickly than our assets.

Net interest income increased by $3.5 million or 29.0% to

$15.4 million
during the year ended December 31, 2001, as compared to the prior year, due to
a $27.8 million or 5.4% increase in the average balance of interest-earning
assets. Our interest rate spread increased by 53 basis points, primarily for
the same reason discussed above when comparing 2002 with 2001.

48



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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,
|                                                                                  |                                          |                                            |                               |                                               |         |                        
|                                                                                  |                                          |                                            |                               |                                               |         | 2002                    |         | 2001     |        | 2000  
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |       
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      | Average                |        |         |         |         |         |          |        |         |        | Average |      |      |        |         |         |         |         |       |        | Average
|                                                                                  |                                          |                                            |                               |                                               |         | Average                 |         |          |        |        |        | Yield/  |      | Average                |        |         |         |         |         | Yield/   |        | Average |        |         |      |      |        | Yield/ 
|                                                                                  |                                          |                                            |                               |                                               |         | Balance                 |         | Interest |        | Cost   |        | Balance |      | Interest               |        | Cost    |         | Balance |         | Interest |        | Cost   
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |        
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      | (Dollars in Thousands) |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |        
|Interest-earning
assets:                                                          |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          | Loans receivable(1)                        |                               | $                                             | 430,087 |                         |         | $        | 31,500 |        |        |         | 7.32 | %                      |        | $       | 396,132 |         |         | $        | 31,914 |         |        |         | 8.06 | %    |        | $       | 389,416 |         |         | $     | 30,365 |         |        |      | 7.80 | %   
|                                                                                  | Securities and trading account
assets(2) |                                            |                               | 233,053                                       |         |                         |         | 11,336   |        |        |        | 4.86    |      |                        |        | 127,841 |         |         |         | 8,411    |        |         |        | 6.58    |      |      |        | 100,446 |         |         |         | 7,066 |        |         |        | 7.03 |     
|                                                                                  |                                          | FHLB stock                                 |                               |                                               | 7,622   |                         |         |          | 422    |        |        |         | 5.54 |                        |        |         | 7,037   |         |         |          | 407    |         |        |         | 5.78 |      |        |         | 6,447   |         |         |       | 453    |         |        |      | 7.02 |     
|                                                                                  |                                          | Cash and cash
equivalents(3)               |                               |                                               | 16,233  |                         |         |          | 235    |        |        |         | 1.45 |                        |        |         | 15,166  |         |         |          | 436    |         |        |         | 2.88 |      |        |         | 22,107  |         |         |       | 1,259  |         |        |      | 5.70 |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          |                                            | Total interest-earning
assets |                                               |         | 686,995                 |         |          |        | 43,493 |        |         |      | 6.33                   |        |         |         | 546,176 |         |          |        | 41,168  |        |         |      | 7.54 |        |         |         | 518,416 |         |       |        | 39,143  |        |      |      | 7.55 |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|Noninterest-earning
assets                                                        |                                          |                                            | 19,201                        |                                               |         |                         |         |          |        |        |        |         |      |                        | 13,054 |         |         |         |         |          |        |         |        |         |      |      | 8,344  |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          |                                            |                               | Total assets                                  |         | $                       | 706,196 |          |        |        |        |         |      |                        |        |         |         | $       | 559,230 |          |        |         |        |         |      |      |        |         |         | $       | 526,760 |       |        |         |        |      |      |      |      | 
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|Interest-bearing
liabilities:                                                     |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          | Deposits:                                  |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |      |      |     
|                                                                                  |                                          |                                            |                               | NOW and money market
accounts                 |         | $                       | 104,355 |          |        |        | 1,853  |         |      |                        | 1.78   |         |         | $       | 45,234  |          |        |         | 978    |         |      |      | 2.11   |         |         | $       | 40,604  |       |        |         | 1,199  |      |      |      | 2.95 | 
|                                                                                  |                                          |                                            |                               | Passbook accounts and
certificates of deposit |         |                         | 390,034 |          |        |        | 12,178 |         |      |                        | 3.12   |         |         |         | 354,873 |          |        |         | 18,204 |         |      |      | 5.13   |         |         |         | 295,270 |       |        |         | 16,388 |      |      |      | 5.55 | 
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          |                                            |                               | Total deposits                                |         |                         | 494,389 |          |        |        | 14,031 |         |      |                        | 2.84   |         |         |         | 400,107 |          |        |         | 19,182 |         |      |      | 4.79   |         |         |         | 335,874 |       |        |         | 17,587 |      |      |      | 5.24 | 
|                                                                                  |                                          | FHLB advances(4)                           |                               |                                               | 140,561 |                         |         |          | 7,198  |        |        |         | 5.12 |                        |        |         | 107,233 |         |         |          | 5,942  |         |        |         | 5.54 |      |        |         | 105,790 |         |         |       | 6,263  |         |        |      | 5.92 |     
|                                                                                  |                                          | Reverse repurchase
agreements              |                               |                                               | 1,017   |                         |         |          | 12     |        |        |         | 1.22 |                        |        |         | 108     |         |         |          | 1      |         |        |         | 1.24 |      |        |         | 42,027  |         |         |       | 2,509  |         |        |      | 5.97 |     
|                                                                                  |                                          | Other borrowings(5)                        |                               |                                               | 17,019  |                         |         |          | 680    |        |        |         | 3.99 |                        |        |         | 10,189  |         |         |          | 692    |         |        |         | 6.79 |      |        |         | 9,228   |         |         |       | 886    |         |        |      | 9.60 |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          |                                            |                               | Total interest-bearing liabilities            |         |                         | 652,986 |          |        |        | 21,921 |         |      |                        | 3.36   |         |         |         | 517,637 |          |        |         | 25,817 |         |      |      | 4.99   |         |         |         | 492,919 |       |        |         | 27,245 |      |      |      | 5.53 | 
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          | Noninterest-bearing
deposits               |                               |                                               | 14,235  |                         |         |          |        |        |        |         |      |                        |        |         | 7,882   |         |         |          |        |         |        |         |      |      |        |         | 5,493   |         |         |       |        |         |        |      |      |     
|                                                                                  |                                          | Noninterest-bearing
liabilities            |                               |                                               | 2,666   |                         |         |          |        |        |        |         |      |                        |        |         | 5,929   |         |         |          |        |         |        |         |      |      |        |         | 3,702   |         |         |       |        |         |        |      |      |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          |                                            |                               | Total liabilities                             |         |                         | 669,887 |          |        |        |        |         |      |                        |        |         |         |         | 531,448 |          |        |         |        |         |      |      |        |         |         |         | 502,114 |       |        |         |        |      |      |      |      | 
|Stockholders
equity                                                              |                                          |                                            | 36,309                        |                                               |         |                         |         |          |        |        |        |         |      |                        | 27,782 |         |         |         |         |          |        |         |        |         |      |      | 24,646 |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          | Total liabilities and stockholders
equity |                               | $                                             | 706,196 |                         |         |          |        |        |        |         |      |                        |        | $       | 559,230 |         |         |          |        |         |        |         |      |      |        | $       | 526,760 |         |         |       |        |         |        |      |      |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|Net interest-earning assets
(liabilities)                                         |                                          | $                                          | 34,009                        |                                               |         |                         |         |          |        |        |        |         |      | $                      | 28,539 |         |         |         |         |          |        |         |        |         |      | $    | 25,497 |         |         |         |         |       |        |         |        |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|Net interest income/interest rate
spread                                          |                                          |                                            |                               |                                               |         | $                       | 21,572  |          |        |        | 2.97   |         |      |                        |        |         |         | $       | 15,351  |          |        |         | 2.55   |         |      |      |        |         |         | $       | 11,898  |       |        |         | 2.02   |     
|                                                                                  |                                          |                                            |                               |                                               |         |                         |         |          |        |        |        |         |      |                        |        |         |         |         |         |          |        |         |        |         |      |      |        |         |         |         |         |       |        |         |        |     
|Net interest margin                                                               |                                          |                                            |                               |                                               |         |                         |         |          |        |        | 3.14   |         |      |                        |        |         |         |         |         |          |        |         | 2.81   |         |      |      |        |         |         |         |         |       |        |         | 2.30   |     
|Ratio of average interest-earnings
assets to average interest-bearing
liabilities |                                          |                                            |                               |                                               |         |                         |         |          |        |        | 105.21 |         |      |                        |        |         |         |         |         |          |        |         | 105.51 |         |      |      |        |         |         |         |         |       |        |         | 105.17 |     



---

|(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.                                                                                                                                              

49



---



##### 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, 2002             |        | Year Ended December 31, 2001            
|                                                            |                                          |                                               |                |        | Compared to Year Ended December 31, 2001 |        | Compared to Year Ended December 31, 2000
|                                                            |                                          |                                               |                |        |                                          |        |                                         
|                                                            |                                          |                                               |                |        | Increase (decrease) due to               |        |                                          |       |        |       | Increase (decrease) due to |        |       |      |         
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |         
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       | Total Net      |        |            |        |        |        |       |        |       |       |          |       |      |      | Total Net
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        | Rate/ |      | Increase |       |                |        |            |        |        |        |       |        | Rate/ |       | Increase
|                                                            |                                          |                                               |                |        | Rate                                     |        | Volume                                   |       | Volume |       | (Decrease)                 |        | Rate  |      | Volume   |       | Volume         |        | (Decrease)
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |           
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       | (In Thousands) |        |            |        |        |        |       |        |       |       |          |       |     
|Interest-earning
assets:                                    |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |       
|                                                            | Loans receivable                         |                                               | $              | (2,901 | )                                        |        | $                                        | 2,736 |        |       | $                          | (249   | )     |      | $        | (414  | )              |        | $          | 1,008  |        |        | $     | 524    |       |       | $        | 17    |      |      | $         | 1,549  |      
|                                                            | Securities and trading account
assets(1) |                                               |                | (2,193 | )                                        |        |                                          | 6,923 |        |       |                            | (1,805 | )     |      |          | 2,925 |                |        |            | (457   | )      |        |       | 1,927  |       |       |          | (125  | )    |      |           | 1,345  |      
|                                                            | FHLB stock                               |                                               |                | (17    | )                                        |        |                                          | 34    |        |       |                            | (1     | )     |      |          | 16    |                |        |            | (80    | )      |        |       | 41     |       |       |          | (7    | )    |      |           | (46    | )    
|                                                            | Cash and cash
equivalents(2)             |                                               |                | (217   | )                                        |        |                                          | 30    |        |       |                            | (15    | )     |      |          | (202  | )              |        |            | (624   | )      |        |       | (395   | )     |       |          | 196   |      |      |           | (823   | )    
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |       
|Total net change in income on
interest-earning assets       |                                          |                                               | (5,328         | )      |                                          |        | 9,723                                    |       |        |       | (2,070                     | )      |       |      | 2,325    |       |                |        | (153       | )      |        |        | 2,097 |        |       |       | 81       |       |      |      | 2,025     |       
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |       
|Interest-bearing
liabilities:                               |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |       
|                                                            | Deposits                                 |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |        |      
|                                                            |                                          | NOW and money market
accounts                 |                |        | (174                                     | )      |                                          |       | 1,278  |       |                            |        | (228  | )    |          |       | 876            |        |            |        | (321   | )      |       |        | 137   |       |          |       | (37  | )    |           |        | (221  | )    
|                                                            |                                          | Passbook accounts and
certificates of deposit |                |        | (7,124                                   | )      |                                          |       | 1,803  |       |                            |        | (706  | )    |          |       | (6,027         | )      |            |        | (1,241 | )      |       |        | 3,308 |       |          |       | (251 | )    |           |        | 1,816 |      
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |       
|                                                            |                                          |                                               | Total deposits |        |                                          | (7,298 | )                                        |       |        | 3,081 |                            |        |       | (934 | )        |       |                | (5,151 | )          |        |        | (1,562 | )     |        |       | 3,445 |          |       |      | (288 | )         |        |       | 1,595 | 
|                                                            | FHLB advances(3)                         |                                               |                | (451   | )                                        |        |                                          | 1,847 |        |       |                            | (140   | )     |      |          | 1,256 |                |        |            | (401   | )      |        |       | 93     |       |       |          | (5    | )    |      |           | (313   | )    
|                                                            | Reverse repurchase
agreements            |                                               |                |       |                                          |        |                                          | 11    |        |       |                            |       |       |      |          | 11    |                |        |            | (1,986 | )      |        |       | (2,503 | )     |       |          | 1,981 |      |      |           | (2,508 | )    
|                                                            | Other borrowings(4)                      |                                               |                | (285   | )                                        |        |                                          | 464   |        |       |                            | (191   | )     |      |          | (12   | )              |        |            | (260   | )      |        |       | 85     |       |       |          | (27   | )    |      |           | (202   | )    
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |       
|Total net change in expense on
interest-bearing liabilities |                                          |                                               | (8,034         | )      |                                          |        | 5,403                                    |       |        |       | (1,265                     | )      |       |      | (3,896   | )     |                |        | (4,209     | )      |        |        | 1,120 |        |       |       | 1,661    |       |      |      | (1,428    | )     
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |       
|Change in net interest
income                               |                                          | $                                             | 2,706          |        |                                          | $      | 4,320                                    |       |        | $     | (805                       | )      |       | $    | 6,221    |       |                | $      | 4,056      |        |        | $      | 977   |        |       | $     | (1,580   | )     |      | $    | 3,453     |       
|                                                            |                                          |                                               |                |        |                                          |        |                                          |       |        |       |                            |        |       |      |          |       |                |        |            |        |        |        |       |        |       |       |          |       |      |      |           |       



---

|(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.                                                                                                                                                        

50



---



##### Table of Contents



Interest Income. Total interest income increased by

$2.3 million or 5.6%
during the year ended December 31, 2002, over 2001, from $41.2 million to $43.5
million. The increase in 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 74 and 172
basis points, respectively, over the period, to 7.32% and 4.86%, respectively.
The Federal Reserve Board lowered interest rates several times during 2002, and
since a substantial portion of our earning assets reprice with the general
level of interest rates, our average yield on earning assets declined.

Total interest income increased by $2.0 million or 5.2%

during the year
ended December 31, 2001 over 2000, from $39.1 million to $41.2 million. During
2001, we experienced a $27.4 million or 27.3% increase in the average balance
of securities and trading account assets and a $6.7 million or 1.7% increase in
the average balance of loans receivable, net. The acquisition of our Kansas
banking operation, which added $69.9 million of loans, was completed in
November 2001, and accordingly did not significantly affect the averages for
the entire year. In addition, the average yield earned on our loan portfolio
increased by 26 basis points to 8.06%, which was partially offset by a decline
in the average yield earned on our securities portfolio (including trading
account assets) of 45 basis points to 6.6% as market interest rates declined.
The increase in the average yield earned on our loan portfolio reflects the
increase in commercial and consumer loans which carry higher yields as compared
to single-family residential loans.

Interest Expense. Total interest expense decreased by

$3.9 million or
15.1% during the year ended December 31, 2002, over 2001, from $25.8 million to
$21.9 million. During 2002, our average interest-bearing liabilities increased
by $135.4 million or 26.2%, due primarily to the increase in borrowings to fund
investment portfolio growth. Notwithstanding the increase in the average
balance of liabilities, interest rate reductions during the year more than
compensated for the increase in average balance, with the average yield on
interest-bearing liabilities declining by 163 basis points over the year, from
4.99% to 3.36%. We funded our asset growth during the year primarily by growth
in deposits, primarily certificates of deposit, but also with transaction
accounts. Average interest-bearing deposits increased by $94.3 million or
23.6% 2002. Average FHLB advances increased during the year by $33.3 million
or 31.1%, while the average amount drawn on our note payable increased by $6.8
million or 67.0% which includes $10.2 million of the proceeds from our initial
public offering to temporarily pay down the balance of such borrowings.

Total interest expense decreased by $1.4 million or 5.2%

during the year
ended December 31, 2001 over 2000, from $27.2 million to $25.8 million. During
2001, we funded our growth primarily with deposits, the average balance of
which increased by $64.8 million or 18.0%. The increase in deposits replaced
reverse repurchase agreements, the average balance of which declined from $42.0
million for 2000 to $108,000 for 2001. In addition, the average rate paid on
deposits declined from 5.24% to 4.79% during the year.

Provision for Loan Losses. We established provisions for

loan losses of
$391,000, $1,000, and $42,000 during the years ended December 31, 2002, 2001
and 2000, respectively. We also acquired $600,000 in additional allowance for
loan losses in connection with our acquisition of our Kansas banking operation
in 2001. Provisions for loan losses are charged to income to bring our
allowance for loan losses to a level deemed appropriate by management. Our
provision for the year ended December 31, 2002 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.

51



---



##### Table of Contents



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

|                                           |                    |   |                         |       |      |   |      |       |  |   |        |       | 
|------------------------------------------ | ------------------ | - | ----------------------- | ----- | ---- | - | ---- | ----- |  | - | ------ | ----- | 
|                                           |                    |   | Year Ended December 31,
|                                           |                    |   |                        
|                                           |                    |   | 2002                    |       | 2001 |   | 2000
|                                           |                    |   |                         |       |      |   |     
|                                           |                    |   | (In Thousands)         
|Income (loss) from trading account

assets |                    | $ | (31                     | )     |      | $ | 436  |       |  | $ | (2,754 | )    
|Gain on sale of

deposits                  |                    |   |                        |       |      |   |     |       |  |   | 3,923  |      
|Gain (loss) on sale of

loans              |                    |   |                        |       |      |   | 69   |       |  |   | (601   | )    
|Banking fee income (1)                     |                    |   | 2,181                   |       |      |   | 996  |       |  |   | 554    |      
|                                           |                    |   |                         |       |      |   |      |       |  |   |        |      
|                                           | Total other income |   | $                       | 2,150 |      |   | $    | 1,501 |  |   | $      | 1,122 | 
|                                           |                    |   |                         |       |      |   |      |       |  |   |        |      



---

|(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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our managements goal is to attempt to mitigate any change

in the market
value of our securities portfolio by the change in the market value of the
interest rate contracts utilized by us to hedge our interest rate exposure.

Total other income amounted to $2.2 million, an increase of

$649,000 or
43.2% during the year ended December 31, 2002, over the prior year, due
primarily to a $1.2 million or 119.0% increase in miscellaneous other income,
primarily attributable to fees generated from our core banking operations. The
increase in miscellaneous other income was partially offset by a decrease in
income from trading account assets, which declined from $436,000 for the year
ended December 31, 2001 to a $31,000 loss for the year ended December 31, 2002
due primarily to the changes in spreads on the trading account investments and
total return swaps.

Total other income amounted to $1.5 million, an increase of

$379,000 or
33.8% during the year ended December 31, 2001 over 2000. During 2001, we
recognized $436,000 in income from trading account assets, as compared to a
$2.8 million loss during 2000. This increase in income from trading account
assets reflected increases in the carrying values of our trading account
assets, which was partially offset by decreases in the carrying values of our
interest rate contracts. In addition, during 2001, other miscellaneous income,
consisting primarily of income from our core banking services, increased by
$442,000 or 79.8% over 2000, due principally to fees received in connection
with the brokering of single-family loans to third party investors and
increased other fee income. To a lesser extent, we had a $69,000 gain on sale
of loans during 2001, compared to a loss of $601,000 during 2000, which was
attributable to the relative market values on the loans sold. These increases
were partially offset by a $3.9 million decrease in gain on sale of deposits.
We recognized a $3.9 million gain on the sale of two branch offices during
2000.

52



---



##### Table of Contents



Other Expenses. The following table sets forth certain

information
regarding other expenses for the periods shown.

|                                |                      |   |                         |        |      |   |       |        |  |   |       |       | 
|------------------------------- | -------------------- | - | ----------------------- | ------ | ---- | - | ----- | ------ |  | - | ----- | ----- | 
|                                |                      |   | Year Ended December 31,
|                                |                      |   |                        
|                                |                      |   | 2002                    |        | 2001 |   | 2000 
|                                |                      |   |                         |        |      |   |      
|                                |                      |   | (In Thousands)          |        |      |   |      
|Salaries and employee

benefits |                      | $ | 7,847                   |        |      | $ | 5,444 |        |  | $ | 3,942 |      
|Premises and equipment          |                      |   | 2,197                   |        |      |   | 1,631 |        |  |   | 1,357 |      
|Insurance premiums              |                      |   | 255                     |        |      |   | 250   |        |  |   | 278   |      
|Marketing                       |                      |   | 260                     |        |      |   | 184   |        |  |   | 256   |      
|Computer services               |                      |   | 542                     |        |      |   | 458   |        |  |   | 362   |      
|Consulting fees                 |                      |   | 733                     |        |      |   | 523   |        |  |   | 495   |      
|Office expenses and

supplies   |                      |   | 694                     |        |      |   | 427   |        |  |   | 387   |      
|Other (1)                       |                      |   | 2,229                   |        |      |   | 1,400 |        |  |   | 1,319 |      
|                                |                      |   |                         |        |      |   |       |        |  |   |       |      
|                                | Total other expenses |   | $                       | 14,757 |      |   | $     | 10,317 |  |   | $     | 8,396 | 
|                                |                      |   |                         |        |      |   |       |        |  |   |       |      



---

|(1) |  | Consists primarily of professional fees, and other miscellaneous
expenses.
|--- |  | --------------------------------------------------------------------------

Total other expenses increased by $4.4 million or 43.0%

during the year
ended December 31, 2002 over the prior year ended December 31, 2001, and
increased by $1.9 million or 22.9% during the year ended December 31, 2001 over
2000. Increased expenses during the periods presented reflects our growth
during the periods, as evidenced in the discussion of the major components of
other expenses discussed below.

The principal category of our other expenses is salaries and

employee
benefits, which increased by $2.4 million or 44.1% during the year ended
December 31, 2002, as compared to the prior year. Salaries and employee
benefits increased by $1.5 million or 38.1% during 2001. The increases during
the year period ended December 31, 2002 and 2001 over the prior years were
primarily due to the hiring of additional employees in connection with the
opening of new branch offices in San Luis Obispo, California in January 2001,
Nipomo, California in July 2001 and Phoenix/Scottsdale, Arizona in November
2002, and the acquisition of our Kansas banking operation in November 2001,
together with our general growth in operations.

Premises and equipment expenses increased by $566,000 or 34.7%

during the
year ended December 31, 2002, as compared to the prior year, and increased by
$274,000 or 20.2% during 2001. The increase in premises and equipment expense
during the year ended December 31, 2002 and 2001 over the prior years was
primarily due to the branch openings and the acquisition of our Kansas banking
operation.

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, 2002, 2001 and 2000, amounted to $325,000,
$295,000 and $286,000.

The increases in miscellaneous other expenses since 2000 reflect

our
growth 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

$3.5 million, $2.7
million and $2.0 million during the years ended December 31, 2002, 2001 and
2000. 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 41.4%, 41.8% and 43.7%, the years ended December 31, 2002,
2001 and 2000.

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Changes in Financial Condition

General. At December 31, 2002, our total assets
amounted to $824.3
million, compared with $670.3 million at December 31, 2001. The increase in
total assets was primarily attributable to an increase in securities classified
as available for sale. At December 31, 2002, our total liabilities amounted to
$781.9 million, compared to $640.2 million at December 31, 2001.

Cash and Cash Equivalents. Cash and cash equivalents,
consisting of cash
and due from banks and federal funds sold, amounted to $19.2 million at
December 31, 2002, and $11.1 million at December 31, 2001. 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 a
positive interest rate spread, 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,
2002, our securities portfolio, which is comprised of securities classified as
available for sale and held to maturity, amounted to $326.9 million or 39.6% 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 $324.5 million at December
31, 2002 and $181.6 million at December 31, 2001. The $142.9 million or 78.7%
increase during the year ended December 31, 2002 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 $2.4 million at December 31, 2002 and $2.6 million at December 31,
2001.

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 $1.9 million at
December 31, 2002, $2.8 million at December 31, 2001. At December 31, 2002, of
the $1.9 million of trading account assets, $1.8 million consisted of
mortgage-backed and related securities, and $126,000 consisted of equity
securities. The decrease in trading account assets since December 2001
reflects managements decision to reduce its trading portfolio and to hold
substantially all of its securities in its available for sale portfolio,
reflecting managements general intention of focusing on interest income from
its securities portfolio as opposed to the generation of short-term gains on
sale. This decision is evidenced by the decline in our securities trading
since December 2001.

Loans Receivable.At December 31, 2002, loans
receivable, net of our
allowance for loan losses, amounted to $448.1 million or 54.3% of total assets,
as compared to $449.7 million or 67.1% of total assets at December 31, 2001.
The $1.7 million or 0.4% decline in the portfolio at December 31, 2002,
compared to December 31, 2001, was due to accelerated prepayments of fixed-rate
commercial real estate and single-family 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.

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Allowance for Loan Losses.At December 31, 2002, our

allowance for loan
losses totaled $3.8 million, compared to $3.7 million at December 31, 2001. At
December 31, 2002, our allowance for loan losses represented approximately
0.83% of the total loan portfolio and 1,740.0% of total non-performing and
troubled debt restructurings loans, as compared to 0.83% and 751.7% at December
31, 2001. The increase in our allowance for loan losses during the periods
reflects the growing percentage of commercial loans that we hold in our
portfolio which entail a higher degree of risk. The allowance for loan losses
is established through provisions based on our managements evaluation of the
risks inherent in our loan portfolio and the real estate economies in the
markets in which we operate.

Prepaid expenses and other assets.At December 31,

2002, prepaid expenses
and other assets amounted to $1.8 million, as compared to $1.9 million as of
December 31, 2001. The decrease in prepaid expenses and other assets since
December 31, 2001 reflected a decrease in market value related to the mortgage
servicing rights due to higher than expected prepayments.

Deposits.At December 31, 2002, deposits totaled

$525.3 million, as
compared to $520.9 million as of December 31, 2001. The $4.4 million or 0.8%
increase in total deposits during the year ended December 31, 2002 was due to
managements strategy to reduce our deposit pricing and allow the resulting
reductions in higher cost deposits to be replaced with FHLB advances. 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 $235.0
million at December 31, 2002 and $96.4 million at December 31, 2001. The
increase in FHLB advances since 2001 was due to our increased utilization of
such borrowings to fund our growth in securities and loans. At December 31,
2002, our FHLB advances had a weighted average interest rate of 2.73%, as
compared to 4.82% at December 31, 2001. Our outstanding FHLB advances have
maturities ranging from 2003 to 2010.

We have a loan facility from two banks consisting of a revolving

line of
credit. On September 17, 2002, we entered into an amendment of this facility,
the primary purpose of which was to increase our maximum borrowing capacity
from $20.0 million at the time of the amendment to $25.0 million. We are
currently permitted to borrow up to $25.0 million under the line of credit,
which decreases to $21.875 million from September 2005 through September 2006
and further decreases to $18.75 million from September 2006 through September
30, 2007. Our note payable amounted to $11.3 million at December 31, 2002 and
$18.0 million at December 31, 2001. The decline in the note payable reflects
the utilization of $10.2 million of the net proceeds from our initial public
offering to temporarily pay down such borrowing. We anticipate that we will
increase our utilization of the note payable as market conditions permit.
Proceeds from the note payable have been contributed to Los Padres Bank in
order to increase Los Padres Banks capital and working capital, thereby
permitting us to increase Los Padres Banks originations of loans and purchases
of mortgage-backed and related securities. The loan facility is secured by Los
Padres Banks common stock. Our amendment to the loan facility also increased
our dividend capacity and relaxed the terms of certain restrictive debt
covenants which apply to us pursuant to this loan facility.

Stockholders Equity. Our stockholders equity

amounted to $42.5 million
at December 31, 2002, an increase of $12.3 million from December 31, 2001.
This increase reflects the closing of our initial public offering, and the sale
by us of 973,614 shares at $12.00 per share on November 12, 2002, resulting in
net proceeds of $10.2 million. In addition, our increased profitability and
net income recognized during 2002 also contributed to the increase in
stockholders equity. Moreover, our stockholders equity was also affected

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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, financial institutions are negatively affected by an

increase
in interest rates to the extent that interest-bearing liabilities mature or
reprice more rapidly than interest-earning assets. 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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, controller and four non-employee directors
of Los Padres Bank. The ALCO meets at least eight times a year to review the
sensitivity of Los Padres Banks assets and liabilities to interest rate
changes, investment opportunities, the performance of the investment
portfolios, and prior purchase and sale activity of securities. The ALCO also
provides guidance to management on reducing interest rate risk and on
investment strategy and retail pricing and funding decisions with respect to
Los Padres Banks overall asset and liability composition. The ALCO reviews
Los Padres Banks liquidity, cash flow needs, interest rate sensitivity of
investments, deposits and borrowings, core deposit activity, current market
conditions and interest rates on both a local and national level in connection
with fulfilling its responsibilities.

Smith Breeden provides consulting services to us regarding,

among other
things, the selection of our investments and borrowings, the pricing of loans
and deposits, and the use of various interest rate contracts to reduce interest
rate risk. Smith Breeden is a consulting firm which renders investment advice
and asset and liability management service to financial institutions, corporate
and government agencies nationally. Certain of our directors are principals of
Smith Breeden.

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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
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
57Table of Contents

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, 2002, 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 $109 million and maturities from
February 2004 to December 2010. With respect to these agreements, we make
fixed-rate payments ranging from 3.0% to 6.3% and receive payments based upon
three-month LIBOR. These fixed-pay swaps, in addition to certain cap
agreements, 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 income (expense) relating to these swaps was

$(2,043,000), $528,000
and $(205,000) during the years ended December 31, 2002, 2001 and 2000,
respectively. This income (expense) is netted against interest expense on FHLB
advances in our consolidated statements of earnings. The approximate net
market value of these interest rate swaps was $(6.8) million and $(1.1) million
as of December 31, 2002 and 2001, 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, 2002, 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, 2002, 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. The aggregate net interest expense (income) related to such interest
rate caps and floors was $0, $(20,000) and $193,000 for the years ended
December 31, 2002, 2001 and 2000, respectively. The approximate market value
of the caps and floors was $0 and $0 at December 31, 2002 and 2001,
respectively.

At December 31, 2002, we did not have any caps or floors in

our trading
portfolio. The aggregate net interest expense (income) relating to our
interest rate caps and floors held in the trading portfolio was $0, $0 and $57,000 during the years ended December 31,

2002, 2001 and
2000, respectively. The approximate market value of our interest rate caps and
floors which are maintained in the trading portfolio was $0 and $0 as of
December 31, 2002 and 2001, respectively.

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

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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, 2002, we did not have any futures contracts.
We had total gains (losses) on our futures contracts of $(97,000), $(291,000)
and $(6.9 million) for the years ended December 31, 2002, 2001 and 2000,
respectively.

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.

At December 31, 2002, we did not have any purchased options

contracts in
our portfolio, and we did not incur any net expense relating to purchased
options contracts during the years ended December 31, 2002, 2001 and 2000.

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, 2002, these
prepayment assumptions varied from 15% to 65% for fixed-rate mortgages and
mortgage-backed securities and varied from 15% to 23% for adjustable-rate
mortgages and mortgage-backed securities.

The following table sets forth at December 31, 2002, 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.

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|                                                                      |  |                                 |         |   |        |                                               |         |      |       |      |        |   |       |      |   |      |   |      |         |   |       |    |         |   |       |    |         |   |        |    |  | 
|--------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------ | --------------------------------------------- | ------- | ---- | ----- | ---- | ------ | - | ----- | ---- | - | ---- | - | ---- | ------- | - | ----- | -- | ------- | - | ----- | -- | ------- | - | ------ | -- |  | 
|                                                                      |  |                                 |         |   |        | Change In Interest Rates (In Basis Points)(1)
|                                                                      |  |                                 |         |   |        |                                              
|                                                                      |  |                                 |         |   |        | -300                                          |         | -200 |       | -100 |        |  |       | +100 |   | +200 |   | +300
|                                                                      |  |                                 |         |   |        |                                               |         |      |       |      |        |   |       |      |   |      |   |     
|                                                                      |  |                                 |         |   |        | (Dollars in Thousands)                       
|Market value gain (loss) in
assets                                    |  | $                               | 22,926  |   |        | $                                             | 17,655  |      |       | $    | 9,555  |   |       |      |  |      |   | $    | (11,661 | ) |       | $  | (26,397 | ) |       | $  | (44,049 | )
|Market value gain (loss) of
liabilities                               |  |                                 | (14,078 | ) |        |                                               | (11,185 | )    |       |      | (6,322 | ) |       |      |  |      |   |      | 6,542   |   |       |    | 13,348  |   |       |    | 20,439  |  
|                                                                      |  |                                 |         |   |        |                                               |         |      |       |      |        |   |       |      |   |      |   |      |         |   |       |    |         |   |       |    |         |  
|Market value gain (loss) of net
assets
before interest rate contracts |  |                                 | 8,848   |   |        |                                               | 6,470   |      |       |      | 3,233  |   |       |      |   |      |   |      | (5,119  | ) |       |    | (13,049 | ) |       |    | (23,610 | )
|Market value gain (loss) of interest
rate contracts                   |  |                                 | (16,421 | ) |        |                                               | (10,813 | )    |       |      | (5,220 | ) |       |      |  |      |   |      | 4,924   |   |       |    | 9,567   |   |       |    | 13,951  |  
|                                                                      |  |                                 |         |   |        |                                               |         |      |       |      |        |   |       |      |   |      |   |      |         |   |       |    |         |   |       |    |         |  
|Total change in MVPE(2)                                               |  | $                               | (7,573  | ) |        | $                                             | (4,343  | )    |       | $    | (1,987 | ) |       |      |  |      |   | $    | (195    | ) |       | $  | (3,482  | ) |       | $  | (9,659  | )
|                                                                      |  |                                 |         |   |        |                                               |         |      |       |      |        |   |       |      |   |      |   |      |         |   |       |    |         |   |       |    |         |  
|Change in MVPE as a percent
of:                                       |  |                                 |         |   |        |                                               |         |      |       |      |        |   |       |      |   |      |   |      |         |   |       |    |         |   |       |    |         |  
|                                                                      |  | MVPE(2)                         |         |   | (11.92 | )%                                            |         |      | (6.84 | )%   |        |   | (3.13 | )%   |   |      |  |      |         |   | (0.31 | )% |         |   | (5.48 | )% |         |   | (15.21 | )%
|                                                                      |  | Total assets of Los Padres
Bank |         |   | (0.92  | )%                                            |         |      | (0.53 | )%   |        |   | (0.24 | )%   |   |      |  |      |         |   | (0.02 | )% |         |   | (0.42 | )% |         |   | (1.17  | )%



---

|(1) |  | Assumes an instantaneous parallel change in interest rates at all
maturities.
|--- |  | -----------------------------------------------------------------------------
|   
|(2) |  | Based on our pre-tax MVPE of $63.5 million at December 31, 2002.             

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, as measured
by 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 16.9% at
December 31, 2002. At December 31, 2002, Los Padres Banks liquid assets
totaled approximately $66.8 million.

Our liquidity, represented by cash and cash equivalents, is a
product of
our operating, investing and financing activities. Our 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. Our 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, 2002,
we had $235.0 million in FHLB advances and we had $53.5 million of additional
borrowing capacity with the FHLB of San Francisco. At December 31, 2002, our
note payable under our revolving line of credit amounted to $11.3 million and
we had $13.7 million of additional borrowing capacity under this loan facility.
On September 17, 2002, we entered into an amendment to this loan facility that
increased our additional borrowing capacity initially by up to $8.4 million,
increased our dividend paying capacity and relaxed certain restrictive
covenants applicable to us, which, among other things, requires us to comply
with specified financial ratios and tests, including a minimum ratio of
non-performing assets to total stockholders equity plus loan loss reserves, minimum regulatory capital requirements
that are
consistent with current requirements for being classified as well
capitalized, a minimum loan to value ratio and a minimum core profitability
requirement. The covenant that restricts our ability to invest in mortgage
derivative securities has been revised to allow us to maintain a larger balance
as of the last day of the month. The covenant that restricts payment of cash
dividends has been revised to provide us with greater flexibility to pay
dividends, in an aggregate amount not to exceed the greater of (a) $300,000
during any fiscal quarter, or (b) up to a maximum of 25% of consolidated net
income

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for the quarter. The minimum core profitability requirements have been
made slightly more restrictive, and the covenant which addresses Los Padres
Banks non-performing assets is new. Management believes that as of December
31, 2002, 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, 2002, the total approved loan commitments
outstanding amounted to $78.0 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 2002 totaled $292.3 million and
borrowings that are scheduled to mature within the same period amounted to
$160.0 million. We believe that we have adequate resources to fund all of our
commitments and that we 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, 2002, Los Padres
Bank was permitted to pay up to $891,000 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. In the event Los
Padres Bank is unable to pay dividends to us, we may not be able to service our
debt, pay our obligations or pay dividends on our common stock.

Capital Resources.Federally insured savings institutions

such as Los
Padres Bank are required to maintain minimum levels of regulatory capital. In
addition, due to our business strategy which has concentrated on growth, a
shift in our lending focus to more commercial lending and the size of our
securities portfolios, we have informally agreed with the OTS that Los Padres
Bank will maintain a total risk-based capital ratio and a leverage capital
ratio of at least 11% and 6%, respectively, which is in excess of the OTS
minimum regulatory requirements. Management does not believe that Los Padres
Banks agreement with the OTS to maintain increased ratios of total risk-based
and leverage capital will limit or restrict our operations. To the extent that
Los Padres Bank fails to comply with these additional increased capital ratios,
the OTS could take such failure to comply into consideration in connection with
further requests to have Los Padres Bank pay dividends to us and in additional
future branch applications. Los Padres Banks failure to comply could also
impact its overall assessment by the OTS in future regulatory examinations,
which, if adverse, could also impact its FDIC insurance assessment.

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The following table reflects as of December 31, 2002, Los
Padres Banks
actual levels of regulatory capital and both the applicable regulatory capital
requirements as well as the increased capital requirements that Los Padres Bank
has informally agreed with the OTS that it will maintain.

|                                     |  |                     |        |                            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  
|------------------------------------ |  | ------------------- | ------ | -------------------------- |  | --------------------- | ---- | ------- |  | ---------------------- | ------ | ------- |  |  | ---- | - |  | - | ------ |  |  |  | ----- | -
|                                     |  | Tangible Capital(1) |        | Tier 1 Leverage Capital(1) |  | Risk-Based Capital(1)
|                                     |  |                     |        |                            |  |                      
|                                     |  | Amount              |        | Percent                    |  | Amount                |      | Percent |  | Amount                 |        | Percent
|                                     |  |                     |        |                            |  |                       |      |         |  |                        |        |        
|                                     |  |                     |        |                            |  |                       |      |         |  | (Dollars in Thousands) |        |         |  |  |      |   |  |  
|Actual regulatory capital            |  |                     | N/A    |                            |  |                       | N/A  |         |  | $                      | 49,836 |         |  |  | 6.11 | % |  | $ | 53,583 |  |  |  | 11.97 | %
|Minimum required by OTS
agreement(2) |  |                     | N/A    |                            |  |                       | N/A  |         |  |                        | 48,945 |         |  |  | 6.00 |   |  |   | 49,230 |  |  |  | 11.00 |  
|                                     |  |                     |        |                            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  
|Excess regulatory capital            |  |                     | N/A    |                            |  |                       | N/A  |         |  | $                      | 891    |         |  |  | 0.11 | % |  | $ | 4,353  |  |  |  | 0.97  | %
|                                     |  |                     |        |                            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  
|Actual regulatory capital            |  | $                   | 49,836 |                            |  |                       | 6.11 | %       |  | $                      | 49,836 |         |  |  | 6.11 | % |  | $ | 53,583 |  |  |  | 11.97 | %
|Minimum regulatory capital           |  |                     | 12,236 |                            |  |                       | 1.50 |         |  |                        | 32,630 |         |  |  | 4.00 |   |  |   | 35,804 |  |  |  | 8.00  |  
|                                     |  |                     |        |                            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  
|Excess regulatory capital            |  | $                   | 37,600 |                            |  |                       | 4.61 | %       |  | $                      | 17,206 |         |  |  | 2.11 | % |  | $ | 17,779 |  |  |  | 3.97  | %
|                                     |  |                     |        |                            |  |                       |      |         |  |                        |        |         |  |  |      |   |  |   |        |  |  |  |       |  



---

|(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 $817.7 million as of December 31, 2002.                                                                                                                                                                                                              
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Although applicable OTS regulations require Los Padres Bank to maintain
Tier 1 leverage capital equal to 4.00% of adjusted total assets and
risk-based capital equal to 8.00% of adjusted risk-weighted assets, Los
Padres Bank has informally agreed with the OTS that it will maintain Tier
1 leverage capital equal to 6.00% of adjusted total assets and risk-based
capital equal to 11.00% of adjusted risk-weighted assets.

Contractual Obligations and Commercial Commitments

The following tables present our contractual cash obligations
and
commercial commitments as of December 31, 2002.

|                              |                         |                                    |   |                |         |          |   |                    |         |            |   |            |         |       |   |        |        |  |   |        |        | 
|----------------------------- | ----------------------- | ---------------------------------- | - | -------------- | ------- | -------- | - | ------------------ | ------- | ---------- | - | ---------- | ------- | ----- | - | ------ | ------ |  | - | ------ | ------ | 
|                              |                         |                                    |   |                |         |          |   | Payment due period
|                              |                         |                                    |   |                |         |          |   |                   
|                              |                         |                                    |   |                |         |          |   | Less than          |         | Two to     |   | Four to    |         | After
|                              |                         |                                    |   | Total          |         | One Year |   | Three Years        |         | Five Years |   | Five Years
|                              |                         |                                    |   |                |         |          |   |                    |         |            |   |           
|                              |                         |                                    |   | (In Thousands)
|Contractual cash
obligations: |                         |                                    |   |                |         |          |   |                    |         |            |   |            |         |       |   |        |        |  |   |       
|                              | Certificates of deposit |                                    | $ | 351,903        |         |          | $ | 292,322            |         |            | $ | 45,032     |         |       | $ | 14,405 |        |  | $ | 144    |       
|                              | FHLB advances           |                                    |   | 235,000        |         |          |   | 160,000            |         |            |   | 55,000     |         |       |   |       |        |  |   | 20,000 |       
|                              | Note payable            |                                    |   | 11,300         |         |          |   |                   |         |            |   | 11,300     |         |       |   |       |        |  |   |       |       
|                              |                         |                                    |   |                |         |          |   |                    |         |            |   |            |         |       |   |        |        |  |   |        |       
|                              |                         | Total contractual cash
obligations |   | $              | 598,203 |          |   | $                  | 452,322 |            |   | $          | 111,332 |       |   | $      | 14,405 |  |   | $      | 20,144 | 
|                              |                         |                                    |   |                |         |          |   |                    |         |            |   |            |         |       |   |        |        |  |   |        |       

|             |                                         |                   |   |                |        |           |   |                                            |        |            |   |            |       |  |   |     |     |  |   |        |        | 
|------------ | --------------------------------------- | ----------------- | - | -------------- | ------ | --------- | - | ------------------------------------------ | ------ | ---------- | - | ---------- | ----- |  | - | --- | --- |  | - | ------ | ------ | 
|             |                                         |                   |   |                |        |           |   | Amount of Commitment Expiration Per Period
|             |                                         |                   |   |                |        |           |   |                                           
|             |                                         |                   |   | Unfunded       |        | Less than |   | One to                                     |        | Four to    |   | After     
|             |                                         |                   |   | Commitments    |        | One Year  |   | Three Years                                |        | Five Years |   | Five Years
|             |                                         |                   |   |                |        |           |   |                                            |        |            |   |           
|             |                                         |                   |   | (In Thousands)
|Commitments: |                                         |                   |   |                |        |           |   |                                            |        |            |   |            |       |  |   |     |     |  |   |       
|             | Commercial lines of
credit              |                   | $ | 19,745         |        |           | $ | 14,741                                     |        |            | $ | 2,582      |       |  | $ | 322 |     |  | $ | 2,100  |       
|             | Consumer lines of
credit(1)             |                   |   | 11,688         |        |           |   | 1,070                                      |        |            |   | 9          |       |  |   |    |     |  |   | 10,609 |       
|             | Undisbursed portion of
loans in process |                   |   | 27,306         |        |           |   | 25,134                                     |        |            |   | 2,172      |       |  |   |    |     |  |   |       |       
|             | Letters of credit                       |                   |   | 1,665          |        |           |   | 1,565                                      |        |            |   | 100        |       |  |   |    |     |  |   |       |       
|             |                                         |                   |   |                |        |           |   |                                            |        |            |   |            |       |  |   |     |     |  |   |        |       
|             |                                         | Total commitments |   | $              | 60,404 |           |   | $                                          | 42,510 |            |   | $          | 4,863 |  |   | $   | 322 |  |   | $      | 12,709 | 
|             |                                         |                   |   |                |        |           |   |                                            |        |            |   |            |       |  |   |     |     |  |   |        |       



---

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

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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 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 July 2001, the Financial Accounting Standards Board
(FASB) issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires that the purchase method of
accounting be used for all business combinations completed after June 30, 2001
and also specifies the types of acquired intangible assets that are required to
be recognized and reported separately from goodwill and those acquired
intangible assets that are required to be recognized and reported separately
from goodwill. SFAS No. 142 requires that goodwill no longer be amortized, but
instead be tested for impairment at least annually. SFAS No. 142 also
requires recognized intangible assets to be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, as replaced by SFAS No. 144. Any recognized
intangible asset determined to have an indefinite useful life will not be
amortized, but instead must be tested for impairment until its life is
determined to no longer be indefinite. We adopted the new rules on accounting
for goodwill and other intangible assets on January 1, 2002.

Furthermore, in connection with the required transitional
impairment
evaluation, SFAS No. 142 requires us to perform an assessment of whether there
was an indication that goodwill was impaired as of January 1, 2002. The
transitional assessment consists of the following steps: (1) identify our
reporting units, (2) determine the carrying value of each reporting unit by
assigning the assets and liabilities, including the existing goodwill and
intangible assets to those reporting units, and (3) determine the fair value of
each reporting unit. The transitional goodwill impairment test was completed
during 2002. No transitional impairment loss was recorded as a result of
adopting this standard.

In August 2001, the Financial Accounting Standards Board
(FASB) issued
SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
This statement addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supersedes SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of, and the accounting and reporting provisions of Accounting
Principles Board (APB) Opinion No. 30, Reporting the Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business (as previously defined in that
opinion). The provisions of this statement are effective for financial
statements issued for fiscal years beginning after December 15, 2001 and are
not expected to have a material impact on the financial statements of the
Company.

In April 2002, the FASB issued SFAS No. 145, Rescission
of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 updates, clarifies and simplifies existing
accounting pronouncements including: rescinding SFAS No. 4, which required all
gains and losses from extinguishment of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect and
amended SFAS No. 13 to require that certain lease modifications that

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have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback
transactions. SFAS No. 145 is effective for fiscal years beginning after May
15, 2002, with early adoption of the provisions related to the rescission of
SFAS No. 4 encouraged. We do not expect the adoption of this Statement to have
a material impact on our financial position or results of operations.

In July 2002, the FASB issued SFAS No. 146, Accounting
for Costs
Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue 94-3, a
liability for an exit cost is defined in EITF-94-3 was recognized at the date
of an entitys commitment to an exit plan. SFAS No. 146 also establishes that
the liability should initially be measured and recorded at fair value. We
intend to adopt the provisions of SFAS No. 146 for exit or disposal activities
that are initiated after December 31, 2002.

In October 2002, the FASB issued SFAS No. 147,
Acquisitions of Certain
Financial Institutions, which provides guidance on the accounting for the
acquisition of a financial institution. This statement requires that the
excess of the fair value of liabilities assumed over the fair value of tangible
and identifiable intangible assets acquired in a business combination
represents goodwill that should be accounted for under SFAS No. 142, Goodwill
and Other Intangible Assets. Thus, the specialized accounting guidance in
paragraph 5 of SFAS No. 72, Accounting for Certain Acquisitions of Banking or
Thrift Institutions, will not apply after September 30, 2002. If certain
criteria in SFAS No. 147 are met, the amount of the unidentifiable intangible
asset will be reclassified to goodwill upon adoption of the statement.
Financial institutions meeting conditions outlined in SFAS No. 147 will be
required to restate previously issued financial statements. Additionally, the
scope of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets, is amended to include long-term customer-relationship intangible assets
such as depositor- and borrower-relationship intangible assets and credit
cardholder intangible assets. This statement is effective for Los Padres Bank
beginning October 1, 2002. We have adopted the new standard as of October 1,
2002 and the adoption of this standard did not have a material impact on our
financial position or results of operation.

In December 2002, the FASB issued SFAS 148, Accounting for
Stock-Based
Compensation  Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements
of Statement 123 to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. This
Statement shall be effective for financial statements for fiscal years ending
after December 15, 2002 and is not expected to have a material impact on the
Companys consolidated financial position or results of operations.

In November 2002, the FASB issued FASB Interpretation
No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others, which clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to a
guarantors accounting for and disclosures of certain guarantees issued. FIN 45
requires enhanced disclosures for certain guarantees. FIN 45 also requires
certain guarantees that are issued or modified after December 31, 2002, to be
initially recorded on the balance sheet at fair value. For guarantees issued on
or before December 31, 2002, liabilities are recorded when and if payments
become probable and estimable. The adoption of FIN 45 is not expected to have a
material impact on the Companys consolidated financial position or results of
operations.

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| |  | In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the
application of Accounting Research Bulletin No. 51, Consolidated Financial
Statements, relating to consolidation of certain entities. FIN 46 applies
in the first fiscal year or interim period beginning after June 15, 2003,
to variable interest entities in which the enterprise holds a variable
interest it acquired before February 1, 2003, and is not expected to have a
material impact on the Companys consolidated financial position or results
of operations.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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

See Managements Discussion and Analysis of Financial
Condition and
Results of Operations  Asset and Liability Management in Item 7 hereof.




Item 8. Financial Statements and Supplementary Data.




INDEX TO FINANCIAL STATEMENTS

|                                   |                                                                                                      |  |     |      | 
|---------------------------------- | ---------------------------------------------------------------------------------------------------- |  | --- | ---- | 
|                                   |                                                                                                      |  |     | Page | 
|INDEPENDENT AUDITORS
REPORT       |                                                                                                      |  | F-1 |     
|CONSOLIDATED FINANCIAL
STATEMENTS: |                                                                                                      |  |     |     
|                                   | Consolidated Statements of Financial Condition -
December 31, 2002 and 2001                          |  |     | F-2  | 
|                                   | Consolidated Statements of Earnings for the
Years Ended December 31, 2002, 2001 and 2000             |  |     | F-3  | 
|                                   | Consolidated Statements of Stockholders Equity
for the
Years Ended December 31, 2002, 2001 and 2000 |  |     | F-4  | 
|                                   | Consolidated Statements of Cash Flows for the
Years Ended December 31, 2002, 2001 and 2000           |  |     | F-6  | 
|                                   | Notes to Consolidated Financial
Statements                                                           |  |     | F-8  | 

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INDEPENDENT AUDITORS REPORT

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, 2002 and 2001, and the related consolidated statements of
earnings, stockholders equity and cash flows for each of the three years in
the period ended December 31, 2002. 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 auditing standards generally
accepted in the United States of America. 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 consolidated financial position of the Company as of
December 31, 2002 and 2001, and the results of its operations and its cash
flows for each of the three years then ended in conformity with accounting
principles generally accepted in the United States of America.

Los Angeles, California

February 19, 2003

F-1



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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)

|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |         |         |         | 
|------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | -------------------------- | ------- | ------------ | ------- | ------- | ------- | ------- | ------- | 
|                                     |                                                                                                                                                                  |                     |                            |         | December 31,
|                                     |                                                                                                                                                                  | 2002                |                            | 2001   
|ASSETS                               |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|                                     | Cash and cash equivalents                                                                                                                                        |                     | $                          | 19,212  |              |         | $       | 11,107  |        
|                                     | Trading account assets                                                                                                                                           |                     |                            | 1,934   |              |         |         | 2,751   |        
|                                     | Securities available for sale                                                                                                                                    |                     |                            | 324,530 |              |         |         | 181,627 |        
|                                     | Securities held to maturity                                                                                                                                      |                     |                            | 2,368   |              |         |         | 2,617   |        
|                                     | Loans receivable, net                                                                                                                                            |                     |                            | 448,050 |              |         |         | 449,709 |        
|                                     | Accrued interest receivable                                                                                                                                      |                     |                            | 3,526   |              |         |         | 3,567   |        
|                                     | Premises and equipment, net                                                                                                                                      |                     |                            | 4,469   |              |         |         | 3,688   |        
|                                     | Prepaid expenses and other assets                                                                                                                                |                     |                            | 1,761   |              |         |         | 1,937   |        
|                                     | Investment in FHLB stock, at cost                                                                                                                                |                     |                            | 11,750  |              |         |         | 7,834   |        
|                                     | Income taxes receivable                                                                                                                                          |                     |                            | 252     |              |         |         |         |        
|                                     | Deferred tax asset                                                                                                                                               |                     |                            | 1,187   |              |         |         |         |        
|                                     | Goodwill                                                                                                                                                         |                     |                            | 3,981   |              |         |         | 3,981   |        
|                                     | Core deposit intangible, net                                                                                                                                     |                     |                            | 1,311   |              |         |         | 1,505   |        
|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|TOTAL                                |                                                                                                                                                                  | $                   | 824,331                    |         |              | $       | 670,323 |        
|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|LIABILITIES:                         |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|                                     | Deposits:                                                                                                                                                        |                     |                            |         |              |         |         |         |        
|                                     |                                                                                                                                                                  | Interest bearing    |                            | $       | 505,165      |         |         | $       | 508,476 |        
|                                     |                                                                                                                                                                  | Noninterest bearing |                            |         | 20,106       |         |         |         | 12,382  |        
|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|                                     |                                                                                                                                                                  |                     | Total deposits             |         |              | 525,271 |         |         |         | 520,858 | 
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                    
|                                     | FHLB advances                                                                                                                                                    |                     |                            | 235,000 |              |         |         | 96,403  |        
|                                     | Securities sold under repurchase agreements                                                                                                                      |                     |                            | 517     |              |         |         | 365     |        
|                                     | Note payable                                                                                                                                                     |                     |                            | 11,300  |              |         |         | 18,000  |        
|                                     | Accounts payable and accrued expenses                                                                                                                            |                     |                            | 9,771   |              |         |         | 3,566   |        
|                                     | Income taxes payable                                                                                                                                             |                     |                            |        |              |         |         | 339     |        
|                                     | Deferred income taxes                                                                                                                                            |                     |                            |        |              |         |         | 648     |        
|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|                                     |                                                                                                                                                                  |                     | Total liabilities          |         |              | 781,859 |         |         |         | 640,179 | 
|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|COMMITMENTS AND CONTINGENCIES        |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|STOCKHOLDERS EQUITY:                |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|                                     | Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
and outstanding                                                                        |                     |                            |         |              |         |         |         |        
|                                     | Common stock, $.01 par value; 9,000,000 shares authorized; 4,327,951 shares
issued and outstanding as of December 31, 2002 and 3,354,336 as of December
31, 2001 |                     |                            | 43      |              |         |         | 34      |        
|                                     | Additional paid-in capital                                                                                                                                       |                     |                            | 30,641  |              |         |         | 20,305  |        
|                                     | Retained earnings                                                                                                                                                |                     |                            | 13,795  |              |         |         | 9,175   |        
|                                     | Accumulated other comprehensive income (loss), net of tax of $(1,181) and $358
at December 31, 2002 and 2001, respectively                                       |                     |                            | (2,007  | )            |         |         | 630     |        
|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|                                     |                                                                                                                                                                  |                     | Total stockholders equity |         |              | 42,472  |         |         |         | 30,144  | 
|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |        
|TOTAL                                |                                                                                                                                                                  | $                   | 824,331                    |         |              | $       | 670,323 |        
|                                     |                                                                                                                                                                  |                     |                            |         |              |         |         |        

See notes to consolidated financial statements.

F-2



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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.

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

|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |        |        | 
|---------------------------------------------------- | ---------------------------------------------- | ---------------------- | --------- | ------------ | ------ | ---- | --------- | ------ | ------ | - | --------- | ------ | ------ | 
|                                                     |                                                |                        |           | Year Ended  
|                                                     |                                                |                        |           | December 31,
|                                                     |                                                |                        |           |             
|                                                     |                                                |                        |           | 2002         |        | 2001 |           | 2000  
|INTEREST INCOME:                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|                                                     | Interest on loans                              |                        | $         | 31,500       |        |      | $         | 31,914 |        |   | $         | 30,365 |       
|                                                     | Interest and dividends on securities           |                        |           | 11,993       |        |      |           | 9,254  |        |   |           | 8,778  |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|                                                     |                                                | Total interest income  |           |              | 43,493 |      |           |        | 41,168 |   |           |        | 39,143 | 
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|INTEREST EXPENSE:                                    |                                                |                        |           |              |        |      |           |        |        |   |           |       
|                                                     | Interest on deposits                           |                        |           | 14,031       |        |      |           | 19,183 |        |   |           | 17,587 |       
|                                                     | Interest on FHLB advances and other borrowings |                        |           | 7,890        |        |      |           | 6,634  |        |   |           | 9,658  |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|                                                     |                                                | Total interest expense |           |              | 21,921 |      |           |        | 25,817 |   |           |        | 27,245 | 
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES |                                                |                        | 21,572    |              |        |      | 15,351    |        |        |   | 11,898    |       
|PROVISION FOR LOAN LOSSES                            |                                                |                        | 391       |              |        |      | 1         |        |        |   | 42        |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES  |                                                |                        | 21,181    |              |        |      | 15,350    |        |        |   | 11,856    |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|OTHER INCOME (LOSS):                                 |                                                |                        |           |              |        |      |           |        |        |   |           |       
|                                                     | (Loss) income from trading assets              |                        |           | (31          | )      |      |           | 436    |        |   |           | (2,754 | )     
|                                                     | Gain on sale of deposits                       |                        |           |              |        |      |           |        |        |   |           | 3,923  |       
|                                                     | Gain (loss) on sale of loans                   |                        |           |             |        |      |           | 69     |        |   |           | (601   | )     
|                                                     | Banking fee income                             |                        |           | 2,181        |        |      |           | 996    |        |   |           | 554    |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|                                                     |                                                | Total other income     |           |              | 2,150  |      |           |        | 1,501  |   |           |        | 1,122  | 
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|OTHER EXPENSES:                                      |                                                |                        |           |              |        |      |           |        |        |   |           |       
|                                                     | Salaries and employee benefits                 |                        |           | 7,847        |        |      |           | 5,444  |        |   |           | 3,942  |       
|                                                     | Premises and equipment                         |                        |           | 2,197        |        |      |           | 1,631  |        |   |           | 1,357  |       
|                                                     | Insurance premiums                             |                        |           | 255          |        |      |           | 250    |        |   |           | 278    |       
|                                                     | Marketing                                      |                        |           | 260          |        |      |           | 184    |        |   |           | 256    |       
|                                                     | Computer services                              |                        |           | 542          |        |      |           | 458    |        |   |           | 362    |       
|                                                     | Consulting fees                                |                        |           | 733          |        |      |           | 523    |        |   |           | 495    |       
|                                                     | Office expenses and supplies                   |                        |           | 694          |        |      |           | 427    |        |   |           | 387    |       
|                                                     | Other                                          |                        |           | 2,229        |        |      |           | 1,400  |        |   |           | 1,319  |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|                                                     |                                                | Total other expenses   |           |              | 14,757 |      |           |        | 10,317 |   |           |        | 8,396  | 
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|INCOME BEFORE INCOME TAXES                           |                                                |                        | 8,574     |              |        |      | 6,534     |        |        |   | 4,582     |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|INCOME TAXES                                         |                                                |                        | 3,529     |              |        |      | 2,732     |        |        |   | 2,001     |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|NET INCOME                                           |                                                | $                      | 5,045     |              |        | $    | 3,802     |        |        | $ | 2,581     |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|BASIC EARNINGS PER SHARE                             |                                                | $                      | 1.44      |              |        | $    | 1.14      |        |        | $ | 0.79      |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|DILUTED EARNINGS PER SHARE                           |                                                | $                      | 1.39      |              |        | $    | 1.12      |        |        | $ | 0.77      |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING            |                                                |                        | 3,503,713 |              |        |      | 3,321,189 |        |        |   | 3,246,789 |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       
|DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING          |                                                |                        | 3,641,684 |              |        |      | 3,396,885 |        |        |   | 3,331,857 |       
|                                                     |                                                |                        |           |              |        |      |           |        |        |   |           |       

See notes to consolidated financial statements.

F-3



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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)

|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |       |        |   | 
|-------------------------- | ------------------------- | --------------------------- | ------------------------------------------------------------- | -------------------------- |  | ------------ | -- | ---------- |  | -------- | ------ | ------------- |  | ------------- | ------ | ------------- | ----- | ------ |  | - | ----- | ------ | ------ | - | - | ------ | ------ | ------ | ----- | ------ | - | 
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  | Accumulated   |        |              
|                           |                           |                             |                                                               |                            |  | Common Stock |    | Additional |  |          |        |               |  | Other         |        | Total        
|                           |                           |                             |                                                               |                            |  |              |    | Paid-In    |  | Retained |        | Comprehensive |  | Comprehensive |        | Stockholders
|                           |                           |                             |                                                               |                            |  | Shares       |    | Amount     |  | Capital  |        | Earnings      |  | Income        |        | Income        |       | Equity
|BALANCE, JANUARY 1, 2000   |                           |                             | 3,246,789                                                     |                            |  | $            | 33 |            |  | $        | 19,573 |               |  | $             | 4,130  |               |       |        |  |   |       |        |        |   |   | $      | 23,736 |       
|                           | Comprehensive income:     |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |      
|                           |                           | Net income                  |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               | 2,581 |        |  | $ | 2,581 |        |        |   |   |        |        |        | 2,581 |       
|                           |                           | Other comprehensive income, |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |       |       
|                           |                           |                             | net of tax                                                    |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |       |        |  
|                           |                           |                             | Unrealized gains on securities                                |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       | 225    |        |   | $ | 225    |        |        |       | 225    |  
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|                           |                           |                             |                                                               | Total comprehensive income |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       | $      | 2,806  |   |   |        |        |        |       |        |   | 
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|                           | Dividends on common stock |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        | (985          | )     |        |  |   |       |        |        |   |   |        |        | (985   | )    
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|BALANCE, DECEMBER 31, 2000 |                           |                             | 3,246,789                                                     |                            |  |              | 33 |            |  |          | 19,573 |               |  |               | 5,726  |               |       |        |  |   |       |        | 225    |   |   |        | 25,557 |       
|                           | Comprehensive income      |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |      
|                           |                           | Net income                  |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               | 3,802 |        |  | $ | 3,802 |        |        |   |   |        |        |        | 3,802 |       
|                           |                           | Other comprehensive income, |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |       |       
|                           |                           |                             | net of tax                                                    |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |       |        |  
|                           |                           |                             | Unrealized gains on securities                                |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       | 912    |        |   |   | 912    |        |        |       | 912    |  
|                           |                           |                             | Effective portion of change in fair
value of cash flow hedges |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       | (507   | )      |   |   | (507   | )      |        |       | (507   | )
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|                           |                           |                             |                                                               | Total comprehensive income |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       | $      | 4,207  |   |   |        |        |        |       |        |   | 
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|                           | Dividends on common stock |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        | (353          | )     |        |  |   |       |        |        |   |   |        |        | (353   | )    
|                           | Stock options exercised   |                             |                                                               | 107,547                    |  |              |    | 1          |  |          |        | 732           |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        | 733    |      
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|BALANCE, DECEMBER 31, 2001 |                           |                             | 3,354,336                                                     |                            |  |              | 34 |            |  |          | 20,305 |               |  |               | 9,175  |               |       |        |  |   |       |        | 630    |   |   |        | 30,144 |       
|                           | Comprehensive income      |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |      
|                           |                           | Net income                  |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               | 5,045 |        |  | $ | 5,045 |        |        |   |   |        |        |        | 5,045 |       
|                           |                           | Other comprehensive income, |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |       |       
|                           |                           |                             | net of tax                                                    |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |        |       |        |  
|                           |                           |                             | Unrealized gains on securities                                |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       | 671    |        |   |   | 671    |        |        |       | 671    |  
|                           |                           |                             | Effective portion of change in fair
value of cash flow hedges |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       | (3,308 | )      |   |   | (3,308 | )      |        |       | (3,308 | )
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|                           |                           |                             |                                                               | Total comprehensive income |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       | $      | 2,408  |   |   |        |        |        |       |        |   | 
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|                           | Initial public offering   |                             |                                                               | 973,615                    |  |              |    | 9          |  |          |        | 10,212        |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        | 10,221 |      
|                           | Stock options             |                             |                                                               |                            |  |              |    |            |  |          |        | 124           |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        | 124    |      
|                           | Dividends on common stock |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        | (425          | )     |        |  |   |       |        |        |   |   |        |        | (425   | )    
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       
|BALANCE, DECEMBER 31, 2002 |                           |                             | 4,327,951                                                     |                            |  | $            | 43 |            |  | $        | 30,641 |               |  | $             | 13,795 |               |       |        |  |   |       | $      | (2,007 | ) |   | $      | 42,472 |       
|                           |                           |                             |                                                               |                            |  |              |    |            |  |          |        |               |  |               |        |               |       |        |  |   |       |        |        |   |   |        |        |       

(Continued)

F-4



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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands)

|                                       |                                                                                                                                                  |  |              |        |      |  |      |      |   |  |   |     |  
|-------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | ------ | ---- |  | ---- | ---- | - |  | - | --- | -
|                                       |                                                                                                                                                  |  | Year Ended  
|                                       |                                                                                                                                                  |  | December 31,
|                                       |                                                                                                                                                  |  |             
|                                       |                                                                                                                                                  |  | 2002         |        | 2001 |  | 2000
|DISCLOSURE OF RECLASSIFICATION AMOUNT: |                                                                                                                                                  |  |              |        |      |  |      |      |   |  |   |    
|                                       | Unrealized holding gains arising during the period,
net of tax expense of $529, $715 and $198 for 2002,
2001 and 2000, respectively              |  | $            | 756    |      |  | $    | 988  |   |  | $ | 275 |  
|                                       | Less: Reclassification adjustment for gains included in
net income, net of tax expense of $60, $55 and $36 for
2002, 2001 and 2000, respectively |  |              | (85    | )    |  |      | (76  | ) |  |   | (50 | )
|                                       |                                                                                                                                                  |  |              |        |      |  |      |      |   |  |   |    
|                                       | Net unrealized gain on securities, net of tax expense of
$469, $660 and $162 for 2002, 2001 and 2000, respectively                               |  | $            | 671    |      |  | $    | 912  |   |  | $ | 225 |  
|                                       |                                                                                                                                                  |  |              |        |      |  |      |      |   |  |   |    
|                                       | Cumulative effect of accounting change (SFAS No. 133),
net of tax expense of $136 for 2001                                                       |  |              |        |      |  | $    | 188  |   |  |   |     |  
|                                       | Unrealized net losses on cash flow hedges, net of tax
benefit of $(2,399) for 2002 and $(500) for 2001                                           |  | $            | (3,313 | )    |  |      | (690 | ) |  |   |     |  
|                                       | Less: reclassification adjustment for net gains on
cash flow hedges included in net income, net of
tax benefit of $4 for 2002 and $(4) for 2001  |  |              | 5      |      |  |      | (5   | ) |  |   |     |  
|                                       |                                                                                                                                                  |  |              |        |      |  |      |      |   |  |   |    
|                                       | Net unrealized loss on cash flow hedges                                                                                                          |  | $            | (3,308 | )    |  | $    | (507 | ) |  |   |     |  
|                                       |                                                                                                                                                  |  |              |        |      |  |      |      |   |  |   |    



|See notes to consolidated financial statements. | (Concluded)
|----------------------------------------------- | -----------

F-5



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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |          |        |         |  
|---------------------------------------------------- | --------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------- | -------- | ------------ | -------- | ------ | -------- | ----- | -------- | ------ | -------- | ------ | ------- | -
|                                                     |                                                                                   |                                                          |                                                     |          | Year Ended  
|                                                     |                                                                                   |                                                          |                                                     |          | December 31,
|                                                     |                                                                                   |                                                          |                                                     |          |             
|                                                     |                                                                                   |                                                          |                                                     |          | 2002         |          | 2001   |          | 2000 
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|                                                     | Net income                                                                        |                                                          | $                                                   | 5,045    |              |          | $      | 3,802    |       |          | $      | 2,581    |       
|                                                     | Adjustments to reconcile net income to net cash provided by
operating activities: |                                                          |                                                     |          |              |          |        |          |       |          |        |          |       
|                                                     |                                                                                   | Accretion of deferred loan fees and costs                |                                                     |          | (680         | )        |        |          | (969  | )        |        |          | (834   | )      
|                                                     |                                                                                   | Depreciation and amortization                            |                                                     |          | 918          |          |        |          | 771   |          |        |          | 679    |        
|                                                     |                                                                                   | Amortization of premiums and discounts                   |                                                     |          | 4,594        |          |        |          | 2,399 |          |        |          | 235    |        
|                                                     |                                                                                   | Amortization of hedging costs                            |                                                     |          |              |          |        |          |       |          |        |          | 520    |        
|                                                     |                                                                                   | Provision for loan losses                                |                                                     |          | 391          |          |        |          | 1     |          |        |          | 42     |        
|                                                     |                                                                                   | Activity in securities held for trading                  |                                                     |          | 658          |          |        |          | 1,065 |          |        |          | 81,326 |        
|                                                     |                                                                                   | Loss on sale of real estate acquired through foreclosure |                                                     |          | 8            |          |        |          |       |          |        |          |        |        
|                                                     |                                                                                   | Loss (gain) on sale of real estate                       |                                                     |          |              |          |        |          | 139   |          |        |          | 28     |        
|                                                     |                                                                                   | Gain on sale of deposits                                 |                                                     |          |              |          |        |          |       |          |        |          | (3,923 | )      
|                                                     |                                                                                   | Stock-based compensation                                 |                                                     |          | 124          |          |        |          | 106   |          |        |          |        |        
|                                                     |                                                                                   | (Gain) loss on sale of loans                             |                                                     |          |              |          |        |          | (69   | )        |        |          | 601    |        
|                                                     |                                                                                   | FHLB stock dividend                                      |                                                     |          | (386         | )        |        |          | (408  | )        |        |          | (421   | )      
|                                                     |                                                                                   | Increase in accrued interest receivable                  |                                                     |          | 41           |          |        |          | (533  | )        |        |          | (322   | )      
|                                                     |                                                                                   | Decrease in income taxes (payable) receivable            |                                                     |          | (591         | )        |        |          | (10   | )        |        |          | (92    | )      
|                                                     |                                                                                   | Deferred income taxes                                    |                                                     |          | 111          |          |        |          | (375  | )        |        |          | (266   | )      
|                                                     |                                                                                   | Decrease (increase) in prepaid expenses                  |                                                     |          | 176          |          |        |          | (66   | )        |        |          | (804   | )      
|                                                     |                                                                                   | Increase in accounts payable                             |                                                     |          | 507          |          |        |          | 772   |          |        |          | 1,096  |        
|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|                                                     |                                                                                   |                                                          | Net cash provided by operating activities           |          |              | 10,916   |        |          |       | 6,625    |        |          |        | 80,446  |  
|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|                                                     | Acquisitions, net of cash acquired                                                |                                                          |                                                     |          |              |          |        | (375     | )     |          |        |          |       
|                                                     | Net increase in loans receivable                                                  |                                                          |                                                     | 520      |              |          |        | (9,403   | )     |          |        | (20,659  | )     
|                                                     | Proceeds from sale of loans                                                       |                                                          |                                                     |          |              |          |        | 27,471   |       |          |        | 9,387    |       
|                                                     | Proceeds from matured and called securities held to maturity                      |                                                          |                                                     |          |              |          |        | 2,000    |       |          |        |          |       
|                                                     | Proceeds from sales of securities available for sale                              |                                                          |                                                     | 2,378    |              |          |        | 12,975   |       |          |        | 40,652   |       
|                                                     | Purchase of securities held to maturity                                           |                                                          |                                                     |          |              |          |        | (2,055   | )     |          |        | (2,000   | )     
|                                                     | Purchases of securities available for sale                                        |                                                          |                                                     | (267,251 | )            |          |        | (189,437 | )     |          |        | (100,757 | )     
|                                                     | Principal paydowns on securities available for sale                               |                                                          |                                                     | 118,496  |              |          |        | 48,866   |       |          |        | 6,420    |       
|                                                     | Principal paydowns on securities held to maturity                                 |                                                          |                                                     | 228      |              |          |        | 105      |       |          |        | 53       |       
|                                                     | Proceeds from sale of real estate acquired through foreclosure                    |                                                          |                                                     | 665      |              |          |        |          |       |          |        |          |       
|                                                     | Proceeds from sale of hedges of short-term liabilities                            |                                                          |                                                     |          |              |          |        |          |       |          |        | 942      |       
|                                                     | Purchase of premises and equipment                                                |                                                          |                                                     | (1,505   | )            |          |        | (988     | )     |          |        | (607     | )     
|                                                     | Purchase (redemption) of FHLB stock                                               |                                                          |                                                     | (3,530   | )            |          |        | (1,551   | )     |          |        | (354     | )     
|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|                                                     |                                                                                   |                                                          | Net cash used in investing activities               |          |              | (149,999 | )      |          |       | (112,392 | )      |          |        | (66,923 | )
|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|                                                     | Net (decrease) increase in deposits                                               |                                                          |                                                     | 5,343    |              |          |        | 88,528   |       |          |        | 45,196   |       
|                                                     | Sale of deposits                                                                  |                                                          |                                                     |          |              |          |        |          |       |          |        | (65,407  | )     
|                                                     | Increase (decrease) in securities sold under agreements to repurchase             |                                                          |                                                     | 152      |              |          |        | 365      |       |          |        | (9,982   | )     
|                                                     | Increase (decrease) in FHLB advances                                              |                                                          |                                                     | 138,597  |              |          |        | 5,403    |       |          |        | 20,000   |       
|                                                     | Advances (repayments) on note payable                                             |                                                          |                                                     | (6,700   | )            |          |        | 9,000    |       |          |        | 1,335    |       
|                                                     | Exercise of stock options on common stock                                         |                                                          |                                                     |          |              |          |        | 627      |       |          |        |          |       
|                                                     | Proceeds from initial public offering                                             |                                                          |                                                     | 10,221   |              |          |        |          |       |          |        |          |       
|                                                     | Dividends paid on common stock                                                    |                                                          |                                                     | (425     | )            |          |        | (353     | )     |          |        | (985     | )     
|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|                                                     |                                                                                   |                                                          | Net cash provided by (used in) financing activities |          |              | 147,188  |        |          |       | 103,570  |        |          |        | (9,843  | )
|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS |                                                                                   |                                                          | 8,105                                               |          |              |          | (2,197 | )        |       |          | 3,680  |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|                                                    
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR         |                                                                                   |                                                          | 11,107                                              |          |              |          | 13,304 |          |       |          | 9,624  |         
|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         
|CASH AND CASH EQUIVALENTS, END OF YEAR               |                                                                                   | $                                                        | 19,212                                              |          |              | $        | 11,107 |          |       | $        | 13,304 |         
|                                                     |                                                                                   |                                                          |                                                     |          |              |          |        |          |       |          |        |         

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)

|                                                                        |                                                      |              |   |              |        |      |   |      |        |  |   |     |        | 
|----------------------------------------------------------------------- | ---------------------------------------------------- | ------------ | - | ------------ | ------ | ---- | - | ---- | ------ |  | - | --- | ------ | 
|                                                                        |                                                      |              |   | Year Ended  
|                                                                        |                                                      |              |   | December 31,
|                                                                        |                                                      |              |   |             
|                                                                        |                                                      |              |   | 2002         |        | 2001 |   | 2000
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -                      |                                                      |              |   |              |        |      |   |      |        |  |   |    
|                                                                        | Cash paid during the year for:                       |              |   |              |        |      |   |      |        |  |   |     |       
|                                                                        |                                                      | Interest     |   | $            | 21,155 |      |   | $    | 25,737 |  |   | $   | 26,489 | 
|                                                                        |                                                      | Income taxes |   | $            | 3,996  |      |   | $    | 3,052  |  |   | $   | 2,423  | 
|SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES - |                                                      |              |   |              |        |      |   |      |        |  |   |    
|                                                                        | Net unrealized gain on available for sale securities |              | $ | 671          |        |      | $ | 912  |        |  | $ | 225 |       

See notes to consolidated financial statements

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HARRINGTON WEST FINANCIAL GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)

1.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



| |  | Business of the Company- Harrington West Financial Group, Inc. (the
Company) is a financial institution 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 10 branches serving individuals and small to medium-sized
businesses. Nine banking facilities are operated on the California Central
Coast, and one banking facility is located in Shawnee Mission, Kansas, and
operated as a division under the Harrington Bank brand.                                                 
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | 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. For a discussion of the Banks acquisitions, see Note 17.                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | In August 2002, the Bank entered into a joint venture agreement with Market
Resources, Inc., the owner of numerous REMAX brokerage agencies in the
Phoenix and Scottsdale, Arizona, metropolitan areas. Under the agreement,
the Bank established Los Padres Mortgage L.L.C. as a 51%-owned mortgage
banking subsidiary. Los Padres Mortgage L.L.C. originates single-family
residential and commercial real estate loans primarily for sale to third
party investors. The Bank also has the opportunity to purchase select
single-family and commercial real estate loans from Los Padres Mortgage
L.L.C. for its portfolio.
|
| |  | On November 12, 2002, the Company completed its initial public offering. An
aggregate of 1,120,000 shares of common stock were sold to the public at
$12.00 per share, comprised of 973,615 shares sold by the company and
146,385 shares sold by certain stockholders. In connection with the initial
public offering, the company raised approximately $10.2 million.                                                                                                                                                                                                                                                      
|
| |  | Basis of Presentation- The consolidated financial statements include the
accounts of the Company, the Bank and its subsidiaries since their
acquisition dates. All significant intercompany accounts and transactions
have been eliminated.                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | On February 1, 1999, Los Padres Bank purchased a 49% interest in Harrington
Wealth Management Company (HWMC). HWMC offers trust and investment
management services to the customers of Los Padres Bank. On October 31,
2001, Los Padres Bank purchased the remaining 51% interest in HWMC. Prior
to October 31, 2001, this investment was accounted for using the equity
method. Beginning in November 2001, HWMC became a wholly owned subsidiary
of Los Padres Bank and is consolidated into Los Padres Bank.                                                                                                            
|
| |  | 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.               

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| |  | 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 and costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | 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.                                                                                                                                                                                                                                                                         
|
| |  | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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| |  | 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, 2002 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
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 $25,483 and $37,508 at December 31, 2002 and 2001,
respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |  | The balance of capitalized servicing rights, net of valuation allowances,
included in other assets at December 31, 2002 and 2001, was $145 and $380,
respectively. The fair values of these rights were $145 and $385,
respectively. The fair value of servicing rights was determined using
discount rates ranging from 15% to 17% and prepayment speeds ranging from 5%
to 15%, 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:                                                                                                                                                                                                                                                          

|                                                           |                            |   |      |     |      |   |     |    | 
|---------------------------------------------------------- | -------------------------- | - | ---- | --- | ---- | - | --- | -- | 
|                                                           |                            |   | 2002 |     | 2001
|Beginning balance of capitalized mortgage servicing rights |                            | $ | 436  |     |      | $ | 138 |   
|Mortgage servicing rights capitalized                      |                            |   |     |     |      |   | 348 |   
|Mortgage servicing rights amortized                        |                            |   | 67   |     |      |   | 50  |   
|                                                           |                            |   |      |     |      |   |     |   
|Ending balance of capitalized mortgage servicing rights    |                            | $ | 369  |     |      | $ | 436 |   
|                                                           |                            |   |      |     |      |   |     |   
|Valuation allowances:                                      |                            |   |      |     |      |   |     |   
|                                                           | Balance, beginning of year |   | $    | 56  |      |   | $   | 21 | 
|                                                           | Additions                  |   |      | 168 |      |   |     | 35 | 
|                                                           |                            |   |      |     |      |   |     |   
|                                                           | Balance, end of year       |   | $    | 224 |      |   | $   | 56 | 
|                                                           |                            |   |      |     |      |   |     |   



| |  | 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 27 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 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, 2002 and 2001,
the gross balance of core deposit intangibles was $1,937, and the
accumulated amortization was $626 and $432, respectively. The amortization
expense was $194 and $116 for the years ended December 31, 2002 and 2001,
respectively.

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| |  | Derivatives Held for Asset and Liability Management Purposes- The Company
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities  Deferral of the Effective Date of SFAS
No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities  an amendment of FASB Statement No. 133, on
January 1, 2001. These statements establish 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 these accounting 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 $1,711, net of tax, from
the amount recorded in the separate component of stockholders equity.                                                                                                                                                                                                   
|
| |  | Derivatives Not Qualifying for Hedge Accounting- The Bank is a party to a
variety of interest rate contracts consisting of interest rate futures,
caps, swaps, floors and options in the management of interest rate exposure
in the investment and loan portfolio. These financial instruments are
included in trading account assets and are reported at fair value with
realized and unrealized gains and losses on these instruments recognized
immediately in income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In accordance with the transition provisions of SFAS No. 133, the Company
recorded a cumulative-effect type adjustment of $188, net of tax, in
accumulated other comprehensive income and a $43 loss, before tax, as of
January 1, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | Recent Accounting Pronouncements- In August 2001, the Financial Accounting
Standards Board (FASB) issued SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. This statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and the accounting and reporting provisions of Accounting Principles Board
(APB) Opinion No. 30, Reporting the Results of Operations  Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions, for the disposal of a
segment of a business (as previously defined in that opinion). The
provisions of this statement are effective for                                                                                                                                                                                                                         

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| |  | financial statements issued for fiscal years beginning after December 15,
2001 and are not expected to have a material impact on the financial
statements of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement eliminates the automatic classification of gain
or loss on extinguishment of debt as an extraordinary item of income and
requires that such gain or loss be evaluated for extraordinary
classification under the criteria of APB No. 30, Reporting Results of
Operations. This statement also requires sales-leaseback accounting for
certain lease modifications that have economic effects that are similar to
sales-leaseback transactions, and makes various other technical corrections
to existing pronouncements. This statement will be effective for the Bank
for the year ending December 31, 2003. The adoption of this statement is
not expected to have a material effect on our results of operations or
financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  | In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and
supersedes Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
SFAS No. 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. Under EITF
Issue No. 94-3, a liability for an exit cost as defined in EITF Issue No.
94-3 was recognized at the date of an entitys commitment to an exit plan.
SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. The Company will adopt the provisions
of SFAS No. 146 for exit or disposal activities that are initiated after
December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Institutions, which provides guidance on the accounting for the
acquisition of a financial institution. This statement requires that the
excess of the fair value of liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired in a business
combination represents goodwill that should be accounted for under SFAS No.
142, Goodwill and Other Intangible Assets. Thus, the specialized accounting
guidance in paragraph 5 of SFAS No. 72, Accounting for Certain Acquisitions
of Banking or Thrift Institutions, will not apply after September 30, 2002.
If certain criteria in SFAS No. 147 are met, the amount of the
unidentifiable intangible asset will be reclassified to goodwill upon
adoption of the statement. Financial institutions meeting conditions
outlined in SFAS No. 147 will be required to restate previously issued
financial statements. Additionally, the scope of SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, is amended to include
long-term customer-relationship intangible assets such as depositor- and
borrower-relationship intangible assets and credit cardholder intangible
assets. This statement is effective for the Bank beginning October 1, 2002.
The Company has adopted the new standard as of October 1, 2002 and the
adoption of this standard did not have a material impact on the Companys
financial position or results of operation.
|
| |  | In December 2002, the FASB issued SFAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of Statement 123 to require prominent disclosures in
both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results. This Statement shall be effective for financial statements
for fiscal                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

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##### Table of Contents





| |  | years ending after December 15, 2002 and is not expected to have a material
impact on the Companys consolidated financial position or results of
operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In November 2002, the FASB issued FASB Interpretation No. 45 (FIN 45),
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of the Indebtedness of Others, which clarifies the
requirements of SFAS No. 5, Accounting for Contingencies, relating to a
guarantors accounting for and disclosures of certain guarantees issued. FIN
45 requires enhanced disclosures for certain guarantees. FIN 45 also
requires certain guarantees that are issued or modified after December 31,
2002, to be initially recorded on the balance sheet at fair value. For
guarantees issued on or before December 31, 2002, liabilities are recorded
when and if payments become probable and estimable. The adoption of FIN 45
is not expected to have a material impact on the Companys consolidated
financial position or results of operations.
|
| |  | In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities, which clarifies the application
of Accounting Research Bulletin No. 51, Consolidated Financial Statements,
relating to consolidation of certain entities. FIN 46 applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which the enterprise holds a variable interest it
acquired before February 1, 2003, and is not expected to have a material
impact on the Companys consolidated financial position or results of
operations.                                                                                                                                                                                                                                                              
|
| |  | 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 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 this split. The accompanying consolidated financial
statements also reflect an increase in its authorized capital shares from
3,000,000 to 10,000,000, which occurred contemporaneously with the stock
split. Of the 10,000,000 shares authorized, 1,000,000 shares are reserved
for preferred stock.                                                                                                                                                                                                                                              

F-14



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##### Table of Contents



2.       LOANS RECEIVABLE



| |  | The Banks loan portfolio as of December 31 is summarized as follows:
| |  | ---------------------------------------------------------------------

|                                         |                                                    |   |         |         |      |   |         |         | 
|---------------------------------------- | -------------------------------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                                         |                                                    |   | 2002    |         | 2001
|Real estate loans:                       |                                                    |   |         |         |      |   |         |        
|                                         | Residential property - one to four units           |   | $       | 116,714 |      |   | $       | 156,150 | 
|                                         | Residential property - more than four units        |   |         | 71,856  |      |   |         | 69,584  | 
|                                         | Residential property - construction                |   |         | 14,697  |      |   |         | 14,607  | 
|                                         | Nonresidential property - construction             |   |         | 4,969   |      |   |         | 5,628   | 
|                                         | Commercial and other income - producing properties |   |         | 183,264 |      |   |         | 156,431 | 
|                                         | Loans for the acquisition and development of land  |   |         | 14,948  |      |   |         | 7,889   | 
|                                         |                                                    |   |         |         |      |   |         |        
|Total real estate loans                  |                                                    |   | 406,448 |         |      |   | 410,289 |        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Commercial and industrial loans          |                                                    |   | 27,676  |         |      |   | 30,838  |        
|Consumer loans                           |                                                    |   | 17,565  |         |      |   | 11,107  |        
|Loans collateralized by deposit accounts |                                                    |   | 372     |         |      |   | 397     |        
|Consumer line-of-credit loans            |                                                    |   | 131     |         |      |   | 142     |        
|                                         |                                                    |   |         |         |      |   |         |        
|                                         |                                                    |   | 452,192 |         |      |   | 452,773 |        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|                                        
|Net deferred loan fees                   |                                                    |   | (1,332  | )       |      |   | (1,102  | )      
|Net premiums                             |                                                    |   | 987     |         |      |   | 1,774   |        
|Allowance for loan losses                |                                                    |   | (3,797  | )       |      |   | (3,736  | )      
|                                         |                                                    |   |         |         |      |   |         |        
|Loans receivable, net                    |                                                    | $ | 448,050 |         |      | $ | 449,709 |        
|                                         |                                                    |   |         |         |      |   |         |        



| |  | The Banks lending is concentrated in Californias Central Coast and the
Kansas City metropolitan area. A deterioration in the economic conditions
of these markets could adversely affect our business, financial condition
and profitability. Such a deterioration could give rise to increased loan
delinquencies, increased problem asset and foreclosures, decreased loan
demand and a decline in real estate values.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Activity in the allowance for loan losses is summarized as follows for the
years ended December 31:                                                                                                                                                                                                                                                                                                                       

|                                                      |  |      |       |      |  |      |       |   |  |   |       |  
|----------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                      |  | 2002 |       | 2001 |  | 2000
|Balance, beginning of year                            |  | $    | 3,736 |      |  | $    | 3,150 |   |  | $ | 3,112 |  
|Allowance acquired in
connection with branch
purchase |  |      |      |      |  |      | 600   |   |  |   |       |  
|Charge-offs                                           |  |      | (330  | )    |  |      | (15   | ) |  |   | (4    | )
|Provision for loan losses                             |  |      | 391   |      |  |      | 1     |   |  |   | 42    |  
|                                                      |  |      |       |      |  |      |       |   |  |   |       |  
|Balance, end of year                                  |  | $    | 3,797 |      |  | $    | 3,736 |   |  | $ | 3,150 |  
|                                                      |  |      |       |      |  |      |       |   |  |   |       |  

F-15



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##### Table of Contents



Activity in real estate acquired through foreclosure consists of the following:

|                           |                                    |   |      |      |      |   |      |     |   |   |   |  | 
|-------------------------- | ---------------------------------- | - | ---- | ---- | ---- | - | ---- | --- | - | - | - |  | 
|                           |                                    |   | 2002 |      | 2001 |   | 2000
|Balance, beginning of year |                                    | $ |     |      |      | $ |     |     |   | $ |  | 
|                           | Acquistion                         |   |      |      |      |   |      | 99  |   |   |   |  | 
|                           | Lower of cost or market write-down |   |      |      |      |   |      | (99 | ) |   |   |  | 
|                           | Acquired through foreclosure       |   |      | 673  |      |   |      |     |   |   |   |  | 
|                           | Disposals                          |   |      | (673 | )    |   |      |     |   |   |   |  | 
|                           |                                    |   |      |      |      |   |      |     |   |   |   | 
|                           |                                    | $ |     |      |      | $ |     |     |   | $ |  | 
|                           |                                    |   |      |      |      |   |      |     |   |   |   | 



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

|                                              |  |      |     |      |  |   |     | 
|--------------------------------------------- |  | ---- | --- | ---- |  | - | --- | 
|                                              |  | 2002 |     | 2001
|Impaired loans with a valuation allowance     |  | $    | 468 |      |  | $ | 389 | 
|Impaired loans without a valuation allowance  |  |      |     |      |  |   |     | 
|                                              |  |      |     |      |  |   |     | 
|Total impaired loans                          |  |      | 468 |      |  |   | 389 | 
|                                              |  |      |     |      |  |   |     | 
|Valuation allowance related to impaired loans |  | $    | 50  |      |  | $ | 50  | 
|                                              |  |      |     |      |  |   |     | 

|                                              |  |      |     |      |  |      |       |  |  |   |       | 
|--------------------------------------------- |  | ---- | --- | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                              |  | 2002 |     | 2001 |  | 2000
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|Average recorded investment in impaired loans |  | $    | 429 |      |  | $    | 2,400 |  |  | $ | 5,180 | 
|Interest income recognized on impaired loans  |  |      | 52  |      |  |      | 26    |  |  |   | 159   | 



| |  | At December 31, the Bank had outstanding commitments for loan originations
totaling $18,887 for 2002 and $6,888 for 2001, of which $8,838 for 2002 and
$950 for 2001 were for adjustable rate loans and $10,049 for 2002 and $5,938
for 2001 were for fixed rate loans. Undisbursed loan funds for the Banks
construction lending program amounted to $27,306 for 2002 and $18,183 for
2001.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.       SECURITIES



| |  | The amortized cost and estimated fair values of securities available for
sale are summarized as follows:
| |  | --------------------------------------------------------------------------------------------------------



|Securities Available for Sale:
|------------------------------

|                                                          |  |           |         |            |  |            |       |       |  |   |      |   |  |   |         | 
|--------------------------------------------------------- |  | --------- | ------- | ---------- |  | ---------- | ----- | ----- |  | - | ---- | - |  | - | ------- | 
|                                                          |  |           |         |            |  | Gross      |       | Gross |  |   |      |  
|                                                          |  | Amortized |         | Unrealized |  | Unrealized |       | Fair 
|                                                          |  | Cost      |         | Gains      |  | Losses     |       | Value
|December 31, 2002                                         |  |           |         |           
|Mortgage-backed securities - pass throughs                |  | $         | 161,603 |            |  | $          | 2,792 |       |  | $ | (39  | ) |  | $ | 164,356 | 
|Collateralized mortgage obligations                       |  |           | 71,103  |            |  |            | 117   |       |  |   | (530 | ) |  |   | 70,690  | 
|Commercial mortgage-backed securities                     |  |           | 64,188  |            |  |            | 713   |       |  |   |      |   |  |   | 64,901  | 
|Asset-backed securities (underlying
securities mortgages) |  |           | 23,736  |            |  |            | 31    |       |  |   | (36  | ) |  |   | 23,731  | 
|Corporate debt securities                                 |  |           | 807     |            |  |            | 45    |       |  |   |      |   |  |   | 852     | 
|                                                          |  |           |         |            |  |            |       |       |  |   |      |   |  |   |         | 
|                                                          |  | $         | 321,437 |            |  | $          | 3,698 |       |  | $ | (605 | ) |  | $ | 324,530 | 
|                                                          |  |           |         |            |  |            |       |       |  |   |      |   |  |   |         | 
|December 31, 2001                                         |  |           |         |            |  |            |       |       |  |   |      |   |  |   |         | 
|Mortage-backed securities                                 |  | $         | 179,647 |            |  | $          | 2,015 |       |  | $ | (35  | ) |  | $ | 181,627 | 
|                                                          |  |           |         |            |  |            |       |       |  |   |      |   |  |   |         | 

F-16



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##### Table of Contents





| |  | The amortized cost and fair value of the available for sale debt securities
by contractual maturity at December 31, 2002 are as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------------

|                                                          |                            |   |           |         |       |   |         |         | 
|--------------------------------------------------------- | -------------------------- | - | --------- | ------- | ----- | - | ------- | ------- | 
|                                                          |                            |   | Amortized |         | Fair 
|                                                          |                            |   | Cost      |         | Value
|Mortgage-backed securities - pass throughs                |                            |   |           |         |       |   |         |        
|                                                          | Due from five to ten years |   | $         | 6,076   |       |   | $       | 6,163   | 
|                                                          | Due over ten years         |   |           | 155,527 |       |   |         | 158,193 | 
|                                                          |                            |   |           |         |       |   |         |        
|Total mortgage backed securities - pass throughs          |                            |   | 161,603   |         |       |   | 164,356 |        
|                                                          |                            |   |           |         |       |   |         |        
|Collateralized mortgage obligations                       |                            |   |           |         |       |   |         |        
|                                                          | Due over ten years         |   |           | 71,103  |       |   |         | 70,690  | 
|                                                          |                            |   |           |         |       |   |         |        
|Total collateralized mortgage obligations                 |                            |   | 71,103    |         |       |   | 70,690  |        
|                                                          |                            |   |           |         |       |   |         |        
|Commercial mortgage-backed securities                     |                            |   |           |         |       |   |         |        
|                                                          | Due from one to five years |   |           | 24,218  |       |   |         | 24,486  | 
|                                                          | Due from five to ten years |   |           | 17,590  |       |   |         | 17,870  | 
|                                                          | Due over ten years         |   |           | 22,380  |       |   |         | 22,545  | 
|                                                          |                            |   |           |         |       |   |         |        
|Total commercial mortgage-back securities                 |                            |   | 64,188    |         |       |   | 64,901  |        
|                                                          |                            |   |           |         |       |   |         |        
|Asset-backed securities
(underlying securities mortgages) |                            |   |           |         |       |   |         |        
|                                                          | Due over ten years         |   |           | 23,736  |       |   |         | 23,731  | 
|                                                          |                            |   |           |         |       |   |         |        
|Total asset backed-securities                             |                            |   | 23,736    |         |       |   | 23,731  |        
|                                                          |                            |   |           |         |       |   |         |        
|Corporate debt securities                                 |                            |   |           |         |       |   |         |        
|                                                          | Due over ten years         |   |           | 807     |       |   |         | 852     | 
|                                                          |                            |   |           |         |       |   |         |        
|Total corporate debt securities                           |                            |   | 807       |         |       |   | 852     |        
|                                                          |                            |   |           |         |       |   |         |        
|Total                                                     |                            | $ | 321,437   |         |       | $ | 324,530 |        
|                                                          |                            |   |           |         |       |   |         |        

F-17



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##### Table of Contents





| |  | Proceeds from sales of available for sale securities were $2,378, $12,975
and $40,652, with related gross realized gains of $145, $131 and $112 for
2002, 2001 and 2000 respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Securities Held to Maturity:
| | ----------------------------

|                           |  |           |       |            |  |            |    |       |  |  |   |  |  |   |       | 
|-------------------------- |  | --------- | ----- | ---------- |  | ---------- | -- | ----- |  |  | - |  |  | - | ----- | 
|                           |  |           |       |            |  | Gross      |    | Gross |  |  |   | 
|                           |  | Amortized |       | Unrealized |  | Unrealized |    | Fair 
|December 31, 2002          |  | Cost      |       | Gains      |  | Losses     |    | Value
|Agency securities          |  | $         | 2,013 |            |  | $          | 74 |       |  |  |  |  |  | $ | 2,087 | 
|Mortgage-backed securities |  |           | 355   |            |  |            | 25 |       |  |  |   |  |  |   | 380   | 
|                           |  |           |       |            |  |            |    |       |  |  |   |  |  |   |       | 
|Total                      |  | $         | 2,368 |            |  | $          | 99 |       |  |  |  |  |  | $ | 2,467 | 
|                           |  |           |       |            |  |            |    |       |  |  |   |  |  |   |       | 

|                           |  |           |       |            |  |            |     |       |  |   |   |  |  |   |       | 
|-------------------------- |  | --------- | ----- | ---------- |  | ---------- | --- | ----- |  | - | - |  |  | - | ----- | 
|                           |  |           |       |            |  | Gross      |     | Gross |  |   |   | 
|                           |  | Amortized |       | Unrealized |  | Unrealized |     | Fair 
|December 31, 2001          |  | Cost      |       | Gains      |  | Losses     |     | Value
|Agency securities          |  | $         | 2,034 |            |  | $          | 79  |       |  | $ |  |  |  | $ | 2,113 | 
|Mortgage-backed securities |  |           | 583   |            |  |            | 21  |       |  |   |   |  |  |   | 604   | 
|                           |  |           |       |            |  |            |     |       |  |   |   |  |  |   |       | 
|Total                      |  | $         | 2,617 |            |  | $          | 100 |       |  | $ |  |  |  | $ | 2,717 | 
|                           |  |           |       |            |  |            |     |       |  |   |   |  |  |   |       | 



| |  | The amortized cost and fair value of held to maturity debt securities by
contractual maturity at December 31, 2002 are as follows:
| |  | ----------------------------------------------------------------------------------------------------------------------------------

|                                 |                        |   |           |       |       |   |       |       | 
|-------------------------------- | ---------------------- | - | --------- | ----- | ----- | - | ----- | ----- | 
|                                 |                        |   | Amortized |       | Fair 
|                                 |                        |   | Cost      |       | Value
|Mortgage-backed securities -     |                        |   |           |       |       |   |       |      
|                                 | Due over 10 years      |   | $         | 355   |       |   | $     | 380   | 
|                                 |                        |   |           |       |       |   |       |      
|Total mortgage-backed securities |                        |   | 355       |       |       |   | 380   |      
|                                 |                        |   |           |       |       |   |       |      
|Agency bonds -                   |                        |   |           |       |       |   |       |      
|                                 | Due less than one year |   |           | 2,013 |       |   |       | 2,087 | 
|                                 |                        |   |           |       |       |   |       |      
|Total agency bonds               |                        |   | 2,013     |       |       |   | 2,087 |      
|                                 |                        |   |           |       |       |   |       |      
|Total                            |                        | $ | 2,368     |       |       | $ | 2,467 |      
|                                 |                        |   |           |       |       |   |       |      

F-18



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##### Table of Contents



4.       PREMISES AND EQUIPMENT



| |  | Premises and equipment consist of the following at December 31:
| |  | ---------------------------------------------------------------

|                                               |  |               |  |      |       |      |       |  |       |   |       | 
|---------------------------------------------- |  | ------------- |  | ---- | ----- | ---- | ----- |  | ----- | - | ----- | 
|                                               |  | Depreciable   |  |      |       |      |       |  |       |  
|                                               |  | Lives (years) |  | 2002 |       | 2001
|Land                                           |  |               |  |      |       | $    | 190   |  |       | $ | 190   | 
|Office building                                |  | 27            |  |      | 204   |      |       |  | 204   |  
|Leasehold improvements                         |  | 3 to 20       |  |      | 3,067 |      |       |  | 2,211 |  
|Furniture, fixtures and equipment              |  | 5 to 20       |  |      | 4,563 |      |       |  | 4,046 |  
|                                               |  |               |  |      |       |      |       |  |       |   |       | 
|Total                                          |  |               |  |      |       |      | 8,024 |  |       |   | 6,651 | 
|Less accumulated depreciation and amortization |  |               |  |      |       |      | 3,555 |  |       |   | 2,963 | 
|                                               |  |               |  |      |       |      |       |  |       |   |       | 
|Premises and equipment, net                    |  |               |  |      |       | $    | 4,469 |  |       | $ | 3,688 | 
|                                               |  |               |  |      |       |      |       |  |       |   |       | 

5.       DEPOSITS



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

|                                              |           |   |         |         |               |  |           |      |               |   |         |         |           |  |      |      |  
|--------------------------------------------- | --------- | - | ------- | ------- | ------------- |  | --------- | ---- | ------------- | - | ------- | ------- | --------- |  | ---- | ---- | -
|                                              |           |   | 2002    |         | 2001         
|                                              |           |   |         |         |              
|                                              |           |   |         |         |               |  | Weighted- |      |               |   |         |         | Weighted-
|                                              |           |   |         |         |               |  | Average   |      |               |   |         |         | Average  
|                                              |           |   | Amount  |         | Interest Rate |  | Amount    |      | Interest Rate
|Noninterest bearing                           |           | $ | 20,106  |         |               |  |          |      |               | $ | 12,382  |         |           |  |     |     
|Passbook                                      |           |   | 16,573  |         |               |  | 0.88      | %    |               |   | 14,507  |         |           |  | 1.33 | %   
|NOW accounts                                  |           |   | 26,841  |         |               |  | 0.40      | %    |               |   | 23,109  |         |           |  | 0.64 | %   
|Commercial DDA accounts                       |           |   | 3,145   |         |               |  | 0.28      | %    |               |   | 2,574   |         |           |  | 1.02 | %   
|Money market deposits                         |           |   | 106,703 |         |               |  | 1.64      | %    |               |   | 41,719  |         |           |  | 1.98 | %   
|                                              |           |   |         |         |               |  |           |      |               |   |         |         |           |  |      |     
|Total                                         |           |   | 173,368 |         |               |  | 1.16      | %    |               |   | 94,291  |         |           |  | 1.26 | %   
|                                              |           |   |         |         |               |  |           |      |               |   |         |         |           |  |      |     
|Certificates of deposits:                     |           |   |         |         |               |  |           |      |               |   |         |         |           |  |      |     
|                                              | Over $100 |   |         | 157,601 |               |  |           | 2.89 | %             |   |         | 210,584 |           |  |      | 4.33 | %
|                                              | Other     |   |         | 194,302 |               |  |           | 2.98 | %             |   |         | 215,983 |           |  |      | 4.43 | %
|                                              |           |   |         |         |               |  |           |      |               |   |         |         |           |  |      |     
|Total certificates of deposits                |           |   | 351,903 |         |               |  |           |      |               |   | 426,567 |         |           |  |      |     
|                                              |           |   |         |         |               |  |           |      |               |   |         |         |           |  |      |     
|Total deposits                                |           | $ | 525,271 |         |               |  |           |      |               | $ | 520,858 |         |           |  |      |     
|                                              |           |   |         |         |               |  |           |      |               |   |         |         |           |  |      |     
|Weighted-average interest rate,
end of period |           |   |         |         |               |  | 2.35      | %    |               |   |         |         |           |  | 3.80 | %   

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##### Table of Contents





| |  | As of December 31, 2002, certificates of deposits over $100 are scheduled to
mature as follows:
| |  | -----------------------------------------------------------------------------------------------

|                         |                 |  |   |         | 
|------------------------ | --------------- |  | - | ------- | 
|Year Ending, December 31 |                 |  |  
|                         | 2003            |  | $ | 138,521 | 
|                         | 2004            |  |   | 4,818   | 
|                         | 2005            |  |   | 8,855   | 
|                         | 2006            |  |   | 3,228   | 
|                         | 2007 and beyond |  |   | 2,179   | 
|                         |                 |  |   |         | 
|                         |                 |  | $ | 157,601 | 
|                         |                 |  |   |         | 



| |  | In February 2000, the Bank sold its two branches and related deposits in the
market of San Diego, originally acquired through the acquisition of U.S.
Community Bank in 1997. The Bank determined that these branches did not fit
strategically with its core banking operations in the California central
coast. The Bank recognized a gain of $3,923 on the sale of these deposits.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.       FEDERAL HOME LOAN BANK ADVANCES



| |  | 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, 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 $288,537 and $234,400 at
December 31, 2002 and 2001, respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | FHLB advances are collateralized by the investment in the stock of the FHLB
and certain mortgage loans aggregating $79,150 and $109,589 at December 31,
2002 and 2001, respectively, and mortgage-backed securities aggregating
$186,018 and $152,150, current par value, at December 31, 2002 and 2001,
respectively. The weighted-average interest rate on these advances was
2.73% and 4.82% at December 31, 2002 and 2001, respectively.                                                                                                                                                                                                    
|
| |  | The maturities of FHLB advances at December 31 are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

|     |  |      |         | 
|---- |  | ---- | ------- | 
|     |  | 2002
|2003 |  | $    | 160,000 | 
|2004 |  |      | 55,000  | 
|2010 |  |      | 20,000  | 
|     |  |      |         | 
|     |  | $    | 235,000 | 
|     |  |      |         | 

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##### Table of Contents



7.       NOTE PAYABLE



| |  | At December 31, 2002 and 2001, the Company has a loan facility from three
banks consisting of a revolving line of credit on which $11,300 and $18,000
have been drawn at each date, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On October 31, 2001, the terms of the loan facility were renegotiated to
expand the revolving line of credit commitment from $15,000 to $20,000.
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 200
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 250 basis points
or prime rate less 50 basis points; Level 3 allows for the choice of LIBOR
plus 300 basis points or prime rate. At December 31, 2001, the Company
qualified for Level 1 loan pricing. A .25% commitment fee on the unused
portion of the line is payable quarterly. The note rate was 4.19% at
December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | On September 17, 2002, the terms of the Companys line of credit under its
loan facility were renegotiated to expand the revolving line of credit
commitment from $20,000 to $25,000, and modify certain covenants.
Specifically, the covenant that restricts our ability to invest in mortgage
derivative securities has been revised to allow us to maintain a larger
balance as of the last day of the month. The covenant that restricts
payment of cash dividends has been revised to allow us to pay dividends in
an aggregate amount not to exceed the greater of (a) $300 during any fiscal
quarter, or (b) up to a maximum of 25% of consolidated net income for the
quarter. Additionally, the minimum core profitability requirements have
been slightly increased, and a new covenant requiring a ratio of
non-performing assets to stockholders equity plus loan loss reserves to not
exceed .3 to 1 has been added.                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | At December 31, 2002 and 2001 the line of credit was secured by the Banks
common stock. Under the terms of the loan facility, the Company is bound by
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 the 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 the 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, 2002 and 2001,
it was in compliance with all of such covenants and restrictions and does
not anticipate that such covenants and restrictions will limit its
operations.

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8.       INCOME TAXES



| |  | The provision for taxes on income consists of the following components for
the years ended December 31:
| |  | -------------------------------------------------------------------------------------------------------

|                                |         |   |       |       |      |   |       |       |   |   |       |       |  
|------------------------------- | ------- | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | -
|                                |         |   | 2002  |       | 2001 |   | 2000 
|Current tax expense:            |         |   |       |       |      |   |       |       |   |   |       |      
|                                | Federal |   | $     | 2,495 |      |   | $     | 2,334 |   |   | $     | 1,702 |  
|                                | State   |   |       | 923   |      |   |       | 773   |   |   |       | 565   |  
|                                |         |   |       |       |      |   |       |       |   |   |       |      
|                                |         |   | 3,418 |       |      |   | 3,107 |       |   |   | 2,267 |      
|                                |         |   |       |       |      |   |       |       |   |   |       |      
|Deferred tax expense (benefit): |         |   |       |       |      |   |       |       |   |   |       |      
|                                | Federal |   |       | 165   |      |   |       | (314  | ) |   |       | (216  | )
|                                | State   |   |       | (54   | )    |   |       | (61   | ) |   |       | (50   | )
|                                |         |   |       |       |      |   |       |       |   |   |       |      
|                                |         |   | 111   |       |      |   | (375  | )     |   |   | (266  | )    
|                                |         |   |       |       |      |   |       |       |   |   |       |      
|                                |         | $ | 3,529 |       |      | $ | 2,732 |       |   | $ | 2,001 |      
|                                |         |   |       |       |      |   |       |       |   |   |       |      



| |  | The actual tax rates differed from the statutory rates as follows for the
years ended December 31:
| |  | --------------------------------------------------------------------------------------------------

|                                        |                                                  |  |      |      |      |  |      |      |   |  |      |     | 
|--------------------------------------- | ------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | ---- | - |  | ---- | --- | 
|                                        |                                                  |  | 2002 |      | 2001 |  | 2000
|Federal income taxes at statutory rates |                                                  |  | 35.0 | %    |      |  | 35.0 | %    |   |  | 35.0 | %  
|Increase resulting from:                |                                                  |  |      |      |      |  |      |      |   |  |      |    
|                                        | California franchise tax, net of federal benefit |  |      | 6.7  |      |  |      | 7.2  |   |  |      | 7.4 | 
|                                        | Other, net                                       |  |      | (0.3 | )    |  |      | (0.4 | ) |  |      | 1.3 | 
|                                        |                                                  |  |      |      |      |  |      |      |   |  |      |    
|                                        |                                                  |  | 41.4 | %    |      |  | 41.8 | %    |   |  | 43.7 | %  
|                                        |                                                  |  |      |      |      |  |      |      |   |  |      |    

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##### Table of Contents





| |  | The following is a summary of the income tax (asset) liability at December
31:
| |  | ------------------------------------------------------------------------------

|                                   |                                                  |   |        |        |      |   |        |        |  
|---------------------------------- | ------------------------------------------------ | - | ------ | ------ | ---- | - | ------ | ------ | -
|                                   |                                                  |   | 2002   |        | 2001
|Current taxes                      |                                                  | $ | (252   | )      |      | $ | 339    |       
|Deferred taxes                     |                                                  |   | (1,187 | )      |      |   | 648    |       
|                                   |                                                  |   |        |        |      |   |        |       
|                                   |                                                  | $ | (1,439 | )      |      | $ | 987    |       
|                                   |                                                  |   |        |        |      |   |        |       
|Deferred tax liabilities:          |                                                  |   |        |        |      |   |        |       
|                                   | Net loan fees/costs                              |   | $      | 1,617  |      |   | $      | 1,757  |  
|                                   | FHLB stock dividends                             |   |        | 785    |      |   |        | 596    |  
|                                   | Mark to market on securities                     |   |        | 17     |      |   |        | 6      |  
|                                   | Unrealized gain on available for sale securities |   |        | 1,273  |      |   |        | 824    |  
|                                   | Purchase accounting adjustments                  |   |        | 98     |      |   |        | 12     |  
|                                   |                                                  |   |        |        |      |   |        |       
|Gross deferred tax liability       |                                                  |   | 3,790  |        |      |   | 3,195  |       
|                                   |                                                  |   |        |        |      |   |        |       
|Deferred tax asset:                |                                                  |   |        |        |      |   |        |       
|                                   | Unrealized hedging loss on cash flow hedges      |   |        | (2,861 | )    |   |        | (466   | )
|                                   | Allowance for loan losses                        |   |        | (1,395 | )    |   |        | (1,188 | )
|                                   | California franchise tax                         |   |        | (390   | )    |   |        | (358   | )
|                                   | Other                                            |   |        | (27    | )    |   |        | (73    | )
|                                   | Depreciation                                     |   |        | (304   | )    |   |        | (219   | )
|                                   | Net operating loss carryforwards                 |   |        |       |      |   |        | (243   | )
|                                   |                                                  |   |        |        |      |   |        |       
|Gross deferred tax asset           |                                                  |   | (4,977 | )      |      |   | (2,547 | )     
|                                   |                                                  |   |        |        |      |   |        |       
|Net deferred tax (asset) liability |                                                  | $ | (1,187 | )      |      | $ | 648    |       
|                                   |                                                  |   |        |        |      |   |        |       



| |  | As a result of acquiring the remaining 51% interest in Harrington Wealth
Management Company in 2001, the Company has federal and state net operating
loss carryforwards of approximately $700, which expire primarily in 2018 and
2019. Due to the restrictions imposed by Internal Revenue Code Section 382
for change of control, the annual amount of net operating loss deductions
that can be utilized to offset future income may be limited.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9.       STOCKHOLDERS EQUITY



| |  | Retained earnings are restricted to the extent that earnings deducted for
tax purposes as bad debt deductions are not available for payment of cash
dividends or other distributions to stockholders without payment of federal
income taxes by the Bank at the then-prevailing corporate tax rates. At
December 31, 2002, 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.

F-23



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| |  | During 1996, the Company granted 150,000 options with a stock price of $5.83
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, 107,547 of the options
were exercised and the balance of 42,453 options was extended to expire on
June 30, 2003. In accordance with requirements of FASB Interpretation No.
44, Accounting for Certain Transactions Involving Stock Compensation (an
interpretation of APB Opinion No. 25), a one-time $106 pre-tax charge to
earnings was recorded, which was equal to the intrinsic value at the time of
the extension, applied to the number of options extended. The intrinsic
value is the difference between the fair value of the underlying stock at
the extension date (i.e., $8.33) and the strike price of the options (i.e.,
$5.83). The offsetting entry was recorded to paid-in capital in the
stockholders equity section. The Company recorded a deferred tax asset of
$43.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | During 2002, the maturity of the 42,453 options was extended two years from
June 30, 2003 to June 30, 2005. A one-time $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 is calculated by taking the
difference between the fair values of the underlying stock at the extension
date (i.e., $11.25) and the fair value of the stock at the previous
extension date (i.e., $8.33) multiplied by 42,453. The offsetting entry was
recorded to paid-in capital in the stockholders equity section. The
Company recorded a deferred tax asset of $51.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  | A summary of the status of the Companys stock options as of December 31 and
changes during those years are presented below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

|                         |                                |        |         |         |      |        |           |       |  |        |         |         |           |   |      |      |  |  |           |         |  |   |      |      | 
|------------------------ | ------------------------------ | ------ | ------- | ------- | ---- | ------ | --------- | ----- |  | ------ | ------- | ------- | --------- | - | ---- | ---- |  |  | --------- | ------- |  | - | ---- | ---- | 
|                         |                                |        | 2002    |         | 2001 |        | 2000     
|                         |                                |        |         |         |      |        |          
|                         |                                |        |         |         |      |        | Weighted- |       |  |        |         |         | Weighted- |   |      |      |  |  | Weighted-
|                         |                                |        |         |         |      |        | Average   |       |  |        |         |         | Average   |   |      |      |  |  | Average  
|                         |                                |        |         |         |      |        | Exercise  |       |  |        |         |         | Exercise  |   |      |      |  |  | Exercise 
|                         |                                | Shares |         | Price   |      | Shares |           | Price |  | Shares |         | Price  
|Incentive stock options: |                                |        |         |         |      |        |           |       |  |        |         |         |           |   |      |      |  |  |           |         |  |   |      |     
|                         | Outstanding, beginning of year |        |         | 373,050 |      |        | $         | 7.50  |  |        |         | 369,000 |           |   | $    | 7.39 |  |  |           | 369,000 |  |   | $    | 7.39 | 
|                         | Granted                        |        |         | 60,525  |      |        | $         | 9.45  |  |        |         | 32,550  |           |   | $    | 8.33 |  |  |           |         |  |   |      |      | 
|                         | Expired unexercised            |        |         | (9,750  | )    |        | $         | 8.56  |  |        |         | (28,500 | )         |   | $    | 7.07 |  |  |           |         |  |   |      |      | 
|                         |                                |        |         |         |      |        |           |       |  |        |         |         |           |   |      |      |  |  |           |         |  |   |      |     
|                         | Outstanding, end of year       |        |         | 423,825 |      |        | $         | 7.75  |  |        |         | 373,050 |           |   | $    | 7.50 |  |  |           | 369,000 |  |   | $    | 7.39 | 
|Non-qualified options    |                                |        | 42,453  |         |      | $      | 5.83      |       |  |        | 42,453  |         |           | $ | 5.83 |      |  |  | 150,000   |         |  | $ | 5.83 |     
|                         |                                |        |         |         |      |        |           |       |  |        |         |         |           |   |      |      |  |  |           |         |  |   |      |     
|Outstanding, end of year |                                |        | 466,278 |         |      | $      | 7.58      |       |  |        | 415,503 |         |           | $ | 7.33 |      |  |  | 519,000   |         |  | $ | 6.94 |     
|                         |                                |        |         |         |      |        |           |       |  |        |         |         |           |   |      |      |  |  |           |         |  |   |      |     
|Exercisable, end of year |                                |        | 317,888 |         |      | $      | 7.35      |       |  |        | 268,875 |         |           | $ | 7.18 |      |  |  | 202,500   |         |  | $ | 6.95 |     



| |  | The outstanding options have prices ranging from $5.83 to $10.50. Remaining
available options to be issued under the stock option plan were 220,867 and
125,598 for December 31, 2002 and 2001, respectively.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



|         |       |         |                     |              |  |                     |     |     |         |   |          |       |  |  |  |         |         |  |   |      |       | 
|-------- | ----- | ------- | ------------------- | ------------ |  | ------------------- | --- | --- | ------- | - | -------- | ----- |  |  |  | ------- | ------- |  | - | ---- | ----- | 
|         |       |         | Options Outstanding |              |  | Options Exercisable
|         |       |         |                     |              |  |                    
|Range of |       |         |                     |              |  | Remaining           |     |     |         |   |          |       |  |  |  |         |         |  |  
|Exercise |       | Number  |                     | Contractual  |  | Exercise            |     |     | Number  |   | Exercise
|Prices   |       | Options |                     | Life (years) |  | Price               |     |     | Options |   | Price   
|$        | 5.83  |         |                     | 117,453      |  |                     |     | 3.5 |         |   | $        | 5.83  |  |  |  |         | 75,000  |  |   | $    | 5.83  | 
|$        | 6.83  |         |                     | 82,500       |  |                     |     | 4.5 |         |   | $        | 6.83  |  |  |  |         | 82,500  |  |   | $    | 6.83  | 
|$        | 8.33  |         |                     | 208,050      |  |                     |     | 5.9 |         |   | $        | 8.33  |  |  |  |         | 160,388 |  |   | $    | 8.33  | 
|$        | 9.33  |         |                     | 52,275       |  |                     |     | 9.0 |         |   | $        | 9.33  |  |  |  |         |         |  |   | $    | 9.33  | 
|$        | 10.50 |         |                     | 6,000        |  |                     |     | 9.5 |         |   | $        | 10.50 |  |  |  |         |         |  |   | $    | 10.50 | 
|         |       |         |                     |              |  |                     |     |     |         |   |          |       |  |  |  |         |         |  |   |      |       | 
|Total    |       |         | 466,278             |              |  |                     | 5.3 |     |         | $ | 7.58     |       |  |  |  | 317,888 |         |  | $ | 7.35 |      
|         |       |         |                     |              |  |                     |     |     |         |   |          |       |  |  |  |         |         |  |   |      |       | 



| |  | Fair Value of Options- The Company applies APB Opinion No. 25 and related
interpretations in accounting for its stock option plan. Accordingly, no
compensation cost has been recognized for its stock option plan.                                                                                                                                                                  
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Had compensation cost for the Companys stock option plan been determined
based on the fair value at the grant dates for awards under the plan
consistent with the method of SFAS No. 123, Accounting for Stock-Based
Compensation, the Companys net income and earnings per share for the years
ended December 31 would have been changed to the pro forma amounts
indicated below:

|                  |                               |             |   |       |      |      |   |       |      |  |   |       |      | 
|----------------- | ----------------------------- | ----------- | - | ----- | ---- | ---- | - | ----- | ---- |  | - | ----- | ---- | 
|Pro Forma Results |                               | 2002        |   | 2001  |      | 2000
|Net income:       |                               |             |   |       |      |      |   |       |      |  |   |      
|                  | As reported                   |             | $ | 5,045 |      |      | $ | 3,802 |      |  | $ | 2,581 |     
|                  | Pro forma                     |             | $ | 4,948 |      |      | $ | 3,696 |      |  | $ | 2,448 |     
|                  | Earnings per share - basic:   |             |   |       |      |      |   |       |      |  |   |       |     
|                  |                               | As reported |   | $     | 1.44 |      |   | $     | 1.14 |  |   | $     | 0.79 | 
|                  |                               | Pro forma   |   | $     | 1.41 |      |   | $     | 1.11 |  |   | $     | 0.75 | 
|                  | Earnings per share - diluted: |             |   |       |      |      |   |       |      |  |   |       |     
|                  |                               | As reported |   | $     | 1.39 |      |   | $     | 1.12 |  |   | $     | 0.77 | 
|                  |                               | Pro forma   |   | $     | 1.36 |      |   | $     | 1.09 |  |   | $     | 0.73 | 

The fair values of options granted under the Companys fixed stock option
plan were estimated on the date of grant using the Black-Scholes
option-pricing model, with the following weighted-average assumptions used:
expected volatility of 27.58% for 2002, 7.90% for 2001 and 11.30% for
2000; risk-free interest rate of 4.89% for 2002, 4.90% for 2001 and 5.65%
for 2000; and expected lives of 9 years for 2002, 2001 and 2000. The fair
value of the 60,525 and 32,550 options granted in 2002 and 2001 were $3.74
and $2.40, respectively. No options were granted in 2000.

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##### Table of Contents





|10. |  | REGULATORY CAPITAL REQUIREMENTS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Banks financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Banks assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.                                                                                                                                              
|   
|    |  | Quantitative measures that have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). 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.
|   
|    |  | Due to our business strategy which has concentrated on growth, a shift in
our lending focus to more commercial lending and the size of our securities
portfolios, we have agreed with the OTS that we will maintain a total
risk-based capital ratio and a leverage capital ratio of at least 11% and
6%, respectively, which is in excess of the OTS minimum requirements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|    |  | As of December 31, 2002 and 2001, 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 and state banking 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, 2002, the Banks retained earnings available
for the payment of dividends were $891. Accordingly, $41,581 of the
Companys equity in the net assets of the Bank was restricted at December
31, 2002. 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.                                                                                                                                                                                                                                                                                                                  

F-26



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##### Table of Contents



REGULATORY CAPITAL
FINANCIAL STATEMENT FOOTNOTE

|                                           |                                         |   |        |        |                   |  |                  |       |                    |  |             |        |                  |  |                   |   |  |  |      |      |       |  |        |        |  |  |   |   |       |  |      |       |   |  |                   |        |  |  |   |   |  |  |      |       |  
|------------------------------------------ | --------------------------------------- | - | ------ | ------ | ----------------- |  | ---------------- | ----- | ------------------ |  | ----------- | ------ | ---------------- |  | ----------------- | - |  |  | ---- | ---- | ----- |  | ------ | ------ |  |  | - | - | ----- |  | ---- | ----- | - |  | ----------------- | ------ |  |  | - | - |  |  | ---- | ----- | -
|                                           |                                         |   |        |        |                   |  |                  |       |                    |  |             |        |                  |  |                   |   |  |  |      |      |       |  |        |        |  |  |   |   |       |  |      |       |   |  | To Be Well       
|                                           |                                         |   |        |        |                   |  |                  |       |                    |  |             |        |                  |  |                   |   |  |  |      |      |       |  |        |        |  |  |   |   |       |  |      |       |   |  | Capitalized Under
|                                           |                                         |   |        |        |                   |  |                  |       |                    |  | For Capital |        | Minimum Required |  | Prompt Corrective
|                                           |                                         |   | Actual |        | Adequacy Purposes |  | by OTS Agreement |       | Actions Provisions
|                                           |                                         |   |        |        |                   |  |                  |       |                   
|                                           |                                         |   | Amount |        | Ratio             |  | Amount           |       |                    |  |             |        | Ratio            |  | Amount            |   |  |  |      |      | Ratio |  | Amount |        |  |  |   |   | Ratio
|                                           |                                         |   |        |        |                   |  |                  |       |                    |  |             |        |                  |  |                   |   |  |  |      |      |       |  |        |        |  |  |   |   |      
|As of December 31, 2002:                   |                                         |   |        |        |                   |  |                  |       |                    |  |             |        |                  |  |                   |   |  |  |      |      |       |  |        |        |  |  |   |   |       |  |      |       |   |  |                   |        |  |  |   |   |  |  |      |      
|                                           | Total Capital
(to risk weighted assets) |   | $      | 53,583 |                   |  |                  | 11.97 | %                  |  | $           | 35,804 |                  |  |                   | 3 |  |  |      | 8.00 | %     |  | $      | 49,230 |  |  |   | 3 |       |  |      | 11.00 | % |  | $                 | 44,755 |  |  |   | 3 |  |  |      | 10.00 | %
|Core capital
(to adjusted tangible assets) |                                         | $ | 49,836 |        |                   |  | 6.11             | %     |                    |  | 32,630      |        |                  |  | 3                 |   |  |  | 4.00 | %    |       |  | 48,945 |        |  |  | 3 |   |       |  | 6.00 | %     |   |  | 40,788            |        |  |  | 3 |   |  |  | 5.00 | %    
|Tangible capital
(to tangible assets)      |                                         | $ | 49,836 |        |                   |  | 6.11             | %     |                    |  | 12,236      |        |                  |  | 3                 |   |  |  | 1.50 | %    |       |  | N/A    |        |  |  |   |   |       |  | N/A  |       |   |  | N/A               |        |  |  |   |   |  |  | N/A  |      
|Tier 1 capital
(to risk weighted assets)   |                                         | $ | 49,836 |        |                   |  | 11.14            | %     |                    |  | N/A         |        |                  |  |                   |   |  |  | N/A  |      |       |  | N/A    |        |  |  |   |   |       |  | N/A  |       |   |  | 26,853            |        |  |  | 3 |   |  |  | 6.00 | %    
|As of December 31, 2001:                   |                                         |   |        |        |                   |  |                  |       |                    |  |             |        |                  |  |                   |   |  |  |      |      |       |  |        |        |  |  |   |   |       |  |      |       |   |  |                   |        |  |  |   |   |  |  |      |      
|                                           | Total Capital
(to risk weighted assets) |   | $      | 45,208 |                   |  |                  | 11.72 | %                  |  | $           | 30,860 |                  |  |                   | 3 |  |  |      | 8.00 | %     |  | $      | 42,432 |  |  |   | 3 |       |  |      | 11.00 | % |  | $                 | 38,575 |  |  |   | 3 |  |  |      | 10.00 | %
|Core capital
(to adjusted tangible assets) |                                         | $ | 41,522 |        |                   |  | 6.27             | %     |                    |  | 26,494      |        |                  |  | 3                 |   |  |  | 4.00 | %    |       |  | 39,741 |        |  |  | 3 |   |       |  | 6.00 | %     |   |  | 33,118            |        |  |  | 3 |   |  |  | 5.00 | %    
|Tangible capital
(to tangible assets)      |                                         | $ | 41,522 |        |                   |  | 6.27             | %     |                    |  | 9,935       |        |                  |  | 3                 |   |  |  | 1.50 | %    |       |  | N/A    |        |  |  |   |   |       |  | N/A  |       |   |  | N/A               |        |  |  |   |   |  |  | N/A  |      
|Tier 1 capital
(to risk weighted assets)   |                                         | $ | 41,522 |        |                   |  | 10.76            | %     |                    |  | N/A         |        |                  |  |                   |   |  |  | N/A  |      |       |  | N/A    |        |  |  |   |   |       |  | N/A  |       |   |  | 23,145            |        |  |  | 3 |   |  |  | 6.00 | %    

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##### Table of Contents





|11. |  | EARNINGS PER SHARE                                                                                      
|--- |  | --------------------------------------------------------------------------------------------------------
|   
|    |  | The following tables represent the calculations of earnings per share
(EPS) for the periods presented.

|                                 |  |                              |       |               |  |           |           |  |  |   |       |  
|-------------------------------- |  | ---------------------------- | ----- | ------------- |  | --------- | --------- |  |  | - | ----- | -
|                                 |  | Year Ended December 31, 2002
|                                 |  |                             
|                                 |  | Income                       |       | Shares        |  | Per-Share
|                                 |  | (Numerator)                  |       | (Denominator) |  | Amount   
|Basic EPS                        |  | $                            | 5,045 |               |  |           | 3,503,713 |  |  | $ | 1.44  |  
|Effect of dilutive stock options |  |                              |       |               |  |           | 137,971   |  |  |   | (0.05 | )
|                                 |  |                              |       |               |  |           |           |  |  |   |       |  
|Diluted EPS                      |  | $                            | 5,045 |               |  |           | 3,641,684 |  |  | $ | 1.39  |  
|                                 |  |                              |       |               |  |           |           |  |  |   |       |  

|                                 |  |                              |       |               |  |           |           |  |  |   |       |  
|-------------------------------- |  | ---------------------------- | ----- | ------------- |  | --------- | --------- |  |  | - | ----- | -
|                                 |  | Year Ended December 31, 2001
|                                 |  |                             
|                                 |  | Income                       |       | Shares        |  | Per-Share
|                                 |  | (Numerator)                  |       | (Denominator) |  | Amount   
|Basic EPS                        |  | $                            | 3,802 |               |  |           | 3,321,189 |  |  | $ | 1.14  |  
|Effect of dilutive stock options |  |                              |       |               |  |           | 75,696    |  |  |   | (0.02 | )
|                                 |  |                              |       |               |  |           |           |  |  |   |       |  
|Diluted EPS                      |  | $                            | 3,802 |               |  |           | 3,396,885 |  |  | $ | 1.12  |  
|                                 |  |                              |       |               |  |           |           |  |  |   |       |  

|                                 |  |                              |       |               |  |           |           |  |  |   |       |  
|-------------------------------- |  | ---------------------------- | ----- | ------------- |  | --------- | --------- |  |  | - | ----- | -
|                                 |  | Year Ended December 31, 2000
|                                 |  |                             
|                                 |  | Income                       |       | Shares        |  | Per-Share
|                                 |  | (Numerator)                  |       | (Denominator) |  | Amount   
|Basic EPS                        |  | $                            | 2,581 |               |  |           | 3,246,789 |  |  | $ | 0.79  |  
|Effect of dilutive stock options |  |                              |       |               |  |           | 85,068    |  |  |   | (0.02 | )
|                                 |  |                              |       |               |  |           |           |  |  |   |       |  
|Diluted EPS                      |  | $                            | 2,581 |               |  |           | 3,331,857 |  |  | $ | 0.77  |  
|                                 |  |                              |       |               |  |           |           |  |  |   |       |  



|12. |  | COMMITMENTS AND CONTINGENCIES                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------
|   
|    |  | Aggregate minimum lease commitments under long-term operating leases as of
December 31, 2001 are as follows:

|                    |  |   |        | 
|------------------- |  | - | ------ | 
|2003                |  | $ | 1,137  | 
|2004                |  |   | 1,092  | 
|2005                |  |   | 1,081  | 
|2006                |  |   | 1,076  | 
|2007                |  |   | 1,041  | 
|2008 and thereafter |  |   | 12,406 | 
|                    |  |   |        | 
|                    |  | $ | 17,833 | 
|                    |  |   |        | 



| |  | 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 $840, $559 and $471 for the years ended
December 31, 2002, 2001 and 2000, respectively.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents





|13. |  | TRADING ACCOUNT ASSETS                                                                                                                                                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | Derivative Instruments Not Receiving Hedge Treatment- The Bank is a party
to a variety of interest rate contracts such as interest rate swaps, caps,
floors, futures, options and total return swaps (Interest Rate
Agreements), which are recorded in the financial statements at fair value
with changes in fair value and periodic payments recorded in earnings.
|   
|    |  |                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  |                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  |                                                                                                                                                                                                                                                                                                                                                                       
|   
|    |  |                                                                                                                                                                                                                                                                                                                                                                       

F-29



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

|                                                                                                                  |  |        |             |       |            |           |                  |         |  |            |     |  |  |                                                                                                                                       |  |       | 
|----------------------------------------------------------------------------------------------------------------- |  | ------ | ----------- | ----- | ---------- | --------- | ---------------- | ------- |  | ---------- | --- |  |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | 
|                                                                                                                  |  |        |             |       | Estimated  |           | Weighted Average
|                                                                                                                  |  |        | Contract or |       | Fair Value |           | Interest Rate   
|                                                                                                                  |  |        | Notional    |       |            |           |                 
|                                                                                                                  |  | Amount |             | Asset |            | Liability |                  | Payable |  | Receivable
|2002                                                                                                              |  |        |             |       |            |           |                  |         |  |            |     |  |  |                                                                                                                                       |  |      
|
|Total
return swaps - receive Lehman Brothers AAA CMBS index plus spread, pay/receive
market value change on index |  | $      | 60,000      |       |            |           |                  |         |  | $          | 17  |  |  | Bank recieves the
spread on Lehman Brothers
AAA CMBS Index Plus 40
basis points and receives
or pays the market
value change of index
|Total return swaps - receive total return
GN MBS adjustable rate, pay LIBOR                                       |  |        | 14,455      |       |            |           |                  |         |  |            |     |  |  | 1.84%                                                                                                                                 |  | 5.72%
|2001                                                                                                              |  |        |             |       |            |           |                  |         |  |            |     |  |  |                                                                                                                                       |  |      
|Total
return swaps - receive total return
CMBS investment grade total return,
pay LIBOR                           |  | $      | 25,000      |       |            | $         | 41               |         |  | $          | 216 |  |  | 2.94%                                                                                                                                 |  | 6.22%
|Interest rate swaps - pay fixed, receive
LIBOR                                                                    |  |        | 25,000      |       |            |           | 237              |         |  |            | 177 |  |  | 5.14%                                                                                                                                 |  | 2.40%
|Total return swaps - receive total return
GN MBS adjustable rate, pay LIBOR                                       |  |        | 23,200      |       |            |           |                  |         |  |            |     |  |  | 3.83%                                                                                                                                 |  | 6.73%
|Futures                                                                                                           |  |        | 1,900       |       |            |           | 22               |         |  |            | 13  |  |  |                                                                                                                                       |  |      



| |  | 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 intent of these Interest Rate Agreements is to
economically hedge the exposures created by the trading securities and
certain interest rate agreements. However, because the exposures being
hedged do not qualify for hedge accounting under SFAS No. 133, changes in
fair value of these instruments are immediately recognized in 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.

F-30



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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.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------

|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|---------------------------- | ------- | -------- | -------- | -------- | ---------- | ------ | ------- | --- | - | - | ------ | ------ | -
|                             |         |          |          |          |            |        |         |     |   |   | Income
|                             |         |          | Realized |          | Unrealized |        | from   
|                             |         |          | Gains    |          | Gains      |        | Trading
|                             |         | (Losses) |          | (Losses) |            | Assets
|December 31, 2002            |         |          |          |          |            |        |         |     |   |   |        |       
|Interest rate contracts:     |         |          |          |          |            |        |         |     |   |   |        |       
|                             | Swaps   |          | $        | (206     | )          |        | $       | 99  |   |   | $      | (107   | )
|                             | Caps    |          |          |          |            |        |         |     |   |   |        |        |  
|                             | Futures |          |          | (97      | )          |        |         |    |   |   |        | (97    | )
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|Total                        |         |          | (303     | )        |            |        | 99      |     |   |   | (204   | )     
|MBS and other trading assets |         |          | 149      |          |            |        | 24      |     |   |   | 173    |       
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|Total trading portfolio      |         | $        | (154     | )        |            | $      | 123     |     |   | $ | (31    | )     
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|December 31, 2001            |         |          |          |          |            |        |         |     |   |   |        |       
|Interest rate contracts:     |         |          |          |          |            |        |         |     |   |   |        |       
|                             | Swaps   |          | $        | 58       |            |        | $       | 9   |   |   | $      | 67     |  
|                             | Floors  |          |          |          |            |        |         | (43 | ) |   |        | (43    | )
|                             | Futures |          |          | (291     | )          |        |         |     |   |   |        | (291   | )
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|Total                        |         |          | (233     | )        |            |        | (34     | )   |   |   | (267   | )     
|MBS and other trading assets |         |          | 902      |          |            |        | (199    | )   |   |   | 703    |       
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|Total trading portfolio      |         | $        | 669      |          |            | $      | (233    | )   |   | $ | 436    |       
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|December 31, 2000            |         |          |          |          |            |        |         |     |   |   |        |       
|Interest rate contracts:     |         |          |          |          |            |        |         |     |   |   |        |       
|                             | Swaps   |          | $        | 502      |            |        | $       | 66  |   |   | $      | 568    |  
|                             | Floors  |          |          | (1,063   | )          |        |         | 808 |   |   |        | (255   | )
|                             | Futures |          |          | (6,899   | )          |        |         |     |   |   |        | (6,899 | )
|                             | Options |          |          | 18       |            |        |         | (13 | ) |   |        | 5      |  
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|Total                        |         |          | (7,442   | )        |            |        | 861     |     |   |   | (6,581 | )     
|MBS and other trading assets |         |          | 931      |          |            |        | 2,896   |     |   |   | 3,827  |       
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  
|Total trading portfolio      |         | $        | (6,511   | )        |            | $      | 3,757   |     |   | $ | (2,754 | )     
|                             |         |          |          |          |            |        |         |     |   |   |        |        |  

F-31



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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      |     | Gross |  |   |     |  
|                                                      |  | Amortized |       | Unrealized |  | Unrealized |     | Fair 
|December 31, 2002                                     |  | Cost      |       | Gains      |  | Losses     |     | Value
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|Mortgage-backed securities and other -
Trading assets |  | $         | 1,846 |            |  | $          | 113 |       |  | $ | (25 | ) |  | $ | 1,934 | 
|                                                      |  |           |       |            |  |            |     |       |  |   |     |   |  |   |       | 

|                                                      |  |           |       |            |  |            |     |       |  |   |     |   |  |   |       | 
|----------------------------------------------------- |  | --------- | ----- | ---------- |  | ---------- | --- | ----- |  | - | --- | - |  | - | ----- | 
|                                                      |  |           |       |            |  | Gross      |     | Gross |  |   |     |  
|                                                      |  | Amortized |       | Unrealized |  | Unrealized |     | Fair 
|December 31, 2001                                     |  | Cost      |       | Gains      |  | Losses     |     | Value
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|                                                     
|Mortgage-backed securities and other -
Trading assets |  | $         | 2,408 |            |  | $          | 353 |       |  | $ | (10 | ) |  | $ | 2,751 | 
|                                                      |  |           |       |            |  |            |     |       |  |   |     |   |  |   |       | 

F-32



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##### Table of Contents





|14. |  | DERIVATIVES HELD FOR ASSET AND LIABILITY MANAGEMENT                                                                                                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | At December 31, 2002, 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 2002, the ineffective portion of
the change in fair value of the cash flow hedges was immaterial.

|                                                    |  |             |         |            |  |               |        |                  |  |  |      |   |  |  |      |  
|--------------------------------------------------- |  | ----------- | ------- | ---------- |  | ------------- | ------ | ---------------- |  |  | ---- | - |  |  | ---- | -
|                                                    |  |             |         |            |  |               |        | Weighted-Average
|                                                    |  | Contract or |         |            |  | Interest Rate
|                                                    |  | Notional    |         | Estimated  |  |              
|                                                    |  | Amount      |         | Fair Value |  | Receivable    |        | Payable         
|December 31, 2002 -
Interest rate swaps - pay fixed |  | $           | 109,000 |            |  | $             | (6,813 | )                |  |  | 1.47 | % |  |  | 4.42 | %
|December 31, 2001 -
Interest rate swaps - pay fixed |  | $           | 40,000  |            |  | $             | (1,101 | )                |  |  | 1.99 | % |  |  | 5.84 | %



| |  | 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,
2002:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |                                  |      |  |      |  |      |   |       |   |      |  |            |  |  |   |        |   |  |   |        |   |  |   |        |  
|-------------------- | -------------------------------- | ---- |  | ---- |  | ---- | - | ----- | - | ---- |  | ---------- |  |  | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|Maturities           |                                  | 2003 |  | 2004 |  | 2005 |   | 2006  |   | 2007 |  | Thereafter
|Interest rate swaps: |                                  |      |  |      |  |      |   |       |   |      |  |            |  |  |   |        |   |  |   |        |   |  |   |       
|                     | Notional amount                  |      |  |      |  |      | $ | 5,000 |   |      |  |            |  |  | $ | 17,000 |   |  | $ | 52,000 |   |  | $ | 35,000 |  
|                     | Weighted-average
payable rate    |      |  |      |  |      |   | 5.27  | % |      |  |            |  |  |   | 3.00   | % |  |   | 3.80   | % |  |   | 5.92   | %
|                     | Weighted-average
receivable rate |      |  |      |  |      |   | 1.69  | % |      |  |            |  |  |   | 1.40   | % |  |   | 1.52   | % |  |   | 1.41   | %



| |  | 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.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|15. |  | FAIR VALUES OF FINANCIAL INSTRUMENTS                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | SFAS 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.
|   
|    |  | 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:                                                                                                          

|                                          |                                             |  |          |         |            |  |          |         |            |  |  |  |  |  |        |         |  |  |        |         | 
|----------------------------------------- | ------------------------------------------- |  | -------- | ------- | ---------- |  | -------- | ------- | ---------- |  |  |  |  |  | ------ | ------- |  |  | ------ | ------- | 
|                                          |                                             |  | 2002     |         | 2001      
|                                          |                                             |  |          |         |           
|                                          |                                             |  | Carrying |         | Estimated  |  | Carrying |         | Estimated 
|                                          |                                             |  | Amount   |         | Fair Value |  | Amount   |         | Fair Value
|Assets:                                   |                                             |  |          |         |            |  |          |         |            |  |  |  |  |  |        |         |  |  |        |        
|                                          | Cash and cash equivalents                   |  | $        | 19,212  |            |  | $        | 19,212  |            |  |  |  |  |  | $      | 11,107  |  |  | $      | 11,107  | 
|                                          | Trading account assets                      |  |          | 1,934   |            |  |          | 1,934   |            |  |  |  |  |  |        | 2,751   |  |  |        | 2,751   | 
|                                          | Securities, available for sale              |  |          | 324,530 |            |  |          | 324,530 |            |  |  |  |  |  |        | 181,627 |  |  |        | 181,627 | 
|                                          | Securities, held to maturity                |  |          | 2,368   |            |  |          | 2,467   |            |  |  |  |  |  |        | 2,617   |  |  |        | 2,717   | 
|                                          | Loans receivable, net                       |  |          | 448,050 |            |  |          | 467,332 |            |  |  |  |  |  |        | 449,709 |  |  |        | 458,861 | 
|                                          | FHLB stock                                  |  |          | 11,750  |            |  |          | 11,750  |            |  |  |  |  |  |        | 7,834   |  |  |        | 7,834   | 
|                                          | Accrued interest receivable                 |  |          | 3,526   |            |  |          | 3,526   |            |  |  |  |  |  |        | 3,567   |  |  |        | 3,567   | 
|Liabilities:                              |                                             |  |          |         |            |  |          |         |            |  |  |  |  |  |        |         |  |  |        |        
|                                          | Demand deposits                             |  |          | 173,368 |            |  |          | 173,368 |            |  |  |  |  |  |        | 94,291  |  |  |        | 94,291  | 
|                                          | Certificates of deposits                    |  |          | 351,903 |            |  |          | 356,824 |            |  |  |  |  |  |        | 426,567 |  |  |        | 429,286 | 
|                                          | FHLB advances                               |  |          | 235,000 |            |  |          | 241,585 |            |  |  |  |  |  |        | 96,403  |  |  |        | 99,721  | 
|                                          | Securities sold under
repurchase agreements |  |          | 517     |            |  |          | 517     |            |  |  |  |  |  |        | 365     |  |  |        | 365     | 
|                                          | Note payable                                |  |          | 11,300  |            |  |          | 11,300  |            |  |  |  |  |  |        | 18,000  |  |  |        | 18,000  | 
|                                          | Accrued interest payable                    |  |          | 147     |            |  |          | 147     |            |  |  |  |  |  |        | 297     |  |  |        | 297     | 
|Hedging Instruments -
Interest rate swaps |                                             |  | (6,813   | )       |            |  | (6,813   | )       |            |  |  |  |  |  | (1,101 | )       |  |  | (1,101 | )      



| |  | 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:
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |                                                                                                                                                                          
|
| |  |                                                                                                                                                                          

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| |  | 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 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, 2002 or
2001, as these instruments predominantly have adjustable terms and are of
a short-term nature.                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-35



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|    |  |                                                                                                                                                                                                                                                                                                                                      | 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.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|16. |  | RELATED-PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                          
|   
|    |  | The Bank has contracted with SBA to provide investment advisory services
and interest rate risk analysis. Certain stockholders of the Company are
also principals and employees of SBA. The amount of consulting expense
relating to SBA for the years ended December 31, 2002, 2001 and 2000 was
$325, $295 and $286, respectively.
|   
|    |  | In the ordinary course of business, the Bank has granted loans to principal
officers and directors and their affiliates amounting to $4,636 and $1,976
at December 31, 2002 and 2001, respectively. The following table is a
rollforward of the related party loan activity.                                                        

|                  |  |      |       |      |  |   |       | 
|----------------- |  | ---- | ----- | ---- |  | - | ----- | 
|                  |  | 2002 |       | 2001
|Beginning balance |  | $    | 1,976 |      |  | $ | 2,236 | 
|Additions         |  |      | 3,207 |      |  |   | 20    | 
|Repayments        |  |      | 547   |      |  |   | 280   | 
|                  |  |      |       |      |  |   |       | 
|Ending balance    |  | $    | 4,636 |      |  | $ | 1,976 | 
|                  |  |      |       |      |  |   |       | 



|17. |  | ACQUISITIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | On November 3, 2001, Los Padres Bank purchased Harrington Bank of Kansas, a
bank located in Shawnee Mission, Kansas. Harrington Bank, FSB was a wholly
owned subsidiary of Harrington Financial Group, a related party. The
largest common shareholders of the former Harrington Financial Group, Inc.,
which include the Chairman and Chief Executive Officer, are also the
largest common shareholders of Harrington West Financial Group. The
acquisition was considered arms-length since both the Company and
Harrington Bank, FSB obtained fairness opinions on the transaction from
investment bankers, and independent committees of Los Padres Bank and
Harrington Bank, FSB, which did not include the Chairman and Chief
Executive Officer, negotiated these transactions. The bank was purchased
based on Los Padres Banks knowledge of Harrington Bank of Kansass
management, markets and its loan portfolio to efficiently utilize Los
Padres Banks interstate banking powers, and for its high financial return
potential. The acquisition was accounted for under the purchase method of
accounting, and the income statement of the combined entity includes the
results of operations of the acquired entity since the acquisition date.

F-36



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##### Table of Contents





| |  | The following table summarizes the fair values of assets and liabilities
and their related premiums at the date of acquisition:
| |  | -------------------------------------------------------------------------------------------------------------------------------

|                                              |                    |   |                 |  |                 |   |             |       |  |   |       |  | 
|--------------------------------------------- | ------------------ | - | --------------- |  | --------------- | - | ----------- | ----- |  | - | ----- |  | 
|                                              |                    |   | Book Values of  |  | Fair Values of  |   |             |       | 
|                                              |                    |   | Assets Acquired |  | Assets Acquired |   | Premiums at
|                                              |                    |   | and Liabilities |  | and Liabilities |   | Date of    
|                                              |                    |   | Assumed         |  | Assumed         |   | Acquisition
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|                                             
|Loans receivable, net                         |                    | $ | 69,870          |  |                 | $ | 71,569      |       |  | $ | 1,699 | 
|Intangible assets subject to amortization     |                    |   |                 |  |                 |   | 937         |       |  |   | 937   | 
|Intangible assets not subject to amortization |                    |   |                 |  |                 |   | 100         |       |  |   | 100   | 
|Other assets                                  |                    |   | 5,894           |  |                 |   | 5,894       |       |  |   |       | 
|                                              |                    |   |                 |  |                 |   |             |       |  |   |       | 
|Total assets                                  |                    |   | 75,764          |  |                 |   | 78,500      |       |  |   | 2,736 | 
|                                              |                    |   |                 |  |                 |   |             |       |  |   |       | 
|Deposits                                      |                    |   | 74,431          |  |                 |   | 75,796      |       |  |   | 1,365 | 
|Other liabilities                             |                    |   | 1,333           |  |                 |   | 1,333       |       |  |   |       | 
|                                              |                    |   |                 |  |                 |   |             |       |  |   |       | 
|Total liabilities                             |                    |   | 75,764          |  |                 |   | 77,129      |       |  |   | 1,365 | 
|                                              |                    |   |                 |  |                 |   |             |       |  |   |       | 
|Net asset value                               |                    |   |                 |  |                 |   |             |       |  |   | 1,371 | 
|Purchase price:                               |                    |   |                 |  |                 |   |             |       |  |   |       | 
|                                              | Cash consideration |   |                 |  |                 |   |             | 5,000 |  |   |       |  | 
|                                              | Direct costs       |   |                 |  |                 |   |             | 188   |  |   |       |  | 
|                                              |                    |   |                 |  |                 |   |             |       |  |   |       | 
|Total purchase price                          |                    |   |                 |  |                 |   |             |       |  |   | 5,188 | 
|                                              |                    |   |                 |  |                 |   |             |       |  |   |       | 
|Goodwill                                      |                    |   |                 |  |                 |   |             |       |  | $ | 3,817 | 
|                                              |                    |   |                 |  |                 |   |             |       |  |   |       | 



| |  | The $937 of core deposit intangible assets subject to amortization noted
above relates to the fair value of non-maturing deposits related to their
below market rate attributes which will be amortized over a 10-year period
and subject to periodic impairment tests. The $100 in intangible assets
not subject to amortization is related to the trade name of Harrington Bank
of Kansas, which will be subject to periodic impairment tests. As the
Harrington Bank of Kansas acquisition was considered a taxable transaction,
the entire $3,817 of goodwill is tax deductible.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | On February 1, 1999, Los Padres Bank purchased, for $980,000, a 49%
interest in Harrington Wealth Management Company (HWMC). HWMC was
established as a joint venture to offer trust and investment management
services to the customers of Los Padres Bank and Harrington Bank, FSB.
Harrington Bank, FSB, which was the wholly owned subsidiary of Harrington
Financial Group, owned the other 51% interest. The largest common
shareholders of the Company, which include the Chairman and Chief Executive
Officer of the Company and formerly the Chief Executive Officer of
Harrington Financial Group, were also the largest common shareholders of
Harrington Financial Group. On October 31, 2001, Los Padres Bank purchased
the remaining 51%
interest in HWMC for $776,000. Both Los Padres Bank and Harrington Bank,
FSB engaged separate, unrelated counsel to assist the transaction.
Additionally, both entities formed independent committees, which excluded
the Chief Executive Officer of the Company and Harrington Financial Group,
to review the fairness of the transaction. No goodwill was recorded in
this transaction since the fair value of the consideration paid was equal
to the book value of the net assets acquired. Prior to the purchase of the
51% interest on October 31, 2001, the income or loss recognized on the
Companys joint venture investment was immaterial.

F-37



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| |  | During 1997, the Company acquired all the assets and liabilities of U.S.
Community Savings Bank. This acquisition was accounted for under the
purchase method of accounting, and accordingly, all assets and liabilities
were adjusted to and recorded at their estimated fair values as of the
acquisition date. On February 8, 2000, the Bank sold the two branches and
deposits associated with the 1997 acquisition of U.S. Community Savings
Bank. The Bank sold the deposits at a 5.76% premium, recognizing a $3,923
gain on sale, which included approximately $406 of remaining unamortized
negative goodwill that was written off as a result of the transaction.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | In November 1997, the Company purchased the deposits of two branches from
another financial institution that included deposits of approximately
$48,956 for which the Bank paid a premium of $1,000. The unamortized core
deposit premium related to this acquisition is $483 and $583 as of December
31, 2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | The carrying values for all other purchased assets and liabilities
approximated their fair values at the acquisition dates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | The premiums on loans are amortized on a loan-by-loan basis using the
straight-line method over the remaining lives of the loans. Premiums on
deposits are amortized using the straight-line method over the
weighted-average maturity of such deposits. Premiums on FHLB advances are
amortized using the level-yield method over the life of each advance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In July 2001, the FASB issued two new pronouncements: SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations completed after June 30, 2001 and also
specifies the types of acquired intangible assets that are required to be
recognized and reported separately from goodwill and those acquired
intangible assets that are required to be included in goodwill. SFAS No.
142 requires that goodwill no longer be amortized, but instead be tested
for impairment at least annually. Additionally, SFAS No. 142 requires
recognized intangible assets to be amortized over their respective
estimated useful lives and reviewed for impairment in accordance with SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, as superseded by SFAS No. 144. Any
recognized intangible asset determined to have an indefinite useful life
will not be amortized, but instead must be tested for impairment until its
life is determined to no longer be indefinite. We adopted the new rules on
accounting for goodwill and other intangible assets on January 1, 2002.
|
| |  | At adoption and at December 31, 2002, we have a $100 intangible asset
related to the trade name associated with the purchase of Harrington Bank
of Kansas that will no longer be amortized and is subject to annual
impairment testing. During the twelve months ended December 31, 2002, we
evaluated our existing intangible assets to make any necessary
reclassifications in order to conform to the new requirements. We
reassessed the useful life and the residual value of our intangible assets
and concluded that the useful life will remain the same and no amortization
adjustment was necessary. As of December 31, 2002, intangible assets that
continue to be subject to amortization
include core deposits of $1,311 (net of $626 of accumulated amortization).
Estimated amortization expenses for the five succeeding fiscal years
follows:                                                                                                                                                                                                                                                                                                                                                                                                     

|     |  |  |     | 
|---- |  |  | --- | 
|2003 |  |  | 194 | 
|2004 |  |  | 194 | 
|2005 |  |  | 194 | 
|2006 |  |  | 194 | 
|2007 |  |  | 177 | 

F-38



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| |  | Furthermore, in connection with the transitional impairment evaluation,
SFAS No. 142 requires us to perform an assessment of whether there was an
indication that goodwill was impaired as of January 1, 2002. The
transitional assessment consisted of the following steps: (1) identifying
reporting units, (2) determining the carrying value of each reporting unit
to be assigned the assets and liabilities, including the existing goodwill
and intangible assets to those reporting units, and (3) determining the
fair value of each reporting unit. The transitional goodwill impairment
test was completed during the nine months ended September 30, 2002. No
transitional impairment loss was recorded by the Company resulting from the
adoption of this standard.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | The following table sets forth a reconciliation of net income and earnings
per share information, for the years ended December 31, 2002, 2001 and
2000:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                                |                       |   |             |      |      |   |       |      |  |   |       |      | 
|------------------------------- | --------------------- | - | ----------- | ---- | ---- | - | ----- | ---- |  | - | ----- | ---- | 
|                                |                       |   | December 31
|                                |                       |   |            
|                                |                       |   | 2002        |      | 2001 |   | 2000 
|Reported net income             |                       | $ | 5,045       |      |      | $ | 3,802 |      |  | $ | 2,581 |     
|Add back: Goodwill amortization |                       |   |             |      |      |   | 22    |      |  |   | 20    |     
|                                |                       |   |             |      |      |   |       |      |  |   |       |     
|Adjusted net income             |                       | $ | 5,045       |      |      | $ | 3,824 |      |  | $ | 2,601 |     
|                                |                       |   |             |      |      |   |       |      |  |   |       |     
|Basic earnings per share:       |                       |   |             |      |      |   |       |      |  |   |       |     
|                                | Reported net income   |   | $           | 1.44 |      |   | $     | 1.14 |  |   | $     | 0.79 | 
|                                | Goodwill amortization |   |             |      |      |   |       | 0.01 |  |   |       | 0.01 | 
|                                |                       |   |             |      |      |   |       |      |  |   |       |     
|Adjusted net income             |                       | $ | 1.44        |      |      | $ | 1.15  |      |  | $ | 0.80  |     
|                                |                       |   |             |      |      |   |       |      |  |   |       |     
|Diluted earnings per share:     |                       |   |             |      |      |   |       |      |  |   |       |     
|                                | Reported net income   |   | $           | 1.39 |      |   | $     | 1.12 |  |   | $     | 0.77 | 
|                                | Goodwill amortization |   |             |      |      |   |       | 0.01 |  |   |       | 0.01 | 
|                                |                       |   |             |      |      |   |       |      |  |   |       |     
|Adjusted net income             |                       | $ | 1.39        |      |      | $ | 1.13  |      |  | $ | 0.78  |     
|                                |                       |   |             |      |      |   |       |      |  |   |       |     



|18. |  | 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. For the plan years ended December 31, 2002, 2001 and
2000, the Company contributed $332, $273, and $191 respectively.
|   
|    |  | F-39                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 



---



##### Table of Contents



|19. |  | PARENT COMPANY ONLY FINANCIAL INFORMATION  
|--- |  | -------------------------------------------
|   
|    |  | Condensed Statements of Financial Condition

|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |        | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------ | ------ | ---- | ------ | ------ | ------ | 
|                                     |                                                                                                                                                                         |                            |        | December 31,
|                                     |                                                                                                                                                                         |                            |        |             
|                                     |                                                                                                                                                                         |                            |        | 2002         |        | 2001
|ASSETS                               |                                                                                                                                                                         |                            |        |              |        |      |        |       
|                                     | Cash and cash equivalents                                                                                                                                               |                            | $      | 585          |        |      | $      | 473    |       
|                                     | Trading account assets                                                                                                                                                  |                            |        | 126          |        |      |        | 140    |       
|                                     | Investment in subsidiaries                                                                                                                                              |                            |        | 53,081       |        |      |        | 47,460 |       
|                                     | Other assets                                                                                                                                                            |                            |        | 406          |        |      |        | 314    |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |       
|TOTAL                                |                                                                                                                                                                         | $                          | 54,198 |              |        | $    | 48,387 |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                         |                            |        |              |        |      |        |       
|Liabilities:                         |                                                                                                                                                                         |                            |        |              |        |      |        |       
|                                     | Note payable                                                                                                                                                            |                            | $      | 11,300       |        |      | $      | 18,000 |       
|                                     | Accounts payable and other liabilities                                                                                                                                  |                            |        | 426          |        |      |        | 243    |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |       
|                                     |                                                                                                                                                                         | Total liabilities          |        |              | 11,726 |      |        |        | 18,243 | 
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |       
|Stockholders Equity:                |                                                                                                                                                                         |                            |        |              |        |      |        |       
|                                     | Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued and outstanding                                                                               |                            |        |              |        |      |        |        |       
|                                     | Common stock, $.01 par value; 9,000,000 shares authorized;
4,327,951 shares issued and outstanding as of December 31,
2002 and 3,354,336 shares as of December 31, 2001 |                            |        | 43           |        |      |        | 34     |       
|                                     | Additional paid-in capital                                                                                                                                              |                            |        | 30,641       |        |      |        | 20,305 |       
|                                     | Retained earnings                                                                                                                                                       |                            |        | 13,795       |        |      |        | 9,175  |       
|                                     | Accumulated other comprehensive income, net of tax                                                                                                                      |                            |        | (2,007       | )      |      |        | 630    |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |       
|                                     |                                                                                                                                                                         | Total stockholders equity |        |              | 42,472 |      |        |        | 30,144 | 
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |       
|TOTAL                                |                                                                                                                                                                         | $                          | 54,198 |              |        | $    | 48,387 |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |       

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##### Table of Contents





| |  | Condensed Statements of Earnings
| |  | --------------------------------

|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                    |  | Year Ended December 31,
|                                                    |  |                        
|                                                    |  | 2002                    |        | 2001 |  | 2000
|Interest income                                     |  |                         |        |      |  | $    | 1      |   |  | $ | 1      |  
|Interest expense                                    |  | $                       | (680   | )    |  |      | (692   | ) |  |   | (884   | )
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|Net interest income                                 |  |                         | (680   | )    |  |      | (691   | ) |  |   | (883   | )
|Other income                                        |  |                         | 22     |      |  |      | 281    |   |  |   | (67    | )
|Other expense                                       |  |                         | (722   | )    |  |      | (594   | ) |  |   | (440   | )
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|Loss before income taxes and equity in subsidiaries |  |                         | (1,380 | )    |  |      | (1,004 | ) |  |   | (1,390 | )
|Income tax benefit                                  |  |                         | 568    |      |  |      | 413    |   |  |   | 572    |  
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|Loss before equity in subsidiary                    |  |                         | (812   | )    |  |      | (591   | ) |  |   | (818   | )
|Equity in net earnings of subsidiary                |  |                         | 5,857  |      |  |      | 4,393  |   |  |   | 3,399  |  
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|Net income                                          |  | $                       | 5,045  |      |  | $    | 3,802  |   |  | $ | 2,581  |  
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  

F-41



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| |  | Condensed Statements of Cash Flows
| |  | ----------------------------------

|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |   |        |      |  
|---------------------------------------------------- | --------------------------------------------- | - | ------------------------------------------------------------- | ----------------------------------------- | - | ----------------------- | ---- | ------ | - | ------ | ---- | ------ | - | ------ | ---- | -
|                                                     |                                               |   |                                                               |                                           |   | Year Ended December 31,
|                                                     |                                               |   |                                                               |                                           |   |                        
|                                                     |                                               |   |                                                               |                                           |   | 2002                    |      | 2001   |   | 2000  
|Cash Flows from Operating Activities:                |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |       
|                                                     | Net income                                    |   | $                                                             | 5,045                                     |   |                         | $    | 3,802  |   |        | $    | 2,581  |  
|                                                     | Adjustments:                                  |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  
|                                                     |                                               |   | Equity in net undistributed earnings of subsidiary            |                                           |   | (5,857                  | )    |        |   | (4,393 | )    |        |   | (3,399 | )   
|                                                     |                                               |   | Sale of trading assets                                        |                                           |   |                        |      |        |   | 330    |      |        |   |       |     
|                                                     |                                               |   | Purchase of trading assets                                    |                                           |   |                         |      |        |   |        |      |        |   | (480   | )   
|                                                     |                                               |   | (Increase) decrease in unrealized gain in trading
assets      |                                           |   | 14                      |      |        |   | (78    | )    |        |   | 88     |     
|                                                     |                                               |   | Amortization and depreciation                                 |                                           |   | (1                      | )    |        |   | 20     |      |        |   | 5      |     
|                                                     |                                               |   | (Increase) decrease in other assets                           |                                           |   | (91                     | )    |        |   | (22    | )    |        |   | 52     |     
|                                                     |                                               |   | (Decrease) increase in accounts payable and
other liabilities |                                           |   | 182                     |      |        |   | (55    | )    |        |   | 479    |     
|                                                     |                                               |   | Other                                                         |                                           |   | 124                     |      |        |   | 106    |      |        |   |       |     
|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  
|                                                     |                                               |   |                                                               | Net cash used in operating activities     |   |                         | (584 | )      |   |        | (290 | )      |   |        | (674 | )
|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  
|Cash Flows from Investing Activities:                |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |       
|                                                     | Purchase of furniture, fixtures and equipment |   |                                                               |                                          |   |                         |      |       |   |        |      | (37    | )
|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  
|                                                     |                                               |   |                                                               | Net cash used in investing activities     |   |                         |     |        |   |        |     |        |   |        | (37  | )
|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  
|Cash Flows from Financing Activities:                |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |       
|                                                     | Net proceeds from initial public offering     |   |                                                               | 10,221                                    |   |                         |      |        |   |        |      |        |  
|                                                     | Net proceeds from exercise of stock options   |   |                                                               |                                          |   |                         |      | 628    |   |        |      |        |  
|                                                     | Cash contribution to subsidiary               |   |                                                               | (5,400                                    | ) |                         |      | (9,578 | ) |        |      | (1,000 | )
|                                                     | Cash dividends received from Bank             |   |                                                               | 3,000                                     |   |                         |      | 500    |   |        |      | 1,500  |  
|                                                     | Cash dividends paid                           |   |                                                               | (425                                      | ) |                         |      | (353   | ) |        |      | (985   | )
|                                                     | Increase (decrease) in notes payable          |   |                                                               | (6,700                                    | ) |                         |      | 9,000  |   |        |      | 1,335  |  
|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  
|                                                     |                                               |   |                                                               | Net cash provided by financing activities |   |                         | 696  |        |   |        | 197  |        |   |        | 850  |  
|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  
|Net increase (decrease) in cash and cash equivalents |                                               |   | 112                                                           |                                           |   |                         | (93  | )      |   |        | 139  |       
|Cash and cash equivalents, beginning of year         |                                               |   | 473                                                           |                                           |   |                         | 566  |        |   |        | 427  |       
|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  
|Cash and cash equivalents, end of year               |                                               | $ | 585                                                           |                                           |   | $                       | 473  |        |   | $      | 566  |       
|                                                     |                                               |   |                                                               |                                           |   |                         |      |        |   |        |      |        |  

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|20. |  | QUARTERLY FINANCIAL INFORMATION
|--- |  | -------------------------------

|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|------------------------------------------------- |  | -------------- | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ |  |  | - | ------ | 
|                                                  |  | Quarters Ended
|                                                  |  |               
|                                                  |  | December 31,   |        | September 30, |  | June 30, |        | March 31,
|                                                  |  |                |        |               |  |          |        |          
|2002                                              |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Interest income                                   |  | $              | 10,942 |               |  | $        | 11,101 |           |  | $ | 10,654 |  |  | $ | 10,796 | 
|Interest expense                                  |  |                | 5,342  |               |  |          | 5,410  |           |  |   | 5,300  |  |  |   | 5,869  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net interest income                               |  |                | 5,600  |               |  |          | 5,691  |           |  |   | 5,354  |  |  |   | 4,927  | 
|Provision for loan losses                         |  |                | 66     |               |  |          | 50     |           |  |   | 75     |  |  |   | 200    | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net interest income after provision for
loan loss |  |                | 5,534  |               |  |          | 5,641  |           |  |   | 5,279  |  |  |   | 4,727  | 
|Noninterest income                                |  |                | 1,111  |               |  |          | 226    |           |  |   | 265    |  |  |   | 548    | 
|Noninterest expense                               |  |                | 4,278  |               |  |          | 3,600  |           |  |   | 3,446  |  |  |   | 3,433  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Income before provision for income taxes          |  |                | 2,367  |               |  |          | 2,267  |           |  |   | 2,098  |  |  |   | 1,842  | 
|Provision for income taxes                        |  |                | 978    |               |  |          | 929    |           |  |   | 865    |  |  |   | 757    | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net income                                        |  | $              | 1,389  |               |  | $        | 1,338  |           |  | $ | 1,233  |  |  | $ | 1,085  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Basic earnings per share                          |  | $              | 0.35   |               |  | $        | 0.40   |           |  | $ | 0.37   |  |  | $ | 0.32   | 
|Diluted earnings per share                        |  | $              | 0.34   |               |  | $        | 0.38   |           |  | $ | 0.36   |  |  | $ | 0.31   | 
|2001                                              |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Interest income                                   |  | $              | 10,658 |               |  | $        | 10,601 |           |  | $ | 10,102 |  |  | $ | 9,807  | 
|Interest expense                                  |  |                | 6,591  |               |  |          | 6,539  |           |  |   | 6,392  |  |  |   | 6,295  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net interest income                               |  |                | 4,067  |               |  |          | 4,062  |           |  |   | 3,710  |  |  |   | 3,512  | 
|Provision for loan losses                         |  |                |       |               |  |          |       |           |  |   | 1      |  |  |   |       | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net interest income after provision for
loan loss |  |                | 4,067  |               |  |          | 4,062  |           |  |   | 3,709  |  |  |   | 3,512  | 
|Noninterest income                                |  |                | 431    |               |  |          | (92    | )         |  |   | 1,020  |  |  |   | 142    | 
|Noninterest expense                               |  |                | 2,888  |               |  |          | 2,485  |           |  |   | 2,644  |  |  |   | 2,300  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Income before provision for income taxes          |  |                | 1,610  |               |  |          | 1,485  |           |  |   | 2,085  |  |  |   | 1,354  | 
|Provision for income taxes                        |  |                | 674    |               |  |          | 621    |           |  |   | 869    |  |  |   | 568    | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net income                                        |  | $              | 936    |               |  | $        | 864    |           |  | $ | 1,216  |  |  | $ | 786    | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Basic earnings per share                          |  | $              | 0.28   |               |  | $        | 0.26   |           |  | $ | 0.36   |  |  | $ | 0.24   | 
|Diluted earnings per share                        |  | $              | 0.27   |               |  | $        | 0.26   |           |  | $ | 0.36   |  |  | $ | 0.23   | 

******

(23571)

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|Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
|---------------------------------------------------------------------------------------------
|                                                                                             
|None.                                                                                        

PART III



|Item 10. Directors and Executive Officer of the Registrant.
|-----------------------------------------------------------

This information is incorporated by reference to our definitive proxy statement
for our 2003 Annual Meeting of Stockholders (Proxy Statement).



|Item 11. Executive Compensation.
|--------------------------------

This information is incorporated by reference to our Proxy Statement.



|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 to our Proxy Statement.

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, 2002.

|                                                           |       |     |                   |         |                   |     |                         |      |                         |  |         |         | 
|---------------------------------------------------------- | ----- | --- | ----------------- | ------- | ----------------- | --- | ----------------------- | ---- | ----------------------- |  | ------- | ------- | 
|                                                           |       |     | Number of         |         |                   |     |                         |      | Number of securities   
|                                                           |       |     | securities to be  |         |                   |     |                         |      | remaining
available for
|                                                           |       |     | issued upon       |         | Weighted-average  |     | future
issuance under  
|                                                           |       |     | exercise of       |         | exercise price of |     | equity compensation    
|                                                           |       |     | outstanding       |         | outstanding       |     | plans (excluding       
|                                                           |       |     | options, warrants |         | options, warrants |     | securities reflected in
|                                                           |       |     | and rights        |         | and rights        |     | column
(a))            
|Plan category                                              |       | (a) |                   | (b)     |                   | (c)
|                                                           |       |     |                   |         |                   |    
|Equity compensation
plans approved by
security holders     |       |     | 423,825           |         |                   | $   | 7.75                    |      |                         |  | 220,867 |        
|Equity compensation
plans not approved
by security holders |       |     |                  |         |                   |     |                        |      |                         |  |        |        
|                                                           |       |     |                   |         |                   |     |                         |      |                         |  |         |        
|                                                           | Total |     |                   | 423,825 |                   |     | $                       | 7.75 |                         |  |         | 220,867 | 
|                                                           |       |     |                   |         |                   |     |                         |      |                         |  |         |        



|Item 13. Certain Relationships and Related Transactions.
|--------------------------------------------------------

This information is incorporated by reference to our Proxy Statement.



|Item 14. Controls and Procedures.
|---------------------------------

Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along

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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-14. 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 controls or in other factors which could
significantly affect these controls subsequent to the date we carried out our
evaluation.

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 Senior Vice President and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.



|Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
|--------------------------------------------------------------------------
|                                                                          
|(a)                                                                       

(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:

Independent
Auditors Report.

Consolidated
Statements of Financial Condition as of December 31, 2002 and 2001.

Consolidated
Statements of Earnings for the Years Ended December 31, 2002, 2001 and 2000.

Consolidated
Statements of Stockholders Equity for the Years Ended December 31, 2002, 2001 and 2000.

Consolidated Statements of Cash Flows for the Years Ended December 31,
2002, 2001 and 2000.

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.

(3) 
The following exhibits are filed as part of this Form 10-K, and this
list includes the Exhibit Index.

|            |  |                                                                          
|----------- |  | -------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                              
|            |  |                                                                          
|3.1         |  | Certificate of Incorporation of Harrington West Financial Group, Inc. (1)
|            |  |                                                                          
|3.1.1       |  | Certificate of Amendment to Certificate of Incorporation. (1)            
|            |  |                                                                          
|3.1.2       |  | Second Certificate of Amendment to Certificate of Incorporation. (1)     
|            |  |                                                                          
|3.2         |  | Bylaws of Harrington West Financial Group, Inc. (1)                      

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|       |  |                                                                                                                                                                                                                                                  
|------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.2.1  |  | Amendment to Bylaws. (1)                                                                                                                                                                                                                         
|       |  |                                                                                                                                                                                                                                                  
|4.0    |  | Specimen stock certificate of Harrington West Financial Group, Inc. (1)                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                  
|10.1   |  | Harrington West Financial Group 1996 Stock Option Plan, as amended. (1)                                                                                                                                                                          
|       |  |                                                                                                                                                                                                                                                  
|10.2   |  | Amended and Restated Credit Agreement dated as of October 30, 1997 among
Harrington West Financial Group, Inc., the lenders party thereto and Harris
Trust and Savings Bank, as amended on October 1, 1999, May 2, 2000 and
November 1, 2001. (1)
|       |  |                                                                                                                                                                                                                                                  
|10.2.1 |  | Fourth Amendment to Amended and Restated Credit Agreement. (1)                                                                                                                                                                                   
|       |  |                                                                                                                                                                                                                                                  
|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)                                                                                              

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|     |  |                                                                                                                                                                                                                        
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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. (1)
|     |  |                                                                                                                                                                                                                        
|10.7 |  | Stock Purchase Agreement by and between Harrington Bank, FSB and Los
Padres Bank, FSB dated as of May 30, 2001. (1)                                                                                                    
|     |  |                                                                                                                                                                                                                        
|21.0 |  | Subsidiaries of the registrant. (1)                                                                                                                                                                                    



| |    
| | ---
| | (1)

(b) Reports on Form 8-K

The Registrant filed a Current Report on Form 8-K with the SEC on November
12, 2002, announcing the closing of its initial public offering of common
stock.

The Registrant filed a Current Report on Form 8-K with the SEC on December
19, 2002, containing the 906 certification executed by the Registrants Chief
Executive Officer and Chief Financial Officer in connection with the filing of
the Registrants Form 10-Q for the period ended September 30, 2002.

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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 18, 2003 |  | By:                                   | /s/   CRAIG
J. CERNY                                            
|               |  |                                       | Craig J. Cerny
Chairman of the Board
and Chief Executive Officer
|              
|March 18, 2003 |  | By:                                   | /s/   SEAN
CALLOW                                               
|               |  |                                       | Sean Callow
Senior Vice President
and 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. CERNYCraig J. Cerny                     |  | Chairman of the Board and Chief Executive Officer |  | March 18, 2003
|                                                      
|/s/   SEAN CALLOWSean Callow                           |  | Senior Vice President and Chief Financial Officer |  | March 18, 2003
|                                                       |  |                                                   |  |               
|/s/   WILLIAM W. PHILLIPS, JR.William W. Phillips, Jr. |  | President and Director                            |  | March 18, 2003
|                                                      
|/s/  STANLEY J. KONStanley J. Kon                      |  | Director                                          |  | March 18, 2003
|                                                      
|/s/   JOHN J. MCCONNELLJohn J. McConnell               |  | Director                                          |  | March 18, 2003
|                                                      
|/s/   PAUL O. HALMEPaul O. Halme                       |  | Director                                          |  | March 18, 2003
|                                                      
|/s/   WILLIAM D.
ROSSWilliam D. Ross                   |  | Director                                          |  | March 18, 2003

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CERTIFICATIONS

I, Craig J. Cerny, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Harrington
West Financial Group, Inc.;                                                                                                                                                                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present
in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                   
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                               
|

| |  |  | (a) | Designed such disclosure controls and
procedures to ensure that material information relating
to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
annual report is being prepared;
| |  |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) | Evaluated the effectiveness of the
registrant s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                 
|
| |  |  | (c) | Presented in this annual report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of
the Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and to the audit committee of the registrants board of
directors (or persons performing the equivalent function):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| |  |  | (a) | All significant deficiencies in the
design or operation of internal controls which could
adversely affect the registrants ability to record,
process, summarize and report financial data and have
identified for the registrants auditors any material
weaknesses in internal controls;
| |  |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) | Any fraud, whether or not material,
that involves management or other employees who have a
significant role in the registrants internal controls;
and                                                                                                                                    

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| | 6. |  | The registrants other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 18, 2003



| | /s/  CRAIG J. CERNY
Craig J. Cerny, Chief Executive Officer
| | -----------------------------------------------------------

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I, Sean Callow, certify that:



| | 1. |  | I have reviewed this annual report on Form 10-K of Harrington
West Financial Group, Inc.;                                                                                                                                                                                                                               
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | 2. |  | Based on my knowledge, this annual report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this annual report;
|
| | 3. |  | Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this annual report;                
|
| | 4. |  | The registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:                                                                                               
|

| |  |  | (a) | Designed such disclosure controls and
procedures to ensure that material information relating
to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
annual report is being prepared;
| |  |  | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) | Evaluated the effectiveness of the
registrant s disclosure controls and procedures as of a
date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and                                                                                                 
|
| |  |  | (c) | Presented in this annual report our
conclusions about the effectiveness of the disclosure
controls and procedures based on our evaluation as of
the Evaluation Date;                                                                                                                        
|

| | 5. |  | The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants
auditors and to the audit committee of the registrants board of
directors (or persons performing the equivalent function):
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|

| |  |  | (a) | All significant deficiencies in the
design or operation of internal controls which could
adversely affect the registrants ability to record,
process, summarize and report financial data and have
identified for the registrants auditors any material
weaknesses in internal controls;
| |  |  | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | (b) | Any fraud, whether or not material,
that involves management or other employees who have a
significant role in the registrants internal controls;
and                                                                                                                                    

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| | 6. |  | The registrants other certifying officers and I have
indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the date
of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Date: March 18, 2003



| | /s/  SEAN CALLOW
Sean Callow,
Senior Vice President and
        Chief Financial Officer
| | ---------------------------------------------------------------------------------------

73