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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K x     ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGEACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2003
 OR o     TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
 Commission File No.: 000-50066 HARRINGTON WEST FINANCIAL GROUP, INC. 
  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. Yes x No o Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. x Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes o No x The aggregate value of the 3,616,791shares of Common Stock of the Registrant
issued and outstanding, which excludes 711,160 shares held by all directors and
executive officers of the Registrant as a group, was approximately $37.3
million based on the last closing sale price of a share of Common Stock of
$10.324 on June 30, 2003. Number of shares of Common Stock outstanding as of March 2, 2004: 5,206,141 DOCUMENTS INCORPORATED BY REFERENCE The registrant hereby incorporates its proxy statement for its 2004 annual
meeting of stockholders in Part III, items 10-13. 1




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|                             |                                                                                                         |                                                 |  |  |  |  |  | 
|---------------------------- | ------------------------------------------------------------------------------------------------------- | ----------------------------------------------- |  |  |  |  |  | 
|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                                                    
|INDEPENDENT AUDITORS REPORT
|                             |                                                                                                         | CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 
|                             |                                                                                                         | CONSOLIDATED STATEMENTS OF EARNINGS            
|                             |                                                                                                         | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|                             |                                                                                                         | CONSOLIDATED STATEMENTS OF CASH FLOWS          
|                             |                                                                                                         | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS     
|                             | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.          
|                             | Item 9a. Controls and Procedures                                                                       
|PART III                    
|                             | Item 10. Directors and Executive Officer of the Registrant                                             
|                             | Item 11. Executive Compensation                                                                        
|                             | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                             | Item 13. Certain Relationships and Related Transactions                                                
|                             | Item 14. Principal Accountant Fees and Services                                                        
|Part IV                     
|                             | Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K                              
|SIGNATURES                  
|EXHIBIT 14                  
|EXHIBIT 23                  
|EXHIBIT 31.1                
|EXHIBIT 31.2                
|EXHIBIT 32                  



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PART I Cautionary Statement Regarding Forward-Looking Statements. This Form 10-K contains and incorporates by reference forward-looking
statements about our financial condition, results of operations and business.
These statements may include statements regarding projected performance for
future periods. You can find many of these statements by looking for words
such as believes, expects, anticipates, estimates, intends, will,
plans or similar words or expressions. These forward-looking statements
involve substantial risks and uncertainties. Some of the factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements include, but are not limited to, the following:  
    
    we may experience higher defaults on our loan portfolio than we expect;
    
    changes in managements estimate of the adequacy of the allowance for loan losses;
    
    changes in managements valuation of our mortgage-backed and
related securities portfolio and interest rate contracts;
    
    increases in competitive pressure among financial
institutions;
    
    general economic conditions, either nationally or locally in
areas in which we conduct or will conduct our operations, or
conditions in financial markets may be less favorable than we
currently anticipate;
    
    our net income from operations may be lower than we expect;
    
    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 2




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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, located
in central California and Scottsdale, Arizona, and its division in the Kansas
City metropolitan area, Harrington Bank. Los Padres Bank provides an array of
financial products and services for businesses and retail customers through its
twelve full-service offices. At December 31, 2003, we had consolidated total
assets of $974.8 million, total deposits of $570.7 million and stockholders
equity of $48.1 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 with a tenth office planned to open in Ventura,
California in the spring of 2004, two offices in the Kansas City metropolitan
area and a 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 Company, 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. 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. 3




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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 Los
Padres Banks wholly owned subsidiary, 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 an office in the Ventura, California
area in the second quarter of 2004, and we are currently seeking
expansion opportunities in Arizona. 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 a 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 4




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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, 2003, Los Padres Banks net loan portfolio
totaled $518.5 million, representing approximately 53.2% of our $974.8 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, 2003, 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. 5




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The following table sets forth the composition of our loan portfolio by
type of loan at the dates indicated. December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent

    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Real estate loans:Single-family
    
    $
    93,725
    
    
    
    17.9
    %
    
    $
    116,714
    
    
    
    25.8
    %
    
    $
    156,150
    
    
    
    34.5
    %
    
    $
    200,373
    
    
    
    50.2
    %
    
    $
    206,572
    
    
    
    53.4
    %Multi-family
    
    
    82,090
    
    
    
    15.7
    
    
    
    71,856
    
    
    
    15.9
    
    
    
    69,584
    
    
    
    15.4
    
    
    
    66,005
    
    
    
    16.6
    
    
    
    60,746
    
    
    
    15.7Commercial
    
    
    234,606
    
    
    
    44.8
    
    
    
    183,264
    
    
    
    40.5
    
    
    
    156,431
    
    
    
    34.5
    
    
    
    108,820
    
    
    
    27.3
    
    
    
    93,803
    
    
    
    24.2Construction(1)
    
    
    30,835
    
    
    
    5.9
    
    
    
    19,666
    
    
    
    4.4
    
    
    
    20,235
    
    
    
    4.5
    
    
    
    13,079
    
    
    
    3.3
    
    
    
    20,814
    
    
    
    5.4Land acquisition and development
    
    
    8,312
    
    
    
    1.6
    
    
    
    14,948
    
    
    
    3.3
    
    
    
    7,889
    
    
    
    1.7
    
    
    
    2,511
    
    
    
    0.6
    
    
    
    3,525
    
    
    
    0.9Commercial and industrial loans
        
    56,943
    
    
    
    10.8
    
    
    
    27,676
    
    
    
    6.1
    
    
    
    30,838
    
    
    
    6.8
    
    
    
    3,969
    
    
    
    1.0
    
    
    
    
    
    
    
    Consumer loans
    
    
    16,612
    
    
    
    3.1
    
    
    
    17,565
    
    
    
    3.9
    
    
    
    11,107
    
    
    
    2.5
    
    
    
    3,265
    
    
    
    0.8
    
    
    
    1,088
    
    
    
    0.3Other loans (2)
    
    
    1,035
    
    
    
    0.2
    
    
    
    503
    
    
    
    0.1
    
    
    
    539
    
    
    
    0.1
    
    
    
    753
    
    
    
    0.2
    
    
    
    502
    
    
    
    0.1Total loans receivable
    
    
    524,158
    
    
    
    100.0
    %
    
    
    452,192
    
    
    
    100.0
    %
    
    
    452,773
    
    
    
    100.0
    %
    
    
    398,775
    
    
    
    100.0
    %
    
    
    387,050
    
    
    
    100.0
    %Less:Allowance for loan losses
    
    
    (4,587
    )
    
    
    
    
    
    
    (3,797
    )
    
    
    
    
    
    
    (3,736
    )
    
    
    
    
    
    
    (3,150
    )
    
    
    
    
    
    
    (3,112
    )Net deferred loan fees
    
    
    (1,394
    )
    
    
    
    
    
    
    (1,332
    )
    
    
    
    
    
    
    (1,102
    )
    
    
    
    
    
    
    (485
    )
    
    
    
    
    
    
    (258
    )Net premiums
    
    
    319
    
    
    
    
    
    
    
    987
    
    
    
    
    
    
    
    1,774
    
    
    
    
    
    
    
    397
    
    
    
    
    
    
    
    543(5,662
    )
    
    
    
    
    
    
    (4,142
    )
    
    
    
    
    
    
    (3,064
    )
    
    
    
    
    
    
    (3,238
    )
    
    
    
    
    
    
    (2,827
    )Loans receivable, net
    
    $
    518,496
    
    
    
    
    
    
    $
    448,050
    
    
    
    
    
    
    $
    449,709
    
    
    
    
    
    
    $
    395,537
    
    
    
    
    
    
    $
    384,223
   (1)
    
    Includes loans secured by residential and commercial properties. At
December 31, 2003, we had $14.4 million of construction loans secured by
residential properties, $6.7 of land and development and $9.7 million of
construction loans secured by commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer line of
credit loans. 6




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The following table sets forth certain information at December 31, 2003,
regarding the dollar amount of loans maturing in our total loan portfolio based
on the contractual terms to maturity or scheduled amortization, but does not
include potential prepayments. Loans having no stated schedule of repayments
and no stated maturity are reported as due in one year or less. Due 5 orDue 1-5
    
    more yearsyears after
    
    afterDue 1 year
    
    December 31,
    
    December 31,or less
    
    2003
    
    2003
    
    Total(In Thousands)Real estate loans:Single-family residential
    
    $
    1
    
    
    $
    1,423
    
    
    $
    92,301
    
    
    $
    93,725Multi-family residential
    
    
    438
    
    
    
    9,164
    
    
    
    72,488
    
    
    
    82,090Commercial
    
    
    6,830
    
    
    
    48,050
    
    
    
    179,726
    
    
    
    234,606Construction(1)
    
    
    12,433
    
    
    
    3,256
    
    
    
    15,146
    
    
    
    30,835Land acquisition and development
    
    
    5,259
    
    
    
    3,053
    
    
    
    
    
    
    
    8,312Commercial and industrial loans
    
    
    24,199
    
    
    
    24,286
    
    
    
    8,458
    
    
    
    56,943Consumer loans
    
    
    28
    
    
    
    645
    
    
    
    15,939
    
    
    
    16,612Other loans (2)
    
    
    994
    
    
    
    
    
    
    
    41
    
    
    
    1,035Total
    
    $
    50,182
    
    
    $
    89,877
    
    
    $
    384,099
    
    
    $
    524,158
   (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. 7




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The following table sets forth the dollar amount of total loans due after
one year from December 31, 2003, as shown in the preceding table, which have
fixed interest rates or which have floating or adjustable interest rates. Floating oradjustable-Fixed rate
    
    -rate
    
    Total(In Thousands)Real estate loans:Single-family residential
    
    $
    46,865
    
    
    $
    46,859
    
    
    $
    93,724Multi-family residential
    
    
    55,070
    
    
    
    26,582
    
    
    
    81,652Commercial
    
    
    149,430
    
    
    
    78,346
    
    
    
    227,776Construction (1)
    
    
    14,586
    
    
    
    3,816
    
    
    
    18,402Land acquisition and development
    
    
    
    
    
    
    3,053
    
    
    
    3,053Commercial and industrial loans
    
    
    21,990
    
    
    
    10,753
    
    
    
    32,743Consumer loans
    
    
    723
    
    
    
    15,862
    
    
    
    16,585Other loans (2)
    
    
    41
    
    
    
    
    
    
    
    41Total
    
    $
    288,705
    
    
    $
    185,271
    
    
    $
    473,976
   (1)
    
    Includes loans secured by residential and commercial properties.(2)
    
    Includes loans collateralized by deposit accounts and consumer
lines of credit loans. Origination, Purchase and Sale of Loans.The lending activities of Los
Padres Bank are subject to the written, non-discriminatory underwriting
standards and loan origination procedures established by Los Padres Banks
board of directors and management. Loan originations are obtained by a variety
of sources, including referrals from real estate brokers, builders, existing
customers, walk-in customers and advertising. In its present marketing
efforts, Los Padres Bank emphasizes its community ties, customized personal
service, competitive rates and terms, and its efficient underwriting and
approval process. Loan applications are taken by lending personnel, and the
loan department supervises the obtainment of credit reports, appraisals and
other documentation involved with a loan. Property valuations are performed by
independent outside appraisers approved by Los Padres Banks board of
directors. Los Padres Bank requires title, hazard and, to the extent
applicable, flood insurance on all security property. Mortgage loan applications are initially processed by loan officers who do
not have approval authority. All real estate loans which are either at or
below the Federal Home Loan Mortgage Corporations (Freddie Mac), lending
limit and which meet all of the 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 8




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additional 10% of unimpaired capital and surplus may be made to a borrower
if the loans are fully secured by readily marketable securities. At December
31, 2003, Los Padres Banks regulatory limit on loans-to-one borrower was $9.5
million and its five largest loans or groups of loans-to-one borrower,
including related entities, aggregated $7.6 million, $7.2 million, $5.9
million, $5.9 million and $5.6 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, 2003. Single-Family Residential Real Estate Loans.Los Padres Bank has
historically concentrated its lending activities on the origination of loans
secured by first mortgage liens on existing single-family residences. The
single-family residential loans originated by Los Padres Bank are generally
made on terms, conditions and documentation which permit the sale of such loans
to Freddie Mac, the Federal National Mortgage Association (Fannie Mae), and
other institutional investors in the secondary market. Since January 2001, as
a means of generating additional fee income and in order to reflect
managements decision to emphasize holding higher spread earning loans in its
portfolio, Los Padres Bank has been brokering conforming permanent
single-family residential loans on behalf of third parties in order to generate
fee income. During the years ended December 31, 2003 and 2002, Los Padres Bank
brokered $99.4 million and $86.1 million, respectively, of such single-family
residential loans on behalf of third parties. Los Padres Bank still holds a portfolio of single-family residential
loans. Los Padres Bank will retain in its portfolio single-family residential
loans that, due to the nature of the collateral, carry higher risk adjusted
spreads. Examples of these types of loans include construction loans that have
converted into permanent loans and non-conforming single-family loans, whether
as a result of a non-owner occupied or rural property, balloon payment or other
exception from agency guidelines. At December 31, 2003, Los Padres Bank had
$93.7 million of single-family residential loans in its portfolio, which
amounted to 17.9% of total loans receivable as of such date. At December 31,
2003, $46.9 million or 50.0% of Los Padres Banks single-family residential
loans had fixed interest rates and $46.8 million or 50.0% 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, 2003, Los Padres Bank had an aggregate of $82.1 million and $234.6 million
invested in multi-family residential and commercial real estate loans,
respectively, or 15.7% and 44.8% of total loans receivable, respectively. Los Padres Banks multi-family residential loans are secured by
multi-family properties of five units or more, while Los Padres Banks
commercial real estate loans are secured by industrial, warehouse and
self-storage properties, office buildings, office and industrial condominiums,
retail space and strip shopping centers, mixed-use commercial properties,
mobile home parks, nursing homes, hotels and motels. Substantially all of
these properties are located in Los Padres Banks primary market areas. Los
Padres Bank typically originates commercial real estate loans for terms of up
to 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) 9




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##### Table of Contents



of 1.3:1 or more. It is also Los Padres Banks general policy to seek
additional protection to mitigate any weaknesses identified in the underwriting
process. Additional coverage may be provided through secondary collateral and
personal guarantees from the principals of the borrowers. Commercial real estate lending entails different and significant risks
when compared to single-family residential lending because such loans typically
involve large loan balances to single borrowers and because the payment
experience on such loans is typically dependent on the successful operation of
the project or the borrowers business. In addition, the balloon payment
features of these loans may require the borrower to either sell or refinance
the underlying property in order to make the payment. These risks can also be
significantly affected by supply and demand conditions in the local market for
apartments, offices, warehouses or other commercial space. Los Padres Bank
attempts to minimize its risk exposure by requiring that the loan does not
exceed established loan-to-value and debt coverage ratios, and by monitoring
the operation and physical condition of the collateral. Construction Loans.Los Padres Bank originates loans to finance the
construction of single-family residences and commercial properties located in
its primary market area. At December 31, 2003, Los Padres Banks construction
loans amounted to $30.8 million or 5.9% of total loans receivable, $14.4
million of which were for the construction of residential properties, $6.7
million of which were for land acquisition and the development of residential
properties, and $9.7 million of which were for the construction of commercial
properties. Los Padres Bank also originates land acquisition and development
loans that are loans for the acquisition of land and the development of
residential properties. At December 31, 2003, Los Padres Banks land
acquisition and development loans amounted to $8.3 million or1.6% 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 10




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##### Table of Contents



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. Commercial and Industrial Loans. Los Padres Bank is placing increased
emphasis on the origination of commercial business loans because of the higher
risk-adjusted spreads generally associated with these type of loans. During
the year ended December 31, 2003, Los Padres Bank originated $78.3 million of
commercial and industrial loans, as compared to $41.0 million and $13.6 million
as of December 31, 2002 and 2001, respectively. At December 31, 2003, Los
Padres Banks commercial and industrial loans amounted to $56.9 million or
10.8% 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 30 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, 2003, $17.6 million
or 3.3% 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, 2003, home equity lines
of credit and home improvement loans totaled $16.0 million or 90.9% of Los
Padres Banks total consumer and other loan portfolio and an aggregate of $21.4
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 $895,000 or 5.1% of Los Padres Banks total consumer and other loan
portfolio at December 31, 2003. 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, 2003, automobile and secured and unsecured personal line
of credit loans amounted to $731,000 or 4.1% of Los Padres Banks total
consumer and other loan portfolio. 11




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##### Table of Contents



Consumer loans generally have shorter terms and higher interest rates than
mortgage loans but generally involve more credit risk than mortgage loans
because of the type and nature of the collateral. In addition, consumer
lending collections are dependent on the borrowers continuing financial
stability, and thus are more likely to be adversely affected by job loss,
divorce, illness and personal bankruptcy. Los Padres Bank believes that the
generally higher yields earned on consumer loans compensate for the increased
credit risk associated with such loans and Los Padres Bank intends to continue
to offer consumer loans in order to provide a full range of services to its
customers. Asset Quality General. Los Padres Banks Internal Asset Review Committee, 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. 12




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##### Table of Contents



Non-performing loans are defined as non-accrual loans. Non-performing
assets are defined as non-performing loans and real estate acquired by
foreclosure or deed-in-lieu thereof. Troubled debt restructurings are defined
as loans which Los Padres Bank has agreed to modify by accepting below market
terms either by granting interest rate concessions or by deferring principal
and/or interest payments. The following table sets forth the amounts and
categories of our non-performing assets and troubled debt restructurings at the
dates indicated. At December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)Non-accruing loans:Single-family residential
    
    $
    
    
    
    $
    218
    
    
    $
    56
    
    
    $
    767
    
    
    $
    99Multi-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,592
    
    
    
    Commercial real estate
    
    
    
    
    
    
    
    
    
    
    348
    
    
    
    
    
    
    
    Land acquisition and development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    689Commercial and industrial
    
    
    8
    
    
    
    
    
    
    
    93
    
    
    
    
    
    
    
    Consumer and other
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    Total non-accruing loans
    
    
    12
    
    
    
    218
    
    
    
    497
    
    
    
    3,362
    
    
    
    788Total non-performing loans
    
    
    12
    
    
    
    218
    
    
    
    497
    
    
    
    3,362
    
    
    
    788Troubled debt restructurings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    700Real estate owned, net of reserves.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total non-performing assets and
troubled debt restructurings
    
    $
    12
    
    
    $
    218
    
    
    $
    497
    
    
    $
    3,362
    
    
    $
    1,488Total non-performing loans
and troubled debt
restructurings as a
percentage of total loans
    
    
    0.00
    %
    
    
    0.05
    %
    
    
    0.11
    %
    
    
    0.84
    %
    
    
    0.38
    %Total non-performing assets
and troubled debt
restructurings as a
percentage of total assets
    
    
    0.00
    %
    
    
    0.03
    %
    
    
    0.07
    %
    
    
    0.69
    %
    
    
    0.30
    %
 At December 31, 2003, we had $12,000 in non-performing loans, both 60-89
days delinquent, representing a decrease of $206,000 or 94.5% from December 31,
2002. At December 31, 2003, 2002 and 2001, we had two, two and three
non-performing loans, respectively. At December 31, 2003, we had no real
estate owned or troubled debt restructurings. The interest income that would have been recorded during the years ended
December 31, 2003, 2002 and 2001 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 $46,437, $43,496 and $41,195, respectively. The interest income
that was recorded during the years ended December 31, 2003, 2002 and 2001 with
respect to Los Padres Banks non-accruing loans at December 31, 2003, was $3,
$33 and $18, 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, 13




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##### Table of Contents



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, 2003, in addition to the
non-performing assets described above, Los Padres Bank had $6.2 million of
classified loans, $6.2 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, 2003, Los Padres Bank had
$4.0 million of loans that were designated special mention. Our classified and
special mention loans, in addition to the non-performing loans discussed above,
are the extent of the loans in our portfolio that give us some repayment
concern. 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. Where Los Padres
Bank has no or nominal actual charge-off data for certain loan types, industry
data and managements judgment is utilized as representative starting loss
rates. Formula allowance for large groups of smaller balance homogenous loans.
The allocated loan loss allowance for large groups of smaller balance
homogenous loans is focused on loss experience for the pool rather than on an
analysis of individual loans. Large groups of smaller balance homogenous loans
consist of consumer loans and single-family residential loans. The allowance
for groups of performing loans is based on historical losses over a ten year
period. 14




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##### Table of Contents



Unallocated Allowance. The unallocated allowance contains amounts that
are based on managements evaluation of conditions that are not directly
measured in the determination of the formula and specific allowances. The
evaluation of the inherent loss with respect to these conditions is subject to
a higher degree of uncertainty because they are not identified with specific
problem credits or portfolio segments. The conditions evaluated in connection
with the unallocated allowance include the following, which existed at the
balance sheet date:  
    
    trends in criticized and non-accrual assets;
    
    the levels and trends in charge-offs, recovery history and loan restructuring;
    
    changes in volumes and terms of the loan portfolio;
    
    changes in the effectiveness of the internal asset review process;
    
    changes in lending policies, procedures and practices;
    
    changes in the experience, ability and depth of lending management;
    
    changes in the national and local economic conditions; and
    
    the trend in local real estate values. Management and the Internal Asset Review Committee review these conditions
quarterly in discussion with our senior credit officers. To the extent that
any of these conditions is evidenced by a specifically identifiable problem
credit or portfolio segment as of the evaluation date, managements estimate of
the effect of such condition may be reflected as a specific allowance,
applicable to such credit or portfolio segment. Where any of these conditions
is not evidenced by a specifically identifiable problem credit or portfolio
segment as of the evaluation date, managements evaluation of the probable loss
related to such condition is reflected in the unallocated allowance. The allowance for loan losses is based upon estimates of probable losses
inherent in the loan portfolio. The actual losses can vary from the estimated
amounts. Our methodology includes several features that are intended to reduce
the differences between estimated and actual losses. The loss migration model
that is used to establish the loan loss factors is designed to be
self-correcting by taking into account our loss experience over prescribed
periods. Similarly, by basing the loan loss factors over a period reflective of
two business cycles, the methodology is designed to take our recent loss
experience for consumer and commercial and industrial loans into account.
Furthermore, based on managements judgment, our methodology permits
adjustments to any loss factor used in the computation of the formula allowance
for significant factors, which affect the collectibility of the portfolio as of
the evaluation date, but are not reflected in the loss factors. By assessing
the probable estimated losses inherent in the loan portfolio on a quarterly
basis, we are able to adjust specific and inherent loss estimates based upon
the most recent information that has become available. Although our management believes it uses the best information available to
establish the level of the allowance, there can be no assurance that additions
to such allowance will not be necessary in future periods. Furthermore,
various regulatory agencies, as an integral part of their examination process,
periodically review our valuation allowance. These agencies may require us to
increase the allowance, based on their judgments of the information available
to them at the time of the examination. The following table is an allocation of our allowance for loan losses as
of the dates presented: 15




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##### Table of Contents



At December 31,2003
    
    2002
    
    2001(In Thousands)Specific reserve
    
    $
    50
    
    
    $
    50
    
    
    $
    50Formula-non homogenous
    
    
    3,974
    
    
    
    3,131
    
    
    
    2,993Formula-homogenous
    
    
    474
    
    
    
    489
    
    
    
    522Unallocated
    
    
    89
    
    
    
    127
    
    
    
    171$
    4,587
    
    
    $
    3,797
    
    
    $
    3,736
 At December 31, 2003, the formula allowance for non-homogeneous loans
increased by $793,000 from December 31, 2002, 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 $15,000 and
$33,000 for the years ending December 31, 2003 and 2002, 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. Specific reserves are established for impaired loans in accordance with
SFAS No. 114, Accounting by Creditors for Impairment of a Loan. From
December 31, 2001 to December 31, 2003, the balance in specific reserves has
remained constant at $50,000 and relates to one single-family loan. 16




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##### Table of Contents



The following table sets forth the activity in our allowance for loan
losses for the periods indicated At and For the Year EndedDecember 31,2003
    
    2002
    
    2001
    
    2000
    
    1999(Dollars in Thousands)Balance at beginning of period
    
    $
    3,797
    
    
    $
    3,736
    
    
    $
    3,150
    
    
    $
    3,112
    
    
    $
    2,975Charge-offs:Real estate loansSingle-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13
    )Multi-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    (330
    )
    
    
    
    
    
    
    
    
    
    
    Consumer and other loans
    
    
    
    
    
    
    
    
    
    
    (15
    )
    
    
    (4
    )
    
    
    (5
    )Total charge-offs
    
    
    
    
    
    
    (330
    )
    
    
    (15
    )
    
    
    (4
    )
    
    
    (18
    )Net charge-offs
    
    
    
    
    
    
    (330
    )
    
    
    (15
    )
    
    
    (4
    )
    
    
    (18
    )Allowance for loan losses acquired
in connection with branch
purchase(1)
    
    
    
    
    
    
    
    
    
    
    600
    
    
    
    
    
    
    
    Provision (credit) for losses on loans
    
    
    790
    
    
    
    391
    
    
    
    1
    
    
    
    42
    
    
    
    155Balance at end of period
    
    $
    4,587
    
    
    $
    3,797
    
    
    $
    3,736
    
    
    $
    3,150
    
    
    $
    3,112Allowance for loan losses as a percent of
total loans outstanding
    
    
    0.88
    %
    
    
    0.83
    %
    
    
    0.83
    %
    
    
    0.79
    %
    
    
    0.80
    %Ratio of net charge-offs to average loans
outstanding
    
    
    
    %
    
    
    0.07
    %
    
    
    
    %
    
    
    
    %
    
    
    0.01
    %
   (1)
    
    In November 2001, we acquired from Harrington Bank, FSB the Shawnee
Mission, Kansas branch, along with related loans and deposits. 17




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##### Table of Contents



The following table sets forth information concerning the allocation of
our allowance for loan losses by loan category at the dates indicated. December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent of
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    Loans in
    
    
    
    
    
    Loans in
    
    
    
    
    
    Loans in
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    Each
    
    
    
    
    
    Each
    
    
    
    
    
    Each
    
    
    
    
    
    EachCategory to
    
    
    
    
    
    Category to
    
    
    
    
    
    Category to
    
    
    
    
    
    Category to
    
    
    
    
    
    Category toAmount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans(Dollars in Thousands)Real estate loans:Single-family residential
    
    $
    308
    
    
    
    17.9
    %
    
    $
    390
    
    
    
    25.8
    %
    
    $
    509
    
    
    
    34.5
    %
    
    $
    717
    
    
    
    50.2
    %
    
    $
    804
    
    
    
    53.4
    %Multi-family residential
    
    
    416
    
    
    
    15.7
    
    
    
    344
    
    
    
    15.9
    
    
    
    437
    
    
    
    15.4
    
    
    
    453
    
    
    
    16.6
    
    
    
    424
    
    
    
    15.7Commercial
    
    
    1,400
    
    
    
    44.8
    
    
    
    773
    
    
    
    40.5
    
    
    
    693
    
    
    
    34.4
    
    
    
    679
    
    
    
    27.3
    
    
    
    994
    
    
    
    24.2Construction
    
    
    419
    
    
    
    5.9
    
    
    
    546
    
    
    
    4.4
    
    
    
    612
    
    
    
    4.6
    
    
    
    380
    
    
    
    3.3
    
    
    
    331
    
    
    
    5.4Land acquisition and development
    
    
    123
    
    
    
    1.6
    
    
    
    215
    
    
    
    3.3
    
    
    
    79
    
    
    
    1.7
    
    
    
    25
    
    
    
    0.6
    
    
    
    72
    
    
    
    0.9Commercial and industrial loans
    
    
    1,616
    
    
    
    10.8
    
    
    
    1,253
    
    
    
    6.1
    
    
    
    1,172
    
    
    
    6.8
    
    
    
    80
    
    
    
    1.0
    
    
    
    
    
    
    
    Consumer and other loans
    
    
    216
    
    
    
    3.1
    
    
    
    149
    
    
    
    3.9
    
    
    
    63
    
    
    
    2.6
    
    
    
    69
    
    
    
    1.0
    
    
    
    28
    
    
    
    0.4Unallocated reserve
    
    
    89
    
    
    
    .2
    
    
    
    127
    
    
    
    .1
    
    
    
    171
    
    
    
    
    
    
    
    747
    
    
    
    
    
    
    
    459
    
    
    
    Total
    
    $
    4,587
    
    
    
    100
    %
    
    $
    3,797
    
    
    
    100
    %
    
    $
    3,736
    
    
    
    100.0
    %
    
    $
    3,150
    
    
    
    100.0
    %
    
    $
    3,112
    
    
    
    100.0
    %
 18




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##### Table of Contents



Investment Activities General. Our securities portfolio is managed under the direction of our
Chief Executive Officer in accordance with a comprehensive written investment
policy which addresses strategies, types and levels of allowable investments
and which are reviewed and approved by Los Padres Banks board of directors.
The management of the securities portfolio is set in accordance with strategies
developed by Los Padres Banks Asset and Liability Committee (ALCO). In
addition, Los Padres Bank has entered into an agreement with Smith Breeden
Associates, Inc. (Smith Breeden) whereby Smith Breeden has been appointed as
investment advisor with respect to the management of Los Padres Banks
securities portfolio. With the assistance of Smith Breeden, Los Padres Banks
Chief Executive Officer, in his role as Chief Investment Officer, has the
primary responsibility for managing the investment portfolio, in accordance
with the policy. The Chief Investment Officers responsibilities include
informing ALCO of the types of investments available, the status and
performance of the portfolio and current market conditions. Designated
officers of Los Padres Bank are authorized to: purchase or sell eligible
investments under repurchase or reverse repurchase agreements; execute hedging
strategies approved by the ALCO; pledge securities owned as collateral for
public agency deposits or repurchase accounts or agreements; and lend
securities to approved dealers in government securities or approved commercial
banks. 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. 19




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##### Table of Contents



Mortgage-Backed and Related Securities. At December 31, 2003, our
mortgage-backed and related securities including pass-through mortgage-backed
securities, collateral mortgage obligations and mortgage related asset-backed
securities classified as available for sale and held to maturity amounted to
$398.7 million or 99.4% of our securities portfolio and 40.9% of our total
assets. By investing in mortgage-backed and related securities, our management
seeks to achieve a targeted option-adjusted spread over applicable funding
costs. We invest in mortgage-backed and related securities, including mortgage
participation certificates, which are insured or guaranteed by U.S. Government
agencies and government sponsored enterprises or by private issuers which are
rated based on the underlying collateral and priority of cash flows, and
investment grade collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs). Mortgage-backed securities, which
also are known as mortgage participation certificates or pass-through
certificates, represent a participation interest in a pool of single-family
mortgages. The principal and interest payments on these securities are passed
from the mortgage originators, through intermediaries, generally U.S.
Government agencies and government sponsored enterprises, that pool and
repackage the participation interests in the form of securities, to investors
such as us. Such U.S. Government agencies and government-sponsored
enterprises, which guarantee the payment of principal and interest to
investors, primarily include Freddie Mac, Fannie Mae and the Government
National Mortgage Association (Ginnie Mae). Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
characteristics of the underlying pool of mortgages, i.e., fixed-rate or
adjustable-rate, as well as prepayment risk, are passed on to the certificate
holder. The term of a mortgage-backed pass-through security thus approximates
the terms of the underlying mortgages. Our mortgage-backed and related securities, including CMOs, include
securities issued by entities which have qualified under the Internal Revenue
Code of 1986, as amended (the Code) as REMICs. CMOs and REMICs, referred to
in this document as CMOs, were developed in response to investor concerns
regarding the uncertainty of cash flows associated with the prepayment option
of the underlying mortgagor and are typically issued by governmental agencies,
government sponsored enterprises and special purpose entities, such as trusts,
corporations or partnerships, established by financial institutions or other
similar institutions. In contrast to pass-through mortgage-backed securities,
in which cash flow is received pro rata by all security holders, the cash flow
from the mortgages underlying a CMO is segmented and paid in accordance with a
predetermined priority to investors holding various CMO classes. By allocating
the principal and interest cash flows from the underlying collateral among the
separate CMO classes, different classes of bonds are created, each with its own
stated maturity, estimated average life, coupon rate and prepayment
characteristics. Like most fixed-income securities, mortgage-backed and related securities
are subject to interest 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 20




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##### Table of Contents



underlying insurance or guarantees or collateral support. These
securities also require less capital under risk-based regulatory capital
requirements than non-insured or non-guaranteed mortgage loans, are more liquid
than individual mortgage loans, which enhances our ability to actively manage
our portfolio, and may be used to collateralize borrowings or other
obligations. At December 31, 2003, $210.8 million or 52.6% 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, 2003, 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, 2003, of the
$398.7 million of mortgage-backed and related securities held by us, an
aggregate of $111.0 million was secured by fixed-rate mortgage loans and an
aggregate of $287.7 million was secured by adjustable-rate mortgage loans. We also invest in investment grade commercial mortgage backed securities
(CMBS), which are securities collateralized by mortgage loans secured by
industrial, office, warehouse, retail space strip shopping centers, motels and
other commercial related real estate. The cash flows from these mortgages are
normally paid in a predetermined priority to investors holding the various
classes of securities. The mortgage loans underlying these securities
typically have a prepayment lockout for a period of five to ten years and, as
such, have less prepayment risk than single family mortgage securities. At
December 31, 2003, we held $60.9 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,
2003, we held $1.6 million of corporate debt securities. Trading Account Assets and Other Securities. At December 31, 2003, 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 $1.5
million, and equity securities (consisting of mutual funds invested in a
variety of corporate fixed income and equity securities), which had a carrying
value of $450,000 as of December 31, 2003. We also have asset-based (i.e.,
total return) interest rate swaps with a notional amount of $100.0 million
which we use to enhance our returns which had a carrying value of $166,000,
which do not receive hedge accounting treatment pursuant to SFAS No. 133. Our
held to maturity 21




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##### Table of Contents



portfolio consisted of agency securities, which had a carrying value of
$222,000 as of December 31, 2003. At December 31, 2003, 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, 2003, we had CMBS total return swaps
with an aggregate notional amount of $100.0 million that mature on or near May
31, 2004. Pursuant to the CMBS total return swaps, we receive the spread on
Lehman Brothers AAA CMBS Index, or Lehman Brothers Investment Grade 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 35 to 55 basis points depending on market conditions. The purpose of
these total return swaps is to create incremental income for Los Padres Bank. The net interest income (expense) relating to our total returns swaps was
$820,000, $916,000, and $(432,000) during the years ended December 31, 2003,
2002 and 2001, respectively. The approximate net market value of our total
returns swaps maintained as trading account assets was $166,000, $(17,000) and
$60,000 as of December 31, 2003, 2002 and 2001, 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. 22




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##### Table of Contents



2003
    
    2002
    
    2001Weighted
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    Fair
    
    Average
    
    Amortized
    
    Fair
    
    Average
    
    Amortized
    
    Fair
    
    AverageCost
    
    Value
    
    Yield
    
    Cost
    
    Value
    
    Yield
    
    Cost
    
    Value
    
    Yield(Dollars in thousands)Mortgage-backed securities
pass throughsDue from five to ten years
    
    $
    4,174
    
    
    $
    4,349
    
    
    
    6.74
    %
    
    $
    6,076
    
    
    $
    6,163
    
    
    
    6.72
    %
    
    $
    8,494
    
    
    $
    8,693
    
    
    
    6.24
    %Due over ten years
    
    
    125,591
    
    
    
    126,025
    
    
    
    4.68
    
    
    
    155,527
    
    
    
    158,193
    
    
    
    4.97
    
    
    
    171,153
    
    
    
    172,934
    
    
    
    5.80Total mortgage backed
securities - pass throughs
    
    
    129,765
    
    
    
    130,374
    (1)
    
    
    4.74
    
    
    
    161,603
    
    
    
    164,356
    
    
    
    5.03
    
    
    $
    179,647
    
    
    $
    181,627
    
    
    
    5.82Collateralized mortgage
obligationsDue over ten years
    
    
    48,704
    
    
    
    48,581
    
    
    
    3.36
    
    
    
    71,103
    
    
    
    70,690
    
    
    
    3.81Total collateralized mortgage
obligations
    
    
    48,704
    
    
    
    48,581
    
    
    
    3.36
    
    
    
    71,103
    
    
    
    70,690
    
    
    
    3.81Commercial mortgage-backed
securitiesDue from one to five years
    
    
    28,717
    
    
    
    29,489
    
    
    
    2.55
    
    
    
    24,218
    
    
    
    24,486
    
    
    
    2.43Due from five to ten years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,590
    
    
    
    17,870
    
    
    
    3.06Due over ten years
    
    
    31,211
    
    
    
    31,427
    
    
    
    3.72
    
    
    
    22,380
    
    
    
    22,545
    
    
    
    3.81Total commercial mortgage-back
Securities
    
    
    59,928
    
    
    
    60,916
    
    
    
    3.16
    
    
    
    64,188
    
    
    
    64,901
    
    
    
    3.08Asset-backed securities
(underlying securities
mortgages)Due from five to ten years
    
    
    5,913
    
    
    
    4,961
    
    
    
    2.87
    
    
    
    
    
    
    
    Due over ten years
    
    
    151,908
    
    
    
    152,291
    
    
    
    2.67
    
    
    
    23,736
    
    
    
    23,731
    
    
    
    2.74Total asset backed-securities
    
    
    157,821
    
    
    
    157,252
    
    
    
    2.68
    
    
    
    23,736
    
    
    
    23,731
    
    
    
    2.74Corporate debt securities
Due over ten years
    
    
    1,489
    
    
    
    1,568
    
    
    
    15.88
    
    
    
    807
    
    
    
    852
    
    
    
    15.53Total corporate debt securities
    
    
    1,489
    
    
    
    1,568
    
    
    
    15.88
    
    
    
    807
    
    
    
    852
    
    
    
    15.53Total
    
    $
    397,707
    
    
    $
    398,691
    
    
    
    3.56
    
    
    $
    321,437
    
    
    $
    324,530
    
    
    
    4.23
   (1)
    
    At December 31, 2003, consisted of $26.4 million of Fannie Mae
participation certificates, $10.2 million of Freddie Mac participation
certificates and $93.8 million of Ginnie Mae participation certificates. 23




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##### Table of Contents



The following table presents certain information regarding the composition
and period to maturity of our securities classified as held to maturity as of
the dates indicated below. December 312003
    
    2002
    
    2001Weighted
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    Fair
    
    Average
    
    Amortized
    
    Fair
    
    Average
    
    Amortized
    
    Fair
    
    AverageCost
    
    Value
    
    Yield
    
    Cost
    
    Value
    
    Yield
    
    Cost
    
    Value
    
    Yield(Dollars in thousands)Mortgage-backed securities:Due over ten years
    
    $
    222
    
    
    $
    240
    
    
    
    6.99
    %
    
    $
    355
    
    
    $
    380
    
    
    
    7.00
    %
    
    $
    583
    
    
    $
    604
    
    
    
    7.00
    %Total mortgage-backed
securities
    
    
    222
    
    
    
    240
    (1)
    
    
    6.99
    
    
    
    355
    
    
    
    380
    
    
    
    7.00
    
    
    
    583
    
    
    
    604
    
    
    
    7.00U.S. Government and agency
securities:Due within one year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,013
    
    
    
    2,087
    
    
    
    5.30
    
    
    
    
    
    
    
    
    
    
    
    Due from one-five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,034
    
    
    
    2,113
    
    
    
    5.30Due 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
    
    
    
    5.30Total securities classified as held
to maturity
    
    $
    222
    
    
    $
    240
    
    
    
    6.99
    
    
    $
    2,368
    
    
    $
    2,467
    
    
    
    5.56
    
    
    $
    2,617
    
    
    $
    2,717
    
    
    
    5.68
   (1)
    
    At December 31, 2003, consisted of $240,000 of Fannie Mae participation
certificates. 24




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##### Table of Contents



The following table presents certain information regarding the composition
of our trading account assets as of the dates indicated below. December 312003
    
    2002
    
    2001Weighted
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    
    
    
    WeightedAmortized
    
    Fair
    
    Average
    
    Amortized
    
    Fair
    
    Average
    
    Amortized
    
    Fair
    
    AverageCost
    
    Value
    
    Yield
    
    Cost
    
    Value
    
    Yield
    
    Cost
    
    Value
    
    Yield(Dollars in thousands)Mortgage-backed securities
    
    $
    1,447
    
    
    $
    1,495
    
    
    
    5.90
    %
    
    $
    1,696
    
    
    $

    1,809
    
    
    
    6.27
    %
    
    $
    2,258
    
    
    $
    2,333
    
    
    
    6.49
    %U.S. Government and agency
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Mutual funds
    
    
    441
    
    
    
    450
    
    
    
    
    
    
    
    150
    
    
    
    125
    
    
    
    
    
    
    
    150
    
    
    
    140Other securities(1)
    
    
    
    
    
    
    166
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    278
    
    
    
    Total trading account assets
    
    $
    1,888
    
    
    $
    2,111
    
    
    
    4.52
    
    
    $
    1,846
    
    
    $
    1,934
    
    
    
    5.76
    
    
    $
    2,408
    
    
    $
    2,751
    
    
    
    6.08
   (1)
    
    At December 31, 2003, consisted of total return swaps which we use to
enhance our returns, and interest rate contracts which do not qualify for
hedge accounting treatment pursuant to SFAS No. 133. 25




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##### Table of Contents



The following table sets forth the fair value of our securities activities
with respect to our securities classified as available for sale and held to
maturity for the periods indicated. At or For the YearsEnded December 31,2003
    
    2002
    
    2001(In Thousands)Beginning balance
    
    $
    326,997
    
    
    $
    184,344
    
    
    $
    50,133Mortgage-backed securities pass-throughs purchased-
available for sale
    
    
    45,611
    
    
    
    61,024
    
    
    
    189,437Collateralized mortgage obligations purchased-
available for sale
    
    
    55,077
    
    
    
    117,145Commercial mortgage-backed securities purchased-
available for sale
    
    
    9,561
    
    
    
    64,544Asset-backed securities purchased- available for sale
    
    
    144,674
    
    
    
    23,735Corporate debt securities purchased-available for sale
    
    
    604
    
    
    
    803Agency securities purchased - held to maturity
    
    
    
    
    
    
    
    
    
    
    2,055Total securities purchased
    
    
    255,527
    
    
    
    267,251
    
    
    
    191,492Less:Sale and principal payments of mortgage-backed
securities, pass throughs - available for sale
    
    
    (76,148
    )
    
    
    (76,014
    )
    
    
    (54,750
    )Sale and principal payments of collateralized mortgage
obligations - available for sale
    
    
    (76,492
    )
    
    
    (44,860
    )Sale and principal payments of commercial
mortgage-backed securities  available for sale
    
    
    (13,662
    )Sale and principal payments of asset-backed securities
 available for sale
    
    
    (10,814
    )Sale and principal payments of mortgage-backed
securities, pass throughs - held to maturity
    
    
    (133
    )
    
    
    (228
    )Total securities sold
    
    
    (177,249
    )
    
    
    (121,102
    )
    
    
    (54,750
    )Proceeds from maturities of securities
    
    
    (2,000
    )
    
    
    
    
    
    
    (2,000
    )Change in net unrealized gain (loss) on
securities available for sale and held to
maturity
    
    
    (286
    )
    
    
    1,274
    
    
    
    1,685Amortization of (premium)/discount
    
    
    (4,058
    )
    
    
    (4,770
    )
    
    
    (2,216
    )Ending balance
    
    $
    398,931
    
    
    $
    326,997
    
    
    $
    184,344
 26




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##### Table of Contents



Sources of Funds General. We consider various sources of funds to fund our investing and
lending activities and we evaluate the available sources of funds in order to
reduce our overall funding costs. Deposits, reverse repurchase agreements,
advances from the FHLB of San Francisco, notes payable, and sales, maturities
and principal repayments on loans and securities have been the major sources of
funds for use in our lending and investing activities, and for other general
business purposes. We closely monitor rates and terms of competing sources of
funds on a daily basis and utilize the source that we believe to be cost
effective. Deposits. Los Padres Bank attempts to price its deposits in order to
promote deposit growth and offers a wide array of deposit products in order to
satisfy our business and retail customers needs. Los Padres Banks current
deposit products include passbook accounts, negotiable order of withdrawal
(NOW) and demand deposit accounts, money market deposit accounts, fixed-rate,
fixed-maturity retail certificates of deposit ranging in terms from one month
to five years and individual retirement accounts. Los Padres Banks retail deposits are generally obtained from residents in
each of its primary market areas. Los Padres Bank also intends to open a new
branch in the Ventura, California area in the spring of 2004. 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. 27




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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. 2003
    
    2002

    2001Average

    Average
    
    Average

    Average

    Average

    AverageBalance

    Rate Paid
    
    Balance

    Rate Paid

    Balance

    Rate Paid(Dollars in Thousands)Passbook accounts
    
    $
    27,952
    
    
    
    .44
    %
    
    $
    18,710
    
    
    
    1.26
    %
    
    $
    13,429
    
    
    
    1.93
    %Money market accounts
    
    
    88,569
    
    
    
    1.51
    
    
    
    73,515
    

    
    
    2.30
    
    
    
    25,409
    
    
    
    3.11NOW accounts
    
    
    39,909
    
    
    
    .13
    
    
    
    30,840
    
    
    
    .52
    
    
    
    19,825
    
    
    
    0.95Certificates of deposit
    
    
    357,362
    
    
    
    2.48
    
    
    
    371,324
    
    
    
    3.22
    
    
    
    341,444
    
    
    
    5.26Total deposits
    
    $
    513,792
    
    
    
    2.02
    
    
    $
    494,389
    
    
    
    2.84
    
    
    $
    400,107
    
    
    
    4.79
 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, 2003. Amount(In Thousands)Certificates of deposit maturing:Three months or less
    
    $
    59,523Over three through six months.
    
    
    53,053Over six through twelve months
    
    
    70,232Over twelve months
    
    
    19,959Total
    
    $
    202,767
 The following table sets forth the activity in Los Padres Banks deposits
during the period indicated. Year Ended December 31,2003
    
    2002
    
    2001(In Thousands)Beginning balance
    
    $
    525,271
    
    
    $
    520,858
    
    
    $
    355,705Net increase (decrease) before interest
Credited
    
    
    36,362
    
    
    
    (8,060
    )
    
    
    71,633Interest credited
    
    
    9,387
    
    
    
    13,403
    
    
    
    16,895Deposit acquisitions (dispositions)
    
    
    
    
    
    
    
    
    
    
    75,410
    (1)Gain on sale of deposits
    
    
    
    
    
    
    
    
    
    
    Purchase accounting premium
    
    
    
    
    
    
    
    
    
    
    1,365Amortization of purchase accounting premium
    
    
    (323
    )
    
    
    (930
    )
    
    
    (150
    )Net increase (decrease) in deposits
    
    
    45,426
    
    
    
    4,413
    
    
    
    165,153Ending balance
    
    $
    570,697
    
    
    $
    525,271
    
    
    $
    520,858
   (1)
    
    In November 2001, we acquired from Harrington Bank, FSB its Shawnee
Mission, Kansas branch along with related deposits and loans. 28




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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 31,2003
    
    2002
    
    2001(In Thousands)0.00% to 2.99%
    
    $
    334,873
    
    
    $
    272,688
    
    
    $
    59,5113.00% to 3.99%
    
    
    12,576
    
    
    
    21,664
    
    
    
    61,1814.00% to 4.99%
    
    
    27,541
    
    
    
    30,424
    
    
    
    203,7185.00% to 5.99%
    
    
    14,314
    
    
    
    18,390
    
    
    
    61,1086.00% to 6.99%
    
    
    4,027
    
    
    
    7,514
    
    
    
    39,8667.00% and higher
    
    
    1,137
    
    
    
    1,223
    
    
    
    1,183Total
    
    $
    394,468
    
    
    $
    351,903
    
    
    $
    426,567
 The following table sets forth the amount and remaining maturities of Los
Padres Banks certificates of deposit at December 31, 2003. Over SixMonths
    
    Over One
    
    Over TwoSix Months
    
    Through One
    
    Year Through
    
    Years Through
    
    Over Threeand Less
    
    Year
    
    Two Years
    
    Three Years
    
    Years
    
    Total(In Thousands)0.00% to 2.99%
    
    $
    194,808
    
    
    $
    132,873
    
    
    $
    4,780
    
    
    $
    1,715
    
    
    $
    697
    
    
    $
    334,8733.00% to 3.99%
    
    
    4,400
    
    
    
    986
    
    
    
    3,001
    
    
    
    1,767
    
    
    
    2,422
    
    
    
    12,5764.00% to 4.99%
    
    
    682
    
    
    
    1,179
    
    
    
    19,729
    
    
    
    5,211
    
    
    
    740
    
    
    
    27,5415.00% to 5.99%
    
    
    3,813
    
    
    
    3,681
    
    
    
    438
    
    
    
    2,472
    
    
    
    3,910
    
    
    
    14,3146.00% to 6.99%
    
    
    601
    
    
    
    2,436
    
    
    
    990
    
    
    
    
    
    
    
    
    
    
    
    4,0277.00% and higher
    
    
    52
    
    
    
    236
    
    
    
    849
    
    
    
    
    
    
    
    
    
    
    
    1,137Total
    
    $
    204,356
    
    
    $
    141,391
    
    
    $
    29,787
    
    
    $
    11,165
    
    
    $
    7,769
    
    
    $
    394,468
 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, 2003, we had five advances from the FHLB of San Francisco which
mature between January 2004 and June 2010. At December 31, 2003, we had total
FHLB of San Francisco advances of $262.5 million at a weighted average coupon
of 1.49%. Our borrowings from the FHLB of San Francisco are limited to 35% of
Los Padres Banks total assets, or $340.6 million at December 31, 2003, $288.5
million at December 31, 2002, and $234.4 million at December 31, 2001. During 2003, we obtained funds from the sales of securities to investment
dealers under agreements to repurchase, known as reverse repurchase agreements.
In a reverse repurchase agreement transaction, we will generally sell a
mortgage-backed security agreeing to repurchase either the same or a 29




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substantially identical security on a specific later date. The difference
between the sale and the purchase price (referred to as the drop) together
with the foregone coupon interest represents the cost of the financing
transaction. The mortgage-backed securities underlying the agreements are
delivered to the dealers who arrange the transaction. For agreements in which
we have agreed to repurchase substantially identical securities, the dealers
may sell, loan or otherwise dispose of our securities in the normal course of
their operations; however, such dealers or third party custodians safe-keep the
securities which are to be specifically repurchased by us. In this type of
transaction, we are subject to the risk that the lender may default at maturity
and not return the collateral. The amount at risk is the value of the
collateral which exceeds the balance of the borrowing. In order to minimize
this potential risk, we only deal with large, established dealers when entering
into these transactions. Reverse repurchase transactions are accounted for as
financing arrangements rather than as sales of such securities, and the
obligation to repurchase such securities is reflected as a liability in our
consolidated financial statements. At December 31, 2003, we had four
repurchase agreements with Citigroup Financial Services totaling $65.0 million
with a weighted average coupon of 2.61% and maturities ranging from July 2005
to July 2010. We are parties to a credit agreement with Harris Trust and Savings Bank
and US Bank, N.A. Under the credit agreement, we have a revolving credit
facility that enables us to borrow up to $15.0 million for general corporate
purposes from time to time with a maturity of September 30, 2007. As of
December 31, 2003, we had no outstanding borrowings under the credit agreement. We pay interest on the outstanding amount of our borrowings from time to
time under the credit agreement at an interest rate that adjusts based upon our
compliance with certain financial criteria and our selection of an interest
rate formula. At our option, the interest rates per annum applicable to any
particular borrowing under the credit agreement is either (1) adjusted LIBOR
plus a margin ranging from 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 un-drawn
portion of the borrowings available to us under the credit agreement for that
year. The credit agreement was renegotiated in October 2003 after we completed a
capital trust offering to modify the credit agreement. One of the modified
covenants included restrictions on the payment of cash dividends and is now
revised to allow us to pay larger dividends in an aggregate amount not to
exceed the greater of (a) $450,000 during any fiscal quarter, or (b) up to a
maximum of 40% of consolidated net income for the quarter. The other covenant
amendment released the collateral held pursuant to the pledge and security
agreement for the credit facility. 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, 2003, it was in
compliance with all of such covenants and restrictions and does not anticipate
that such covenants and restrictions will significantly limit its operations. 30




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On September 25, 2003, we completed a $15.5 million capital trust
offering. The capital securities were issued through a newly formed trust,
Harrington West Capital Trust I, in a private transaction. The capital trust
securities bear an interest rate of three-month LIBOR plus 2.85% and will
mature on October 8, 2033 and have a five-year call feature. We used a portion
of the proceeds to pay off the secured line of credit with Harris Trust and
Savings Bank and US Bank, N.A. The remainder of the proceeds will be used to
expand the Los Padres Bank operations. The following table sets forth certain information regarding our
short-term borrowings at or for the dates indicated. At or For the Year EndedDecember 31,2003
    
    2002
    
    2001(Dollars in Thousands)Securities sold under agreements to repurchase:Average balance outstanding
    
    $
    919
    
    
    $
    1,018
    
    
    $
    108Maximum amount outstanding at any month-end
during the period
    
    
    1,157
    
    
    
    1,501
    
    
    
    613Balance outstanding at end of period
    
    
    728
    
    
    
    517
    
    
    
    365Average interest rate during the period
    
    
    .74
    %
    
    
    1.21
    %
    
    
    1.24
    %Average interest rate at end of period
    
    
    .63
    %
    
    
    1.12
    %
    
    
    1.00
    %Short-term FHLB advances:Average balance outstanding
    
    $
    190,392
    
    
    $
    61,348
    
    
    $
    47,959Maximum amount outstanding at any month-end
during the period
    
    
    242,500
    
    
    
    160,000
    
    
    
    85,403Balance outstanding at end of period
    
    
    242,500
    
    
    
    160,000
    
    
    
    21,403Average interest rate during the period
    
    
    1.22
    %
    
    
    2.03
    %
    
    
    4.05
    %Average interest rate at end of period
    
    
    .96
    %
    
    
    1.43
    %
    
    
    4.07
    %
 Subsidiaries Our primary subsidiary is Los Padres Bank. We were formed for the purpose
of acquiring Los Padres Bank, and we completed the acquisition in 1996. Los
Padres Bank is a wholly-owned subsidiary. In February 1999, we purchased a 49% interest in Harrington Wealth
Management Company, (HWM) which provides trust and investment management
services to individuals and small institutional clients. In November 2001, we
purchased the remaining 51% interest in HWM. HWM 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, 2003, HWM administered approximately 357 accounts and
had $114.6 million of assets under management that are not included on our
balance sheet. For the years ended December 31, 2003, 2002 and 2001, HWM
generated revenues of $456,000, $412,000, and $348,000, respectively. HWM is
a wholly owned subsidiary of Los Padres Bank. In August 2002, we established Los Padres Mortgage Company, LLC (LPMC)
as a 51%-owned mortgage banking subsidiary of Los Padres Bank. LPMC 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, LPMC
originates single-family residential and commercial real estate loans primarily 31




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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 LPMC. Los Padres Bank has the opportunity to purchase select
single-family and commercial real estate loans from LPMC for its portfolio. Valley Oaks Financial Corporation was formed as a wholly owned service
corporation of Los Padres Bank in 1983 and serves as the title-holder with
respect to the mortgages we originate. Harrington West Capital Trust was formed as a deconsolidated subsidiary of
Harrington West Financial Group in 2003 and was created in conjunction with the
capital trust offering. Employees As of December 31, 2003, we had 173 full-time equivalent employees. Our
employees are not subject to any collective bargaining agreements and we
believe that our relationship with our employees is satisfactory. Regulation of Harrington West Financial Group, Inc. General. Savings and loan holding companies and savings associations are
extensively regulated under both federal and state law. This regulation is
intended primarily for the protection of depositors and the Savings Association
Insurance Fund (SAIF) and not for the benefit of our stockholders. The
following information describes certain aspects of that regulation applicable
to us, Los Padres Bank and Harrington Wealth Management Company, and does not
purport to be complete. The discussion is qualified in its entirety by
reference to all particular statutory or regulatory provisions. We are a
unitary savings and loan holding company subject to regulatory oversight by the
Office of Thrift Supervision (OTS). As such, we are required to register and
file reports with the OTS and are subject to regulation and examination by the
OTS. In addition, the OTS has enforcement authority over us and our
subsidiaries, which also permits the OTS to restrict or prohibit activities
that are determined to be a serious risk to Los Padres Bank. Activities Restriction Test. As a unitary savings and loan holding
company, we are generally not subject to activity restrictions, provided Los
Padres Bank satisfies the Qualified Thrift Lender (QTL), test or meets the
definition of a domestic building and loan association pursuant to the Code.
We presently intend to continue to operate as a unitary savings and loan
holding company. Recent legislation terminated the unitary thrift holding
company exemption for all companies that apply to acquire savings associations
after May 4, 1999. However, since we are grandfathered, our unitary holding
company powers and authorities were not affected. Despite our grandfathered
status, if we acquire control of another savings association as a separate
subsidiary, we would become a multiple savings and loan holding company, and
our activities, and any activities of our subsidiaries (other than Los Padres
Bank or any savings association), would be restricted generally to activities
permissible for financial holding companies and other activities permitted for
multiple savings and loan holding companies under OTS regulations, unless such
other associations each also qualify as a QTL or a domestic building and loan
association and were acquired in a supervisory acquisition. Furthermore, if we
were in the future to sell control of Los Padres Bank to any other company,
such company would not succeed to our grandfathered status and would be subject
to the same business activity restrictions. Restrictions on Acquisitions. We must obtain approval from the OTS before
acquiring control of any other savings association. Such acquisitions are
generally prohibited if they result in a multiple savings and loan holding
company controlling savings associations in more than one state. However, 32




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such interstate acquisitions are permitted based on specific state
authorization or in a supervisory acquisition of a failing savings association. Federal law generally provides that no person, acting directly or
indirectly or through or in concert with one or more other persons, may acquire
control, as that term is defined in OTS regulations, of a federally insured
savings association without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.
In addition, no company may acquire control of such an institution without
prior OTS approval. These provisions also prohibit, among other things, any
director or officer of a savings and loan holding company, or any individual
who owns or controls more than 25% of the voting shares of a savings and loan
holding company, from acquiring control of any savings association not a
subsidiary of the savings and loan holding company, unless the acquisition is
approved by the OTS. Regulation of Los Padres Bank General. As a federally chartered, SAIF-insured savings association, Los
Padres Bank is subject to extensive regulation by the OTS and the Federal
Deposit Insurance Corporation (FDIC). Lending activities and other
investments of Los Padres Bank must comply with various statutory and
regulatory requirements. Los Padres Bank is also subject to certain reserve
requirements promulgated by the Federal Reserve Board. The OTS, in conjunction with the FDIC, regularly examines Los Padres Bank
and prepares reports for the consideration of Los Padres Banks Board of
Directors on any deficiencies found in the operations of Los Padres Bank. The
relationship between Los Padres Bank and depositors and borrowers is also
regulated by federal and state laws, especially in such matters as the deposit
insurance of savings accounts and the form and content of mortgage documents
utilized by Los Padres Bank. Los Padres Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition, in addition to obtaining regulatory
approvals prior to entering into certain transactions such as mergers with or
acquisitions of other financial institutions. This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the SAIF and depositors.
The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of
assets and the establishment of adequate loan loss reserves for regulatory
purposes. Any change in such regulations, whether by the OTS, the FDIC, or the
Congress could have a material adverse impact on us, Los Padres Bank, and our
operations. Insurance of Deposit Accounts. 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, 2003, 33




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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 2003
at approximately $0.004 per $100 of assessable deposits to fund interest
payments on bonds issued by the Financing Corporation (FICO), an agency of
the Federal government established to recapitalize the predecessor to the SAIF.
These assessments will continue until the FICO bonds mature in 2017. Proposed Legislation. From time to time, new laws are proposed that, if
enacted, could have an effect on the financial institutions industry. For
example, deposit insurance reform legislation is currently pending in Congress
that would:  
    
    merge the Bank Insurance Fund and the SAIF.
    
    increase the current deposit insurance coverage limit for
insured deposits to $130,000 and index future coverage limits to
inflation.
    
    double deposit insurance coverage limits for individual
retirement accounts.
    
    replace the current fixed 1.25 designated reserve ratio with
a reserve range of , 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, 2003, 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 34




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capitalized, require it to comply with restrictions applicable to
undercapitalized institutions; and, if the institution is undercapitalized,
require it to comply with certain restrictions applicable to significantly
undercapitalized institutions. Finally, pursuant to an interagency agreement,
the FDIC can examine any institution that has a substandard regulatory
examination score or is considered undercapitalized without the express
permission of the institutions primary regulator. OTS capital regulations also require savings associations to meet three capital standards:  
    
    tangible capital equal to at least 1.5% of total adjusted assets,
    
    leverage capital (core capital) equal to 4% of total adjusted assets, and
    
    risk-based capital equal to 8.0% of total risk-weighted assets. These capital requirements are viewed as minimum standards by the OTS, and
most institutions are expected to maintain capital levels well above the
minimum. Minimum capital levels higher than those provided in the regulations
may be established by the OTS for individual savings associations, upon a
determination that the savings associations capital is or may become
inadequate in view of its circumstances. The following table reflects as of December 31, 2003, Los Padres Banks
actual levels of regulatory capital and the applicable regulatory capital
requirements. Tangible Capital(1)
    
    Tier 1 Leverage Capital(1)
    
    Risk-Based Capital(1)Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Actual regulatory capital
    
    $
    58,924
    
    
    
    6.08
    %
    
    $
    58,924
    
    
    
    6.08
    %
    
    $
    63,461
    
    
    
    10.99
    %Minimum regulatory capital
    
    
    14,534
    
    
    
    1.50
    
    
    
    38,757
    
    
    
    4.00
    
    
    
    46,209
    
    
    
    8.00Excess regulatory capital
    
    $
    44,390
    
    
    
    4.58
    %
    
    $
    20,167
    
    
    
    2.08
    %
    
    $
    17,252
    
    
    
    2.99
    %
   (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 $968.9 million as of December 31, 2003. 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 35




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##### Table of Contents



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, 2003, Los Padres Banks loans-to-one-borrower limit was
$9.5 million based upon the 15% of unimpaired capital and surplus measurement.
At December 31, 2003, Los Padres Banks largest single lending relationship had
an outstanding aggregate balance of $7.6 million, and consisted of four loans
secured by commercial real estate, each of which was performing in accordance
with its terms. Qualified Thrift Lender Test. Savings associations must meet a QTL test,
which 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, 2003, Los Padres
Bank was in compliance with its QTL requirement and met the definition of a
domestic building and loan association. Affiliate Transactions. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
and under circumstances that are substantially the same, or at least as
favorable to the savings association or its subsidiary, as transactions with
non-affiliates. Certain of these transactions, such as loans or extensions of
credit to an affiliate, are restricted to a percentage of the associations
capital and surplus. In addition, a savings association may not make a loan or
other extension of credit to any affiliate engaged in activities not
permissible for a bank holding company or purchase or invest in securities
issued by most affiliates. Affiliates of a savings association include, among
other entities, the savings associations holding company and companies that
are under common control with the savings association. We and HWM are
considered to be affiliates of Los Padres Bank. Capital Distribution Limitations. OTS regulations impose limitations upon
all capital distributions by savings associations, like cash dividends,
payments to repurchase or otherwise acquire its shares, payments to
stockholders of another institution in a cash-out merger and other
distributions charged against capital. Under the rule, a savings association
in some circumstances may:  
    
    be required to file an application and await approval from
the OTS before it makes a capital distribution;
    
    be required to file a notice 30 days before the capital distribution; or 36




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##### Table of Contents




    
    be permitted to make the capital distribution without notice or application to the OTS. The OTS regulations require a savings association to file an application if:  
    
    it is not eligible for expedited treatment of its other applications under OTS regulations;
    
    the total amount of all of capital distributions, including
the proposed capital distribution, for the applicable calendar year
exceeds its net income for that year to date plus retained net
income for the preceding two years;
    
    it would not be at least adequately capitalized, under the
prompt corrective action regulations of the OTS following the
distribution; or
    
    the associations proposed capital distribution would violate
a prohibition contained in any applicable statute, regulation, or
agreement between the savings association and the OTS, or the FDIC,
or violate a condition imposed on the savings association in an
OTS-approved application or notice. In addition, a savings association must give the OTS notice of a capital
distribution if the savings association is not required to file an application,
but:  
    
    would not be well capitalized under the prompt corrective
action regulations of the OTS following the distribution;
    
    the proposed capital distribution would reduce the amount of
or retire any part of the savings associations common or preferred
stock or retire any part of debt instruments like notes or
debentures included in capital, other than regular payments required
under a debt instrument approved by the OTS; or
    
    the savings association is a subsidiary of a savings and loan
holding company. If neither the savings association nor the proposed capital distribution
meet any of the above listed criteria, the OTS does not require the savings
association to submit an application or give notice when making the proposed
capital distribution. The OTS may prohibit a proposed capital distribution
that would otherwise be permitted if the OTS determines that the distribution
would constitute an unsafe or unsound practice. Community Reinvestment Act and the Fair Lending Laws. Savings
associations have a responsibility under the Community Reinvestment Act and
related regulations of the OTS to help meet the credit needs of their
communities, including low- and moderate-income neighborhoods. In addition,
the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from
discriminating in their lending practices on the basis of characteristics
specified in those statutes. An institutions failure to comply with the
provisions of the Community Reinvestment Act could, at a minimum, result in
regulatory restrictions on its activities and the denial of applications. In
addition, an institutions failure to comply with the Equal Credit Opportunity
Act and the Fair Housing Act could result in the OTS, other federal regulatory
agencies as well as the Department of Justice taking enforcement actions.
Based on an examination conducted in 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. 37




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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,
2003, financial data, was $13.4 million. At December 31, 2003, Los Padres Bank
had $13.4 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, 2003, 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. that 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
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 38




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##### Table of Contents



additional activities that the Federal Reserve Board, in consultation with
the Secretary of the Treasury, determines to be financial in nature, incidental
to such financial activities, or complementary activities that do not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. The GLB provides that no company may acquire control of an insured savings
association unless that company engages, and continues to engage, only in the
financial activities permissible for a financial holding company, unless the
company is grandfathered as a unitary savings and loan holding company. The
Financial Institution Modernization Act grandfathers any company that was a
unitary savings and loan holding company on May 4, 1999 or became a unitary
savings and loan holding company pursuant to an application pending on that
date. The GLB also permits national banks to engage in expanded activities
through the formation of financial subsidiaries. A national bank may have a
subsidiary engaged in any activity authorized for national banks directly or
any financial activity, except for insurance underwriting, insurance
investments, real estate investment or development, or merchant banking, which
may only be conducted through a subsidiary of a financial holding company.
Financial activities include all activities permitted under new sections of the
Bank Holding Company Act or permitted by regulation. To the extent that the GLB permits banks, securities firms, and insurance
companies to affiliate, the financial services industry may experience further
consolidation. The GLB is intended to grant to community banks certain powers
as a matter of right that larger institutions have accumulated on an ad hoc
basis and which unitary savings and loan holding companies already possess.
Nevertheless, the GLB may have the result of increasing the amount of
competition that we face from larger institutions and other types of companies
offering financial products, many of which may have substantially more
financial resources than we have. Sarbanes-Oxley Act. In July 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002 (SOA) implementing legislative reforms intended to
address corporate and accounting improprieties. The SOA generally applies to
all companies, both U.S. and non-U.S., that file or are required to file
periodic reports with the Securities and Exchange Commission (SEC) under the
Securities Exchange Act of 1934 (the Exchange Act). The SOA includes very
specific additional disclosure requirements and new corporate governance rules,
requires the SEC and securities exchanges to adopt extensive additional
disclosure, corporate governance and other related rules and mandates further
studies of certain issues by the SEC and the Comptroller General. The SOA
represents significant federal involvement in matters traditionally left to
state regulatory systems, such as the regulation of the accounting profession,
and to state corporate law, such as the relationship between a board of
directors and management and between a board of directors and its committees. 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; 39




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##### Table of Contents




    
    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. Regulation of Non-banking Affiliates Harrington Wealth Management Company is registered with the SEC as an
investment advisor. Harrington Wealth Management Company is subject to various
regulations and restrictions imposed by the SEC, as well as by various state
authorities. 40




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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, 2003. Total Deposits atLeased/Owned
    
    Date Office
    
    December 31, 2003and
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Lease Expiration Date
    
    Date
    
    thousands)Solvang Branch and Administrative
    
    Lease expires on
    
    June 1983
    
    $
    99,414Offices
    
    1/31/05 with two610 Alamo Pintado Road
    
    options for fiveSolvang, CA 93463
    
    years eachLoan
Center1992 Mission Drive
    
    Lease expires on
1/31/05 with two
    
    March 1998
    
    
    Solvang,
CA 93463
    
    options for fiveyears eachPismo Branch
831 Oak Park BoulevardPismo Beach, CA 93449

    
    Lease expires on
2/9/08 with two
options for five
    
    May 1988
    
    
    71,825years eachAtascadero
Branch7315 El Camino Real
    
    Lease expires on
4/30/06 with two
    
    May 1991
    
    
    47,123Atascadero, CA 93422
    
    options for fiveyears eachSanta
Maria Branch402 E. Main Street
    
    Lease expires on
6/30/07 with three
    
    July 1992
    
    
    58,400Santa Maria, CA 93454
    
    options for fiveyears eachBuellton
Branch234 E. Highway 246, Suite 109
    
    Lease expires on
11/2/07 with one
    
    December 1997
    
    
    15,612Buellton, CA 93427
    
    option for fiveyearsGoleta
Branch197 North Fairview
    
    Lease expires on
10/31/05 with three
    
    February 1999
    
    
    73,043Goleta, CA 93117
    
    options for fiveyears eachSan
Luis Branch1322 Madonna Road
    
    Lease expires on
12/31/05 with two
    
    January 2001
    
    
    25,816San Luis Obispo, CA 93405
    
    options for fiveyears eachNipomo
Branch 542 W. Teft Road
    
    Lease expires on
11/30/05 with three
    
    July 2001
    
    
    16,232Nipomo, CA 93444
    
    options for fiveyears each
 41




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##### Table of Contents



Total Deposits atLeased/Owned
    
    Date Office
    
    December 31, 2003and
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Lease Expiration Date
    
    Date
    
    thousands)Storage Area
    
    Month-to-month
    
    June 1992
    
    
    1120 Mission Drive
    
    Lease with noSolvang, CA 93463
    
    expiration dateHuman Resources, Compliance &Training Room
    
    Lease expires on
    
    March 2000
    
    
    Suite A-4 and A-5
    
    1/31/05 with two1984 Old Mission Drive
    
    options for fiveSolvang, CA 93463
    
    years eachLoan Origination Center
    
    Lease expires on
    
    April 2002
    
    
    Suite B-12
    
    1/31/05 with two1988 Old Mission Drive
    
    options for fiveSolvang, CA 93463
    
    years eachHarrington Bank
    
    Lease expires on
    
    November 2001
    
    
    75,8356300 Nall Avenue
    
    12/31/10 with fourKansas City, KS 66208
    
    options for fiveyears eachHarrington West Financial Group,
Inc.10801 Mastin Boulevard, Suite 740
    
    Lease expires on
    
    January 2002
    
    
    Overland Park, KS 66210
    
    3/31/04Harrington Wealth ManagementCompany10150 Lantern Road, Suite 150
    
    Lease expires on
    
    November 2001
    
    
    Fishers, IN 46038
    
    10/31/06Scottsdale Branch
    
    Lease expires on
9/30/12 with two
    
    November 2002
    
    
    48,77310555 North 114th Street, Suite 100
    
    options for fiveScottsdale, AZ 85295
    
    years eachLos Padres Mortgage Company
    
    Lease expires on
    
    October 2002
    
    
    6424 E. Greenway Parkway
    
    4/30/10 with oneScottsdale, A AZ 85295
    
    five year optionLos Padres Mortgage Company
    
    Lease expires on
    
    October 2002
    
    
    3939 E. Ray Road, Suite 100
    
    9/14/07 with onePhoenix, AZ 85044
    
    five year optionLos Padres Mortgage Company12211-12213 West Bell Road
    
    Lease expires on
    
    October 2002
    
    
    Surprise, AZ 85374
    
    4/30/07Los Padres Mortgage Company10720 W. Indian School Road, Ste. 45
    
    Month to month
    
    October 2002
    
    
    Phoenix, AZ 85037
    
    lease with noexpiration date
 42




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##### Table of Contents



Total Deposits atLeased/Owned
    
    Date Office
    
    December 31, 2003and
    
    Opened or Purchase
    
    (Dollars inOffice Location
    
    Lease Expiration Date
    
    Date
    
    thousands)Ojai Branch
110 South Ventura Street
    
    Owned
    
    November 1997
    
    
    38,617Ojai, CA 93023Hanalei Bay Condo
    
    Owned
    
    July 1994
    
    
    5380 Honiki RoadPrinceville, KauaiMetcalf Branch
    
    Owned
    
    December 2003
    
    
    714300 MetcalfOverland Park, KS 66223
    
    
    
    
    
    $
    510,697
 
 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, 2004, we
had 4,338,451 shares of common stock outstanding and approximately 141
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 each of the quarters of 2003 and the fourth quarter of 2002. Our
common stock began trading on the Nasdaq National Market on November 6, 2002
under the stock symbol HWFG. 43




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##### Table of Contents



Quarter Ended
    
    High
    
    LowDecember 31, 2002
    
    $
    12.24
    
    
    $
    10.75March 31, 2003
    
    
    11.99
    
    
    
    11.27June 30, 2003
    
    
    12.98
    
    
    
    11.70September 30, 2003
    
    
    16.15
    
    
    
    12.24December 2003
    
    
    17.65
    
    
    
    15.60
 Dividends For the first and 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. In the first and second quarter of 2003, we
declared a quarterly dividend of $0.04 per share. In the third quarter of
2003, we declared a dividend of $0.08 per share. In the fourth quarter of
2003, a quarterly dividend of $0.10 was declared. The dividend rate on our common stock and the continued payment of
dividends is determined by our board of directors, which takes into account our
consolidated earnings, financial condition, liquidity and capital requirements,
applicable governmental regulations and policies, and other factors deemed
relevant by our board of directors. More specifically, Delaware law provides
that a corporation may make a dividend to its stockholders out of the
corporations capital surplus or, in case there shall be no surplus, out of its
net profits for the fiscal year in which the dividend is declared and/or the
preceding fiscal year. The holders of our common stock are entitled to receive
and share equally in such dividends as may be declared by our board of
directors out of funds legally available 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 $450,000 or 40% of our consolidated net income during
any fiscal quarter or declare dividends at any time an event of default has
occurred under the revolving line of credit. Recent Sales of Unregistered Securities In September 2003, our special purpose business trust, Harrington West
Capital Trust I, issued $15.5 million of trust preferred securities in a
private placement offering for which Sandler ONeill and Partners, L.P. acted
as placement agent. In connection with this transaction, we issued certain
junior subordinated debentures and guarantees. We and Harrington West Capital
Trust I relied on the exemption from the registration requirement set forth in
Rule 144A of the Securities Act. 44




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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, 2003. Financial
information at or for each of the five years ended December 31, 2003 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 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Selected Financial Condition Data:Total assets
    
    $
    974,799
    
    
    $
    824,331
    
    
    $
    670,323
    
    
    $
    484,969
    
    
    $
    495,191Loans receivable, net
    
    
    518,496
    
    
    
    448,050
    
    
    
    449,709
    
    
    
    395,537
    
    
    
    384,223Securities available for sale
    
    
    398,691
    
    
    
    324,530
    
    
    
    181,627
    
    
    
    47,438
    
    
    
    Securities held to maturity
    
    
    222
    
    
    
    2,368
    
    
    
    2,617
    
    
    
    2,687
    
    
    
    741Trading account assets
    
    
    2,111
    
    
    
    1,934
    
    
    
    2,751
    
    
    
    3,964
    
    
    
    86,174Deposits
    
    
    570,697
    
    
    
    525,271
    
    
    
    520,858
    
    
    
    355,705
    
    
    
    379,839Federal Home Loan Bank advances
    
    
    262,500
    
    
    
    235,000
    
    
    
    96,403
    
    
    
    91,000
    
    
    
    71,000Note payable
    
    
    
    
    
    
    11,300
    
    
    
    18,000
    
    
    
    9,000
    
    
    
    7,665Securities sold under repurchase
agreements
    
    
    65,728
    
    
    
    517
    
    
    
    365
    
    
    
    
    
    
    
    Other debt
    
    
    15,464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stockholders equity
    
    
    48,076
    
    
    
    42,472
    
    
    
    30,144
    
    
    
    25,557
    
    
    
    23,736Selected Income Statement Data:Interest income
    
    $
    46,434
    
    
    $
    43,493
    
    
    $
    41,168
    
    
    $
    39,143
    
    
    $
    36,941Interest expense
    
    
    20,308
    
    
    
    21,921
    
    
    
    25,817
    
    
    
    27,245
    
    
    
    24,546Net interest income
    
    
    26,126
    
    
    
    21,572
    
    
    
    15,351
    
    
    
    11,898
    
    
    
    12,395Provision (credit) for loan losses
    
    
    790
    
    
    
    391
    
    
    
    1
    
    
    
    42
    
    
    
    155Net interest income after provision (credit) for loan losses
    
    
    25,336
    
    
    
    21,181
    
    
    
    15,350
    
    
    
    11,856
    
    
    
    12,240Other income:Income (loss) from trading account assets
    
    
    2,647
    
    
    
    (31
    )
    
    
    436
    
    
    
    (2,754
    )
    
    
    (555
    )Gain on sale of deposits
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,923
    
    
    
    Gain (loss) on sale of loans
    
    
    
    
    
    
    
    
    
    
    69
    
    
    
    (601
    )
    
    
    (Loss) on extinguishment of debt
    
    
    (1,610
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other gain
(loss)
    
    
    30
    
    
    
    (350
    )
    
    
    (139
    )
    
    
    
    
    
    
    Other income(1)
    
    
    4,108
    
    
    
    2,531
    
    
    
    1,135
    
    
    
    554
    
    
    
    1,023Other expenses:Salaries and employee benefits
    
    
    10,086
    
    
    
    7,847
    
    
    
    5,444
    
    
    
    3,942
    
    
    
    4,064Premises and equipment
    
    
    2,722
    
    
    
    2,197
    
    
    
    1,631
    
    
    
    1,357
    
    
    
    1,503Other expenses(2)
    
    
    5,041
    
    
    
    4,713
    
    
    
    3,242
    
    
    
    3,097
    
    
    
    3,002Income before income taxes
    
    
    12,662
    
    
    
    8,574
    
    
    
    6,534
    
    
    
    4,582
    
    
    
    4,139Income taxes
    
    
    5,249
    
    
    
    3,529
    
    
    
    2,732
    
    
    
    2,001
    
    
    
    1,779Net income
    
    $
    7,413
    
    
    $
    5,045
    
    
    $
    3,802
    
    
    $
    2,581
    
    
    $
    2,360Common Stock Summary:Diluted earnings per share
    
    $
    1.63
    
    
    $
    1.39
    
    
    $
    1.12
    
    
    $
    0.77
    
    
    $
    0.71Dividends per share
    
    
    0.26
    
    
    
    0.12
    
    
    
    0.11
    
    
    
    0.30
    
    
    
    Stockholders equity per share
    
    
    11.08
    
    
    
    9.81
    
    
    
    8.99
    
    
    
    7.87
    
    
    
    7.31Diluted weighted average shares outstanding

    
    
    4,545,835
    
    
    
    3,641,684
    
    
    
    3,396,885
    
    
    
    3,331,857
    
    
    
    3,313,938Selected Operating Data(3):Performance Ratios and Other Data:Return on average assets
    
    
    0.82
    %
    
    
    0.68
    %
    
    
    0.66
    %
    
    
    0.53
    %
    
    
    0.48
    %Return on average equity
    
    
    16.37
    
    
    
    15.36
    
    
    
    13.65
    
    
    
    10.47
    
    
    
    10.46Equity to assets
    
    
    4.93
    
    
    
    5.15
    
    
    
    4.50
    
    
    
    5.27
    
    
    
    4.79Interest rate spread(4)
    
    
    2.90
    
    
    
    2.97
    
    
    
    2.55    
    
    
    2.02
    
    
    
    2.20Net interest margin(4)
    
    
    3.07
    
    
    
    3.14
    
    
    
    2.81
    
    
    
    2.30
    
    
    
    2.41Average interest-earning assets to average interest-bearing
liabilities
    
    
    107.03
    
    
    
    105.21
    
    
    
    105.51
    
    
    
    105.17
    
    
    
    104.53Total noninterest expenses to average total assets
    
    
    2.04
    
    
    
    1.97
    
    
    
    1.79
    
    
    
    1.54
    
    
    
    1.58Efficiency ratio(5)
    
    
    60.61
    
    
    
    63.17
    
    
    
    63.12
    
    
    
    67.66
    
    
    
    64.61
 45




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##### Table of Contents



At or For the Year Ended December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Asset Quality Ratios(6):Non-performing assets and troubled debt
restructurings to total assets
    
    
    0.00
    
    
    
    0.03
    
    
    
    0.07
    
    
    
    0.69
    
    
    
    0.30Non-performing loans and troubled debt
restructurings to total loans
    
    
    0.00
    
    
    
    0.05
    
    
    
    0.11
    
    
    
    0.84
    
    
    
    0.38Allowance for loan losses to total loans
    
    
    0.88
    
    
    
    0.83
    
    
    
    0.83
    
    
    
    0.79
    
    
    
    0.80Allowance for loan losses to total
non-performing loans and troubled debt
restructurings
    
    
    N/A
    
    
    
    1,739.45
    
    
    
    751.71
    
    
    
    93.69
    
    
    
    209.14Net charge-offs to average loans outstanding
    
    
    0.00
    
    
    
    0.08
    
    
    
    
    
    
    
    
    
    
    
    0.01Bank Regulatory Capital Ratios:Tier 1 risk-based capital ratio
    
    
    10.20
    
    
    
    11.14
    
    
    
    10.76
    
    
    
    10.55
    
    
    
    9.48Total risk-based capital ratio
    
    
    10.99
    
    
    
    11.97
    
    
    
    11.72
    
    
    
    11.56
    
    
    
    10.38Tier 1 leverage capital ratio
    
    
    6.08
    
    
    
    6.11
    
    
    
    6.27
    
    
    
    6.76
    
    
    
    6.09
   (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, capital trust
offering, and a revolving line of credit we have with two 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 46




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accordance with accounting principles generally accepted in the United
States of America. The preparation of these consolidated financial statements
requires us to make a number of estimates and assumptions that affect the
reported amounts and disclosures in the consolidated financial statements. On
an ongoing basis, we evaluate our estimates and assumptions based upon
historical experience and various other factors and circumstances. We believe
that our estimates and assumptions are reasonable in the circumstances;
however, actual results may differ significantly from these estimates and
assumptions which could have a material impact on the carrying value of assets
and liabilities at the balance sheet dates and our results of operations for
the reporting periods. The financial information contained in our consolidated financial
statements is, to a significant extent, based on approximate measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
recognizing income or expense, recovering an asset or relieving a liability.
We use historical loss factors to determine the inherent loss that may be
present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. We also calculate the fair value of our
interest rate contracts and securities based on market prices and the expected
useful lives of our depreciable assets. We enter into interest rate contracts
that are classified as trading account assets or to accommodate our own risk
management purposes. The interest rate contracts are generally interest swaps,
caps, floors and futures contracts, although we could enter into other types of
interest rate contracts. We value these contracts at fair value, using readily
available, 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, 2003, we have
not created any special purpose entities to securitize assets or to obtain
off-balance sheet funding. Although we have sold loans in past years, those
loans have been sold to third parties without recourse, subject to customary
representations and warranties. Allowance for loan losses.The allowance for loan losses is an estimate
of the losses that may be sustained in our loan portfolio. The allowance is
based on two principles of accounting: (i) Statement of Financial Accounting
Standards, or SFAS, No. 5, Accounting for Contingencies, which requires that
losses be accrued when they are probable of occurring and estimable; and (ii)
SFAS No. 114, Accounting by Creditors for Impairment of a Loan and SFAS No.
118, Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures, which requires that losses be accrued based on the differences
between the value of collateral, present value of future cash flows or values
that are observable in the secondary market and the loan balance. Our
allowance for loan losses has four components: (i) an allocated allowance for
specifically identified problem loans, (ii) a formula allowance for
non-homogenous loans, (iii) an allocated allowance for large groups of smaller
balance homogenous loans and (iv) an unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a model based on historical
losses as an indicator of future losses and as a result could differ from the
losses incurred in the future; however, since this history is updated with the
most recent loss information, the differences that might otherwise occur may be
mitigated. The specific allowance uses various techniques to arrive at an
estimate of loss. Historical loss information, discounted cash flows, fair
market value of collateral and secondary market information are all used to
estimate those losses. The use of these values is inherently subjective and
our actual losses could be greater or less than the estimates. The unallocated
allowance captures losses that are attributable to various economic events,
industry or geographic sectors whose impact on the portfolio have occurred but
have yet to be recognized in either the formula or specific allowances. 47




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Results of Operations Summary of Earnings. We reported net income for the year ended December
31, 2003 of $7.4 million, compared to $5.0 million and $3.8 million for the
years ended December 31, 2002 and 2001. Our net income improved by $2.4
million or 46.9% during 2003, as compared to 2002 and $1.2 million or 32.7%
during 2002 as compared to 2001. On a diluted earnings per share basis, we
earned $1.63, $1.39, and $1.12 for the years ended December 31, 2003, 2002 and
2001, respectively. 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 EndedDecember 31,2003
    
    2002
    
    2001(Dollars in Thousands)Net interest income after provision
for loan losses
    
    $
    25,336
    
    
    $
    21,181
    
    
    $
    15,350Retail banking fees and other income
    
    
    4,108
    
    
    
    2,531
    
    
    
    1,135Total net revenue
    
    
    29,444
    
    
    
    23,712
    
    
    
    16,485Other expenses
    
    
    17,849
    
    
    
    14,757
    
    
    
    10,317Core banking income
    
    
    11,595
    
    
    
    8,955
    
    
    
    6,168Other noninterest income (1)
    
    
    1,067
    
    
    
    (381
    )
    
    
    366Income before income taxes
    
    $
    12,662
    
    
    $
    8,574
    
    
    $
    6,534Core banking income as a percent of
income before income
taxes
    
    
    91.36
    %
    
    
    100.36
    %
    
    
    92.27
    %Percent increase in core banking income
    
    
    29.48
    %
    
    
    45.19
    %
    
    
    53.66
    %
   (1)
    
    Consists of income (loss) from trading assets, gain on sale of deposits,
gain on sale of loans, other gains and (losses) and loss from
extinguishment of debt. 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 $4.2 million or 19.6% to $25.3 million
during the year ended December 31, 2003, over 2002. The increase is partly due
to a $164.3 million or 23.9% increase in the 48




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average balance of interest-earning assets, which was partly offset by a
$142.4 million or 21.8% increase in the average balance of interest-bearing
liabilities, for an increase in net interest-earning assets of $21.9 million or
64.4% from 2002. The interest rate margin decreased slightly by 7 basis points
to 3.07% for 2003 from 3.14% for 2002, which reflects the growth in lower
margin investment securities and the lag-time in the repricing of assets versus
liabilities. Net interest income increased by $5.8 million or 38.0% to $21.2 million
during the year ended December 31, 2002, as compared to the prior year, due to
a $140.8 million or 25.8% increase in the average balance of interest-earning
assets. For the year ended December 31, 2002, our interest rate spread
increased by 42 basis points, primarily due to the increase in the average
balance of interest-earning assets which is primarily attributable to the
increase in commercial loans we hold in our portfolio which carry higher
interest rates, and the decline in average rates paid on deposits. 49




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##### Table of Contents



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 31,2003
    
    2002
    
    2001Average
    
    
    
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost(Dollars in Thousands)Interest-earning assets:Loans receivable(1)
    
    $
    490,174
    
    
    $
    33,147
    
    
    
    6.76
    %
    
    $
    430,087
    
    
    $
    31,500
    
    
    
    7.32
    %
    
    $
    396,132
    
    
    $
    31,914
    
    
    
    8.06
    %Securities and trading account
assets(2)
    
    
    331,437
    
    
    
    12,517
    
    
    
    3.78
    
    
    
    233,053
    
    
    
    11,336
    
    
    
    4.86
    
    
    
    127,841
    
    
    
    8,411
    
    
    
    6.58FHLB stock
    
    
    12,969
    
    
    
    579
    
    
    
    4.46
    
    
    
    7,622
    
    
    
    422
    
    
    
    5.54
    
    
    
    7,037
    
    
    
    407
    
    
    
    5.78Cash and cash equivalents(3)
    
    
    16,756
    
    
    
    191
    
    
    
    1.14
    
    
    
    16,233
    
    
    
    235
    
    
    
    1.45
    
    
    
    15,166
    
    
    
    436
    
    
    
    2.88Total interest-earning assets
    
    
    851,336
    
    
    
    46,434
    
    
    
    5.45
    
    
    
    686,995
    
    
    
    43,493
    
    
    
    6.33
    
    
    
    546,176
    
    
    
    41,168
    
    
    
    7.54Noninterest-earning assets
    
    
    22,263
    
    
    
    
    
    
    
    
    
    
    
    19,201
    
    
    
    
    
    
    
    
    
    
    
    13,054Total assets
    
    $
    873,599
    
    
    
    
    
    
    
    
    
    
    $
    706,196
    
    
    
    
    
    
    
    
    
    
    $
    559,230Interest-bearing liabilities:Deposits:NOW and money market
accounts
    
    $
    128,478
    
    
    
    1,392
    
    
    
    1.08
    
    
    $
    104,355
    
    
    
    1,853
    
    
    
    1.78
    
    
    $
    45,234
    
    
    
    978
    
    
    
    2.11Passbook accounts and
certificates of deposit
    
    
    385,314
    
    
    
    8,985
    
    
    
    2.33
    
    
    
    390,034
    
    
    
    12,178
    
    
    
    3.12
    
    
    
    354,873
    
    
    
    18,204
    
    
    
    5.13Total deposits
    
    
    513,792
    
    
    
    10,377
    
    
    
    2.02
    
    
    
    494,389
    
    
    
    14,031
    
    
    
    2.84
    
    
    
    400,107
    
    
    
    19,182
    
    
    
    4.79FHLB advances(4)
    
    
    233,320
    
    
    
    8,496
    
    
    
    3.64
    
    
    
    140,561
    
    
    
    7,198
    
    
    
    5.12
    
    
    
    107,233
    
    
    
    5,942
    
    
    
    5.54Reverse repurchase agreements
    
    
    35,468
    
    
    
    932
    
    
    
    2.63
    
    
    
    1,017
    
    
    
    12
    
    
    
    1.22
    
    
    
    108
    
    
    
    1
    
    
    
    1.24Other borrowings(5)
    
    
    12,856
    
    
    
    503
    
    
    
    3.91
    
    
    
    17,019
    
    
    
    680
    
    
    
    3.99
    
    
    
    10,189
    
    
    
    692
    
    
    
    6.79Total interest-bearing liabilities
    
    
    795,436
    
    
    
    20,308
    
    
    
    2.55
    
    
    
    652,986
    
    
    
    21,921
    
    
    
    3.36
    
    
    
    517,637
    
    
    
    25,817
    
    
    
    4.99Noninterest-bearing deposits
    
    
    21,551
    
    
    
    
    
    
    
    
    
    
    
    14,235
    
    
    
    
    
    
    
    
    
    
    
    7,882Noninterest-bearing liabilities
    
    
    11,338
    
    
    
    
    
    
    
    
    
    
    
    2,666
    
    
    
    
    
    
    
    
    
    
    
    5,929Total liabilities
    
    
    828,325
    
    
    
    
    
    
    
    
    
    
    
    669,887
    
    
    
    
    
    
    
    
    
    
    
    531,448Stockholders equity
    
    
    45,274
    
    
    
    
    
    
    
    
    
    
    
    36,309
    
    
    
    
    
    
    
    
    
    
    
    27,782Total liabilities and stockholders
equity
    
    $
    873,599
    
    
    
    
    
    
    
    
    
    
    $
    706,196
    
    
    
    
    
    
    
    
    
    
    $
    559,230Net interest-earning assets
(liabilities)
    
    $
    55,900
    
    
    
    
    
    
    
    
    
    
    $
    34,009
    
    
    
    
    
    
    
    
    
    
    $
    28,539Net interest income/interest rate
spread
    
    
    
    
    
    $
    26,126
    
    
    
    2.90
    
    
    
    
    
    
    $
    21,572
    
    
    
    2.97
    
    
    
    
    
    
    $
    15,351
    
    
    
    2.55Net interest margin
    
    
    
    
    
    
    
    
    
    
    3.07
    
    
    
    
    
    
    
    
    
    
    
    3.14
    
    
    
    
    
    
    
    
    
    
    
    2.81Ratio of average interest-earnings
assets to average interest-bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    107.03
    
    
    
    
    
    
    
    
    
    
    
    105.21
    
    
    
    
    
    
    
    
    
    
    
    105.51
   (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. 50




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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, 2003
    
    Year Ended December 31, 2002Compared to Year Ended December 31, 2002
    
    Compared to Year Ended December 31, 2001Increase (decrease) due to
    
    
    
    Increase (decrease) due toTotal Net
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total NetRate/
    
    Increase
    
    
    
    
    
    
    
    
    
    Rate/
    
    IncreaseRate
    
    Volume
    
    Volume
    
    (Decrease)
    
    Rate
    
    Volume
    
    Volume
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable
    
    $
    (2,416
    )
    
    $
    4,401
    
    
    $
    (338
    )
    
    $
    1,647
    
    
    $
    (2,901
    )
    
    $
    2,736
    
    
    $
    (249
    )
    
    $
    (414
    )Securities and trading account
assets(1)
    
    
    (2,534
    )
    
    
    4,786
    
    
    
    (1,071
    )
    
    
    1,181
    
    
    
    (2,193
    )
    
    
    6,923
    
    
    
    (1,805
    )
    
    
    2,925FHLB stock
    
    
    (82
    )
    
    
    297
    
    
    
    (58
    )
    
    
    157
    
    
    
    (17
    )
    
    
    34
    
    
    
    (1
    )
    
    
    16Cash and cash equivalents(2)
    
    
    (50
    )
    
    
    9
    
    
    
    (3
    )
    
    
    (44
    )
    
    
    (217
    )
    
    
    30
    
    
    
    (15
    )
    
    
    (202
    )Total net change in income on
interest-earning assets
    
    
    (5,082
    )
    
    
    9,493
    
    
    
    (1,470
    )
    
    
    2,941
    
    
    
    (5,328
    )
    
    
    9,723
    
    
    
    (2,070
    )
    
    
    2,325Interest-bearing liabilities:DepositsNOW and money market
accounts
    
    
    (722
    )
    
    
    428
    
    
    
    (167
    )
    
    
    (461
    )
    
    
    (174
    )
    
    
    1,278
    
    
    
    (228
    )
    
    
    876Passbook accounts and
certificates of deposit
    
    
    (3,083
    )
    
    
    (147
    )
    
    
    37
    
    
    
    (3,193
    )
    
    
    (7,124
    )
    
    
    1,803
    
    
    
    (706
    )
    
    
    (6,027
    )Total deposits
    
    
    (3,805
    )
    
    
    281
    
    
    
    (130
    )
    
    
    (3,654
    )
    
    
    (7,298
    )
    
    
    3,081
    
    
    
    (934
    )
    
    
    (5,151
    )FHLB advances(3)
    
    
    (2,080
    )
    
    
    4,751
    
    
    
    (1,373
    )
    
    
    1,298
    
    
    
    (451
    )
    
    
    1,847
    
    
    
    (140
    )
    
    
    1,256Reverse repurchase agreements.
    
    
    14
    
    
    
    421
    
    
    
    485
    
    
    
    920
    
    
    
    
    
    
    
    11
    
    
    
    
    
    
    
    11Other borrowings(4)
    
    
    (14
    )
    
    
    (166
    )
    
    
    3
    
    
    
    (177
    )
    
    
    (285
    )
    
    
    464
    
    
    
    (191
    )
    
    
    (12
    )Total net change in expense on
interest-bearing liabilities
    
    
    (5,885
    )
    
    
    5,287
    
    
    
    (1,015
    )
    
    
    (1,613
    )
    
    
    (8,034
    )
    
    
    5,403
    
    
    
    (1,265
    )
    
    
    (3,896
    )Change in net interest income
    
    $
    803
    
    
    $
    4,206
    
    
    $
    (455
    )
    
    $
    4,554
    
    
    $
    2,706
    
    
    $
    4,320
    
    
    $
    (805
    )
    
    $
    6,221
   (1)
    
    Consists of securities classified as available for sale and held to
maturity and trading account assets.(2)
    
    Consists of cash and due from banks and federal funds sold.(3)
    
    Interest on FHLB advances is net of cash flow hedging costs. We use
interest rate swaps to hedge the short-term repricing characteristics of
our floating-rate FHLB advances. See Asset and Liability Management.(4)
    
    Consists of a note payable under a revolving line of credit and the
capital trust offering. 51




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Interest Income. Total interest income increased by $2.9 million or 6.8%
for 2003, over 2002, from $43.5 million to $46.4 million. The increase in the
average balance of earning assets more than offset a decline in the average
yield earned on our loan portfolio and securities portfolio (including trading
account assets), which declined by 56 and 108 basis points, respectively, over
the period, to 6.76% and 3.78%, respectively. The Federal Reserve Board
maintained a low federal funds rate during 2003, and since a substantial
portion of our earning assets reprice with the general level of interest rates,
our average yield on earning assets declined. 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 the federal funds rate 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 earnings assets declined. Interest Expense. Total interest expense decreased by $1.6 million or
7.4% during the year ended December 31, 2003, over 2002, from $21.9 million to
$20.3 million. During 2003, our average interest-bearing liabilities increased
by $142.4 million or 21.8%, due primarily to the increase in borrowings to
support our growth and the new office in Scottsdale, Arizona, which collected
$31.3 million in deposits during 2003. 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 81 basis points over the year, from
3.36% to 2.55%. We funded our asset growth during the year by growth in
deposits, primarily with transaction accounts, repurchase agreements and FHLB
advances. Average interest-bearing deposits increased by $19.4 million or 3.9%
in 2003. Average FHLB advances increased during the year by $92.8 million or
66.0%, while the average amount of other borrowings decreased by $4.2 million
or 24.5%. 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 2.6%, 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% in 2002. Average
FHLB advances increased during the year by $33.3 million of 31.1%, while the
average amount drawn on our note payable increased by $6.8 million of 67.0%
which includes $10.2 million of the proceeds from our initial public offering
to temporarily pay down the balance of such borrowings. Provision for Loan Losses. We established provisions for loan losses of
$790,000, $391,000, and $1,000 during the years ended December 31, 2003, 2002,
and 2001, respectively. 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 2003 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. 52




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The following table sets forth information regarding other income for the
periods shown. Year Ended December 31,2003
    
    2002
    
    2001(In Thousands)Income (loss) from trading account assets
    
    $
    2,647
    
    
    $
    (31
    )
    
    $
    436(Loss) on extinguishment of debt
    
    
    (1,610
    )
    
    
    
    
    
    
    Gain (loss) on sale of loans
    
    
    
    
    
    
    
    
    
    
    69Other gain (loss)
    
    
    30
    
    
    
    (350
    )
    
    
    (139
    )Banking fee income (1)
    
    
    4,108
    
    
    
    2,531
    
    
    
    1,135Total other income
    
    $
    5,175
    
    
    $
    2,150
    
    
    $
    1,501
   (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. For the year ended December 31, 2003 total other income amounted to $5.2
million, an increase of $3.0 million or 140.7% over the prior year. The
increase in other income was due primarily to the increase in banking fee
income related to wholesale loan brokerage fees of $2.0 million and prepayment
penalties on commercial and multi-family loans of $591,000. Prepayment
penalties and refinancings were higher than normal due to the low interest rate
environment increasing activity in 2003. Wholesale brokerage fees increased
over 2002 by $863,000 or 77.6% and prepayment penalties increased by $333,183
or 129.2% for 2003 over 2002. The $2.6 million of trading asset gains in 2003
were due to gains on the CMBS total return swaps and fixed-rate mortgage
securities, which was partially offset by losses of $1.6 million related to
early extinguishment of long-term, high-interest FHLB debt with a similar
duration of the securities sold. For the year ended December 31, 2002 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. The increase was 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. 53




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Other Expenses. The following table sets forth certain information
regarding other expenses for the periods shown. Year Ended December 31,2003
    
    2002
    
    2001(In Thousands)Salaries and employee benefits
    
    $
    10,086
    
    
    $
    7,847
    
    
    $
    5,444Premises and equipment
    
    
    2,722
    
    
    
    2,197
    
    
    
    1,631Insurance premiums
    
    
    520
    
    
    
    255
    
    
    
    250Marketing
    
    
    320
    
    
    
    260
    
    
    
    184Computer services
    
    
    640
    
    
    
    542
    
    
    
    458Consulting fees
    
    
    1,011
    
    
    
    733
    
    
    
    523Office expenses and supplies
    
    
    762
    
    
    
    694
    
    
    
    427Other (1)
    
    
    1,788
    
    
    
    2,229
    
    
    
    1,400Total other expenses.
    
    $
    17,849
    
    
    $
    14,757
    
    
    $
    10,317
   (1)
    
    Consists primarily of professional fees, and other miscellaneous
expenses. Total other expenses increased by $3.1 million or 21.0% during the year
ended December 31, 2003 over the prior year ended December 31, 2002, and
increased by $4.4 million or 43.0% during the year ended December 31, 2002 over
2001. Increased expenses during the periods presented reflect 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 $2.2 million or 28.5% during the year ended
December 31, 2003, as compared to the prior year. Salaries and employee
benefits increased by $2.4 million or 44.1% during 2002. The increases during
the year period ended December 31, 2003 and 2002 over the prior years were
primarily due to the hiring of additional employees in connection with the
opening of new branch offices in Scottsdale, Arizona in the beginning of 2003
and the Metcalf location in the later part of 2003, together with our general
growth in operations also, commission expense to loan officers increased by
$746,000 or 66.2% in 2003 over 2002 due to the strong loan origination volumes
in 2003. Premises and equipment expenses increased by $525,000 or 23.9% during the
year ended December 31, 2003, as compared to the prior year, and increased by
$566,000 or 34.7% during 2002. 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 general growth in operations. We have contracted with Smith Breeden to provide investment advisory
services and interest rate risk analysis. Certain of our directors are also
principals of Smith Breeden. The consulting fees paid by us to Smith Breeden
during the years ended December 31, 2003, 2002 and 2001, amounted to $365,000,
$325,000 and $295,000. The increases in miscellaneous other expenses since 2001 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 $5.3 million, $3.5
million and $2.7 million during the years ended December 31, 2003, 2002 and
2001. 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 41.5%, 41.4% and 41.8%, the years ended December 31, 2003,
2002 and 2001. 54




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Changes in Financial Condition General. At December 31, 2003, our total assets amounted to $974.8
million, compared with $824.3 million at December 31, 2002. The increase in
total assets was primarily attributable to an increase in loans receivable and
securities classified as available for sale. At December 31, 2002, our total
liabilities amounted to $926.7 million, compared to $781.9 million at December
31, 2002. Cash and Cash Equivalents. Cash and cash equivalents, consisting of cash
and due from banks and federal funds sold, amounted to $22.9 million at
December 31, 2003, and $19.2 million at December 31, 2002. We manage our cash
and cash equivalents based upon our operating, investing and financing
activities. We generally attempt to invest our excess liquidity into higher
yielding assets such as loans or securities. See -Liquidity and Capital
Resources. Securities. In order to limit our credit risk exposure and to earn an
incremental income, we maintain a significant portion of our assets in various
types of securities, consisting primarily of investment grade mortgage-backed
securities and CMOs, and REMICs, which we collectively refer to as
mortgage-backed and related securities. Our securities portfolio also
includes, to a lesser extent, U.S. Government securities. At December 31,
2003, our securities portfolio, which is comprised of securities classified as
available for sale and held to maturity, amounted to $398.9 million or 40.9% of
our total assets. Mortgage-backed and related securities, which are the
principal components of our securities portfolio, often carry lower yields than
traditional mortgage loans. These types of securities, however, generally
increase the quality of our assets by virtue of the securities underlying
insurance or guarantees, require less capital under risk-based regulatory
capital requirements than non-insured or non-guaranteed mortgage loans, are
more liquid than individual mortgage loans, which enhances our ability to
actively manage our portfolio, and may be used to collateralize borrowings or
other obligations we incur. Securities classified as available for sale, which consist of
mortgage-backed and related securities, amounted to $398.9 million at December
31, 2003 and $324.5 million at December 31, 2002. The $74.2 million or 22.9%
increase during the year ended December 31, 2003 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 $222,000 at December 31, 2003 and $2.4 million at December 31,
2002. The decrease of $2.2 million was due primarily to the maturity of a
government security during 2003. 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 $2.1 million at
December 31, 2003 and $1.9 million at December 31, 2002. At December 31, 2003,
of the $2.1 million of trading account assets, $1.5 million consisted of
mortgage-backed securities, $450,000 consisted of equity securities and
$166,000 of unrealized gains associated with the $100.0 million notional amount
of CMBS total return swaps. 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, 2003, loans receivable, net of our
allowance for loan losses, amounted to $518.5 million or 53.2% of total assets,
as compared to $448.1 million or 54.3% of total assets at December 31, 2002.
The $70.5 million or 15.7% increase in the loan portfolio during 2003, and the
related 55




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##### Table of Contents



loan mix change to higher spread earning loans was due to our emphasis on
commercial real estate, commercial and industrial, and multifamily mortgage
loans and Los Padres Banks strategy to broker for third parties substantially
all new single-family mortgage originations in order to generate fee income. Allowance for Loan Losses.At December 31, 2003, our allowance for loan
losses totaled $4.6 million, compared to $3.8 million at December 31, 2002. At
December 31, 2003, our allowance for loan losses represented approximately
0.88% of the total loan portfolio as compared to 0.83% at December 31, 2002.
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, 2003, prepaid expenses
and other assets amounted to $1.9 million, as compared to $1.8 million as of
December 31, 2002. The increase in prepaid expenses and other assets since
December 31, 2002 reflected the increase in accounts receivable due to
principal and interest payments due on mortgage-backed securities. Deposits.At December 31, 2003, deposits totaled $570.7 million, as
compared to $525.3 million as of December 31, 2002. The $45.4 million or 8.7%
increase in total deposits during the year ended December 31, 2003 relative to
our 18.3% increase in total assets 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 $262.5
million at December 31, 2003 and $235.0 million at December 31, 2002. The
increase in FHLB advances since 2002 was due to our increased utilization of
such borrowings to fund our growth in loans and securities. At December 31,
2003, our FHLB advances had a weighted average interest rate of 1.49%, as
compared to 2.73% at December 31, 2002. Our outstanding FHLB advances have
maturities ranging from 2004 to 2010. We have a loan facility from two banks consisting of a revolving line of
credit. On October 30, 2003, we entered into an amendment of this facility,
the primary purpose of which was to release the stock of the Bank from security
on the note and to modify covenants after completing the capital trust offering
of $15.5 million on September 25, 2003. Our maximum borrowing capacity
decreased from $25.0 million at the time of the amendment to $15.0 million. We
are currently permitted to borrow up to $15.0 million under the line of credit
through September 30, 2007. Our note payable amounted to $0.0 million at
December 31, 2003 and $11.3 million at December 31, 2002. The decline in the
balance of the note payable reflects the utilization of a portion of the net
proceeds from the capital trust offering. We anticipate that we will increase
our utilization of the note payable as growth opportunities develop. 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 no longer 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 that apply to us pursuant to this loan facility. Trust preferred securities amounted to $15.5 million at December 31, 2003
and no trust preferred securities were outstanding at December 31, 2002. In
September 2003, our newly created special purpose 56




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business trust, Harrington West Capital Trust I, issued $15.5 million of
trust preferred securities. The trust preferred securities bear an interest
rate of three month LIBOR plus 2.85%, will mature on October 8, 2033 and have a
five-year call feature. A portion of the proceeds from the offering were used
to pay down our outstanding line of credit. Stockholders Equity. Our stockholders equity amounted to $48.1 million
at December 31, 2003, an increase of $5.6 million from December 31, 2002. Net
income earned during 2003 largely contributed to the increase in stockholders
equity. Moreover, our stockholders equity was also affected by unrealized
gains and losses on securities and interest rate contracts, dividends paid on
our common stock and the exercise of stock options. Asset and Liability Management In general, 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 of directors written
policies and procedures are implemented by the Asset and Liability Committee of
Los Padres Bank (ALCO), which is comprised of Los Padres Banks chief
executive officer, president, chief financial officer, director of financial
reporting and four non-employee directors of Los Padres Bank. The ALCO meets
at least eight times a year to review the sensitivity of Los Padres Banks
assets and liabilities to interest rate changes, investment opportunities, the
performance of the investment portfolios, and prior purchase and sale activity
of securities. The ALCO also provides guidance to management on reducing
interest rate risk and on investment strategy and retail pricing and funding
decisions with respect to Los Padres Banks overall asset and liability
composition. The ALCO reviews Los Padres Banks liquidity, cash flow needs,
interest rate sensitivity of investments, deposits and borrowings, core 57




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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. Two of our directors are minority
stockholders in and one is an officer of Smith Breeden. The ALCO regularly reviews interest rate risk by utilizing analyses
prepared by Smith Breeden with respect to the impact of alternative interest
rate scenarios on net interest income and on Los Padres Banks MVPE. The ALCO
also reviews analyses prepared by Smith Breeden concerning the impact of
changing market volatility, prepayment forecast error, and changes in
option-adjusted spreads and non-parallel yield curve shifts. In the absence of our hedging activities, our MVPE would decline as a
result of a general increase in market rates of interest. This decline would
be due to the market values of our assets being more sensitive to interest rate
fluctuations than are the market values of our liabilities due to our
investment in and origination of generally longer-term assets which are funded
with shorter-term liabilities. Consequently, the elasticity (i.e.,the change
in the market value of an asset or liability as a result of a change in
interest rates) of our assets is greater than the elasticity of our
liabilities. Accordingly, the primary goal of our asset and liability management policy
is to effectively increase the elasticity of our liabilities and/or effectively
contract the elasticity of our assets so that the respective elasticities are
matched as closely as possible. This elasticity adjustment can be accomplished
internally by restructuring our balance sheet or externally by adjusting the
elasticities of our assets and/or liabilities through the use of interest rate
contracts. Our strategy is to hedge either internally through the use of
longer-term certificates of deposit or less sensitive transaction deposits and
FHLB advances or externally through the use of various interest rate contracts. External hedging generally involves the use of interest rate swaps, caps,
floors, options and futures. The notional amount of interest rate contracts
represents the underlying amount on which periodic cash flows are calculated
and exchanged between counterparties. However, this notional amount does not
necessarily represent the principal amount of securities which would
effectively be hedged by that interest rate contract. In selecting the type and amount of interest rate contract to utilize, we
compare the elasticity of a particular contract to that of the securities to be
hedged. An interest rate contract with the appropriate offsetting elasticity
could have a notional amount much greater than the face amount of the
securities being hedged. We adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities,on January 1, 2001. SFAS No. 133 requires that an entity recognize
all interest rate contracts as either assets or liabilities in the statement of
financial condition and measure those instruments at fair value. If certain
conditions are met, an interest rate contract may be specifically designated as
a fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure.
The accounting for changes in the fair value of an interest rate contract
(that is, gains and losses) depends on the intended use of the interest rate
contract and the resulting designation. To qualify for hedge accounting, we
must show that, at the inception of the interest rate contracts and on an
ongoing basis, the changes in the fair value of the interest rate contracts are
expected to be highly effective in offsetting related changes in the cash flows
of the hedged liabilities. We have entered into various interest rate swaps
for the purpose of hedging certain of our short-term liabilities. These
interest rate swaps qualify for hedge accounting. Accordingly, the effective
portion of the accumulated change in the fair 58




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##### Table of Contents



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 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, 2003, 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 $137.0 million and maturities
from February 2004 to December 2013. With respect to these agreements, we make
fixed-rate payments ranging from 2.7% to 6.3% and receive payments based upon
three-month LIBOR. These fixed-pay swaps are used to effectively modify the
interest rate sensitivity of a portion of Los Padres Banks short-term LIBOR
correlated borrowings which include short-term deposits, securities sold under
agreements to repurchase and FHLB advances. The (expense) income relating to these swaps was $(3.7) million, ($2.0)
million, and $528,000 during the years ended December 31, 2003, 2002 and 2001,
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 $(5.9) million and $(6.8) million
as of December 31, 2003 and 2002, 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, 2003, 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, 2003, 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 $(20,000) for the year ended December 31, 2001. 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 59




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##### Table of Contents



of deposit contracts (Eurodollar futures contracts) which are priced off
LIBOR as well as Treasury Note and Bond futures contracts. We will from time
to time agree to sell a specified number of contracts at a specified date. To
close out a contract, we will enter into an offsetting position to the original
transaction. If interest rates rise, the value of our short futures positions increase.
Consequently, sales of futures contracts serve as a hedge against rising
interest rates. At December 31, 2003, we did not have any futures contracts.
We had total gains (losses) on our futures contracts of $(97,000) and
$(291,000) for the years ended December 31, 2002 and 2001, 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. 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, 2003, these
prepayment assumptions varied from 7 % to 38% for fixed-rate mortgages and
mortgage-backed securities and varied from 7% to 36% for adjustable-rate
mortgages and mortgage-backed securities. The following table sets forth at December 31, 2003, 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. 60




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##### Table of Contents



Change In Interest Rates (In Basis Points)(1)-300
    
    -200
    
    -100
    
    -
    
    +100
    
    +200
    
    +300(Dollars in Thousands)Market value gain (loss) in assets
    
    $
    37,758
    
    
    $
    27,465
    
    
    $
    14,922
    
    
    
    
    
    
    $
    (17,010
    )
    
    $
    (36,120
    )
    
    $
    (56,845
    )Market value gain (loss) of liabilities
    
    
    (19,616
    )
    
    
    (14,460
    )
    
    
    (8,040
    )
    
    
    
    
    
    
    8,236
    
    
    
    16,691
    
    
    
    25,357Market value gain (loss) of net assets
before interest rate contracts
    
    
    18,142
    
    
    
    13,005
    
    
    
    6,882
    
    
    
    
    
    
    
    (8,774
    )
    
    
    (19,429
    )
    
    
    (31,488
    )Market value gain (loss) of interest
rate contracts
    
    
    (18,848
    )
    
    
    (12,392
    )
    
    
    (5,927
    )
    
    
    
    
    
    
    5,579
    
    
    
    10,829
    
    
    
    15,777Total change in MVPE(2)
    
    $
    (706
    )
    
    $
    613
    
    
    $
    955
    
    
    
    
    
    
    $
    (3,195
    )
    
    $
    (8,600
    )
    
    $
    (15,711
    )Change in MVPE as a percent of:MVPE(2)
    
    
    (0.90
    )%
    
    
    (0.78
    )%
    
    
    (1.22
    )%
    
    
    
    
    
    
    (4.09
    )%
    
    
    (11.00
    )%
    
    
    (20.10
    )%Total assets of Los Padres Bank
    
    
    (0.07
    )%
    
    
    (0.06
    )%
    
    
    (0.10
    )%
    
    
    
    
    
    
    (0.33
    )%
    
    
    (0.88
    )%
    
    
    (1.61
    )%
   (1)
    
    Assumes an instantaneous parallel change in interest rates at all
maturities.(2)
    
    Based on our pre-tax MVPE of $74.3 million at December 31, 2003. 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 36.1% at
December 31, 2003. At December 31, 2003, Los Padres Banks liquid assets
totaled approximately $174.6 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, 2003,
we had $262.5 million in FHLB advances and we had $78.1 million of additional
borrowing capacity with the FHLB of San Francisco. At December 31, 2003, our
note payable under our revolving line of credit amounted to $0.0 million and we
had $15.0 million of additional borrowing capacity under this loan facility.
On October 30, 2003, we entered into an amendment to our credit agreement which
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) $450,000 during any fiscal quarter, or (b) up
to a maximum of 40% of consolidated net income for the quarter. The minimum
core profitability requirements have been made 61




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slightly more restrictive, and the covenant which addresses Los Padres
Banks non-performing assets is new. Management believes that as of December
31, 2003, 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, 2003, the total approved loan commitments
outstanding amounted to $34.4 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 2003 totaled $345.8 million and
borrowings that are scheduled to mature within the same period amounted to
$242.5 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, 2003, Los Padres
Bank was permitted to pay up to $3 million of dividends to us. In order to
make such dividend payment, Los Padres Bank is required to provide 30 days
advance notice to the OTS, during which time the OTS may object to such
dividend payment. It is possible, depending upon the financial condition of
Los Padres Bank, and other factors, that the OTS could object to the payment of
dividends by Los Padres Bank on the basis that the payment of such dividends is
an unsafe or unsound practice. In addition, we are also subject to
restrictions on our ability to pay dividends under our revolving loan facility.
In the event Los Padres Bank is unable to pay dividends to us, we may not be
able to service our debt, pay our obligations or pay dividends on our common
stock. Capital Resources.Federally insured savings institutions such as Los
Padres Bank are required to maintain minimum levels of regulatory capital.
Los Padres Banks failure to comply could also impact its overall assessment by
the OTS in future regulatory examinations, which, if adverse, could also impact
its FDIC insurance assessment. 62




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##### Table of Contents



The following table reflects as of December 31, 2003, Los Padres Banks
actual levels of regulatory capital and the applicable regulatory capital
requirements. Tier 1 LeverageTangible Capital(1)
    
    Capital(1)
    
    Risk-Based Capital(1)Amount
    
    Percent
    
    Amount
    
    Percent
    
    Amount
    
    Percent(Dollars in Thousands)Actual regulatory capital
    
    $
    58,924
    
    
    
    6.08
    %
    
    $
    58,924
    
    
    
    6.08
    %
    
    $
    63,461
    
    
    
    10.99
    %Minimum regulatory capital
    
    
    14,534
    
    
    
    1.50
    
    
    
    38,757
    
    
    
    4.00
    
    
    
    46,209
    
    
    
    8.00Excess regulatory capital
    
    $
    44,390
    
    
    
    4.58
    %
    
    $
    20,167
    
    
    
    2.08
    %
    
    $
    17,252
    
    
    
    2.99
    %
   (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 $968.9 million as of December 31, 2003. Contractual Obligations and Commercial Commitments The following tables present our contractual obligations and commercial
commitments as of December 31, 2003. Payment due periodLess than
    
    One to
    
    Three to
    
    More thanTotal
    
    One Year
    
    Three Years
    
    Five Years
    
    Five Years(In Thousands)Contractual obligations:Certificates of deposit
    
    $
    394,468
    
    
    $
    345,747
    
    
    $
    40,953
    
    
    $
    7,482
    
    
    $
    286FHLB advances
    
    
    262,500
    
    
    
    242,500
    
    
    
    
    
    
    
    
    
    
    
    20,000Leases
    
    
    21,327
    
    
    
    1,265
    
    
    
    2,515
    
    
    
    2,447
    
    
    
    15,100Reverse repurchase agreements
    
    
    65,728
    
    
    
    728
    
    
    
    20,000
    
    
    
    30,000
    
    
    
    15,000Other debt
    
    
    15,464
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,464Total contractual
obligations
    
    $
    759,487
    
    
    $
    590,240
    
    
    $
    63,467
    
    
    $
    39,929
    
    
    $
    65,849
 Amount of Commitment Expiration Per PeriodUnfunded
    
    Less than
    
    One to
    
    Four to
    
    AfterCommitments
    
    One Year
    
    Three Years
    
    Five Years
    
    Five Years(In Thousands)Commitments:Commercial lines of credit
    
    $
    27,635
    
    
    $
    16,430
    
    
    $
    5,964
    
    
    $
    1,303
    
    
    $
    3,938Consumer lines of credit(1)
    
    
    22,568
    
    
    
    1,203
    
    
    
    00
    
    
    
    00
    
    
    
    21,365Undisbursed portion of loans
in process
    
    
    17,050
    
    
    
    14,161
    
    
    
    2,662
    
    
    
    
    
    
    
    227Letters of credit
    
    
    861
    
    
    
    761
    
    
    
    
    
    
    
    
    
    
    
    100Total commitments
    
    $
    68,114
    
    
    $
    32,555
    
    
    $
    8,626
    
    
    $
    1,303
    
    
    $
    25,630
   (1)
    
    Lines of credit with no stated maturity date are included in commitments
for less than one year. Off-Balance Sheet Arrangements As discussed in the Asset and Liability Management section above, we
utilize external hedging transactions to effectively increase the elasticity of
our liabilities and/or effectively contract the elasticity of our assets so
that the respective elasticities are matched as closely as possible with the
use of external hedging. External hedging generally involves the use of
interest rate swaps, caps, floors, options and futures, which are off-balance
sheet arrangements. We use interest rate swap instruments to effectuate our
external 63




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##### Table of Contents



hedging strategy. At December 31, 2003, 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 $137.0 million and
maturities from February 2004 to December 2013. The notional amount of
interest rate contracts represents the underlying amount on which periodic cash
flows are calculated and exchanged between counterparties. However, this
notional amount does not necessarily represent the principal amount of
securities, which would effectively be hedged by that interest rate contract.
Our interest rate swap instruments require that we make fixed-rate payments
ranging from 2.7% to 6.3% and receive payments based upon three-month LIBOR.
These fixed-pay swaps are used to effectively modify the interest rate
sensitivity of a portion of Los Padres Banks short-term LIBOR correlated
borrowings which include short-term deposits, securities sold under agreements
to repurchase and FHLB advances. At December 31, 2003, the interest rate swaps listed below are hedging the
interest rate risk of cash flows associated with short-term FHLB advances and
certificates of deposit with terms between six and twelve months. These swaps
qualify as cash flow hedges. Weighted-AverageContract or
    
    
    
    
    
    Interest RateNotional
    
    EstimatedAmount
    
    Fair Value
    
    Receivable
    
    PayableDecember 31, 2003 -Interest
rate swaps - pay fixed
receive 3-month LIBOR
    
    $
    137,000
    
    
    $
    (5,904
    )
    
    
    1.17
    %
    
    
    4.40
    %December 31, 2002 -Interest
rate swaps - pay fixed
receive 3-month LIBOR
    
    $
    109,000
    
    
    $
    (6,813
    )
    
    
    1.47
    %
    
    
    4.42
    %
 The following table sets forth the maturity distribution and
weighted-average interest rates of the interest rate swaps used to limit the
repricing risk of deposits and short-term borrowings as of December 31, 2003: Maturities
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    ThereafterInterest rate swaps:Notional amount
    
    $
    5,000
    
    
    
    
    
    
    $
    23,000
    
    
    $
    52,000
    
    
    $
    4,000
    
    
    $
    53,000Weighted-average
payable rate
    
    
    5.27
    %
    
    
    
    
    
    
    2.92
    %
    
    
    3.80
    %
    
    
    3.78
    %
    
    
    5.59
    %Weighted-average
receivable rate
    
    
    1.16
    %
    
    
    
    
    
    
    1.16
    %
    
    
    1.17
    %
    
    
    1.17
    %
    
    
    1.18
    %
 At December 31, 2003, we did not hold any interest rate swaps as trading
account assets, except for certain interest rate swaps that we utilize in order
to enhance our returns and not for the purpose of interest rate risk
management. The following table sets forth the interest rate swaps held to enhance our
returns. 64




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##### Table of Contents



Estimated
    
    Weighted AverageContract orNotional
    
    Fair Value
    
    Interest RateAmount
    
    Asset
    
    Liability
    
    Payable
    
    Receivable2003Total return
swaps - receive total return
CMBS investment grade total return,
pay LIBOR
    
    $
    100,000
    
    
    $
    166
    
    
    $
    0
    
    

    Bank receives the spread on Lehman Brothers AAA CMBS Index Plus a spread and receives or pays the
market value change of index2002Total return
swaps - receive total return
CMBS investment grade total return,
pay LIBOR
    
    $
    60,000
    
    
    $
    0
    
    
    $
    17
    
    
    Bank receives the spread on Lehman Brothers AAA CMBS Index Plus a spread and receives or pays the
market value change of indexTotal return swaps  receive total return
GN MBS adjustable rate, pay LIBOR
    
    
    14,455
    
    
    
    0
    
    
    
    0
    
    
    
    1.84
    %
    
    
    5.72
    %
 The Interest Rate Agreements used have an active secondary market and are
included in trading account assets at fair value. The realized and unrealized
gains and losses on these instruments are recognized immediately in other
income. Los Padres Banks exposure to credit risk from derivative financial
instruments is represented by the fair value of the instruments. Credit risk
amounts represent the replacement cost Los Padres Bank could incur should
counterparties with contracts in a gain position completely fail to perform
under the terms of those contracts. Counterparties are subject to the credit
approval and credit monitoring policies and procedures of Los Padres Bank. Los
Padres Bank limits its credit exposure by entering into International Swap
Dealer Association (ISDA) Master Agreements with each counterparty. ISDA
Master Agreements set the legal framework for transactions with counterparties
in over the counter derivative markets. Los Padres Bank only deals with
counterparties that are investment grade. Los Padres Bank has unfunded loan commitments and letters of credit which
are also considered off-balance sheet arrangements. A summary of these
commitments is presented in the Contractual Obligations and Commercial
Commitments section above. Inflation and Changing Prices Our consolidated financial statements and related data presented in this
prospectus have been prepared in accordance with accounting principles
generally accepted in the U.S., which require the measurement of financial
position and operating results in terms of historical dollars (except with
respect to securities which are carried at market value), without considering
changes in the relative purchasing power of 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 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 65




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##### Table of Contents



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. 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. As
of June 2003, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, including the deferral of
certain effective dates as a result of the provisions of FASB Staff Position
No. 150-3, Effective Date, Disclosures, and Transition for Mandatorily
Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Non-controlling interests Under FASB Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. The Company believes that it has properly classified
and measured in its balance sheet and disclosed in its financial statements
instruments with characteristics of both liabilities and equity. The adoption
of this standard did not have a material impact on the Companys financial
position or results of operation. 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. In addition to numerous FASB
staff positions written to clarify and improve the application of FIN46, the
FASB announced deferral of certain entities, and an amendment to FIN 46
entitled FASB Interpretation No. 46 (revised December 2003), 66




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##### Table of Contents



Consolidation of
Variable Interest Entities (FIN 46R). The Company adopted FIN46R to its
interests in special purpose entities (SPEs) as of December 31, 2003.
Adoption of this new method of accounting for SPEs did not and is not expected
to have a material impact on the Companys consolidated results of operation
and financial position. As of June 2003, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity, including the deferral of
certain effective dates as a result of the provisions of FASB Staff Position
No. 150-3, Effective Date, Disclosures, and Transition for Mandatorily
Redeemable Financial instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Non-controlling Interests Under FASB Statement No. 150,
Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity. The Company believes that it has properly classified
and measured in its balance sheet and disclosed in its financial statements
instruments with characteristics of both liabilities and equity. The adoption
of this standard did not have a material impact on the Companys financial
position or results of operation. 
 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. 67




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC. INDEX TO FINANCIAL STATEMENTS PageINDEPENDENT AUDITORS REPORT
    
    
    1CONSOLIDATED FINANCIAL STATEMENTS:Consolidated Statements of Financial Condition -
December 31, 2003 and 2002
    
    
    2Consolidated Statements of Earnings for the
Years Ended December 31, 2003, 2002 and 2001
    
    
    3Consolidated Statements of Stockholders Equity for the
Years Ended December 31, 2003, 2002 and 2001
    
    
    4-5Consolidated Statements of Cash Flows for the
Years Ended December 31, 2003, 2002 and 2001
    
    
    6-7Notes to Consolidated Financial Statements
    
    
    8-46




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##### Table of Contents



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, 2003 and 2002, and the related consolidated statements of
earnings, stockholders equity and cash flows for each of the three years in
the period ended December 31, 2003. 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, 2003 and 2002, 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 March 9, 2004 F-1




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Dollars in thousands, except share data) December 31,2003
    
    2002ASSETSCash and cash equivalents
    
    $
    22,856
    
    
    $
    19,212Trading account assets
    
    
    2,111
    
    
    
    1,934Securities available for sale
    
    
    398,691
    
    
    
    324,530Securities held to maturity
    
    
    222
    
    
    
    2,368Loans receivable, net
    
    
    518,496
    
    
    
    448,050Accrued interest receivable
    
    
    2,928
    
    
    
    3,526Premises and equipment, net
    
    
    6,454
    
    
    
    4,469Prepaid expenses and other assets
    
    
    1,867
    
    
    
    1,761Investment in FHLB stock, at cost
    
    
    13,425
    
    
    
    11,750Income taxes receivable
    
    
    
    
    
    
    252Deferred tax asset
    
    
    2,651
    
    
    
    1,187Goodwill
    
    
    3,981
    
    
    
    3,981Core deposit intangible, net
    
    
    1,117
    
    
    
    1,311TOTAL
    
    $
    974,799
    
    
    $
    824,331LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Interest bearing
    
    $
    541,533
    
    
    $
    505,165Noninterest bearing
    
    
    29,164
    
    
    
    20,106Total deposits
    
    
    570,697
    
    
    
    525,271FHLB advances
    
    
    262,500
    
    
    
    235,000Securities sold under repurchase agreements
    
    
    65,728
    
    
    
    517Other Debt
    
    
    15,464
    
    
    
    Note payable
    
    
    
    
    
    
    11,300Accounts payable and accrued expenses
    
    
    11,623
    
    
    
    9,771Income taxes payable
    
    
    711
    
    
    
    Total liabilities
    
    
    926,723
    
    
    
    781,859COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, $.01 par value; 1,000,000 shares authorized; none issued
and outstandingCommon stock, $.01 par value; 9,000,000 shares authorized; 4,338,451 shares
issued and outstanding as of December 31, 2003 and 4,327,951 as of
December 31, 2002
    
    
    43
    
    
    
    43Additional paid-in capital
    
    
    30,710
    
    
    
    30,641Retained earnings
    
    
    20,082
    
    
    
    13,795Accumulated other comprehensive income, net of tax of $(2,024) and $(1,181)
at December 31, 2003 and 2002, respectively
    
    
    (2,759
    )
    
    
    (2,007
    )Total stockholders equity
    
    
    48,076
    
    
    
    42,472TOTAL
    
    $
    974,799
    
    
    $
    824,331
 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 EndedDecember 31,2003
    
    2002
    
    2001INTEREST INCOME:Interest on loans
    
    $
    33,147
    
    
    $
    31,500
    
    
    $
    31,914Interest and dividends on securities
    
    
    13,287
    
    
    
    11,993
    
    
    
    9,254Total interest income
    
    
    46,434
    
    
    
    43,493
    
    
    
    41,168INTEREST EXPENSE:Interest on deposits
    
    
    10,377
    
    
    
    14,031
    
    
    
    19,183Interest on FHLB advances and other borrowings
    
    
    9,931
    
    
    
    7,890
    
    
    
    6,634Total interest expense
    
    
    20,308
    
    
    
    21,921
    
    
    
    25,817NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES
    
    
    26,126
    
    
    
    21,572
    
    
    
    15,351PROVISION FOR LOAN LOSSES
    
    
    790
    
    
    
    391
    
    
    
    1NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    25,336
    
    
    
    21,181
    
    
    
    15,350OTHER INCOME (LOSS):(Loss) income from trading assets
    
    
    2,647
    
    
    
    (31
    )
    
    
    436Loss on extinguishment of debt
    
    
    (1,610
    )
    
    
    
    
    
    
    Gain (loss) on sale of loans
    
    
    
    
    
    
    
    
    
    
    69Other gain (loss)
    
    
    30
    
    
    
    (350
    )
    
    
    (139
    )Banking fee income
    
    
    4,108
    
    
    
    2,531
    
    
    
    1,135Total other income
    
    
    5,175
    
    
    
    2,150
    
    
    
    1,501OTHER EXPENSES:Salaries and employee benefits
    
    
    10,086
    
    
    
    7,847
    
    
    
    5,444Premises and equipment
    
    
    2,722
    
    
    
    2,197
    
    
    
    1,631Insurance premiums
    
    
    520
    
    
    
    255
    
    
    
    250Marketing
    
    
    320
    
    
    
    260
    
    
    
    184Computer services
    
    
    640
    
    
    
    542
    
    
    
    458Consulting fees
    
    
    1,011
    
    
    
    733
    
    
    
    523Office expenses and supplies
    
    
    762
    
    
    
    694
    
    
    
    427Other
    
    
    1,788
    
    
    
    2,229
    
    
    
    1,400Total other expenses
    
    
    17,849
    
    
    
    14,757
    
    
    
    10,317INCOME BEFORE INCOME TAXES
    
    
    12,662
    
    
    
    8,574
    
    
    
    6,534INCOME TAXES
    
    
    5,249
    
    
    
    3,529
    
    
    
    2,732NET INCOME
    
    $
    7,413
    
    
    $
    5,045
    
    
    $
    3,802BASIC EARNINGS PER SHARE
    
    $
    1.71
    
    
    $
    1.44
    
    
    $
    1.14DILUTED EARNINGS PER SHARE
    
    $
    1.63
    
    
    $
    1.39
    
    
    $
    1.12BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING
    
    
    4,330,840
    
    
    
    3,503,713
    
    
    
    3,321,189DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING
    
    
    4,545,835
    
    
    
    3,641,684
    
    
    
    3,396,885
 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) AccumulatedCommon Stock
    
    AdditionalPaid-In
    
    Retained
    
    Comprehensive
    
    OtherComprehensive
    
    TotalStockholdersShares
    
    Amount
    
    Capital
    
    Earnings
    
    Income
    
    Income
    
    EquityBALANCE, DECEMBER 31, 2000
    
    
    3,246,789
    
    
    
    33
    
    
    
    19,573
    
    
    
    5,726
    
    
    
    
    
    
    
    225
    
    
    
    25,557Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,802
    
    
    $
    3,802
    
    
    
    
    
    
    
    3,802Other comprehensive income,
net of taxUnrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    912
    
    
    
    912
    
    
    
    912Effective portion of change
in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (507
    )
    
    
    (507
    )
    
    
    (507
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,207Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (353
    )
    
    
    
    
    
    
    
    
    
    
    (353
    )Stock options
    
    
    107,547
    
    
    
    1
    
    
    
    732
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    733BALANCE, DECEMBER 31, 2001
    
    
    3,354,336
    
    
    
    34
    
    
    
    20,305
    
    
    
    9,175
    
    
    
    
    
    
    
    630
    
    
    
    30,144Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,045
    
    
    
    5,045
    
    
    
    
    
    
    
    5,045Other comprehensive income,
net of taxUnrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    671
    
    
    
    671
    
    
    
    671Effective portion of change
in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,308
    )
    
    
    (3,308
    )
    
    
    (3,308
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,408Initial public offering
    
    
    973,615
    
    
    
    9
    
    
    
    10,212
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,221Stock Options
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    124Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (425
    )
    
    
    
    
    
    
    
    
    
    
    (425
    )BALANCE, DECEMBER 31, 2002
    
    
    4,327,951
    
    
    $
    43
    
    
    $
    30,641
    
    
    $
    13,795
    
    
    
    
    
    
    $
    (2,007
    )
    
    $
    42,472Comprehensive incomeNet income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,413
    
    
    
    7,413
    
    
    
    
    
    
    
    7,413Other comprehensive income,
net of taxUnrealized gains on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,245
    )
    
    
    (1,245
    )
    
    
    (1,245
    )Effective portion of change
in fair
value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    493
    
    
    
    493
    
    
    
    493Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,661Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,126
    )
    
    
    
    
    
    
    
    
    
    
    (1,126
    )Stock Options
    
    
    10,500
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69BALANCE, DECEMBER 31, 2003
    
    
    4,338,451
    
    
    $
    43
    
    
    $
    30,710
    
    
    $
    20,082
    
    
    
    
    
    
    $
    (2,759
    )
    
    $
    48,076
 (Continued) See notes to financial statements. F-4




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(Dollars in thousands) Year EndedDecember 31,2003
    
    2002
    
    2001DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding (losses) gains arising during the period,
net of tax (benefit) expense of $(1,500), $529 and $715 for 2003,
2002 and 2001, respectively
    
    $
    (2,115
    )
    
    $
    756
    
    
    $
    988Less: Reclassification adjustment for gains included in
net income, net of tax expense of $617, $60 and $55 for
2003, 2002 and 2001, respectively
    
    
    870
    
    
    
    (85
    )
    
    
    (76
    )Net unrealized (loss) gain on securities, net of tax (benefit) expense
of $(883), $469 and $660 for 2003, 2002 and 2001, respectively
    
    $
    (1,245
    )
    
    $
    671
    
    
    $
    912Cumulative effect of accounting change (SFAS No. 133),
net of tax expense of $136 for 2001
    
    
    
    
    
    
    
    
    
    $
    188Unrealized net gains on cash flow hedges, net of tax expense
(benefit) of $380 for 2003 and $(2,399) for 2002
    
    
    535
    
    
    
    (3,313
    )
    
    
    (690
    )Less: reclassification adjustment for net gains on
cash flow hedges included in net income, net of
tax benefit of $30 for 2003, $4 for 2002 and $(4) for 2001
    
    
    (42
    )
    
    
    5
    
    
    
    (5
    )Net unrealized loss on cash flow hedges
    
    $
    493
    
    
    $
    (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 EndedDecember 31,2003
    
    2002
    
    2001CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    7,413
    
    
    $
    5,045
    
    
    $
    3,802Adjustments to reconcile net income to net cash provided by
operating activities:Accretion of deferred loan fees and costs
    
    
    (2,006
    )
    
    
    (680
    )
    
    
    (969
    )Depreciation and amortization
    
    
    1,076
    
    
    
    918
    
    
    
    771Amortization of premiums and discounts
    
    
    4,198
    
    
    
    4,594
    
    
    
    2,399Provision for loan losses
    
    
    790
    
    
    
    391
    
    
    
    1Activity in securities held for trading
    
    
    (180
    )
    
    
    803
    
    
    
    1,196Loss on sale of real estate acquired through foreclosure
    
    
    
    
    
    
    8
    
    
    
    Gain on sale of investment securities
    
    
    (1,487
    )
    
    
    (145
    )
    
    
    (131
    )Loss on sale of real estate
    
    
    
    
    
    
    
    
    
    
    139Stock-based compensation
    
    
    
    
    
    
    124
    
    
    
    106(Gain) on sale of loans
    
    
    
    
    
    
    
    
    
    
    (69
    )FHLB stock dividend
    
    
    (573
    )
    
    
    (386
    )
    
    
    (408
    )Increase (decrease) in accrued interest receivable
    
    
    598
    
    
    
    41
    
    
    
    (533
    )Decrease (increase) in income taxes (payable) receivable
    
    
    963
    
    
    
    (591
    )
    
    
    (10
    )Deferred income taxes
    
    
    (1,464
    )
    
    
    111
    
    
    
    (375
    )(Increase) decrease in prepaid expenses
    
    
    (106
    )
    
    
    176
    
    
    
    (66
    )Increase in accounts payable
    
    
    2,791
    
    
    
    507
    
    
    
    772Net cash provided by operating activities
    
    
    12,013
    
    
    
    10,916
    
    
    
    6,625CASH FLOWS FROM INVESTING ACTIVITIES:Acquisitions, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (375
    )Net (increase) decrease in loans receivable
    
    
    (69,688
    )
    
    
    520
    
    
    
    (9,403
    )Proceeds from sale of loans
    
    
    
    
    
    
    
    
    
    
    27,471Proceeds from matured and called securities held to maturity
    
    
    2,000
    
    
    
    
    
    
    
    2,000Proceeds from sales of securities available for sale
    
    
    34,033
    
    
    
    2,378
    
    
    
    12,975Purchase of securities held to maturity
    
    
    
    
    
    
    
    
    
    
    (2,055
    )Purchases of securities available for sale
    
    
    (255,527
    )
    
    
    (267,251
    )
    
    
    (189,437
    )Principal paydowns on securities available for sale
    
    
    143,083
    
    
    
    118,496
    
    
    
    48,866Principal paydowns on securities held to maturity
    
    
    133
    
    
    
    228
    
    
    
    105Proceeds from sale of real estate acquired through foreclosure
    
    
    
    
    
    
    665
    
    
    
    Purchase of premises and equipment
    
    
    (2,867
    )
    
    
    (1,505
    )
    
    
    (988
    )Purchase of FHLB stock
    
    
    (1,102
    )
    
    
    (3,530
    )
    
    
    (1,551
    )Net cash used in investing activities
    
    
    (149,935
    )
    
    
    (149,999
    )
    
    
    (112,392
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net (decrease) increase in deposits
    
    
    45,745
    
    
    
    5,343
    
    
    
    88,528Increase in securities sold under agreements to repurchase
    
    
    65,211
    
    
    
    152
    
    
    
    365Increase in FHLB advances
    
    
    27,500
    
    
    
    138,597
    
    
    
    5,403(Repayments) advances on note payable
    
    
    (11,300
    )
    
    
    (6,700
    )
    
    
    9,000Increase in other debt
    
    
    15,464
    
    
    
    
    
    
    
    Exercise of stock options on common stock
    
    
    69
    
    
    
    
    
    
    
    627Proceeds from initial public offering
    
    
    
    
    
    
    10,221
    
    
    
    Dividends paid on common stock
    
    
    (1,127
    )
    
    
    (425
    )
    
    
    (353
    )Net cash provided by (used in) financing activities
    
    
    141,566
    
    
    
    147,188
    
    
    
    103,570NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS
    
    
    3,644
    
    
    
    8,105
    
    
    
    (2,197
    )CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
    
    
    19,212
    
    
    
    11,107
    
    
    
    13,304CASH AND CASH EQUIVALENTS, END OF YEAR
    
    $
    22,856
    
    
    $
    19,212
    
    
    $
    11,107
 (Continued) F-6




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Year EndedDecember 31,2003
    
    2002
    
    2001SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION -Cash paid during the year for:Interest
    
    $
    16,443
    
    
    $
    21,155
    
    
    $
    25,737Income taxes
    
    $
    5,234
    
    
    $
    3,996
    
    
    $
    3,052SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES -Net unrealized gain on available for sale securities
    
    $
    1,245
    
    
    $
    671
    
    
    $
    912
  See notes to consolidated financial statements
    
    (Concluded)
 F-7




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##### Table of Contents



HARRINGTON WEST FINANCIAL GROUP, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)  1.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESBusiness of the Company- Harrington West Financial Group, Inc. (the
Company) is a savings and loan holding company incorporated on August 29,
1995 to acquire and hold all of the outstanding common stock of Los Padres
Bank (the Bank), a federally chartered savings bank which operates 12
branches serving individuals and small to medium-sized businesses. Nine
banking facilities are operated on the California Central Coast, two
banking facilities are located in Kansas, and operated as a division under
the Harrington Bank brand, and one banking facility is located in
Scottsdale, Arizona.On 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.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 973,015 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 inter-company accounts and transactions
have been eliminated.On February 1, 1999, the Bank purchased a 49% interest in Harrington Wealth
Management Company (HWMC). HWMC offers trust and investment management
services to the customers of the Bank. On October 31, 2001, the Bank
purchased the remaining 51% interest in HWMC. 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 the Bank and is
consolidated into the 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. F-8




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##### Table of Contents



Segments- The Company has a single operating segment, banking operations.Cash and Cash Equivalents- For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal
funds sold. Generally, federal funds are purchased and sold for one-day
periods.Securities Sold under Agreements to Repurchase- Transactions involving
sales of securities under agreements to repurchase are accounted for as
collateralized financings except where the Bank does not have an
arrangement to purchase the same or substantially the same securities
before maturity at a fixed or determinable price.Trading Securities- Trading securities are debt and equity securities that
are bought and held principally for the purpose of active management.
These securities are reported at fair value and included in trading account
assets on the balance sheet. Realized and unrealized gains and losses are
included in income from trading account assets.Available for Sale Securities- Debt and equity securities not classified
as either held to maturity or trading securities are classified as
securities available for sale and recorded at fair value, with unrealized
gains and losses, after applicable taxes, excluded from earnings and
reported as a separate component of stockholders equity. Declines in the
value of debt securities and marketable equity securities that are
considered to be other than temporary are recorded as a permanent
impairment of securities available for sale in the statement of earnings.
Gains and losses on the sale of securities are recorded on the trade date
and are determined using the specific identification method.Held to Maturity Securities- Held to maturity securities represent
investments that the Bank has the positive intent and ability to hold to
maturity and are reported at amortized cost.Loans Receivable- Loans receivable are carried at the principal amount
outstanding, net of deferred loan fees, costs, premiums and allowance for
loan losses.Loan Interest Income and Fees- Interest on loans is accrued as earned,
except non-accrual loans on which interest is normally discontinued
whenever the payment of principal or interest is considered to be in doubt.
When a loan is placed on non-accrual, all previously accrued but
uncollected interest is reversed against current period income. Interest
income is subsequently recognized only to the extent cash payments are
received.Loan origination fees and certain direct loan origination costs are
deferred and recognized over the lives of the related loans as an
adjustment to yield using a method that approximates the level-yield
method. Calculation of the yield is done on a loan-by-loan basis.
Unamortized fees are recognized in income in the year the related loans are
sold or paid off. Other loan fees and charges representing service costs
for the repayment of loans, delinquent payments or miscellaneous loan
services are recorded as income when collected.Discounts and premiums on loans are amortized into interest income, using a
method that approximates the level-yield method over the estimated life of
the related loans.Allowance for Loan Losses- Allowance for loan losses is increased by
charges to income and decreased by charge-offs (net of recoveries).The allowance is maintained at a level believed by management to be
sufficient to absorb estimated probable credit losses. Managements
determination of the adequacy of the allowance is based on periodic
evaluations of the credit portfolio and other relevant factors. This
evaluation is inherently F-9




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##### Table of Contents



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, 2003 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 $8,675 and $25,483 at December 31, 2003 and 2002,
respectively. F-10




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##### Table of Contents



The balance of capitalized servicing rights, net of valuation allowances,
included in other assets at December 31, 2003 and 2002, was $44 and $145,
respectively. The fair values of these rights were $44 and $145,
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: 2003
    
    2002Beginning balance of capitalized mortgage servicing rights
    
    $
    369
    
    
    $
    436Mortgage servicing rights capitalized
    
    
    
    
    
    
    Mortgage servicing rights amortized
    
    
    (63
    )
    
    
    (67
    )Ending balance of capitalized mortgage servicing rights
    
    $
    306
    
    
    $
    369Valuation allowances:Balance, beginning of year
    
    $
    224
    
    
    $
    56Additions
    
    

    38
    
    
    
    168Balance, end of year
    
    $
    262
    
    
    $
    224
  Real Estate Acquired through Foreclosure- Real estate acquired through
foreclosure is carried at estimated fair value at the time of foreclosure.
Any subsequent operating expense or income, reduction in estimated values,
and gains or losses on disposition of such properties are included in
current operations.Income Taxes- Deferred tax assets or liabilities shown on the balance
sheet are adjusted to reflect differences between the tax bases of assets
and liabilities and their reported amounts in the financial statements.Premises and Equipment- Premises and equipment are stated at cost less
accumulated depreciation. Depreciation and amortization are computed on
the straight-line method over the estimated useful lives of the assets.
The depreciable lives range from 3 to 20 years for leasehold improvements,
5 to 20 years for furniture, fixtures and equipment and 30 years for the
office building.Impairment of Long Lived Assets- The Bank reviews its long-lived assets
for impairment annually or when events or circumstances indicate that the
carrying amount of these assets may not be recoverable. An asset is
considered impaired when the expected undiscounted cash flows over the
remaining useful life is less than the net book value. When impairment is
indicated for an asset, the amount of impairment loss is the excess of the
net book value over its fair value.Core Deposit Intangibles- Core deposit intangibles are established in
connection with purchase business combinations of banking or thrift
institutions. The intangible asset represents the fair 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, 2003 and 2002,
the gross balance of core deposit intangibles was $1,937, and the
accumulated
amortization was $820 and $626, respectively. The amortization expense was
$194 for each of the years ended December 31, 2003 and 2002, respectively. F-11




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##### Table of Contents



Goodwill Goodwill is no longer amortized in accordance with SFAS No. 142
but, instead is tested for impairment at least annually. A goodwill
impairment test was completed on September 30, 2003. No impairment loss
was recorded by the Company.Derivatives Held for Asset and Liability Management Purposes- The Company
adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended 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 ($2,121), 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.Recent Accounting Pronouncements -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. F-12




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##### Table of Contents



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 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, F-13




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##### Table of Contents



"Consolidated Financial
Statements, relating to consolidation of certain entities. In addition
to numerous FASB staff positions written to clarify and improve the
application of FIN46, the FASB announced deferral of certain entities, and
an amendment to FIN 46 entitled FASB Interpretation No. 46 (revised
December 2003), Consolidation of Variable Interest Entities(FIN 46R).
The Company adopted FIN46R for its interests in special purpose entities
(SPEs) as of December 31, 2003. Adoption of this new method of
accounting for SPEs did not and is not expected to have a material impact
on the Companys consolidated results of operation and financial position.
As of June 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity, including
the deferral of certain effective dates as a result of the provisions of
FASB Staff Position No. 150-3, Effective Date, Disclosures, and Transition
for Mandatorily Redeemable Financial instruments of Certain Nonpublic
Entities and Certain Mandatorily Redeemable Non-controlling Interests Under
FASB Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. The Company believes that
it has properly classified and measured in its balance sheet and disclosed
in its financial statements instruments with characteristics of both
liabilities and equity. The adoption of this standard did not have a
material impact on the Companys financial position or results of
operation.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 is reserved for preferred stock.The company announced in an 8-K filing on February 11, 2004
that it has declared a 6 for 5 stock split in the form of a stock
dividend payable on March 11, 2004 to holders of record on
February 25, 2004. Fractional shares distributed in connection
with this stock dividend will be paid in cash based on the closing
market price on the record date. The stock split in the form of a
stock dividend is not reflected in accompanied consolidated financial
statements. F-14




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##### Table of Contents



2.
    
    LOANS RECEIVABLEThe Banks loan portfolio as of December 31 is summarized as follows: 2003
    
    2002Real estate loans:Residential property - one to four units
    
    $
    93,725
    
    
    $
    116,714Residential property - more than four units
    
    
    82,090
    
    
    
    71,856Residential property - construction
    
    
    14,376
    
    
    
    14,697Nonresidential property - construction
    
    
    16,459
    
    
    
    4,969Commercial and other income - producing properties
    
    
    234,606
    
    
    
    183,264Loans for the acquisition and development of land
    
    
    8,312
    
    
    
    14,948Total real estate loans
    
    
    449,568
    
    
    
    406,448Commercial and industrial loans
    
    
    56,942
    
    
    
    27,676Consumer loans
    
    
    16,613
    
    
    
    17,565Loans collateralized by deposit accounts
    
    
    895
    
    
    
    372Consumer line-of-credit loans
    
    
    140
    
    
    
    131524,158
    
    
    
    452,192Net deferred loan fees
    
    
    (1,394
    )
    
    
    (1,332
    )Net premiums
    
    
    319
    
    
    
    987Allowance for loan losses
    
    
    (4,587
    )
    
    
    (3,797
    )Loans receivable, net
    
    $
    518,496
    
    
    $
    448,050
  The Banks lending is concentrated in Californias Central Coast, Kansas
City and the Scottsdale, Arizona metropolitan area. A deterioration in the
economic conditions of these markets could adversely affect our business,
financial condition and profitability. Such a deterioration could give
rise to increased loan delinquencies, increased problem asset and
foreclosures, decreased loan demand and a decline in real estate values.  At December 31, 2003, Los Padres Banks regulatory limit on loans-to-one
borrower was $9.5 million and its five largest loans or groups of
loans-to-one borrower, including related entities, aggregated $7.6 million,
$7.2 million, $5.9 million, $5.9 million and $5.6 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, 2003.  Activity in the allowance for loan losses is summarized as follows for the
years ended December 31: 2003
    
    2002
    
    2001Balance, beginning of year
    
    $
    3,797
    
    
    $
    3,736
    
    
    $
    3,150Allowance acquired in connection with branch purchase
    
    
    
    
    
    
    
    
    
    
    600Charge-offs
    
    
    
    
    
    
    (330
    )
    
    
    (15
    )Provision for loan losses
    
    
    790
    
    
    
    391
    
    
    
    1Balance, end of year
    
    $
    4,587
    
    
    $
    3,797
    
    
    $
    3,736
 F-15




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##### Table of Contents



Loans for which impairment has been recognized are as follows at December
31: 2003
    
    2002Impaired loans with a valuation allowance
    
    $
    723
    
    
    $
    468Impaired loans without a valuation allowanceTotal impaired loans
    
    
    723
    
    
    
    468Valuation Allowance related to impaired loans
    
    $
    50
    
    
    $
    50
 2003
    
    2002
    
    2001Average recorded investment in impaired loans
    
    $
    596
    
    
    $
    429
    
    
    $
    2,400Interest income recognized on impaired loans
    
    
    44
    
    
    
    52
    
    
    
    26
  At December 31, the Bank had outstanding commitments for loan originations
totaling $34,381 for 2003 and $18,887 for 2002, of which $28,543 for 2003
and $8,838 for 2002 were for adjustable rate loans and $5,838 for 2003 and
$10,049 for 2002 were for fixed rate loans. Undisbursed loan funds for the
Banks construction lending program amounted to $17,050 for 2003 and
$27,306 for 2002.  3.
    
    SECURITIES  The amortized cost and estimated fair values of securities available for
sale are summarized as follows: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairSecurities Available for Sale:
    
    Cost
    
    Gains
    
    Losses
    
    ValueDecember 31, 2003Mortgage-backed securities - pass throughs
    
    $
    129,766
    
    
    $
    915
    
    
    $
    (307
    )
    
    $
    130,374Collateralized mortgage obligations
    
    
    48,704
    
    
    
    
    
    
    
    (123
    )
    
    
    48,581Commercial mortgage-backed securities
    
    
    59,927
    
    
    
    1,022
    
    
    
    (33
    )
    
    
    60,916Asset-backed securities (underlying securities mortgages)
    
    
    157,821
    
    
    
    404
    
    
    
    (973
    )
    
    
    157,252Corporate debt securities
    
    
    1,489
    
    
    
    79
    
    
    
    
    
    
    
    1,568$
    397,707
    
    
    $
    2,420
    
    
    $
    (1,436
    )
    
    $
    398,691December 31, 2002Mortgage-backed securities - pass throughs
    
    $
    161,603
    
    
    $
    2,792
    
    
    $
    (39
    )
    
    $
    164,356Collateralized mortgage obligations
    
    
    71,103
    
    
    
    117
    
    
    
    (530
    )
    
    
    70,690Commercial mortgage-backed securities
    
    
    64,188
    
    
    
    713
    
    
    
    
    
    
    
    64,901Asset-backed securities (underlying securities mortgages)
    
    
    23,736
    
    
    
    31
    
    
    
    (36
    )
    
    
    23,731Corporate debt securities
    
    
    807
    
    
    
    45
    
    
    
    
    
    
    
    852$
    321,437
    
    
    $
    3,698
    
    
    $
    (605
    )
    
    $
    324,530
 F-16




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##### Table of Contents



The fair values and unrealized losses of the securities classified as
available-for-sale or held-to-maturity with unrealized losses as of December
31, 2003 segregated by investments that have been in a continuous unrealized
loss position for less than 12 months and investments that have been in a
continuous unrealized loss position for 12 months or longer are summarized
below: Less than 12 Months
    
    12 Months or More
    
    TotalFair
    
    Unrealized
    
    Fair
    
    Unrealized
    
    Fair
    
    UnrealizedDecember 31, 2003
    
    Value
    
    Losses
    
    Value
    
    Losses
    
    Value
    
    LossesMortgage-backed securities -
pass throughs
    
    $
    49,450
    
    
    $
    (307
    )
    
    $
    0
    
    
    $

    0
    
    
    $
    49,450
    
    
    $
    (307
    )Collateralized mortgage obligations
    
    
    48,581
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    48,581
    
    
    
    (123
    )Commercial mortgage-backed
securities
    
    
    2,766
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    2,766
    
    
    
    (33
    )Asset-backed securities
    
    
    29,092
    
    
    
    (973
    )
    
    
    
    
    
    
    
    
    
    
    29,092
    
    
    
    (973
    )$
    129,889
    
    
    $
    (1,436
    )
    
    $
    0
    
    
    $
    0
    
    
    $
    129,889
    
    
    $
    (1,436
    )
  Our mortgage-backed securities are insured or guaranteed by U.S. Government
agencies and government sponsored enterprises. 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). As of December 31,
2003, there are 26 mortgage-backed securities that are in an unrealized loss
position. Due to the insurance or guarantees on these securities, management
believes that the unrealized losses associated with these investments are
attributable to changes in interest rates and spreads, and accordingly, the
unrealized losses are not other-than-temporary impairments.  Our collateralized mortgage obligations are issued by private entities or
trusts and, as of December 31, 2003, are all rated AAA by a nationally
recognized rating agency. As of December 31, 2003, there are eight
collateralized mortgage obligation securities that are in an unrealized loss
position. Due to the AAA ratings noted above, Management believes that the
unrealized losses associated with these investments are attributable to changes
in interest rates and spreads, and accordingly, the unrealized losses are not
other-than-temporary impairments.  Our commercial mortgaged-backed securities are issued by various entities or
trusts and, as of December 31, 2003, all are rated as investment grade by a
nationally recognized rating agency. As of December 31, 2003, there are three
commercial mortgage-backed securities that are in an unrealized loss position.
Due to the investment grade ratings noted above, management believes that the
unrealized losses associated with these investments are attributable to changes
in interest rates and spreads, and accordingly, the unrealized losses are not
other-than-temporary impairments.  Our asset-backed securities are issued by private entities or trusts and, as of
December 31, 2003, are all rated as investment grade by a nationally recognized
rating agency. With the exception of one security discussed later in this
paragraph, the underlying collateral of these investments are single-family
mortgages. As of December 31, 2003, there are 12 asset-backed securities that
are in an unrealized loss position. As to the mortgage-related asset backed
securities, management believes that the unrealized losses associated with
these investments are attributable to changes in interest rates and spreads,
and accordingly, the unrealized losses are not other-than-temporary
impairments. The non-mortgage related F-17




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##### Table of Contents



asset-backed security, having a fair
value and unrealized loss of $4,961 and $952, respectively, of the
total fair value and unrealized loss for all asset-backed securities of $29,092
and $973, for December 31, 2003 and December 31, 2002, respectively, is
collateralized by a pool of loans and leases on medical equipment and medical
business loans and is of the senior tranches of the securities issued with
priority cash flow rights. This medical equipment, asset-backed security is
investment grade, rated Baa by Moodys and A+ by Fitch, as of December 31,
2003. Management believes that the $952 unrealized loss on this security is
attributable to uncertainty surrounding the bankruptcy of the servicer, DVI,
Inc. (DVI) and therefore the ability of the loans to be adequately monitored
and serviced. On February 24, 2004, an agreement was finalized to transfer the
servicing of DVI securities to U.S. Bank, NA. Since December 2003, U.S. Bank
personnel have been assisting DVI with the servicing of these securities and
underlying loans. As a result, the fair value of our DVI has improved, and
accordingly, Management believes that the unrealized loss associated with this
investment is not an other-than-temporary impairment. F-18




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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, 2003 are as follows: Amortized
    
    FairCost
    
    ValueMortgage-backed securities - pass throughsDue from five to ten years
    
    $
    4,174
    
    
    $
    4,349Due over ten years
    
    
    125,592
    
    
    
    126,025Total
mortgage backed securities - pass throughs
    
    
    129,766
    
    
    
    130,374Collateralized mortgage obligationsDue over ten years
    
    
    48,704
    
    
    
    48,581Total collateralized mortgage obligations
    
    
    48,704
    
    
    
    48,581Commercial mortgage-backed securitiesDue from one to five years
    
    
    28,717
    
    
    
    29,489Due over ten years
    
    
    31,210
    
    
    
    31,427Total commercial mortgage-back securities
    
    
    59,927
    
    
    
    60,916Asset-backed securities (underlying securities
mortgages)Due from five to ten years
    
    
    5,913
    
    
    
    4,961Due over ten years
    
    
    151,908
    
    
    
    152,291Total asset backed-securities
    
    
    157,821
    
    
    
    157,252Corporate debt securitiesDue over ten years
    
    
    1,489
    
    
    
    1,568Total corporate debt securities
    
    
    1,489
    
    
    
    1,568Total
    
    $
    397,707
    
    
    $
    398,691
 F-19




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##### Table of Contents



Proceeds from sales of available for sale securities were $34,033, $2,378
and $12,975, with related gross realized gains of $1,487, $145 and $131,
for 2003, 2002 and 2001, respectively.Securities Held to Maturity: Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember 31, 2003
    
    Cost
    
    Gains
    
    Losses
    
    ValueMortgage-backed securities
    
    $
    222
    
    
    $
    18
    
    
    
    
    
    
    $
    240Total
    
    $
    222
    
    
    $
    18
    
    
    
    
    
    
    $
    240
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairDecember 31, 2002
    
    Cost
    
    Gains
    
    Losses
    
    ValueAgency securities
    
    $
    2,013
    
    
    $
    74
    
    
    
    
    
    
    $
    2,087Mortgage-backed securities
    
    
    355
    
    
    
    25
    
    
    
    
    
    
    
    380Total
    
    $
    2,368
    
    
    $
    99
    
    
    
    
    
    
    $
    2,467
  The amortized cost and fair value of held to maturity debt securities by
contractual maturity at December 31, 2003 are as follows: Amortized
    
    FairCost
    
    ValueMortgage-backed securities -Due over 10 years
    
    $
    222
    
    
    $
    240Total
    
    $
    222
    
    
    $
    240
 F-20




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##### Table of Contents



4.
    
    PREMISES AND EQUIPMENTPremises and equipment consist of the following at December 31: DepreciableLives (years)
    
    2003
    
    2002Land
    
    
    
    $
    756
    
    
    $
    190Office building
    
    30
    
    
    1,314
    
    
    
    204Leasehold improvements
    
    3 to 20
    
    
    3,014
    
    
    
    3,067Furniture, fixtures and equipment
    
    5 to 20
    
    
    5,238
    
    
    
    4,563Total
    
    
    
    
    10,322
    
    
    
    8,024Less accumulated depreciation and amortization
    
    
    
    
    3,868
    
    
    
    3,555Premises and equipment, net
    
    
    
    $
    6,454
    
    
    $
    4,469
  5.
    
    DEPOSITS  A summary of deposits by type of account as of December 31 is as follows: 2003
    
    2002Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    AverageAmount
    
    Interest Rate
    
    Amount
    
    Interest RateNoninterest bearing
    
    $
    29,164
    
    
    
    
    
    
    $
    20,106
    
    
    
    Passbook
    
    
    19,868
    
    
    
    0.45
    %
    
    
    16,573
    
    
    
    0.88
    %NOW accounts
    
    
    32,567
    
    
    
    0.05
    %
    
    
    26,841
    
    
    
    0.40
    %Commercial DDA accounts
    
    
    4,621
    
    
    
    0.27
    %
    
    
    3,145
    
    
    
    0.28
    %Money market deposits
    
    
    90,009
    
    
    
    1.32
    %
    
    
    106,703
    
    
    
    1.64
    %Total
    
    
    176,229
    
    
    
    0.74
    %
    
    
    173,368
    
    
    
    1.16
    %Certificates of deposits:Over $100
    
    
    202,767
    
    
    
    2.16
    %
    
    
    157,601
    
    
    
    2.89
    %Other
    
    
    191,701
    
    
    
    2.28
    %
    
    
    194,302
    
    
    
    2.98
    %Total certificates of deposits
    
    
    394,468
    
    
    
    
    
    
    
    351,903Total deposits
    
    $
    570,697
    
    
    
    
    
    
    $
    525,271Weighted-average interest rate,
end of period
    
    
    
    
    
    
    1.76
    %
    
    
    
    
    
    
    2.35
    %
 F-21




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##### Table of Contents



As of December 31, 2003, certificates of deposits over $100 are scheduled
to mature as follows: December 312004
    
    $
    182,8082005
    
    
    12,0252006
    
    
    4,8592007
    
    
    2,4452008 and beyond
    
    
    630$
    202,767
  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 $340,589 and $288,537 at
December 31, 2003 and 2002, respectively.  FHLB advances are collateralized by the investment in the stock of the FHLB
and certain mortgage loans aggregating $262,298 and $79,150 at December 31,
2003 and 2002, respectively, and mortgage-backed securities aggregating
$119,629 and $186,018, current par value, at December 31, 2003 and 2002,
respectively. The weighted-average interest rate on these advances was
1.49% and 2.73% at December 31, 2003 and 2002, respectively.  The maturities of FHLB advances at December 31 are as follows: 20032004
    
    $
    242,5002010
    
    
    20,000$
    262,500
 F-22




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##### Table of Contents



7.
    
    NOTE PAYABLEAt December 31, 2003 and 2002, the Company has a loan facility from three
banks consisting of a revolving line of credit on which $0 and $11,300 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.On October 30, 2003, the terms of the Companys line of credit under its
loan facility were renegotiated from $25,000 to $15,000 after the Company
completed a $15.5 million capital trust offering (noted below in Footnote
#8) on September 25, 2003 and paid-off the line of credit. Additionally, a
few of the covenants were amended.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.  8.
    
    OTHER DEBT  On September 25, 2003, the company completed a $15.5 million capital trust
offering. The capital trust securities will bear an interest rate of LIBOR
plus 2.85 percent and will mature on October 8, F-23




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##### Table of Contents



2033. The capital securities were issued through a newly formed trust,
Harrington West Capital Trust I, in a private transaction. Interest is due
quarterly.  9.
    
    SECURITIES SOLD UNDER REPURCHASE AGREEMENTS We obtain funds from the sales of securities to investment dealers under
agreements to repurchase, known as reverse repurchase agreements. In a reverse
repurchase agreement transaction, we will generally sell a mortgage-backed
security agreeing to repurchase either the same or a substantially identical
security on a specific later date. For agreements in which we have agreed to
repurchase substantially identical securities, the dealers may sell, loan or
otherwise dispose of our securities in the normal course of their operations;
however, such dealers or third party custodians safe-keep the securities which
are to be specifically repurchased by us. Reverse repurchase transactions are
accounted for as financing arrangements rather than as sales of such
securities, and the obligation to repurchase such securities is reflected as a
liability in our consolidated financial statements. At December 31, 2003, we had four wholesale repurchase agreements with
Citigroup Financial Services totaling $65.0 million with a weighted average
coupon of 2.61% and maturities ranging from July 2005 to July 2010. We also
had retail repurchase agreements with our customers of $517 and $728 at
December 31, 2003 and 2002, respectively. The retail repurchase agreements
mature daily and have a weighted-average interest rate of .63% and 1.12% at
December 31, 2003 and 2002, respectively.  10.
    
    INCOME TAXES  The provision for taxes on income consists of the following components for
the years ended December 31: 2003
    
    2002
    
    2001Current tax expense:Federal
    
    $
    4,799
    
    
    $
    2,495
    
    
    $
    2,334State
    
    
    1,393
    
    
    
    923
    
    
    
    7736,192
    
    
    
    3,418
    
    
    
    3,107Deferred tax benefit:Federal
    
    
    (663
    )
    
    
    165
    
    
    
    (314
    )State
    
    
    (280
    )
    
    
    (54
    )
    
    
    (61
    )(943
    )
    
    
    111
    
    
    
    (375
    )$
    5,249
    
    
    $
    3,529
    
    
    $
    2,732
  The actual tax rates differed from the statutory rates as follows for the
years ended December 31: F-24




---



##### Table of Contents



2003
    
    2002
    
    2001Federal income taxes at statutory rates
    
    
    35.0
    %
    
    
    35.0
    %
    
    
    35.0
    %Increase resulting from:State tax, net of federal benefit
    
    
    5.7
    
    
    
    6.7
    
    
    
    7.2Other, net
    
    
    0.8
    
    
    
    (0.3
    )
    
    
    (0.4
    )41.5
    %
    
    
    41.4
    %
    
    
    41.8
    %
  The following is a summary of the income tax liability at December 31: 2003
    
    2002Current taxes
    
    $
    711
    
    
    $
    (252
    )Deferred taxes
    
    
    (2,651
    )
    
    
    (1,187
    )$
    (1,940
    )
    
    $
    (1,439
    )Deferred tax asset:Unrealized hedging loss on cash flow hedges
    
    
    (2,518
    )
    
    
    (2,861
    )Allowance for loan losses
    
    
    (1,923
    )
    
    
    (1,395
    )State tax
    
    
    (455
    )
    
    
    (390
    )Other
    
    
    
    
    
    
    (27
    )Depreciation
    
    
    (177
    )
    
    
    (304
    )Gross deferred tax asset
    
    
    (5,073
    )
    
    
    (4,977
    )Deferred tax liabilities:Net loan fees/costs
    
    $
    1,329
    
    
    $
    1,617FHLB stock dividends
    
    
    624
    
    
    
    785Mark to market on securities
    
    
    
    
    
    
    17Unrealized gain on available for sale securities
    
    
    408
    
    
    
    1,273Other
    
    
    61Purchase accounting adjustments
    
    
    
    
    
    
    98Gross deferred tax liability
    
    
    2,422
    
    
    
    3,790Net deferred tax asset
    
    $
    (2,651
    )
    
    $
    (1,187
    )
  As a result of acquiring the remaining 51% interest in HWMC 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. F-25




---



##### Table of Contents



11.
    
    STOCKHOLDERS EQUITYRetained earnings are restricted to the extent that earnings deducted for
tax purposes as bad debt deductions are not available for payment of cash
dividends or other distributions to stockholders without payment of federal
income taxes by the Bank at the then-prevailing corporate tax rates. At
December 31, 2003, this restricted amount was $671.Qualified Stock Option Plan- The Company has a qualified stock option plan
that provides for the granting of stock options to key employees of the
Bank. Options granted under the plan are vested ratably over a four-year
period. The option price is based on a determination of a price that is
not less than the fair value of the shares at the date of grant by the
Compensation Committee and ratified by the Board of Directors.During 1996, the Company granted 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 $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 $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. F-26




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##### Table of Contents



A summary of the status of the Companys stock options as of December 31
and changes during those years are presented below: 2003
    
    2002
    
    2001Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    ExerciseShares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceIncentive stock options:Outstanding, beginning of year
    
    
    423,825
    
    
    $
    7.75
    
    
    
    373,050
    
    
    $
    7.50
    
    
    
    369,000
    
    
    $
    7.39Granted
    
    
    63,950
    
    
    $
    11.28
    
    
    
    60,525
    
    
    $
    9.45
    
    
    
    32,550
    
    
    $
    8.33Expired unexercised
    
    
    
    
    
    
    
    
    
    
    (9,750
    )
    
    $
    8.56
    
    
    
    (28,500
    )
    
    $
    7.07Options exercised
    
    
    (10,500
    )
    
    $
    6.62Outstanding, end of year
    
    
    477,275
    
    
    $
    8.25
    
    
    
    423,825
    
    
    $
    7.75
    
    
    
    373,050
    
    
    $
    7.50Stock options granted to SBA
    
    
    42,453
    
    
    $
    5.83
    
    
    
    42,453
    
    
    $
    5.83
    
    
    
    42,453
    
    
    $
    5.83Outstanding, end of year
    
    
    519,728
    
    
    $
    8.05
    
    
    
    466,278
    
    
    $
    7.58
    
    
    
    415,503
    
    
    $
    7.33Exercisable, end of year
    
    
    334,500
    
    
    $
    7.40
    
    
    
    317,888
    
    
    $
    7.35
    
    
    
    268,875
    
    
    $
    7.18
  The outstanding options have prices ranging from $5.83 to $12.26.
Remaining available options to be issued under the stock option plan were
158,492 and 220,867 for December 31, 2003 and 2002, respectively. Options Outstanding
    
    Options ExercisableRange of
    
    
    
    
    
    RemainingExercise
    
    Number
    
    Contractual
    
    Exercise
    
    Number
    
    ExercisePrices
    
    Options
    
    Life (years)
    
    Price
    
    Options
    
    Price$5.83
    
    
    112,953
    
    
    
    2.5
    
    
    $
    5.83
    
    
    
    75,000
    
    
    $
    5.83$6.83
    
    
    78,000
    
    
    
    3.5
    
    
    $
    6.83
    
    
    
    82,500
    
    
    $
    6.83$8.33
    
    
    206,550
    
    
    
    4.9
    
    
    $
    8.33
    
    
    
    177,000
    
    
    $
    8.33$9.33
    
    
    52,275
    
    
    
    8.0
    
    
    $
    9.33$10.50
    
    
    6,000
    
    
    
    8.5
    
    
    $
    10.50$11.25
    
    
    58,950
    
    
    
    9.0
    
    
    $
    11.25$11.50
    
    
    4,000
    
    
    
    9.1
    
    
    $
    11.50$12.26
    
    
    1,000
    
    
    
    9.5
    
    
    $
    12.26Total
    
    
    519,728
    
    
    
    5.1
    
    
    $
    8.05
    
    
    
    334,500
    
    
    $
    7.40
  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. F-27




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##### Table of Contents



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
    
    2003
    
    2002
    
    2001Net income:As reported
    
    $
    7,413
    
    
    $
    5,045
    
    
    $
    3,802Pro forma
    
    $
    7,334
    
    
    $
    4,948
    
    
    $
    3,696Earnings per
share - basic:As reported
    
    $
    1.71
    
    
    $
    1.44
    
    
    $
    1.14Pro forma
    
    $
    1.69
    
    
    $
    1.41
    
    
    $
    1.11Earnings per
share - diluted:As reported
    
    $
    1.63
    
    
    $
    1.39
    
    
    $
    1.12Pro forma
    
    $
    1.61
    
    
    $
    1.36
    
    
    $
    1.09
  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 29.03% for 2003, 27.58% for 2002 and 7.90% for
2001; risk-free interest rate of 3.94% for 2003, 4.89% for 2002 and 4.90%
for 2001; and expected lives of 9 years for 2002, 2001 and 2000. The fair
value of the 63,950, 60,525 and 32,550 options granted in 2003, 2002 and
2001 were $3.61, $3.74 and $2.40, respectively. F-28




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##### Table of Contents



12.
    
    REGULATORY CAPITAL REQUIREMENTSThe Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Banks financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Banks assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting
practices. The Banks capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings and other factors.Quantitative measures that have been established by regulation to ensure
capital adequacy require the Bank to maintain minimum capital amounts and
ratios (set forth in the table below). The Banks primary regulatory
agency, the Office of Thrift Supervision (OTS), currently requires that
the Bank maintain minimum ratios of tangible capital (as defined in the
regulations) to tangible assets of 1.5%, core capital (as defined) to
adjusted tangible assets of 4%, and total capital (as defined) to
risk-weighted assets of 8%. These capital requirements are viewed as
minimum standards by the OTS, and most institutions are expected to
maintain capital levels well above the minimum. Minimum capital levels
higher than those provided in the regulations may be established by the OTS
for individual savings associations, upon a determination that the savings
associations capital is or may become inadequate in view of its
circumstances.During 2002, due to our business strategy which has concentrated on growth,
a shift in our lending focus to more commercial lending and the size of our
securities portfolios, we agreed with the OTS that we will maintain a total
risk-based capital ratio and a leverage capital ratio of at least 11.0% and
6.0%, respectively, which was in excess of the OTS minimum requirements.
During 2003, the OTS agreed to remove the 11.0% and 6.0% requirement noted
above.As of December 31, 2003 and 2002, 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, 2003, the Banks retained earnings available
for the payment of dividends were $5,743. Accordingly, $42,333 of the
Companys equity in the net assets of the Bank was restricted at December
31, 2003. 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-29




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##### Table of Contents



To Be WellCapitalized UnderFor Capital
    
    Minimum Required
    
    Prompt CorrectiveActual
    
    Adequacy Purposes
    
    by OTS Agreement
    
    Actions ProvisionsAmount
    
    Ratio
    
    Amount
    
    
    
    
    
    Ratio
    
    Amount
    
    
    
    
    
    Ratio
    
    Amount
    
    
    
    
    
    RatioAs of December 31, 2003:Total Capital
(to risk weighted assets)
    
    $
    63,461
    
    
    
    10.99
    %
    
    $
    46,209
    
    
    
    3
    
    
    
    8.00
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    $
    57,761
    
    
    
    3
    
    
    
    10.00
    %Core capital
(to adjusted tangible assets)
    
    $
    58,924
    
    
    
    6.08
    %
    
    
    38,757
    
    
    
    3
    
    
    
    4.00
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    48,446
    
    
    
    3
    
    
    
    5.00
    %Tangible capital
(to tangible assets)
    
    $
    58,924
    
    
    
    6.08
    %
    
    
    14,534
    
    
    
    3
    
    
    
    1.50
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    N/ATier 1 capital
(to risk weighted assets)
    
    $
    58,924
    
    
    
    10.20
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    34,657
    
    
    
    3
    
    
    
    6.00
    %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/ATier 1 capital
(to risk weighted assets)
    
    $
    49,836
    
    
    
    11.14
    %
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    
    
    
    
    N/A
    
    
    
    26,853
    
    
    
    3
    
    
    
    6.00
    %
   F-30




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##### Table of Contents



13.
    
    EARNINGS PER SHAREThe following tables represent the calculations of earnings per share
(EPS) for the periods presented. Year Ended December 31, 2003Income
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    7,413
    
    
    
    4,330,840
    
    
    $
    1.71Effect of dilutive stock options
    
    
    
    
    
    
    214,995
    
    
    
    (0.08
    )Diluted EPS
    
    $
    7,413
    
    
    
    4,545,835
    
    
    $
    1.63
 Year Ended December 31, 2002Income
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    5,045
    
    
    
    3,503,713
    
    
    $
    1.44Effect of dilutive stock options
    
    
    
    
    
    
    137,971
    
    
    
    (0.05
    )Diluted EPS
    
    $
    5,045
    
    
    
    3,641,684
    
    
    $
    1.39
 Year Ended December 31, 2001Income
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    3,802
    
    
    
    3,321,189
    
    
    $
    1.14Effect of dilutive stock options
    
    
    
    
    
    
    75,696
    
    
    
    (0.02
    )Diluted EPS
    
    $
    3,802
    
    
    
    3,396,885
    
    
    $
    1.12
  14.
    
    COMMITMENTS AND CONTINGENCIES  Aggregate minimum lease commitments under long-term operating leases as of
December 31, 2003 are as follows: 2004
    
    $
    1,2652005
    
    
    1,2582006
    
    
    1,2562007
    
    
    1,2242008
    
    
    1,2242009 and thereafter
    
    
    15,100$
    21,327
  Minimum lease payments for the Banks premises are adjusted annually based
upon the Consumer Price Index. The leases also provide for option renewal
periods. Rental expense was $1,055, $840 and $559 for the years ended
December 31, 2003, 2002 and 2001, respectively. F-31




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##### Table of Contents



15.
    
    TRADING ACCOUNT ASSETSDerivative Instruments Not Receiving Hedge Treatment- The Bank is a party
to a variety of interest rate contracts such as interest rate swaps, caps,
floors, futures, options and total return swaps (Interest Rate
Agreements), which are recorded in the financial statements at fair value
with changes in fair value and periodic payments recorded in earnings.  Interest rate swapsare contracts in which the parties agree to exchange
fixed and floating rate payments for a specified period of time on a
specified (notional) amount. The notional amount is only used to
calculate the amount of the periodic interest payments to be exchanged
and does not represent the amount at risk. As of December 31, 2003, the
Bank held $100,000 notional amount of Commercial Mortgage Backed
Securities (CMBS) swaps whereby the Bank receives the spread on the
Lehman Brothers CMBS Index plus a constant spread and receives or pays
the market value change of the index.Interest rate futures contractsare commitments to either purchase or
sell designated instruments at a future date for a specified price.
Initial margin requirements are met in cash or other instruments, and
changes in the contract values are settled in cash daily. The Bank
maintained $0 and $2,013 at December 31, 2003 and 2002, respectively, in
agency securities as a deposit with a broker for its futures activities.
The Company did not have any interest rate futures contracts outstanding
at December 31, 2003 and 2002. F-32




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##### Table of Contents



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 |  
|2003                                                                        |                                     |           |        |             |         |            |   |               |     |                  |            |   |    |                              |                        |                          |  |       |  | 
|Total return swaps  receive total return                                   |                                     |           |        |             |         |            |   |               |     |                  |            |   |    | Bank receives the spread    
|                                                                            | CMBS investment grade total return, |           |        |             |         |            |   |               |     |                  |            |   |    |                              | on Lehman Brothers AAA
|                                                                            |                                     | pay LIBOR |        | $           | 100,000 |            |   | $             | 166 |                  |            | $ | 0  |                              |                        | CMBS Index Plus a spread
|                                                                            |                                     |           |        |             |         |            |   |               |     |                  |            |   |    | and receives or pays the    
|                                                                            |                                     |           |        |             |         |            |   |               |     |                  |            |   |    | market value change
of index
|2002                                                                        |                                     |           |        |             |         |            |   |               |     |                  |            |   |    |                              |                        |                          |  |       |  | 
|Total return swaps  receive total return                                   |                                     |           |        |             |         |            |   |               |     |                  |            |   |    | Bank receives the spread    
|                                                                            | CMBS investment grade total return, |           |        |             |         |            |   |               |     |                  |            |   |    |                              | on Lehman Brothers AAA
|                                                                            |                                     | pay LIBOR |        | $           | 60,000  |            |   | $             | 0   |                  |            | $ | 17 |                              |                        | CMBS Index Plus a spread
|                                                                            |                                     |           |        |             |         |            |   |               |     |                  |            |   |    | and receives or pays the    
|                                                                            |                                     |           |        |             |         |            |   |               |     |                  |            |   |    | market value change
of index
|Total return swaps  receive total return
GN MBS adjustable rate, pay LIBOR |                                     |           | 14,455 |             |         | $          | 0 |               |     | $                | 0          |   |    |                              |                        | 1.84%                    |  | 5.72% |  | 

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

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

F-33



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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, 2003            |         |   |          |       |            |   |         |     |   |   |        |      
|Interest rate contracts:     |         |   |          |       |            |   |         |     |   |   |        |      
|                             | Swaps   |   | $        | 1,009 |            |   | $       | 182 |   |   | $      | 1,191 |  
|MBS and other trading assets |         |   | 1,488    |       |            |   | (32     | )   |   |   | 1,456  |      
|                             |         |   |          |       |            |   |         |     |   |   |        |      
|Total trading portfolio      |         | $ | 2,497    |       |            | $ | 150     |     |   | $ | 2,647  |      
|                             |         |   |          |       |            |   |         |     |   |   |        |      
|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    |      
|                             |         |   |          |       |            |   |         |     |   |   |        |      

F-34



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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 
|                                       |                         |   | Cost      |       | Gains      |   | Losses     |     | Value
|December 31, 2003                      |                         |   |           |       |            |   |            |     |       |   |    |    |   |   |       |      
|Mortgage-backed securities and other - |                         | $ | 1,447     |       |            | $ | 49         |     |       | $ | (1 | )  |   | $ | 1,495 |      
|                                       | Mutual funds            |   |           | 441   |            |   |            | 10  |       |   |    |   |   |   |       | 451   | 
|                                       | CMBS total return swaps |   |           |      |            |   |            | 165 |       |   |    |   |   |   |       | 165   | 
|                                       |                         |   |           |       |            |   |            |     |       |   |    |    |   |   |       |      
|                                       | Trading assets          |   | $         | 1,888 |            |   | $          | 224 |       |   | $  | (1 | ) |   | $     | 2,111 | 
|                                       |                         |   |           |       |            |   |            |     |       |   |    |    |   |   |       |      

|                                                      |  |           |       |            |  |            |     |       |  |   |     |   |  |   |       | 
|----------------------------------------------------- |  | --------- | ----- | ---------- |  | ---------- | --- | ----- |  | - | --- | - |  | - | ----- | 
|                                                      |  |           |       |            |  | 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 | 
|                                                      |  |           |       |            |  |            |     |       |  |   |     |   |  |   |       | 



|16. |  | DERIVATIVES HELD FOR ASSET AND LIABILITY MANAGEMENT                                                                                                                                                                                                                                                                                                           
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | At December 31, 2003, 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 2003, 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, 2003 - |                                 |                       |   |             |  |            |   |            |   |               |  |                  |   |  |  |     
|                    | Interest rate swaps - pay fixed |                       | $ | 137,000     |  |            | $ | (5,904     | ) |               |  | 1.17             | % |  |  | 4.40 | %
|                    |                                 | receive 3-month LIBOR |   |             |  |            |   |            |   |               |  |                  |   |  |  |      |   | 
|                   
|December 31, 2002 - |                                 |                       |   |             |  |            |   |            |   |               |  |                  |   |  |  |     
|                    | Interest rate swaps - pay fixed |                       | $ | 109,000     |  |            | $ | (6,813     | ) |               |  | 1.47             | % |  |  | 4.42 | %
|                    |                                 | receive 3-month LIBOR |   |             |  |            |   |            |   |               |  |                  |   |  |  |      |   | 



| |  | 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,
2003:
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     |                                  |      |   |       |   |      |  |      |  |      |   |            |   |  |   |        |   |  |   |       |   |  |   |        |  
|-------------------- | -------------------------------- | ---- | - | ----- | - | ---- |  | ---- |  | ---- | - | ---------- | - |  | - | ------ | - |  | - | ----- | - |  | - | ------ | -
|Maturities           |                                  | 2004 |   | 2005  |   | 2006 |  | 2007 |  | 2008 |   | Thereafter
|Interest rate swaps: |                                  |      |   |       |   |      |  |      |  |      |   |            |   |  |   |        |   |  |   |       |   |  |   |       
|                     | Notional amount                  |      | $ | 5,000 |   |      |  |     |  |      | $ | 23,000     |   |  | $ | 52,000 |   |  | $ | 4,000 |   |  | $ | 53,000 |  
|                     | Weighted-average
payable rate    |      |   | 5.27  | % |      |  |     |  |      |   | 2.92       | % |  |   | 3.80   | % |  |   | 3.78  | % |  |   | 5.59   | %
|                     | Weighted-average
receivable rate |      |   | 1.16  | % |      |  |     |  |      |   | 1.16       | % |  |   | 1.17   | % |  |   | 1.17  | % |  |   | 1.18   | %

F-35



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|    |  | The Bank is dedicated to managing credit risks associated with investment
and interest rate risk management activities. The Bank maintains positions
with a variety of counterparties or obligors (counterparties). To limit
credit exposure arising from such transactions, the Bank evaluates the
credit standing of counterparties, establishes limits for the total
exposure to any one counterparty, monitors exposure against the established
limits, and monitors investment portfolio composition to manage
concentrations.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|17. |  | FAIR VALUES OF FINANCIAL 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:                                                                                                                                                                                                                                

|                                          |                                             |  |          |         |            |  |          |         |            |  |        |         |  |  |        |         | 
|----------------------------------------- | ------------------------------------------- |  | -------- | ------- | ---------- |  | -------- | ------- | ---------- |  | ------ | ------- |  |  | ------ | ------- | 
|                                          |                                             |  | 2003     |         | 2002      
|                                          |                                             |  |          |         |           
|                                          |                                             |  | Carrying |         | Estimated  |  | Carrying |         | Estimated 
|                                          |                                             |  | Amount   |         | Fair Value |  | Amount   |         | Fair Value
|Assets:                                   |                                             |  |          |         |            |  |          |         |            |  |        |         |  |  |        |        
|                                          | Cash and cash equivalents                   |  | $        | 22,856  |            |  | $        | 22,856  |            |  | $      | 19,212  |  |  | $      | 19,212  | 
|                                          | Trading account assets                      |  |          | 2,111   |            |  |          | 2,111   |            |  |        | 1,934   |  |  |        | 1,934   | 
|                                          | Securities, available for sale              |  |          | 398,691 |            |  |          | 398,691 |            |  |        | 324,530 |  |  |        | 324,530 | 
|                                          | Securities, held to maturity                |  |          | 222     |            |  |          | 240     |            |  |        | 2,368   |  |  |        | 2,467   | 
|                                          | Loans receivable, net                       |  |          | 518,496 |            |  |          | 536,969 |            |  |        | 448,050 |  |  |        | 467,332 | 
|                                          | FHLB stock                                  |  |          | 13,425  |            |  |          | 13,425  |            |  |        | 11,750  |  |  |        | 11,750  | 
|                                          | Accrued interest receivable                 |  |          | 2,928   |            |  |          | 2,928   |            |  |        | 3,526   |  |  |        | 3,526   | 
|Liabilities:                              |                                             |  |          |         |            |  |          |         |            |  |        |         |  |  |        |        
|                                          | Demand deposits                             |  |          | 176,229 |            |  |          | 176,229 |            |  |        | 173,368 |  |  |        | 173,368 | 
|                                          | Certificates of deposits                    |  |          | 394,468 |            |  |          | 397,378 |            |  |        | 351,903 |  |  |        | 356,824 | 
|                                          | FHLB advances                               |  |          | 262,500 |            |  |          | 264,627 |            |  |        | 235,000 |  |  |        | 241,585 | 
|                                          | Securities sold under
repurchase agreements |  |          | 65,728  |            |  |          | 66,260  |            |  |        | 517     |  |  |        | 517     | 
|                                          | Other debt                                  |  |          | 15,464  |            |  |          | 15,464  |            |  |        |        |  |  |        |        | 
|                                          | Note payable                                |  |          |        |            |  |          |        |            |  |        | 11,300  |  |  |        | 11,300  | 
|                                          | Accrued interest payable                    |  |          | 629     |            |  |          | 629     |            |  |        | 147     |  |  |        | 147     | 
|Hedging
Instruments -
Interest rate swaps |                                             |  | (5,904   | )       |            |  | (5,904   | )       |            |  | (6,813 | )       |  |  | (6,813 | )      



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



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

F-36



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| |  | Securities- The fair values of securities are generally obtained from
market bids for similar or identical securities or are obtained from
independent security brokers or dealers.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-37



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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, 2003 or
2002, as these instruments predominantly have adjustable terms and are of
a short-term nature.                                                                                                                                                                                                                                                                                                                                                                                                                                              

F-38



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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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|18. |  | RELATED-PARTY TRANSACTIONS                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   
|    |  | The Bank has contracted with SBA to provide investment advisory services
and interest rate risk analysis. A principal of SBA is a director for the
Company and the Bank. Several principals and employees of SBA are
stockholders of the Company. The amount of consulting expense relating to
SBA for the years ended December 31, 2003, 2002 and 2001 was $365, $325
and $295, respectively.                                                                              
|   
|    |  | In the ordinary course of business, the Bank has granted loans to principal
officers and directors and their affiliates amounting to $891 and $4,636 at
December 31, 2003 and 2002, respectively. The following table is a
rollforward of the related party loan activity.                                                                                                                                                                                                  

|                  |  |      |       |      |  |   |       |  
|----------------- |  | ---- | ----- | ---- |  | - | ----- | -
|                  |  | 2003 |       | 2002
|Beginning balance |  | $    | 4,636 |      |  | $ | 1,976 |  
|Additions         |  |      | 3,575 |      |  |   | 3,207 |  
|Repayments        |  |      | (350  | )    |  |   | (547  | )
|Deletions         |  |      | (264  | )    |  |   |      |  
|                  |  |      |       |      |  |   |       |  
|Ending balance    |  | $    | 7,597 |      |  | $ | 4,636 |  
|                  |  |      |       |      |  |   |       |  



|19. |  | EMPLOYEE BENEFIT PLAN                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|    |  | The Company sponsors a defined contribution plan for the benefit of its
employees. The Companys contributions to the plan are determined annually
by the Board of Directors in accordance with plan requirements. For tax
purposes, eligible participants may contribute up to a maximum of 15% of
their compensation, not to exceed the dollar limit imposed by the Internal
Revenue Service. For the plan years ended December 31, 2003, 2002 and
2001, the Company contributed $405, $332 and $273, respectively.

F-39



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|20. |  | PARENT COMPANY ONLY FINANCIAL INFORMATION  
|--- |  | -------------------------------------------
|   
|    |  | Condensed Statements of Financial Condition

|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |        |        | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------ | ------ | ---- | ------ | ------ | ------ | 
|                                     |                                                                                                                                                                         |                            |        | December 31,
|                                     |                                                                                                                                                                         |                            |        |             
|                                     |                                                                                                                                                                         |                            |        | 2003         |        | 2002
|ASSETS                               |                                                                                                                                                                         |                            |        |              |        |      |        |       
|                                     | Cash and cash equivalents                                                                                                                                               |                            | $      | 1,040        |        |      | $      | 585    |       
|                                     | Trading account assets                                                                                                                                                  |                            |        | 864          |        |      |        | 126    |       
|                                     | Investment in subsidiaries                                                                                                                                              |                            |        | 61,719       |        |      |        | 53,081 |       
|                                     | Other assets                                                                                                                                                            |                            |        | 359          |        |      |        | 406    |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |       
|TOTAL                                |                                                                                                                                                                         | $                          | 63,982 |              |        | $    | 54,198 |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |       
|LIABILITIES AND STOCKHOLDERS EQUITY |                                                                                                                                                                         |                            |        |              |        |      |        |       
|Liabilities:                         |                                                                                                                                                                         |                            |        |              |        |      |        |       
|                                     | Note payable                                                                                                                                                            |                            | $      | 0            |        |      | $      | 11,300 |       
|                                     | Other debt                                                                                                                                                              |                            |        | 15,464       |        |      |        | 0      |       
|                                     | Accounts payable and other liabilities                                                                                                                                  |                            |        | 442          |        |      |        | 426    |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |       
|                                     |                                                                                                                                                                         | Total liabilities          |        |              | 15,906 |      |        |        | 11,726 | 
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |       
|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;
4,338,451 shares issued and outstanding as of December 31,
2003 and 4,327,951 shares as of December 31, 2002 |                            |        | 43           |        |      |        | 43     |       
|                                     | Additional paid-in capital                                                                                                                                              |                            |        | 30,710       |        |      |        | 30,641 |       
|                                     | Retained earnings                                                                                                                                                       |                            |        | 20,082       |        |      |        | 13,795 |       
|                                     | Accumulated other comprehensive income, net of tax                                                                                                                      |                            |        | (2,759       | )      |      |        | (2,007 | )     
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |       
|                                     |                                                                                                                                                                         | Total stockholders equity |        |              | 48,076 |      |        |        | 42,472 | 
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |       
|TOTAL                                |                                                                                                                                                                         | $                          | 63,982 |              |        | $    | 54,198 |       
|                                     |                                                                                                                                                                         |                            |        |              |        |      |        |       

F-40



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##### Table of Contents





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

|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                    |  | Year Ended December 31,
|                                                    |  |                        
|                                                    |  | 2003                    |        | 2002 |  | 2001
|Interest income                                     |  | $                       | 3      |      |  | $    |        |   |  | $ | 1      |  
|Interest expense                                    |  |                         | (500   | )    |  |      | (680   | ) |  |   | (692   | )
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|Net interest income                                 |  |                         | (497   | )    |  |      | (680   | ) |  |   | (691   | )
|Other income                                        |  |                         | 56     |      |  |      | 22     |   |  |   | 281    |  
|Other expense                                       |  |                         | (867   | )    |  |      | (722   | ) |  |   | (594   | )
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|Loss before income taxes and equity in subsidiaries |  |                         | (1,308 | )    |  |      | (1,380 | ) |  |   | (1,004 | )
|Income tax benefit                                  |  |                         | 543    |      |  |      | 568    |   |  |   | 413    |  
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|Loss before equity in subsidiary                    |  |                         | (765   | )    |  |      | (812   | ) |  |   | (591   | )
|Equity in net earnings of subsidiary                |  |                         | 8,178  |      |  |      | 5,857  |   |  |   | 4,393  |  
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  
|Net income                                          |  | $                       | 7,413  |      |  | $    | 5,045  |   |  | $ | 3,802  |  
|                                                    |  |                         |        |      |  |      |        |   |  |   |        |  

F-41



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##### Table of Contents



Condensed Statements of Cash Flows

|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |        |   |        |      |  
|---------------------------------------------------- | ------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------- | ----------------------------------------- | ------ | ----------------------- | ------ | ------ | - | ------ | ---- | ------ | - | ------ | ---- | -
|                                                     |                                             |                                                  |                                                               |                                           |        | Year Ended December 31,
|                                                     |                                             |                                                  |                                                               |                                           |        |                        
|                                                     |                                             |                                                  |                                                               |                                           |        | 2003                    |        | 2002   |   | 2001  
|Cash Flows from Operating Activities:                |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|                                                     | Net income                                  |                                                  | $                                                             | 7,413                                     |        |                         | $      | 5,045  |   |        | $    | 3,802  |  
|                                                     | Adjustments:                                |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |        |  
|                                                     |                                             |                                                  | Equity in net undistributed earnings of subsidiary            |                                           |        | (8,178                  | )      |        |   | (5,857 | )    |        |   | (4,393 | )   
|                                                     |                                             |                                                  | Sale of trading assets                                        |                                           |        |                        |        |        |   |       |      |        |   | 330    |     
|                                                     |                                             |                                                  | (Increase) decrease in unrealized gain in trading
assets      |                                           |        | (20                     | )      |        |   | 14     |      |        |   | (78    | )   
|                                                     |                                             |                                                  | Amortization and depreciation                                 |                                           |        | 2                       |        |        |   | (1     | )    |        |   | 20     |     
|                                                     |                                             |                                                  | (Increase) decrease in other assets                           |                                           |        | 47                      |        |        |   | (91    | )    |        |   | (22    | )   
|                                                     |                                             |                                                  | (Decrease) increase in accounts payable and
other liabilities |                                           |        | 16                      |        |        |   | 182    |      |        |   | (55    | )   
|                                                     |                                             |                                                  | Other                                                         |                                           |        |                        |        |        |   | 124    |      |        |   | 106    |     
|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|                                                     |                                             |                                                  |                                                               | Net cash used in operating activities     |        |                         | (720   | )      |   |        | (584 | )      |   |        | (290 | )
|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|Cash Flows from Investing Activities:                |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|                                                     |                                             | Net (increase) decrease in investment securities |                                                               |                                           | (1,471 | )                       |        |        |  |        |      |        |  |       
|                                                     | Investment in subsidiary                    |                                                  |                                                               | (460                                      | )      |                         |        |       |   |        |      |       |  
|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|                                                     |                                             |                                                  |                                                               | Net cash used in investing activities     |        |                         | (1,931 | )      |   |        |     |        |   |        |     |  
|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|Cash Flows from Financing Activities:                |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|                                                     | Net proceeds from initial public offering   |                                                  |                                                               |                                          |        |                         |        | 10,221 |   |        |      |        |  
|                                                     | Net proceeds from exercise of stock options |                                                  |                                                               | 69                                        |        |                         |        |       |   |        |      | 628    |  
|                                                     | Cash contribution to subsidiary             |                                                  |                                                               |                                          |        |                         |        | (5,400 | ) |        |      | (9,578 | )
|                                                     | Cash dividends received from Bank           |                                                  |                                                               |                                          |        |                         |        | 3,000  |   |        |      | 500    |  
|                                                     | Cash dividends paid                         |                                                  |                                                               | (1,127                                    | )      |                         |        | (425   | ) |        |      | (353   | )
|                                                     | Increase/(decrease) in other debt           |                                                  |                                                               | 15,464                                    |        |                         |        |       |   |        |      |       |  
|                                                     | (Decrease) increase in notes payable        |                                                  |                                                               | (11,300                                   | )      |                         |        | (6,700 | ) |        |      | 9,000  |  
|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|                                                     |                                             |                                                  |                                                               | Net cash provided by financing activities |        |                         | 3,106  |        |   |        | 696  |        |   |        | 197  |  
|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|Net (decrease) increase in cash and cash equivalents |                                             |                                                  | 455                                                           |                                           |        |                         | 112    |        |   |        | (93  | )     
|Cash and cash equivalents, beginning of year         |                                             |                                                  | 585                                                           |                                           |        |                         | 473    |        |   |        | 566  |       
|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|Cash and cash equivalents, end of year               |                                             | $                                                | 1,040                                                         |                                           |        | $                       | 585    |        |   | $      | 473  |       
|                                                     |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|Supplemental Disclosures                             |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|Non-cash investing and financing activities:         |                                             |                                                  |                                                               |                                           |        |                         |        |        |   |        |      |       
|                                                     | Dividend in kind                            |                                                  | $                                                             | (757                                      | )      |                         |        |       |   |        |      |       |  

F-42



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|21. |  | QUARTERLY FINANCIAL INFORMATION
|--- |  | -------------------------------

|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|------------------------------------------------- |  | -------------- | ------ | ------------- |  | -------- | ------ | --------- |  | - | ------ |  |  | - | ------ | 
|                                                  |  | Quarters Ended
|                                                  |  |               
|                                                  |  | December 31,   |        | September 30, |  | June 30, |        | March 31,
|                                                  |  |                |        |               |  |          |        |          
|2003                                              |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Interest income                                   |  | $              | 11,919 |               |  | $        | 11,851 |           |  | $ | 11,306 |  |  | $ | 11,358 | 
|Interest expense                                  |  |                | 5,173  |               |  |          | 4,965  |           |  |   | 5,049  |  |  |   | 5,121  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net interest income                               |  |                | 6,746  |               |  |          | 6,886  |           |  |   | 6,257  |  |  |   | 6,237  | 
|Provision for loan losses                         |  |                | 80     |               |  |          | 100    |           |  |   | 250    |  |  |   | 360    | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net interest income after provision for
loan loss |  |                | 6,666  |               |  |          | 6,786  |           |  |   | 6,007  |  |  |   | 5,877  | 
|Noninterest income                                |  |                | 1,228  |               |  |          | 1,227  |           |  |   | 1,562  |  |  |   | 1,158  | 
|Noninterest expense                               |  |                | 4,505  |               |  |          | 4,579  |           |  |   | 4,472  |  |  |   | 4,293  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Income before provision for income taxes          |  |                | 3,389  |               |  |          | 3,434  |           |  |   | 3,097  |  |  |   | 2,742  | 
|Provision for income taxes                        |  |                | 1,389  |               |  |          | 1,436  |           |  |   | 1,286  |  |  |   | 1,138  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Net income                                        |  | $              | 2,000  |               |  | $        | 1,998  |           |  | $ | 1,811  |  |  | $ | 1,604  | 
|                                                  |  |                |        |               |  |          |        |           |  |   |        |  |  |   |        | 
|Basic earnings per share                          |  | $              | 0.46   |               |  | $        | 0.46   |           |  | $ | 0.42   |  |  | $ | 0.37   | 
|Diluted earnings per share                        |  | $              | 0.43   |               |  | $        | 0.44   |           |  | $ | 0.40   |  |  | $ | 0.36   | 
|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   | 

***

F-43



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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.




Item 9a. Controls and Procedures

As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer along with our Senior Vice President and
Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures pursuant to the Exchange Act Rule
13a-15(b). Based upon that evaluation, our Chief Executive Officer along with
the our Senior Vice President and Chief Financial Officer concluded that our
disclosure controls and procedures are effective in timely alerting us to
material information relating to us (including our consolidated subsidiaries)
required to be included in our periodic SEC filings. There have been no
significant changes in our internal control over financial reporting during our
most recent quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.

Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and Senior Vice President and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure.




PART III




Item 10. Directors and Executive Officer of the Registrant.

This information is incorporated by reference to our definitive proxy
statement for our 2004 Annual Meeting of Stockholders (Proxy Statement).

As of December 31, 2003, we had not formally adopted a Code of Ethics that
applies to our principal executive officer, principal financial officer,
principal accounting officer or controller or persons performing similar
functions. However, Los Padres Bank did have a Code of Ethics in effect as of
December 31, 2003 and has had it in place since September 20, 1996. We and Los
Padres Bank retain the same principal executive officers, financial officers
and accounting officers. As of March 10, 2004, our board of directors formally
adopted the Companys Code of Ethics, a copy of which is filed as Exhibit
14 to this Annual Report on Form 10K.




Item 11. Executive Compensation.

This information is incorporated by reference to our Proxy Statement.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.

This information with respect to beneficial ownership by beneficial owners
and management is incorporated by reference 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, 2003.

|                                                               |       |     |                   |         |                   |     |                         |      |                         |  |         |         | 
|-------------------------------------------------------------- | ----- | --- | ----------------- | ------- | ----------------- | --- | ----------------------- | ---- | ----------------------- |  | ------- | ------- | 
|                                                               |       |     | 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         |       |     | 477,275           |         |                   | $   | 8.25                    |      |                         |  | 158,492 |        
|Equity compensation
plans not approved
by security holders
(1) |       |     | 42,453            |         |                   |     | 5.83                    |      |                         |  |        |        
|                                                               |       |     |                   |         |                   |     |                         |      |                         |  |         |        
|                                                               | Total |     |                   | 519,728 |                   |     | $                       | 8.05 |                         |  |         | 158,492 | 
|                                                               |       |     |                   |         |                   |     |                         |      |                         |  |         |        



---

|(1) |  | During 1996, we granted 150,000 options to Smith Breeden Associates for
financial advisory services provided to us in connection with our
acquisition of Los Padres Bank. For further information regarding these
options refer to footnote No. 11 of our Financial Statements in Item 8
hereof.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 13. Certain Relationships and Related Transactions.

This information is incorporated by reference to our Proxy Statement.




Item 14. Principal Accountant Fees and Services

The information required by Item 9(e) of Schedule 14A is incorporated by
reference to our Proxy Statement.




Part IV




Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a)  Documents filed as part of this report.

(1)  The following documents are filed as part of this Annual Report on
Form 10-K and are incorporated herein by reference to Item 8 hereof:

70



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##### Table of Contents



Independent Auditors Report

Consolidated Statements of Financial Condition as of December 31, 2003
and 2002.

Consolidated Statements of Earnings for the Years Ended December 31,
2003, 2002 and 2001.

Consolidated Statements of Stockholders Equity for the Years Ended
December 31, 2003, 2002 and 2001.

Consolidated Statements of Cash Flows for the Years Ended December 31,
2003, 2002 and 2001.

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)                                                                                                                                                                                              
|            |  |                                                                                                                                                                                                                                                  
|3.2.1       |  | Amendment to Bylaws. (1)                                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                                                  
|4.0         |  | Specimen stock certificate of Harrington West Financial Group, Inc. (1)                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                  
|4.1         |  | Indenture Agreement dated September 25, 2003. (2)                                                                                                                                                                                                
|            |  |                                                                                                                                                                                                                                                  
|4.2         |  | Amended and Restated Declaration of Trust of Harrington West
Capital Trust I dated September 25, 2003 (2)                                                                                                                                        
|            |  |                                                                                                                                                                                                                                                  
|4.3         |  | Preferred Securities Guarantee Agreement dated September 25,
2003 (2)                                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                  
|10.1        |  | Harrington West Financial Group 1996 Stock Option Plan, as
amended. (1)                                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                  
|10.2        |  | Amended and Restated Credit Agreement dated as of October 30,
1997 among Harrington West Financial Group, Inc., the lenders party
thereto and Harris Trust and Savings Bank, as amended on October 1,
1999, May 2, 2000 and November 1, 2001. (1)
|            |  |                                                                                                                                                                                                                                                  
|10.2.1      |  | Fourth Amendment to Amended and Restated Credit Agreement dated
September 17, 2002. (1)                                                                                                                                                          
|            |  |                                                                                                                                                                                                                                                  
|10.2.2      |  | Fifth Amendment to Amended and Restated Credit Agreement dated
February 24, 2003. (2)                                                                                                                                                            
|            |  |                                                                                                                                                                                                                                                  
|10.2.3      |  | Sixth Amendment to Amended and Restated Credit Agreement dated
October 30, 2003. (2)                                                                                                                                                             
|            |  |                                                                                                                                                                                                                                                  
|10.3        |  | 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)                                                                                              

71



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|            |  |                                                                                                                                                                                                                        
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NO. |  | DESCRIPTION                                                                                                                                                                                                            
|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)                                                                                                    
|            |  |                                                                                                                                                                                                                        
|11          |  | Statement re computation of per share earnings  Reference is
made to Item 8. Financial Statements and Supplementary Data for
the required information.                                                              
|            |  |                                                                                                                                                                                                                        
|14          |  | Code of Ethics                                                                                                                                                                                                         
|            |  |                                                                                                                                                                                                                        
|23          |  | Consent of Deloitte and Touche, LLP                                                                                                                                                                                    
|            |  |                                                                                                                                                                                                                        
|31.1        |  | Section 302 Certification by Chief Executive Officer filed herewith.                                                                                                                                                   
|            |  |                                                                                                                                                                                                                        
|31.2        |  | Section 302 Certification by Chief Financial Officer filed herewith.                                                                                                                                                   
|            |  |                                                                                                                                                                                                                        
|32          |  | Section 906 Certification by Chief Executive Officer and
Chief Financial Officer furnished herewith.                                                                                                                   



---

|(1) |  | Incorporated by reference to the Registrants Form S-1 (File
No. 333-99031) filed with the Securities and Exchange Commission
(the SEC) on August 30, 2002, as amended.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to the Registrants Form 10-Q for
the quarter ending September 30, 2003 filed with the SEC on November
11, 2003.                               

(b)  Reports on Form 8-K

The Registrant filed a Current Report on Form 8-K with the SEC on October
16, 2003 announcing the issuance of its press release for its earnings for the
quarter ended September 30, 2003.

72



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##### Table of Contents






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 10, 2004 |  |  |  | By:                                   |  | /s/ Craig J. Cerny         
|               |  |  |  |                                       |  |                            
|               |  |  |  |                                       |  | Craig J. Cerny             
|               |  |  |  |                                       |  | Chairman of the Board      
|               |  |  |  |                                       |  | and Chief Executive Officer
|               |  |  |  |                                       |  |                            
|March 10, 2004 |  |  |  | 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. Cerny

Craig J. Cerny                |  | Chairman of the Board and
Chief Executive Officer |  | March 10, 2004
|                                                  |  |                                                   |  |               
|/s/ Sean Callow

Sean Callow                      |  | Senior Vice President and
Chief Financial Officer |  | March 10, 2004
|                                                  |  |                                                   |  |               
|/s/ William W. Phillips

William W. Phillips, Jr. |  | President and Director                            |  | March 10, 2004
|                                                  |  |                                                   |  |               
|/s/ Stanley J. Kon

Stanley J. Kon                |  | Director                                          |  | March 10, 2004
|                                                  |  |                                                   |  |               
|/s/ John J. McConnell

John J. McConnell          |  | Director                                          |  | March 10, 2004
|                                                  |  |                                                   |  |               
|/s/ Paul O. Halme

Paul O. Halme                  |  | Director                                          |  | March 10, 2004
|                                                  |  |                                                   |  |               
|/s/ William D. Ross

William D. Ross              |  | Director                                          |  | March 10, 2004

73