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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended March 31, 2005ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from
_________ to _________
 Commission File Number: 000-50066 HARRINGTON WEST FINANCIAL GROUP, INC.  Delaware
    
    48-1175170(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 610 Alamo Pintado Road
Solvang, California
(Address of principal executive offices) 93463
(Zip Code) (805) 688-6644
(Registrants telephone number, including area code)    Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. þYes o No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Securities Exchange Act of 1934). oYes þ No Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date: 5,363,853 shares of Common Stock, par value $0.01 per share, outstanding as of April 26, 2005.




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HARRINGTON WEST FINANCIAL GROUP, INC. TABLE OF CONTENTS PagePart I    Financial InformationItem 1.Condensed Consolidated Financial Statements
    
    
    2Condensed Consolidated Statements of Financial Condition as of March 31, 2005 (Unaudited) and December 31, 2004
    
    
    2Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    3Condensed Consolidated Statements of Shareholders Equity and Comprehensive Income for the Three months ended March 31, 2005 (Unaudited) and Year Ended December 31, 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 4. Controls and Procedures
    
    
    31Part II   Other InformationItem 1. Legal Proceedings
    
    
    32Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 3.Defaults upon Senior Securities
    
    
    32Item 4.Submission of Matters to a Vote of Security Holders
    
    
    32Item 5.Other Information
    
    
    32Item 6.Exhibits
    
    
    33Signatures
    
    
    34Exhibit 31.1Exhibit 31.2Exhibit 32
  - 1 -




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PART 1-FINANCIAL INFORMATION 
 Item 1: Condensed Consolidated Financial Statements HARRINGTON WEST FINANCIAL
GROUP, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
 (Dollars in thousands, except share data)  March 31, 2005
    
    
    December 31, 2004ASSETSCash and cash equivalents
    
    $
    11,589
    
    
    $
    13,238Trading account assets (including assets pledged of $342 and
$383 at March 31, 2005 and December 31, 2004, respectively)
    
    
    911
    
    
    
    1,046Securities available for sale (including assets pledged of
$202,466 and $205,780 at March 31, 2005 and December 31,
2004, respectively)
    
    
    421,961
    
    
    
    431,206Securities held to maturity
    
    
    91
    
    
    
    93Loans receivable, (net of allowance for loan losses of $5,377
and $5,228 at March 31, 2005 and December 31,
2004, respectively)
    
    
    621,420
    
    
    
    598,442Accrued interest receivable
    
    
    3,431
    
    
    
    3,322Premises and equipment, net
    
    
    9,392
    
    
    
    8,886Prepaid expenses and other assets
    
    
    3,519
    
    
    
    3,745Investment in FHLB stock, at cost
    
    
    15,463
    
    
    
    15,134Deferred tax asset
    
    
    613
    
    
    
    1,314Goodwill
    
    
    3,981
    
    
    
    3,981Core deposit intangible, net
    
    
    875
    
    
    
    923TOTAL ASSETS
    
    $
    1,093,246
    
    
    $
    1,081,330LIABILITIES & STOCKHOLDERS EQUITYDeposits:Interest bearing
    
    $
    562,713
    
    
    $
    564,552Non-interest bearing
    
    
    38,800
    
    
    
    33,630Total Deposits
    
    
    601,513
    
    
    
    598,182FHLB advances
    
    
    325,000
    
    
    
    316,000Securities sold under repurchase agreements
    
    
    79,479
    
    
    
    79,689Subordinated debt
    
    
    25,774
    
    
    
    25,774Accounts payable and accrued expenses
    
    
    4,446
    
    
    
    8,563Income taxes payable
    
    
    1,139
    
    
    
    462TOTAL LIABILITIES
    
    
    1,037,351
    
    
    
    1,028,670STOCKHOLDERS EQUITYPreferred stock, $.01 par value: 1,200,000 shares authorized:
none issued and outstandingCommon stock, $.01 par value; 10,800,000 shares authorized:5,337,828 and 5,278,934 shares issued and outstanding as of
March 31, 2005 and December 31, 2004, respectively
    
    
    54
    
    
    
    53Additional paid-in capital
    
    
    31,785
    
    
    
    31,225Retained earnings
    
    
    25,291
    
    
    
    23,637Accumulated other comprehensive income (loss), net of tax of $699
and $285 at March 31, 2005 and December 31, 2004, respectively
    
    
    (1,235
    )
    
    
    (2,255
    )Total Stockholders Equity
    
    
    55,895
    
    
    
    52,660TOTAL LIABILITIES & STOCKHOLDERS EQUITY
    
    $
    1,093,246
    
    
    $
    1,081,330
 The accompanying notes are an integral part of these condensed financial statements. - 2 -




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 Dollars in thousands, except share data  Three months endedMarch 31,2005
    
    
    2004INTEREST INCOMEInterest on loans
    
    $
    9,908
    
    
    $
    8,592Interest and dividends on securities
    
    
    4,400
    
    
    
    3,655Total interest income
    
    
    14,308
    
    
    
    12,247INTEREST EXPENSEInterest on deposits
    
    
    3,085
    
    
    
    2,535Interest on FHLB advances and other borrowings
    
    
    3,662
    
    
    
    2,673Total interest expense
    
    
    6,747
    
    
    
    5,208NET INTEREST INCOME BEFOREPROVISION FOR LOAN LOSSES
    
    
    7,561
    
    
    
    7,039PROVISION FOR LOAN LOSSES
    
    
    150
    
    
    
    90NET INTEREST INCOME AFTER PROVISIONFOR LOAN LOSSES
    
    
    7,411
    
    
    
    6,949OTHER INCOME (LOSS)Income from trading assets
    
    
    712
    
    
    
    338Other income (loss) gain
    
    
    (7
    )
    
    
    (10
    )Banking fee income
    
    
    858
    
    
    
    760Total other income
    
    
    1,563
    
    
    
    1,088OTHER EXPENSESSalaries & employee benefits
    
    
    2,811
    
    
    
    2,683Premises & equipment
    
    
    904
    
    
    
    724Insurance premiums
    
    
    125
    
    
    
    148Marketing
    
    
    99
    
    
    
    109Computer services
    
    
    181
    
    
    
    155Consulting fees
    
    
    362
    
    
    
    245Office expenses & supplies
    
    
    214
    
    
    
    211Other
    
    
    514
    
    
    
    464Total other expenses
    
    
    5,210
    
    
    
    4,739INCOME BEFORE INCOME TAXES
    
    
    3,764
    
    
    
    3,298INCOME TAXES
    
    
    1,529
    
    
    
    1,239NET INCOME
    
    $
    2,235
    
    
    $
    2,059BASIC EARNINGS PER SHARE
    
    $
    0.42
    
    
    $
    0.40DILUTED EARNINGS PER SHARE
    
    $
    0.40
    
    
    $
    0.37BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,291,640
    
    
    
    5,209,166DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,616,246
    
    
    
    5,545,816
 The accompanying notes are an integral part of these condensed financial statements . - 3 -




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands, except share data)
 AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Comprehensive
    
    
    StockholdersStock
    
    
    Amt
    
    
    Capital
    
    
    Earnings
    
    
    Income
    
    
    Income
    
    
    EquityBalance, January 1, 2004
    
    
    5,206,109
    
    
    $
    52
    
    
    $
    30,710
    
    
    $
    20,073
    
    
    
    
    
    
    
    ($2,759
    )
    
    $
    48,076Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,209
    
    
    $
    8,209
    
    
    
    
    
    
    
    8,209Other comprehensive income,
net of taxUnrealized (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (324
    )
    
    
    (324
    )
    
    
    (324
    )Effective portion in change in
fair value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    828
    
    
    
    828
    
    
    
    828Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,713Stock options
    
    
    72,825
    
    
    
    1
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,645
    )
    
    
    
    
    
    
    
    
    
    
    (4,645
    )Balance, December 31, 2004
    
    
    5,278,934
    
    
    
    53
    
    
    
    31,225
    
    
    
    23,637
    
    
    
    
    
    
    
    (2,255
    )
    
    
    52,660Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,235
    
    
    $
    2,235
    
    
    
    
    
    
    
    2,235Other comprehensive income,
net of taxUnrealized (losses) on securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (775
    )
    
    
    (775
    )
    
    
    (775
    )Effective portion in change in
fair value of cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,795
    
    
    
    1,795
    
    
    
    1,795Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    3,255Stock options exercised
    
    
    58,894
    
    
    
    1
    
    
    
    560
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    561Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (581
    )
    
    
    
    
    
    
    
    
    
    
    (581
    )Balance, March 31, 2005
    
    
    5,337,828
    
    
    $
    54
    
    
    $
    31,785
    
    
    $
    25,291
    
    
    
    
    
    
    
    ($1,235

    )
    
    $
    55,895
 The accompanying notes are an integral part of these condensed financial statements. - 4 -




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HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands) Three months endedMarch 31,2005
    
    
    2004DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding (loss) arising during period,
net of tax (benefit) expense of $(511) and $389 for the
three-months ending March 31, 2005 and 2004, respectively
    
    $
    (745
    )
    
    $
    567Less: Reclassification adjustment for gains (losses) included
in net income, net of tax expense (benefit) of $20 and
$(177) for the three months ended March 31, 2005 and 2004,
respectively
    
    
    30
    
    
    
    (257
    )Net unrealized (loss) on securities, net of tax (benefit) expense
of ($533) and $566 for the three months ended,
March 31, 2005 and 2004, respectively
    
    $
    (775
    )
    
    $
    824Unrealized net gain (loss) on cash flow hedges, net of tax expense
(benefit) of $1,282 and $(1,098) for the three months
ending March 31, 2005 and 2004, respectively
    
    $
    1,868
    
    
    $
    (1,600
    )Less: Reclassification adjustment for net gains on cash
flow hedges included in net income, net of tax
expense of $50 and $12 for the three months ended
March 31, 2005 and 2004, respectively
    
    
    73
    
    
    
    17Net unrealized gain (loss) on cash flow hedges, net of tax expense
(benefit)of $1,232 and $(1,110) for the three months ended
March 31, 2005 and 2004, respectively
    
    $
    1,795
    
    
    $
    (1,617
    )Total change in Other Comprehensive Income
    
    $
    1,020
    
    
    $
    (793
    )
 The accompanying notes are an integral part of these condensed financial statements. - 5 -




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)
 Three months ended
    
    
    Three months endedMarch 31,
    
    
    March 31,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,235
    
    
    $
    2,059Adjustments to reconcile net income
to net cash provided by operating activities:Accretion of deferred loan fees and costs
    
    
    139
    
    
    
    (134
    )Depreciation and amortization
    
    
    345
    
    
    
    260Amortization of premiums and discounts on loans
receivable and securities
    
    
    714
    
    
    
    734Provision for loan losses
    
    
    150
    
    
    
    90(Gain) on sale of investment securities
    
    
    (50
    )
    
    
    (434
    )Activity in securities held for trading
    
    
    135
    
    
    
    161FHLB stock dividend
    
    
    
    
    
    
    (127
    )(Increase) decrease in accrued interest receivable
    
    
    (109
    )
    
    
    10Increase in income taxes payable
    
    
    677
    
    
    
    179Increase (decrease) in deferred income taxes
    
    
    701
    
    
    
    (228
    )(Increase) decrease in prepaid expenses and other assets
    
    
    (22
    )
    
    
    295Decrease in accounts payable
    
    
    (2,325
    )
    
    
    (2,451
    )Net cash provided by operating activities
    
    
    2,590
    
    
    
    414CASH FLOWS FROM INVESTING ACTIVITIES:Net increase in loans receivable
    
    
    (23,361
    )
    
    
    (14,666
    )Proceeds from sales of securities available for sale
    
    
    3,045
    
    
    
    6,772Principal paydowns on securities available for sale
    
    
    19,699
    
    
    
    20,531Principal paydowns on securities held to maturity
    
    
    2
    
    
    
    8Purchases of securities available for sale
    
    
    (14,844
    )
    
    
    (29,036
    )Purchase of premises and equipment
    
    
    (557
    )
    
    
    (1,027
    )Purchase of FHLB Stock
    
    
    (329
    )
    
    
    (400
    )Net cash used in investing activities
    
    
    (16,345
    )
    
    
    (17,818
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    3,336
    
    
    
    14,073Decrease in securities sold under agreements to repurchase
    
    
    (210
    )
    
    
    (29
    )Increase (decrease) in FHLB advances
    
    
    9,000
    
    
    
    (6,000
    )Exercise of stock options on common stock
    
    
    561
    
    
    
    352Dividends paid on common stock
    
    
    (581
    )
    
    
    (434
    )Net cash provided by financing activities
    
    
    12,106
    
    
    
    7,962NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (1,649
    )
    
    
    (9,442
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    13,238
    
    
    
    22,856CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    11,589
    
    
    $
    13,414SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION-Cash paid during the period for:Interest
    
    $
    6,236
    
    
    $
    4,171Income Taxes
    
    $
    
    
    
    $
    880
 The accompanying notes are an integral part of these condensed financial statements. - 6 -




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business of the CompanyHarrington West Financial Group, Inc. (the Company) is a diversified,
community-based financial institution holding company, incorporated on August 29, 1995 to acquire
and hold all of the outstanding common stock of Los Padres Bank, FSB (the Bank), a federally
chartered savings bank. We provide a broad menu of financial services to individuals and small to
medium sized businesses and will operate 15 banking offices at the end of May 2005 in three markets
as follows; eleven Los Padres banking offices on the California Central Coast when we complete the
purchase and assumption in May 2005 of a banking office in Thousand Oaks, two Los Padres banking
offices in Scottsdale, Arizona, and two banking offices are located in the Kansas City metropolitan
area, which are operated as a division under the Harrington Bank brand name. The Company also owns
Harrington Wealth Management Company, a trust and investment management company with $137.8 million
in assets under management or custody, which offers services to individuals and small institutional
clients on a fee basis by employing a customized asset allocation approach and investing
predominantly in low fee, indexed mutual funds and exchange traded funds. Basis of PresentationThe unaudited consolidated financial statements are condensed and do not
contain all information required by accounting principles generally accepted in the United States
of America (generally accepted accounting principles) to be included in a full set of financial
statements. The condensed consolidated financial statements include the Company and the accounts
of its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. Certain reclassifications have
been made to make information comparable between years. The information furnished reflects all
adjustments, which in the opinion of management are necessary for a fair statement of the financial
position and the results of the operations of the Company. All such adjustments are of a normal
and recurring nature. The preparation of financial statements that are in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. The unaudited condensed consolidated interim financial statements of the Company and subsidiaries
presented herein should be read in conjunction with the consolidated financial statements of the
Company for the year ended December 31, 2004, included in the Annual Report on Form 10-K. Allowance for Loan Losses Allowance for loan losses is increased by charges to income and
decreased by charge-offs (net of recoveries). The allowance is maintained at a level believed by management to be sufficient to absorb estimated
probable credit losses. Managements determination of the adequacy of the allowance is based on
periodic evaluations of the credit portfolio and other relevant factors. This evaluation is
inherently subjective, as it requires material estimates, including, among others, the amounts and
timing of expected future cash flows on impaired loans, estimated losses on commercial loans,
consumer loans and mortgages, and general amounts for historical loss experience, economic
conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios,
all of which may be susceptible to significant change. 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, - 7 -




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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 March 31, 2005 is adequate to absorb losses
inherent in the loan portfolio. Fair Value of Options The Company issues fixed stock options to certain employees,
officers, and directors. SFAS No. 123, Accounting for Stock-based Compensation,encourages, but
does not require, companies to account for stock options using the fair value method, which
generally results in compensation expense recognition. As also permitted by SFAS No. 123, the
Company accounts for its fixed stock options using the intrinsic-value method, prescribed in APB
Opinion No. 25, Accounting for Stock Issued to Employees, which generally does not result in
compensation expense recognition. Under the intrinsic value method, compensation cost for stock
options is measured at the date of grant as the excess, if any, of the quoted market price of the
Companys stock over the exercise price of the options. - 8 -




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The fair value of options granted under the Companys incentive stock option plan were estimated on
the date of grant using the Black-Scholes option-pricing model based on the assumptions below. Had
the Company recognized compensation expense over the vesting period of the options based on the
fair value method as discussed above, the Companys pro forma net income and earnings per share for
the three month period ended March 31, 2005 and March 31, 2004 would have been as follows: Three months endedPro Forma Results
    
    March 31, 2005
    
    
    March 31, 2004Net income:As reported
    
    $
    2,235
    
    
    $
    2,059Pro forma
    
    $
    2,180
    
    
    $
    2,022Earnings per share  basic:As reported
    
    $
    0.42
    
    
    $
    0.40Pro forma
    
    $
    0.41
    
    
    $
    0.39Earnings per share  diluted:As reported
    
    $
    0.40
    
    
    $
    0.37Pro forma
    
    $
    0.39
    
    
    $
    0.36
 For purposes of this computation, the significant assumptions used for the three-month periods
ending March 31, 2005 and March 31, 2004 computed on a weighted average basis, were: 2005
    
    
    2004Risk free interest rate:
    
    
    4.3
    %
    
    
    4.1
    %Expected life (years):
    
    
    9
    
    
    
    9Expected volatility:
    
    
    40.7
    %
    
    
    32.7
    %
 Recent Accounting Pronouncements In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement
of Position No. 03-3 (SOP 03-3), Accounting for Certain Loans of Debt Securities Acquired in a
Transfer.SOP 03-3 addresses the accounting for differences between contractual cash flows and the
cash flows expected to be collected from purchased loans or debt securities if those differences
are attributable, in part, to credit quality, SOP 03-3 requires purchased loans and debt securities
to be recorded initially at fair value based on the present value of the cash flows expected to be
collected with no carryover of any valuation allowance previously recognized by the seller.
Interest income should be recognized based on the effective yield from the cash flows to be
collected. To the extent that the purchased loans or debt securities experience subsequent
deterioration in credit quality, a valuation allowance would be established for any additional cash
flows that are not expected to be received. However, if more cash flows subsequently are expected
to be received than originally estimated, the effective yield would be adjusted on a prospective
basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004.
Upon adoption on January 1, 2005, there was no impact on the Companys financial position or
results of operations. Management does note expect the adoption of - 9 -




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this statement to have a material impact on the Companys future financial position or
consolidated results of operation. In March 2004, the Emerging Issues Task Force (EITF) reached consensus on the guidance
provided in EITF Issue No. 03-1, The Meaning of Other Than Temporary Impairment and its
Application to Certain Investments(EITF 03-1), as applicable to debt and equity securities that
are within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and equity securities that are accounted for using the cost method specified in
Accounting Policy Board Opinion No. 18, The Equity Method of Accounting for Investments in Common
Stock.An investment is impaired if the fair value of the investment is less than its cost. EITF
03-1 outlines that an impairment would be considered other-than-temporary unless: a) the investor
has the ability and intent to hold an investment for a reasonable period of time sufficient for the
recovery of the fair value up to (or beyond) the cost of the investment, and b) evidence indicating
that the cost of the investment is recoverable within a reasonable period of time outweighs
evidence to the contrary. Although not presumptive, a pattern of selling investments prior to the
forecasted recovery of fair value may call into question the investors intent. In addition, the
severity and duration of the impairment should also be considered in determining whether the
impairment is other-than-temporary. In September 2004, the FASB issued a proposed Board-directed
FASB Staff Position, FSP EITF Issue 03-1-a, Implementation Guidance of the Application of Paragraph
16 of EITF Issue No. 03-1.The proposed FSP would provide implementation guidance with respect to
debt securities that are impaired solely due to interest rates and/or sector spreads and analyzed
for other-than-temporary impairment under paragraph 16 of Issue 03-1. The Board also issued FSP
EITF Issue 03-1-b which delays the effective date for the measurement and recognition guidance
contained in paragraphs 10-20 of EITF 03-1. The delay does not suspend the requirement to
recognize other-than temporary impairments as required by existing authoritative literature.
Adoption of this standard may cause the Company to recognize under current guidance or to recognize
such losses in earlier periods, especially those due to increases in interest rates. Since
fluctuations in fair value for available-for-sale securities are already recorded in accumulative
other comprehensive (income) loss, adoption of this standard is not expected to have a significant
impact on stockholders equity. In December 2004, the FASB revised SFAS No. 123 (R) (SFAS 123 (R)), Share Based Payment.
SFAS 123 (R) replaced existing requirements under SFAS No. 123 and APB 25. SFAS 123 (R) requires
companies to measure and recognize compensation expense equal to the fair value of stock options or
other share based payments. SFAS 123 (R)is effective for all interim and annual periods beginning
after December 15, 2005 and, thus, will be effective for the Company beginning with the first
quarter of calendar year 2006. The Company is in the process of evaluating the impact of this
standard on its consolidated results of operation and financial position. In December 2004, the FASB issued SFAS No. 153 (SFAS 153), Exchanges of Nonmonetary Assets,
an amendment of APB 29, Accounting for Nonmonetary Transactions. This statement amends the
principle that exchanges of nonmonetary assets should be measured based on the fair value of the
assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets
that do not have commercial substance. This Statement is effective for nonmonetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. Management does not anticipate the
issuance of this Bulletin to have a material impact on the Companys consolidated results of
operation and financial position. - 10 -




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3. EARNINGS PER SHARE The following tables represent the calculation of earnings per share (EPS) for the periods
presented. Three months ended March 31, 2005Income (Numerator)
    
    
    Shares (Denominator)
    
    
    Per-Share AmountBasic EPS
    
    $
    2,235
    
    
    
    5,291,640
    
    
    $
    0.42Effect of dilutive stock options
    
    
    
    
    
    

    324,606
    
    
    
    (0.02
    )Diluted EPS
    
    $
    2,235
    
    
    
    5,616,246
    
    
    $
    0.40
 Three months ended March 31, 2004Income (Numerator)
    
    
    Shares (Denominator)
    
    
    Per-Share AmountBasic EPS
    
    $
    2,059
    
    
    
    5,209,166
    
    
    $
    0.40Effect of dilutive stock options
    
    
    
    
    
    
    336,650
    
    
    
    (0.03
    )Diluted EPS
    
    $
    2,059
    
    
    
    5,545,816
    
    
    $
    0.37
 4. COMMITMENTS AND CONTINGENCIES The following tables present our contractual obligations and commercial commitments as of March 31,
2005. 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
    
    $
    429,341
    
    
    $
    382,564
    
    
    $
    35,452
    
    
    $
    11,252
    
    
    $
    73FHLB advances
    
    
    325,000
    
    
    
    306,000
    
    
    
    
    
    
    
    
    
    
    
    19,000Reverse Repurchase Agreements
    
    
    79,479
    
    
    
    20,479
    
    
    
    14,000
    
    
    
    30,000
    
    
    
    15,000Leases
    
    
    20,176
    
    
    
    1,268
    
    
    
    2,535
    
    
    
    2,444
    
    
    
    13,929Subordinated debt
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Due to broker
    
    
    325
    
    
    
    325
    
    
    
    
    
    
    
    
    
    
    
    Interest expense for debt
obligations
    
    
    47,250
    
    
    
    4,413
    
    
    
    8,303
    
    
    
    6,261
    
    
    
    28,273Total contractual
obligations
    
    $
    927,345
    
    
    $
    715,049
    
    
    $
    60,290
    
    
    $
    49,957
    
    
    $
    102,049
 - 11 -




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Amount of Commitment Expiration Per PeriodUnfunded
    
    
    Less than
    
    
    One to
    
    
    Three to
    
    
    AfterCommitments
    
    
    One Year
    
    
    Three Years
    
    
    Five Years
    
    
    Five Years(In Thousands)Commitments:Commercial lines of credit
    
    $
    27,869
    
    
    $
    24,676
    
    
    $
    1,946
    
    
    $
    778
    
    
    $
    469Consumer lines of credit(1)
    
    
    40,277
    
    
    
    1,765
    
    
    
    
    
    
    
    2
    
    
    
    38,510Undisbursed portion of loans in process
    
    
    43,828
    
    
    
    23,806
    
    
    
    20,022
    
    
    
    
    
    
    
    Approved but, unfunded mortgage loans
    
    
    18,907
    
    
    
    18,907
    
    
    
    
    
    
    
    
    
    
    
    Approved but, unfunded commercial
loans
    
    
    650
    
    
    
    650
    
    
    
    
    
    
    
    
    
    
    
    Approved but unfunded consumer loans
    
    
    1,235
    
    
    
    1,235
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    1,547
    
    
    
    1,247
    
    
    
    300
    
    
    
    
    
    
    
    Total commitments
    
    $
    134,313
    
    
    $
    72,286
    
    
    $
    22,268
    
    
    $
    780
    
    
    $
    38,979
   (1)
    
    Line of credit with no stated maturity date is included in commitments for less than one
year. 
 Item 2: Managements Discussion and Analysis Corporate Profile Harrington West Financial Group, Inc. (NASDAQ: HWFG) is a diversified, community-based,
financial institution holding company. Our primary business is delivering an array of financial
products and services to commercial and retail consumers through our fifteen full-service banking
offices in multiple markets, after the expected completion of our Thousand Oaks, California branch
acquisition in May 2005. We also operate Harrington Wealth Management Company, our wholly owned
subsidiary, which provides trust and investment management services to individuals and small
institutional clients through customized investment allocations and a high service approach. The
culture of our company emphasizes building long-term customer relationships through exemplary
personalized service. Our corporate headquarters are in Solvang, California with executive offices
in Overland Park, Kansas. Mission and Philosophy Our mission is to increase shareholder value through the development of highly profitable,
community-focused banking operations that offer a broad range of high value loan alternatives,
deposit products, and investment and trust services for commercial and retail customers in the
markets of the California central coast and the metropolitan areas of Kansas City and
Phoenix/Scottsdale. Multiple Market Strategy Although our markets are geographically dispersed, we can compete effectively in each region
due to our considerable market knowledge of each area, our placement of local management with
extensive banking experience in the respective market, our strong community ties that enhance
relationship development, the favorable demographic and economic characteristics specific to each
market, and our broad product menu and flexible terms. We gain operating efficiency from centralized operations, administration, and systems. The
banking operations of each region, however, are distinct to its market and its clientele and led by
a local management team responsible for the regions profitable development. We operate the Kansas
City offices under the Harrington Bank (dba) brand name; California and Arizona offices operate
under the Los Padres Bank brand name. - 12 -




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We believe this multiple market banking strategy benefits our shareholders by providing the
ability to:  1.
    Diversify the loan portfolio and thus economic and credit risk2.
    Capitalize on the most favorable growth markets3.
    Deploy elements of our diverse product mix that are best suited for
each market4.
    Price products strategically among the markets to maximize
profitability. While employing this strategy, we have expanded our banking facilities from four to fifteen
offices since 1996. We expect to operate eleven full-service offices on the central coast of
California along Highway 101 from Thousand Oaks to Atascadero by May 2005, two banking offices in
Johnson County, Kansas, the fastest growing area of the Kansas City metro, and two offices in
Scottsdale, Arizona. We are considering additional expansion opportunities in each region and plan
to open two to three offices every eighteen months. We evaluate opportunities for acquiring
entities, which offer financial services, but remain value-oriented. We expect acquisitions will
be accretive to earnings per share within a twelve-month period. Product Line Diversification Over the last five years, we have broadened our product lines to diversify revenue sources and
to become a full service community banking company. In 1999, we added Harrington Wealth Management
Company, a federally registered trust and investment management company, to provide our customers a
consultative and customized investment process for their trust and investment funds. In 2000, we
added a full line of commercial banking and deposit products for small- to medium-sized businesses
and developed our consumer lending lines to include home equity lines of credit. In 2001, we added
Internet banking and bill pay services to augment our in-branch services and consultation. In 2003,
we further expanded mortgage banking and brokerage activities in all of our markets. Modern Financial and Investment Management Skills We have considerable expertise in investment and asset liability management. Our Chief
Executive Officer spent thirteen of his twenty years in this field consulting on risk management
practices with banking institutions and advising on mortgage and related assets managed on a short
duration basis. We utilize excess capital in a short duration and high credit quality investment
portfolio comprised largely of mortgage related securities to enhance our earnings. Our goal is to
produce a pre-tax return on these investments of 1.25% to 1.50% over the related funding sources.
We believe our ability to price loans and investments on an option-adjusted spread basis and then
manage the interest rate risk of longer term, fixed rate loans allows us to compete effectively
against other institutions, which do not offer these products due to their inability or
unwillingness to manage the interest rate risk. Control Banking Risks We seek to control banking risks. Our disciplined credit evaluation and underwriting
environment emphasizes the assessment of collateral support, cash flows, guarantor support, and
stress testing. We manage operational risk through stringent policies, procedures, and controls and
manage interest rate risk through our modern financial and hedging skills and the application of
risk management tools. - 13 -




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##### Table of Contents



Concentrate on Selected Performance Measures We evaluate our performance based upon the primary measures of return on average equity, which
we seek to maintain in the mid-teens, earnings per share growth, and franchise value creation
through the growth of deposits, loans, and wealth management assets. Profitability Drivers We expect these factors will drive more consistent and growing profitability in the future:  1.
    Steady development and growth of loans, deposits, and investment management and
trust accounts in all of our markets.2.
    Changing the loan mix to higher risk-adjusted spread earning categories such as
business lending, commercial real estate lending, small tract construction and
construction-to-permanent loan lending, and selected consumer lending activities such
as home equity lines.3.
    Growing our non-costing consumer and commercial deposits and continuing to
change the overall deposit mix to core deposit accounts.4.
    Diversifying and increasing our banking fee income through existing and new fee
income sources such as our overdraft protection program and other deposit fees, loan
fee income from mortgage banking, prepayment penalty fees and other loan fees,
Harrington Wealth Management trust and investment fees, and other retail banking fees.5.
    Achieving a high level of performance on our investment portfolio by earning a
pre-tax total return over one month LIBOR of approximately 1.25% to 1.50% per annum.6.
    Controlling interest rate risk of the institution to a low level and seeking
high credit quality of the loan and investment portfolios. Together, we believe these factors will contribute to more consistent and growing profitability.
The effect of these factors on our financial results is discussed further in the following
sections. - 14 -




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##### Table of Contents



Results of Operations The Company reported net income of $2.2 million for the three months ended March 31, 2005, as
compared to $2.1 million for the three months ended March 31, 2004, an increase of $176 thousand or
8.5%. The increase in net income was primarily driven by an increase in net interest income and an
increase in other income, which was partially offset by an increase in non-interest expense. On a
diluted earnings per share basis, the Company earned $.40 per share for the three months ended
March 31, 2005, compared to $.37 per share for the three months ended March 31, 2004. Return on
average equity was 16.5% in the March 2005 quarter compared to 16.9% in the same period in 2004. The Companys net interest income after provision for loan losses increased by $462 thousand
or 6.6% to $7.4 million in the three months ended March 31, 2005 over the prior comparable period
in 2004. The increase in the Companys net interest income during the period reflected the
continued growth in its interest-earning assets and its increased focus on higher spread-earning
loans, primarily commercial and industrial, commercial real estate, and multi-family residential
real estate loans. The net interest margin decreased by 11 basis points to 2.84% during the three
months ended March 31, 2005, when compared to 2.95% in the same period of 2004. The margin has
declined slightly as a result of the lag in the repricing of some floating rate loans (lagging
prime based and COFI loans), investments, and three month LIBOR based interest rate swap hedges
relative to the repricing of the Companys daily floating rate borrowings. This lag is generally
one to three months. See Asset and Liability Management and Item 3 of this Part I 
Quantitative and Qualitative Disclosures about Market Risks. HWFGs net interest margin is
expected to be positively influenced in future quarters by the acquisition of approximately $44.0
million in deposits in the Thousand Oaks, California market. It is expected that these deposits
will have a total cost of funds that is less than the Companys short-term borrowing cost.
Furthermore, the premium paid on loans acquired in the Companys 2001 purchase of the Harrington
Bank branch in Mission, Kansas will be fully amortized by the end of May 2005. - 15 -




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The following table sets forth, for the periods presented, information regarding (i) the total
dollar amount of interest income from interest-earning assets and the resultant average yields;
(ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant
average rate; (iii) net interest income before provision for loan losses; (iv) interest rate
spread; and (v) net interest margin. No tax equivalent adjustments were made during the periods
presented. Information is based on average daily balances during the presented periods. Three months ended March 31,2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AverageBalance
    
    
    Interest
    
    
    Yield/ Cost
    
    
    Balance
    
    
    Interest
    
    
    Yield/ Cost(Dollars in thousands)Interest-earning assets:Loans receivable (1)
    
    $
    614,185
    
    
    $
    9,908
    
    
    
    6.45
    %
    
    $
    525,001
    
    
    $
    8,592
    
    
    
    6.55
    %FHLB stock
    
    
    15,388
    
    
    
    145
    
    
    
    3.78
    %
    
    
    13,570
    
    
    
    125
    
    
    
    3.67
    %Securities and trading account assets (2)
    
    
    426,506
    
    
    
    4,220
    
    
    
    3.96
    %
    
    
    402,510
    
    
    
    3,519
    
    
    
    3.50
    %Cash and cash equivalents (3)
    
    
    8,898
    
    
    
    35
    
    
    
    1.57
    %
    
    
    13,891
    
    
    
    11
    
    
    
    .33
    %Total interest-earning assets
    
    
    1,064,977
    
    
    
    14,308
    
    
    
    5.37
    %
    
    
    954,972
    
    
    
    12,247
    
    
    
    5.13
    %Noninterest-earning assets
    
    
    25,629
    
    
    
    
    
    
    
    
    
    
    
    23,359Total assets
    
    $
    1,090,606
    
    
    
    
    
    
    
    
    
    
    $
    978,331Interest-bearing liabilities:Deposits:NOW and money market accounts
    
    
    119,486
    
    
    
    386
    
    
    
    1.29
    %
    
    
    122,105
    
    
    
    279
    
    
    
    .91
    %Passbook accounts and certificates of
deposit
    
    
    449,105
    
    
    
    2,699
    
    
    
    2.40
    %
    
    
    427,730
    
    
    
    2,256
    
    
    
    2.11
    %Total deposits
    
    
    568,591
    
    
    
    3,085
    
    
    
    2.17
    %
    
    
    549,835
    
    
    
    2,535
    
    
    
    1.84
    %FHLB advances (4)
    
    
    320,900
    
    
    
    2,812
    
    
    
    3.51
    %
    
    
    259,781
    
    
    
    2,078
    
    
    
    3.20
    %Reverse Repurchase Agreements
    
    
    79,611
    
    
    
    514
    
    
    
    2.58
    %
    
    
    65,622
    
    
    
    430
    
    
    
    2.62
    %Other borrowings (5)
    
    
    25,000
    
    
    
    336
    
    
    
    5,38
    %
    
    
    15,000
    
    
    
    165
    
    
    
    4.39
    %Total interest-bearing liabilities
    
    
    994,102
    
    
    
    6,747
    
    
    
    2.71
    %
    
    
    890,238
    
    
    
    5,208
    
    
    
    2.34
    %Non-interest-bearing deposits
    
    
    35,164
    
    
    
    
    
    
    
    
    
    
    
    27,533Non-interest-bearing liabilities
    
    
    7,054
    
    
    
    
    
    
    
    
    
    
    
    11,889Total liabilities
    
    
    1,036,320
    
    
    
    
    
    
    
    
    
    
    
    929,660Stockholders equity
    
    
    54,286
    
    
    
    
    
    
    
    
    
    
    
    48,671Total liabilities and stockholders equity
    
    $
    1,090,606
    
    
    
    
    
    
    
    
    
    
    $
    978,331Net interest-earning assets (liabilities)
    
    $
    70,875
    
    
    
    
    
    
    
    
    
    
    $
    64,734Net interest income/interest rate spread
    
    
    
    
    
    $
    7,561
    
    
    
    2.66
    %
    
    
    
    
    
    $
    7,039
    
    
    
    2.79
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.84
    %
    
    
    
    
    
    
    
    
    
    
    2.95
    %Ratio of average interest-earnings assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    107.13
    %
    
    
    
    
    
    
    
    
    
    
    107.27
    %
   1)
    Includes non-accrual loans. Interest income includes fees earned on loans
originated.2)
    Consists of securities classified as available for sale, 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. Hedging costs include
interest income and expense and ineffectiveness adjustments for cash flow hedges. The
Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing
characteristics of the floating FHLB advances.5)
    Consists of subordinated debt and note payable under a revolving line of
credit. - 16 -




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The following table sets forth the effects of changing rates and volumes on net interest
income. Information is provided with respect to (i) effects on interest income attributable to
changes in rates (changes in rate multiplied by prior volume); (ii) effects on interest income
attributable to changes in volume (changes in volume multiplied by prior rate); (iii) changes in
rate/volume (change in rate multiplied by change in volume). Three Months EndedMarch 31, 2005 vs. March 31,2004Increase (decrease) due to:Total NetRate/
    
    
    IncreaseRate
    
    
    Volume
    
    
    Volume
    
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable (1)
    
    
    ($491
    )
    
    $
    5,838
    
    
    
    ($4,031
    )
    
    $
    1,316FHLB stock
    
    
    14
    
    
    
    67
    
    
    
    (61
    )
    
    
    20Securities and trading account assets (2)
    
    
    1,854
    
    
    
    839
    
    
    
    (1,992
    )
    
    
    701Cash and cash equivalents (3)
    
    
    172
    
    
    
    (16
    )
    
    
    (132
    )
    
    
    24TotalTotal net change in income on interest-
earning assets
    
    
    1,549
    
    
    
    6,728
    
    
    
    (6,216
    )
    
    
    2,061Interest-bearing liabilities:DepositsNOW and money market accounts
    
    
    461
    
    
    
    (24
    )
    
    
    (330
    )
    
    
    107Passbook accounts and certificates
of deposit
    
    
    1,261
    
    
    
    451
    
    
    
    (1,269
    )
    
    
    443Total deposits
    
    
    1,722
    
    
    
    427
    
    
    
    (1,599
    )
    
    
    550FHLB advances (4)
    
    
    793
    
    
    
    1,956
    
    
    
    (2,015
    )
    
    
    734Reverse Repurchase Agreements
    
    
    (28
    )
    
    
    367
    
    
    
    (255
    )
    
    
    84Other borrowings (5)
    
    
    149
    
    
    
    439
    
    
    
    (417
    )
    
    
    171Total net change in expense on interest-
bearing liabilities
    
    
    2,636
    
    
    
    3,189
    
    
    
    (4,286
    )
    
    
    1,539Change in net interest income
    
    
    ($1,087
    )
    
    $
    3,539
    
    
    
    ($1,930
    )
    
    $
    522
   1)
    Includes non-accrual loans. Interest income includes fees earned on
loans originated.2)
    Consists of securities classified as available for sale, 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. Hedging costs
include interest income and expense and ineffectiveness adjustments for cash flow
hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the
short term repricing characteristics of the floating FHLB advances.5)
    Consists of subordinated debt and a note payable under a revolving line
of credit .   - 17 -




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##### Table of Contents



The Company reported interest income of $14.3 million for the three months ended March 31,
2005, compared to $12.2 million for the three months ended March 31, 2004, an increase of $2.1
million or 16.8%. The primary reason for the increase during the period was the increase in the
volume of net loans receivable. The Company reported total interest expense of $6.7 million for the three months ended March
31, 2005, compared to $5.2 million for the three months ended March 31, 2004, an increase of $1.5
million or 29.6%. The increase in interest expense during the period was attributable to an
increase in the volume of interest-bearing liabilities and an increase in the average rate on
interest-bearing liabilities as a result of the upward repricing of interest bearing-liabilities
due to rising interest rates. The Company recorded its provision for loan losses of $150 thousand during the three months
ended March 31, 2005, compared to $90 thousand for the three months ended March 31, 2004, an
increase of $60 thousand. The provision reflects the reserves required based upon, among other
things, the Companys analysis of the composition, credit quality and growth of its commercial real
estate and commercial and industrial loan portfolios. At March 31, 2005, the Company had $112
thousand of non-performing assets, as compared to $95 thousand of non-performing assets as of
December 31, 2004. The following table sets forth the activity in our allowance for loan losses for the periods
indicated. For the Quarter EndedMarch 31,2005
    
    
    2004(Dollars in thousands)Balance at beginning of period
    
    $
    5,228
    
    
    $
    4,587Charge-offs:Real estate loansSingle-family residential
    
    
    
    
    
    
    Multi-family residential
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    Consumer and other loans
    
    
    (1
    )
    
    
    Total charge-offs
    
    
    (1
    )
    
    
    Net charge-offs
    
    
    (1
    )
    
    
    Provision (credit) for losses on loans
    
    
    150
    
    
    
    90Balance at end of period
    
    $
    5,377
    
    
    $
    4,677Allowance for loan losses as a percent of
total loans outstanding
    
    
    0.85
    %
    
    
    0.88
    %Ratio of net charge-offs to average loans
outstanding
    
    
    
    %
    
    
    
    %
 The Companys total other income, which includes gain and losses on securities, other
assets, and, loans, deposits, borrowings, and trading assets, plus banking fee income amounted to
$1.6 million for the quarter ending March 31, 2005 compared to $1.1 million during the same quarter
last year, an increase of $475 thousand or 43.7%. The increase in other income was primarily
attributable to an - 18 -




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##### Table of Contents



increase in income on trading assets of $374 thousand or 110.7% and banking fee income which
increased by $98 thousand or 12.9% in the March 2005 quarter over the March 2004 quarter. The Company attempts to manage its investment securities and the related borrowings and hedges
thereof on a duration-matched basis and thus profit from its selection of undervalued investments.
As such, net gains and losses on these investments are primarily the result of the changes in
interest rate spreads between the securities and the hedged borrowings and the related effect on
net market values. That is, as spreads tighten, net mark-to-market gains are generated, and as
spreads widen, net mark-to-market losses occur on these instruments. During the March 2005
quarter, the Company had $712 thousand in net gains on trading assets and from the sale of
securities. The increase in net gains in the first quarter of 2005 over 2004 is largely attributed
to $115.0 million notional of the trading portfolios total return swaps, consisting of $95.0
million in notional of AAA rated commercial mortgage security (CMBS) and $20.0 million notional
of A rated home equity asset-backed total return swaps whereby the Bank receives the spread
between the yield on the index or basket of securities and comparable duration LIBOR rates and
receives or pays the market value change due to the spread changes. These total return swaps
continued to perform favorably adding $673 thousand in pre-tax gains in the March 2005 quarter due
to tighter hedged spreads between CMBS yields and comparable duration LIBOR yields. As of March
31, 2004, a 1 basis point spread change is expected to have a $76 thousand pre-tax mark-to-market
value effect on the total return swaps. Management measures the performance of the investment portfolio on the spread between its
total return (interest income plus net gains and losses on securities and hedges) and one month
LIBOR with a goal spread of 1.25% and 1.50%. For the March 2005 quarter, the investment portfolio
has generated annualized net returns on this basis of 1.36%. Management expects to manage the size
of the investment portfolio opportunistically as equity capital levels warrant and based on the
growth of core banking assets and liabilities. Banking fee income amounted to $858 thousand for the quarter ending March 31, 2005 compared to
$760 thousand during the same quarter last year, an increase of $98 thousand or 12.9%. Fees on
deposits and trust fees from the Companys subsidiary, Harrington Wealth Management Company, were
the main source of the growth in banking fee income. Deposit and other retail banking fee income
contributed $317 thousand for the March 2005 quarter, an increase of $78 thousand or 32.6% over the
same quarter last year. Harrington Wealth Managements trust fee income contributed $164 thousand
for the three-months ending March 2005, an increase of $19 thousand or 13.1%, compared to the same
period in 2004. The following chart shows the comparison of banking fee income sources for the March 2005 quarter
and year-to-date period over the same periods in 2004. March
    
    
    
    March2005
    
    
    
    2004Banking Fee Type
    
    
    Quarter
    
    
    
    Quarter
    
    
    
    % ChangeMortgage Brokerage Fees, Prepayment Penalties and
Other Loan Fees
    
    
    $
    377
    
    
    
    $
    376
    
    
    
    
    0.3
    %Deposit, Other Retail Banking Fees and Other Fee Income
    
    
    
    317
    
    
    
    
    239
    
    
    
    
    32.6
    %Harrington Wealth Management Fees
    
    
    
    164
    
    
    
    
    145
    
    
    
    
    13.1
    %$
    858
    
    
    
    $
    760
    
    
    
    
    12.9
    %
 - 19 -




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##### Table of Contents



The Companys total other expenses were $5.2 million during the three months ended March
31, 2005, as compared to $4.7 million for the three months ended March 31, 2004, an increase of
$471 thousand or 9.9%. The increase in expenses was largely due to the expenses associated with
the initial start-up expenses for the Companys new banking operations in all three of our markets
and an increase in general corporate expenses associated with the Company implementing new
corporate governance regulations, including SOX 404. The Company estimates that each new office
adds approximately $400 thousand in operating expenses per year, and profitability attainment takes
from 6 to 18 months. The new corporate governance regulations, including SOX 404, are expected to
add approximately $500 thousand in incremental annual expenditures to the Companys operating
expenses. Net income was favorably impacted in the March 2004 quarter by a reduction in the Companys
effective tax rate due to the taxable income being earned and apportioned to states with lower tax
rates. The effective tax rate was 40.6% in the March 2005 quarter compared to 37.6% in the March
2004 quarter. Financial Condition The Companys total assets increased $11.9 million or 1.1% to $1.1 billion at March 31, 2005.
The increase was attributable to growth in net loans of $23.0 million or 3.8% to $621.4 million as
of March 31, 2005, compared to $598.4 million at December 31, 2004. The Companys primary focus
with respect to its lending operations has historically been the direct origination of
single-family and multi-family residential, commercial real estate, business, and consumer loans.
Although the Company continues to emphasize single-family residential loan products that meet its
customers needs, the Company now generally brokers such loans on behalf of third party investors
in order to generate fee income. As part of its strategic plan to diversify its loan portfolio,
the Company has been increasing its emphasis on loans secured by commercial real estate,
multi-family residential, consumer and commercial and industrial loans. Single-family residential
loan balances increased to $105.7 million at March 31, 2005, compared to $100.5 million at December
31, 2004, an increase of $5.2 million, while non-single-family loans as a group increased to $523.4
million at March 31, 2005, compared to $505.2 million at December 31, 2004, an increase of $18.2
million. - 20 -




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##### Table of Contents



The following table sets forth the composition of our loan portfolio by type of loan at the dates
indicated. March 31, 2005
    
    
    December 31, 2004Change(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    Percent
    
    
    AmountReal Estate Loans:Single-family
    
    $
    105,672
    
    
    
    16.8
    %
    
    $
    100,485
    
    
    
    16.6
    %
    
    $
    5,187Multi-family
    
    
    83,343
    
    
    
    13.3
    
    
    
    84,937
    
    
    
    14.0
    
    
    
    (1,594
    )Commercial
    
    
    269,472
    
    
    
    42.8
    
    
    
    260,759
    
    
    
    43.1
    
    
    
    8,713Construction (1)
    
    
    38,512
    
    
    
    6.1
    
    
    
    34,981
    
    
    
    5.8
    
    
    
    3,531Land acquisition and development
    
    
    33,828
    
    
    
    5.4
    
    
    
    27,460
    
    
    
    4.5
    
    
    
    6,368Commercial and industrial loans
    
    
    72,818
    
    
    
    11.6
    
    
    
    72,240
    
    
    
    11.9
    
    
    
    578Consumer loans
    
    
    24,212
    
    
    
    3.8
    
    
    
    23,757
    
    
    
    3.9
    
    
    
    455Other loans (2)
    
    
    1,167
    
    
    
    0.2
    
    
    
    1,044
    
    
    
    0.2
    
    
    
    123Total loans receivable
    
    
    629,024
    
    
    
    100.0
    %
    
    
    605,663
    
    
    
    100.0
    %
    
    
    23,361Less:Allowance for loan loss
    
    
    (5,377
    )
    
    
    
    
    
    
    (5,228
    )
    
    
    
    
    
    
    (149
    )Net deferred loan fees
    
    
    (1,870
    )
    
    
    
    
    
    
    (1,730
    )
    
    
    
    
    
    
    (140
    )Net premiums
    
    
    (357
    )
    
    
    
    
    
    
    (263
    )
    
    
    
    
    
    
    (94
    )(7,604
    )
    
    
    
    
    
    
    (7,221
    )
    
    
    
    
    
    
    (383
    )Loans receivable, net
    
    $
    621,420
    
    
    
    
    
    
    $
    598,442
    
    
    
    
    
    
    $
    22,978
   (1)
    Includes loans secured by residential, land and commercial properties. At March 31,
2005, we had $20.2 million of construction loans secured by single-family residential
properties, $9.3 million secured by commercial properties, $3.5 million for land
development and $5.5 million secured by multi-family residential properties.(2)
    Includes loans collateralized by deposits and consumer line of credit loans. Securities classified as available for sale decreased to $422.0 million at March 31, 2005, as
compared to $431.2 million at December 31, 2004, a decrease of $9.2 million or 2.1%. With the
tighter spreads on mortgage and related investments in recent quarters, management has become more
selective and has reduced investment purchases. The Company manages the securities portfolio in
order to enhance net interest income and net market value, as opportunities dictate, and deploys
excess capital in investment assets until such time as the Company can reinvest into loans or other
community banking assets that generate higher risk-adjusted returns. - 21 -




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##### Table of Contents



The amortized historical cost, market values and gross unrealized gains and losses of
securities are as follows: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities Available for Sale:March 31, 2005Mortgage-backed securities  pass through
    
    $
    108,632
    
    
    $
    191
    
    
    
    ($1,676
    )
    
    $
    107,147Collateralized mortgage obligations
    
    
    68,719
    
    
    
    
    
    
    
    (791
    )
    
    
    67,928Commercial mortgage-backed securities
    
    
    45,391
    
    
    
    
    
    
    
    (360
    )
    
    
    45,031Asset-backed securities (underlying
securities mortgages)
    
    
    193,691
    
    
    
    1,947
    
    
    
    (114
    )
    
    
    195,524Asset-backed securities
    
    
    4,824
    
    
    
    
    
    
    
    (179
    )
    
    
    4,645Corporate debt securities
    
    
    1,588
    
    
    
    98
    
    
    
    
    
    
    
    1,686$
    422,845
    
    
    $
    2,236
    
    
    
    ($3,120
    )
    
    $
    421,961
 Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    Losses
    
    
    Value(Dollars in thousands)Securities Available for Sale:December 31, 2004Mortgage-backed securities  pass through
    
    $
    114,365
    
    
    $
    294
    
    
    
    ($957
    )
    
    $
    113,702Collateralized mortgage obligations
    
    
    73,894
    
    
    
    
    
    
    
    (495
    )
    
    
    73,399Commercial mortgage-backed securities
    
    
    47,545
    
    
    
    472
    
    
    
    (96
    )
    
    
    47,921Asset-backed securities (underlying
securities mortgages)
    
    
    187,949
    
    
    
    1,504
    
    
    
    (64
    )
    
    
    189,389Asset-backed securities
    
    
    5,460
    
    
    
    34
    
    
    
    (351
    )
    
    
    5,143Corporate debt securities
    
    
    1,569
    
    
    
    83
    
    
    
    
    
    
    
    1,652$
    430,782
    
    
    $
    2,387
    
    
    
    ($1,963
    )
    
    $
    431,206
 The fair values of securities can change due to credit concerns, i.e. whether the issuer
will in fact be able to pay the obligation when due, prepayment speeds, and due to changes in
interest rates. All of the available for sale securities held by the Company are carried at their
fair value. Adjustments to the carrying amount for changes in fair value for securities classified
as available-for-sale are not recorded in the Companys income statement. Instead, the after-tax
effect of the change is shown in other comprehensive income. Consequently, as shown in the tables
above, there are unrealized gains and losses related to the available for sale securities held by
the Company. - 22 -




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##### Table of Contents



The following table discloses security balances by categories that are at an unrealized loss
at March 31, 2005 with the corresponding duration of the loss. Included in the table are 49
securities that have been in an unrealized loss position for less than a year and 30 securities
that have been in an unrealized loss position for more than one year. Although the securities have
varying levels of credit risk, the Company has concluded that none of these securities is other
than temporarily impaired and the full recovery of principal and interest is expected if held to
maturity. The Company has the ability and intent to hold these securities until recovery. Less than 12 Months
    
    
    12 Months or More
    
    
    Total(Dollars in thousands)as of December 31, 2004Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed
securities  pass
through
    
    $
    65,611
    
    
    
    ($968
    )
    
    $
    26,610
    
    
    
    ($708
    )
    
    $
    92,221
    
    
    
    ($1,676
    )Collateralized
mortgage obligations
    
    
    32,326
    
    
    
    (562
    )
    
    
    10,689
    
    
    
    (229
    )
    
    
    43,015
    
    
    
    (791
    )Commercial
mortgage-backed
securities
    
    
    44,242
    
    
    
    (322
    )
    
    
    789
    
    
    
    (38
    )
    
    
    45,031
    
    
    
    (360
    )Asset-backed
securities (underlying
securities mortgages)
    
    
    16,386
    
    
    
    (114
    )
    
    
    
    
    
    
    
    
    
    
    16,386
    
    
    
    (114
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    4,645
    
    
    
    (179
    )
    
    
    4,645
    
    
    
    (179
    )$
    158,565
    
    
    
    ($1,966
    )
    
    $
    42,733
    
    
    
    ($1,154
    )
    
    $
    201,298
    
    
    
    ($3,120
    )
 Less than 12 Months
    
    
    12 Months or More
    
    
    Total(Dollars in thousands)as of December 31, 2004Fair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    LossesMortgage-backed
securities  pass
through
    
    $
    54,582
    
    
    
    ($350
    )
    
    $
    29,319
    
    
    
    ($607
    )
    
    $
    83,901
    
    
    
    ($957
    )Collateralized
mortgage obligations
    
    
    61,773
    
    
    
    (271
    )
    
    
    11,626
    
    
    
    (224
    )
    
    
    73,399
    
    
    
    (495
    )Commercial
mortgage-backed
securities
    
    
    7,090
    
    
    
    (70
    )
    
    
    832
    
    
    
    (26
    )
    
    
    7,922
    
    
    
    (96
    )Asset-backed
securities (underlying
securities mortgages)
    
    
    18,711
    
    
    
    (64
    )
    
    
    1,302
    
    
    
    
    
    
    
    20,013
    
    
    
    (64
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    4,216
    
    
    
    (351
    )
    
    
    4,216
    
    
    
    (351
    )$
    142,156
    
    
    
    ($755
    )
    
    $
    47,295
    
    
    
    ($1,208
    )
    
    $
    189,451
    
    
    
    ($1,963
    )
 As of March 31, 2005, there were 30 securities in an unrealized loss position for greater
than twelve months: 27 mortgage backed securities, 1 collateralized mortgage obligation security, 1
commercial mortgage-backed security, and 1 asset-backed security. As to the 29 mortgage secured
securities, management believes that the unrealized loss associated with these investments is
attributable to changes in interest rates and spreads, and accordingly, the unrealized losses are
not other-than-temporary impairments. Management intends to hold these securities until
recovery. - 23 -




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##### Table of Contents



The asset-backed security is collateralized by a pool of loans and leases on medical equipment
and medical business loans and they have a fair value of $4.6 million and $5.1 million as of March
31, 2005 and December 31, 2004, respectively. The securities are of the senior tranches with
priority cash flow rights. This medical equipment, asset-backed security is rated CCC by Moodys
and B1 by Fitch, as of March 31, 2005. Management believes the improvement in the unrealized loss
from $351 thousand as of December 31, 2004 to $179 thousand as of March 31, 2005 is attributed to
the decrease in delinquencies and default rates of the underlying loans. The delinquencies on the
underlying loans of these securities have dropped from 13.4% as of the December 2004 servicers
report to 7.4% per the March 2005 servicer report. As of the three-months ending March 31, 2005,
and as a result of our senior tranche position, 37.3% or $3.0 million of our outstanding principal
has been returned, and the average life of the security is estimated to be approximately two years.
The value of the DVI securities increased by 12 points or $606 thousand from March 31, 2004 to
March 31, 2005 due to the improvement in delinquencies, default rates and the repayment of
underlying loans. Furthermore, management performs a stress test of the cash flows based on
conservative delinquency, default and recovery rates on the underlying loans. Based on this
analysis, all payments can be made on our DVI security and, as such, the current unrealized loss
associated with this investment is not an other-than-temporary impairment. Management intends to
hold these securities until recovery. The following table presents available for sale securities in a loss position for greater than
twelve months and summarizes by category of those securities, which securities are pledged as
collateral versus securities that are not pledged as collateral as of March 31, 2005. Securities
are pledged as collateral for FHLB advances, repurchase agreements and for our swap agreements. Pledged Securities
    
    
    Unpledged Securities
    
    
    TotalFair
    
    
    Unrealized
    
    
    Fair
    
    
    Unrealized
    
    
    Fair
    
    
    UnrealizedValue
    
    
    Losses
    
    
    Value
    
    
    Losses
    
    
    Value
    
    
    Losses(Dollars in thousands)Mortgage-backed
securities  pass
through
    
    $
    53,223
    
    
    
    ($708
    )
    
    $
    
    
    
    $
    
    
    
    $
    53,223
    
    
    
    ($708
    )Collateralized
mortgage obligations
    
    
    21,379
    
    
    
    (229
    )
    
    
    
    
    
    
    
    
    
    
    21,379
    
    
    
    (229
    )Commercial
mortgage-backed
securities
    
    
    1,579
    
    
    
    (38
    )
    
    
    
    
    
    
    
    
    
    
    1,579
    
    
    
    (38
    )Asset-backed securities
    
    
    
    
    
    
    
    
    
    
    4,645
    
    
    
    (179
    )
    
    
    4,645
    
    
    
    (179
    )$
    76,181
    
    
    
    ($975
    )
    
    $
    4,645
    
    
    
    ($179
    )
    
    $
    80,826
    
    
    
    ($1,154
    )
 Total deposits increased to $601.5 million as of March 31, 2005, as compared to $598.2
million as of December 31, 2004, an increase of $3.3 million or 0.6%. Deposit growth was minimal
due to the Companys emphasis on reducing the cost of higher rate sensitive deposits relative to
our borrowing rates and increasing non-interest bearing deposits. Non-interest bearing deposits
reached $38.8 million at March 31, 2005 compared with $33.6 million at December 31, 2004, an
increase of $5.2 million or 15.4%. This increase in non-interest bearing deposits has contributed
to reducing overall deposit cost despite rising market interest rates in 2005. Advances from the Federal Home Loan Bank (FHLB) of San Francisco increased to $325.0 million
at March 31, 2005, compared to $316.0 million at December 31, 2004, a $9.0 million or 2.8%
increase. During the quarter, the Company used FHLB advances to support the increase in new loan - 24 -




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##### Table of Contents



fundings. For additional information concerning limitations on FHLB advances, see Liquidity
and Capital Resources. Stockholders equity increased to $55.9 million at March 31, 2005, as compared to $52.7
million at December 31, 2004, an increase of $3.2 million or 6.1%. The $3.2 million
increase in stockholders equity was positively influenced by $2.2 million of net income recognized
during the three-month period and $1.0 million of other comprehensive income due to an increase in
the unrealized gains on securities available for sale and interest rate hedge contracts. Liquidity and Capital Resources Liquidity.The liquidity of Los Padres Bank, a consolidated subsidiary of the Company is
monitored closely for regulatory purposes at the Bank level by calculating the ratio of cash, cash
equivalents (not committed, pledged or required to liquidate specific liabilities), investments and
qualifying mortgage-backed securities to the sum of total deposits plus borrowings payable within
one year, was 25.7% at March 31, 2005. At March 31, 2005, Los Padres Banks liquid assets
totaled approximately $160.6 million. In general, the Los Padres Banks liquidity is represented by cash and cash equivalents and is
a product of its operating, investing and financing activities. The Banks primary sources of
internal liquidity consist of deposits, prepayments and maturities of outstanding loans and
mortgage-backed and related securities, maturities of short-term investments, sales of
mortgage-backed and related securities and funds provided from operations. The Banks external
sources of liquidity consist of borrowings, primarily advances from the FHLB of San Francisco,
securities sold under agreements to repurchase and a revolving line of credit loan facility, which
it maintains with two banks. At March 31, 2005, the Bank had $325.0 million in FHLB advances and
had $57.6 million of additional borrowing capacity with the FHLB of San Francisco based on a 35% of
total Bank asset limitation. Borrowing capacity from the FHLB is further limited to $26.0 million
based on excess collateral pledged at the FHLB as of March 31, 2005. The Bank also has $123.4
million of unpledged AA and A rated home equity asset-backed securities that can be pledged for
further borrowings of $104.9 million utilizing reverse repurchase agreements. The Company has a revolving line of credit with a maximum borrowing capacity of $15.0 million
with a maturity of September 30, 2007. We anticipate that we will utilize this line of credit as
growth opportunities develop and to provide working capital. At March 31, 2005 and December 31,
2004, the Company was not indebted under its revolving line of credit. A substantial source of the Companys cash flow from which it services its debt and capital
trust securities, pays its obligations, and pays dividends to its shareholders is the receipt of
dividends from Los Padres Bank. The availability of dividends from Los Padres Bank is limited by
various statutes and regulations. In order to make such dividend payment, Los Padres Bank is
required to provide 30 days advance notice to the Office of Thrift Supervision (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, 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. The OTS, on July 7, 2004, approved the payment of $6 million in dividends from
Los Padres Bank to the Company over the next four quarters. Capital Resources.Federally insured savings institutions such as Los Padres Bank are
required to maintain minimum levels of regulatory capital. Under applicable regulations, an
institution is well capitalized if it has a total risk-based capital ratio of at least 10.0%, a
Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5.0%, with no
written agreement, order, capital directive, - 25 -




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##### Table of Contents



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 March 31, 2005, Los Padres Bank met the
capital requirements of a well capitalized institution under applicable OTS regulations. At
March 31, 2005, the Banks Tier 1 (Core) Capital Ratio was 6.84%, Total Risk-Based Capital Ratio
was 11.19%, Tier 1 Risk-Based Capital Ratio was 10.44% and Tangible Equity Ratio was 6.84%. On May 3, 2005, the Company announced a share repurchase program of up to 200,000 shares over
the next year as market conditions warrant. These shares will be purchased in the open market or
privately negotiated transactions. Asset and Liability Management The Company evaluates the change in its market value of portfolio equity (MVPE) to changes
in interest rates and seeks to manage these changes to relatively low levels through various risk
management techniques. MVPE is defined as the net present value of the cash flows from an
institutions existing assets, liabilities and off-balance sheet instruments. The MVPE is
estimated by valuing 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. In general,
thrift institutions are negatively affected by an increase in interest rates to the extent that
interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. This
factor causes the income and MVPE of these institutions to increase as rates fall and decrease as
interest rates rise. The Companys management believes that its asset and liability management strategy, as
discussed below, provides it with a competitive advantage over other financial institutions. The
Company believes that its ability to hedge its interest rate exposure through the use of various
interest rate contracts provides it with the flexibility to acquire loans structured to meet its
customers preferences and investments that provide attractive net risk-adjusted spreads,
regardless of whether the customers loan or our investment is fixed-rate or adjustable-rate or
short-term or long-term. Similarly, the Company can choose a cost-effective source of funds and
subsequently engage in an interest rate swap or other hedging transaction so that the interest rate
sensitivities of its interest-earning assets and interest-bearing liabilities are more closely
matched. The Companys asset and liability management strategy is formulated and monitored by the board
of directors of Los Padres Bank. The Boards written policies and procedures are implemented by
the Asset and Liability Committee of Los Padres Bank (ALCO), which is comprised of Los Padres
Banks chief executive officer, president/chief financial officer, principal accounting officer,
director of financial reporting and four non-employee directors of Los Padres Bank. The ALCO meets
at least eight times a year to review the sensitivity of Los Padres Banks assets and liabilities
to interest rate changes, investment opportunities, the performance of the investment portfolios,
and prior purchase and sale activity of securities. The ALCO also provides guidance to management
on reducing interest rate risk and on investment strategy and retail pricing and funding decisions
with respect to Los Padres Banks overall asset and liability composition. The ALCO reviews Los
Padres Banks liquidity, cash flow needs, - 26 -




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interest rate sensitivity of investments, deposits and borrowings, core deposit activity,
current market conditions and interest rates on both a local and national level in connection with
fulfilling its responsibilities. The ALCO regularly reviews interest rate risk with respect to the impact of alternative
interest rate scenarios on net interest income and on Los Padres Banks MVPE. The Asset and
Liability Committee also reviews analyses concerning the impact of changing market volatility,
prepayment forecast error, and changes in option-adjusted spreads and non-parallel yield curve
shifts. In the absence of hedging activities, the Companys MVPE would decline as a result of a
general increase in market rates of interest. This decline would be due to the market values of
the Companys assets being more sensitive to interest rate fluctuations than are the market values
of its liabilities due to its investment in and origination of generally longer-term assets which
are funded with shorter-term liabilities. Consequently, the elasticity (i.e.,the change in the
market value of an asset or liability as a result of a change in interest rates) of the Companys
assets is greater than the elasticity of its liabilities. Accordingly, the primary goal of the Companys asset and liability management policy is to
effectively increase the elasticity of its liabilities and/or effectively contract the elasticity
of its assets so that the respective elasticities are matched as closely as possible. This
elasticity adjustment can be accomplished internally, by restructuring the balance sheet, or
externally by adjusting the elasticities of assets and/or liabilities through the use of interest
rate contracts. The Companys strategy is to hedge, either internally through the use of
longer-term certificates of deposit or less sensitive transaction deposits and FHLB advances, or
externally through the use of various interest rate contracts. External hedging generally involves the use of interest rate swaps, caps, floors, options and
futures. The notional amount of interest rate contracts represents the underlying amount on which
periodic cash flows are calculated and exchanged between counterparties. However, this notional
amount does not necessarily represent the principal amount of securities that would effectively be
hedged by that interest rate contract. In selecting the type and amount of interest rate contract to utilize, the Company compares
the elasticity of a particular contract to that of the securities to be hedged. An interest rate
contract with the appropriate offsetting elasticity could have a notional amount much greater than
the face amount of the securities being hedged. The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities,on January 1, 2001. SFAS No. 133 as amended requires that an entity recognize all
interest rate contracts as either assets or liabilities in the statement of financial condition and
measure those instruments at fair value. If certain conditions are met, an interest rate contract
may be specifically designated as a fair value hedge, a cash flow hedge, or a hedge of foreign
currency exposure. The accounting for changes in the fair value of an interest rate contract (that
is, gains and losses) depends on the intended use of the interest rate contract and the resulting
designation. To qualify for hedge accounting, the Company must show that, at the inception of the
interest rate contracts, and on an ongoing basis, the changes in the fair value of the interest
rate contracts are expected to be highly effective in offsetting related changes in the cash flows
of the hedged liabilities. The Company has entered into various interest rate swaps for the
purpose of hedging certain of its short-term liabilities. These interest rate swaps qualify for
hedge accounting. Accordingly, the effective portion of the accumulated change in the fair value
of the cash flow hedges is recorded in a separate component of stockholders equity, net of tax,
while the ineffective portion is recognized in earnings immediately. - 27 -




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The Company has also entered into various total return swaps in an effort to enhance income,
where cash flows are based on the level and changes in the yield spread on investment grade
commercial mortgage and asset backed security indexes relative to similar duration LIBOR swap
rates. These swaps do not qualify for hedge accounting treatment and are included in the trading
account assets and are reported at fair value with realized and unrealized gains and losses on
these instruments recognized in income (loss) from trading account assets. Critical Accounting Policies General.The following discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, and the notes thereto, which have
been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these consolidated financial statements requires us to make a number
of estimates and assumptions that affect the reported amounts and disclosures in the consolidated
financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon
historical experience and various other factors and circumstances. We believe that our estimates
and assumptions are reasonable in the circumstances; however, actual results may differ
significantly from these estimates and assumptions, which could have a material impact on the
carrying value of assets and liabilities at the balance sheet dates and our results of operations
for the reporting periods. The financial information contained in our consolidated financial statements is, to a
significant extent, based on approximate measures of the financial effects of transactions and
events that have already occurred. A variety of factors could affect the ultimate value that is
obtained either when recognizing income or expense, recovering an asset or relieving a liability.
We use historical loss factors to determine the inherent loss that may be present in our loan
portfolio. Actual losses could differ significantly from the historical factors that we use. We
also calculate the fair value of our interest rate contracts and securities based on market prices
and the expected useful lives of our depreciable assets. We enter into interest rate contracts
that are classified as trading account assets or to accommodate our own risk management purposes.
The interest rate contracts are generally interest swaps, although we could enter into other types
of interest rate contracts. We value these contracts at fair value, using readily available, and
market quoted prices. We have not historically entered into derivative contracts, which relate to
credit, equity, commodity, energy or weather-related indices. Generally accepted accounting
principles themselves may change from one previously acceptable method to another method. Although
the economics of our transactions would be the same, the timing of events that would impact our
transactions could change. As of March 31, 2005, we have not created any additional 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, which contains
amounts that are based on managements evaluation of conditions that are not directly measured in
the determination of the specific allowances. - 28 -




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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. Trading and Investment Portfolio.Substantially all of our securities are classified as
available for sale securities and, pursuant to Statement of Financial Accounting Standards (SFAS)
No. 115, are reported at fair value with unrealized gains and losses included in stockholders
equity. We invest in a portfolio of mortgage-backed and related securities, interest rate
contracts, U.S. Government agency securities and, to a much lesser extent, equity securities. The
Company has also entered into various total return swaps in an effort to enhance income, where cash
flows are based on the level and changes in the yield spread on investment grade commercial
mortgage backed security indexes and specific A rated asset backed home equity securities
relative to similar duration LIBOR swap rates. These swaps do not qualify for hedge accounting
treatment and are included in the trading account assets and are reported at fair value with
realized and unrealized gains and losses on these instruments recognized in income (loss) from
trading account assets, pursuant to Statement of Financial Accounting Standards (SFAS) No. 115. Hedging Activity.Accounting for Derivative Instruments and Hedging Activities was
implemented on January 1, 2001. SFAS No. 133 requires that an entity recognize all interest rate
contracts as either assets or liabilities in the statement of financial condition and measure those
instruments at fair value. If certain conditions are met, an interest rate contract may be
specifically designated as a fair value hedge, a cash flow hedge, or a hedge of foreign currency
exposure. The accounting for changes in the fair value of an interest rate contract (that is,
gains and losses) depends on the intended use of the interest rate contract and the resulting
designation. To qualify for hedge accounting, the Company must show that, at the inception of the
interest rate contracts, and on an ongoing basis, the changes in the fair value of the interest
rate contracts are expected to be highly effective in offsetting related changes in the cash flows
of the hedged liabilities. The Company has entered into various interest rate swaps for the
purpose of hedging certain of its short-term liabilities. These interest rate swaps qualify for
hedge accounting. Accordingly, the effective portion of the accumulated change in the fair value
of the cash flow hedges is recorded in a separate component of stockholders equity, net of tax,
while the ineffective portion is recognized in earnings immediately. Cautionary Statement Regarding Forward-Looking Statements. This Form 10-Q 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; - 29 -




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
    changes in managements estimate of the adequacy of the allowance for loan losses;
    changes in managements valuation of our mortgage-backed and related securities
portfolio and interest rate contracts;
    increases in competitive pressure among financial institutions;
    general economic conditions, either nationally or locally in areas in which we
conduct or will conduct our operations, or conditions in financial markets may be less
favorable than we currently anticipate;
    our net income from operations may be lower than we expect;
    natural disasters;
    we may lose more business or customers than we expect, or our operating costs may be
higher than we expect;
    the availability of capital to fund our growth and expansion;
    changes in the interest rate environment and their impact on customer behavior and
our interest margins;
    political and global changes arising from the war on terrorism;
    the impact of repricing and competitors pricing initiatives on loan and deposit products;
    our ability to adapt successfully to technological changes to meet customers needs
and developments in the market place;
    our ability to access cost-effective funding;
    our ability to successfully complete our strategy to continue to grow our business
in California, Kansas and Arizona;
    our returns from our securities portfolio may be lower than we expect; or
    legislative or regulatory changes or changes in accounting principles, policies or
guidelines may adversely affect our ability to conduct our business. Because these forward-looking statements are subject to risks and uncertainties, our actual
results may differ materially from those expressed or implied by these statements. You are
cautioned not to place undue reliance on our forward-looking statements, which speak only as of the
date of this Form 10-Q. Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and stockholder values of our common
stock may differ materially from those expressed in these forward-looking statements. Many of the
factors that will determine these results and values are beyond our ability to control or predict. We do not undertake any obligation to release publicly any revisions to any forward-looking
statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the
occurrence of unanticipated events. - 30 -




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Item 3: Quantitative and Qualitative Disclosures about Market Risk The OTS requires each thrift institution to calculate the estimated change in the
institutions MVPE assuming an instantaneous, parallel shift in the Treasury yield curve of 100 to
300 basis points either up or down in 100 basis point increments. The OTS permits institutions to
perform this MVPE analysis using their own internal model based upon reasonable assumptions. In estimating the market value of mortgage loans and mortgage-backed securities, the Company
utilizes various prepayment assumptions, which vary, in accordance with historical experience,
based upon the term, interest rate, prepayment penalties, if applicable, and other factors with
respect to the underlying loans. At March 31, 2005, these prepayment assumptions varied from 7.0%
to 53.0% for fixed-rate mortgages and mortgage-backed securities and varied from 7.0% to 34.0% for
adjustable-rate mortgages and mortgage-backed securities. The following table sets forth at March 31, 2005 the estimated sensitivity of Los Padres
Banks MVPE to parallel yield curve shifts using the Companys internal market value calculation.
The table demonstrates the sensitivity of the Companys assets and liabilities both before and
after the inclusion of its interest rate contracts. Change In Interest Rates (In Basis Points)(1)-300
    
    
    -200
    
    
    -100
    
    -
    
    +100
    
    
    +200
    
    
    +300(Dollars in Thousands)Market value gain (loss) in assets
    
    $
    40,234
    
    
    $
    28,212
    
    
    $
    15,281
    
    
    
    ($17,755
    )
    
    
    ($37,398
    )
    
    
    ($58,178
    )Market value gain (loss) of liabilities
    
    
    (58,919
    )
    
    
    (39,041
    )
    
    
    (19,391
    )
    
    
    18,889
    
    
    
    37,247
    
    
    
    55,128Market value gain (loss) of net assets
before interest rate contracts
    
    
    (18,685
    )
    
    
    (10,829
    )
    
    
    (4,110
    )
    
    
    1,134
    
    
    
    (151
    )
    
    
    (3,050
    )Market value gain (loss) of interest
rate contracts before tax
    
    
    17,543
    
    
    
    11,337
    
    
    
    5,501
    
    
    
    (5,174
    )
    
    
    (10,064
    )
    
    
    (14,684
    )Total change in MVPE (2)
    
    
    ($1,142
    )
    
    $
    508
    
    
    $
    1,391
    
    
    
    ($4,040
    )
    
    
    ($10,215
    )
    
    
    ($17,734
    )Change in MVPE as a percent of:MVPE(2)
    
    
    -1.23
    %
    
    
    0.55
    %
    
    
    1.50
    %
    
    
    -4.36
    %
    
    
    -11.03
    %
    
    
    -19.15
    %MVPE post shock ratio (3)
    
    
    -0.40
    %
    
    
    -0.16
    %
    
    
    0.01
    %
    
    
    -0.24
    %
    
    
    -0.67
    %
    
    
    -1.24
    %
   (1)
    
    Assumes an instantaneous parallel change in interest rates at all maturities.(2)
    
    Based on the Companys pre-tax tangible MVPE of $92.6 million at March 31, 2005.(3)
    
    Pre-tax tangible MVPE as a percentage of tangible assets. The table set forth above does not purport to show the impact of interest rate changes on
the Companys equity under generally accepted accounting principles. Market value changes only
impact the Companys income statement or the balance sheet to the extent the affected instruments
are marked to market, and over the life of the instruments as an impacton recorded yields. 
 Item 4: Controls and Procedures As of the end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Companys management, including the
Companys Chief - 31 -




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Executive Officer and the Companys Chief Financial Officer, of the effectiveness
of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15(b) under
the Securities Exchange Act of 1934 (the Exchange Act). Based upon that evaluation, the
Companys Chief Executive Officer and the Companys Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective in timely alerting them to material
information relating to the Company (including its consolidated subsidiaries) required to be
included in the Companys periodic SEC filings. There have been no significant changes in the
Companys internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting. Disclosure controls and procedures are Company controls and other procedures that are designed
to ensure that information required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Companys management, including its Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. 
 PART II-OTHER INFORMATION 
 Item 1:Legal Proceedings The Company is involved in various legal proceedings occurring in the ordinary
course of business, which, in the aggregate, are believed by management to be
immaterial to the financial condition and results of operations of the Company. 
 Item 2:Unregistered Sales of Equity Securities and Use of Proceeds Not Applicable. 
 Item 3:Defaults Upon Senior Securities Not applicable. 
 Item 4:Submission of Matters to a Vote of Security Holders. None. 
 Item 5:Other Information Not applicable. - 32 -




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Item 6:Exhibits EXHIBIT NO.
    
    DESCRIPTION31.1
    
    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.
 - 33 -




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SIGNATURES Pursuant to the requirements 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.Date: May 10, 2005
    By:
    /s/ CRAIG J. CERNYCraig J. Cerny, Chief Executive Officer
(Principal Executive Officer)By:
    /s/ WILLIAM W. PHILLIPSWilliam W. Phillips,
President, Chief Operating Officer and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
 - 34 -