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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934For the quarterly period ended March 31, 2004
 OR o
    
    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
(State or other jurisdiction of incorporation or organization)
    
    48-1175170
(I.R.S. Employer Identification No.)
 610 Alamo Pintado Road
Solvang, California
(Address of principal executive offices) 93463
(Zip Code) (805) 688-6644
(Registrants telephone number, including area code)    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. x Yes 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).
o Yes x No Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 5,258,234 shares of Common Stock, par value $0.01 per share, outstanding
as of May 4, 2004.




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HARRINGTON WEST FINANCIAL GROUP, INC. INDEX  
 PagePart I - Financial InformationItem 1.
    
    Condensed Consolidated Financial Statements
    
    
    2Condensed Consolidated Statements of Financial Condition as of March 31, 2004 (Unaudited) and December 31, 2003
    
    
    2Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2004 and 2003 (Unaudited)
    
    
    3Condensed
Consolidated Statements of Shareholders Equity and Comprehensive Income for the three months ended March 31, 2004 (Unaudited) and Year Ended December 31, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2004 and 2003 (Unaudited)
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    22Part II - Other InformationItem 1.
    
    Legal Proceedings
    
    
    23Item 2.
    
    Changes in Securities and Use of Proceeds
    
    
    23Item 3.
    
    Defaults upon Senior Securities
    
    
    23Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    23Item 5.
    
    Other Information
    
    
    23Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    23Signatures
    
    
    24Exhibit 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
  (Dollars in thousands, except share data)
 March 31, 2004
    
    December 31, 2003(unaudited)ASSETSCash and cash equivalents
    
    $
    13,414
    
    
    $
    22,856Trading account assets
    
    
    1,950
    
    
    
    2,111Securities available for sale
    
    
    422,599
    
    
    
    398,691Securities held to maturity
    
    
    215
    
    
    
    222Loans receivable, (net of allowance for loan losses of $4,677
and $4,587at March 31, 2004 and December 31,
2003, respectively)
    
    
    533,118
    
    
    
    518,496Accrued interest receivable
    
    
    2,918
    
    
    
    2,928Premises and equipment, net
    
    
    7,263
    
    
    
    6,454Prepaid expenses and other assets
    
    
    1,572
    
    
    
    1,867Investment in FHLB stock, at cost
    
    
    13,952
    
    
    
    13,425Deferred tax asset
    
    
    2,879
    
    
    
    2,651Goodwill
    
    
    3,981
    
    
    
    3,981Core deposit intangible, net
    
    
    1,069
    
    
    
    1,117TOTAL ASSETS
    
    $
    1,004,930
    
    
    $
    974,799LIABILITIES AND STOCKHOLDERS EQUITYDeposits:Interest bearing
    
    $
    555,789
    
    
    $
    541,533Non-interest bearing
    
    
    28,976
    
    
    
    29,164Total Deposits
    
    
    584,765
    
    
    
    570,697FHLB advances
    
    
    256,500
    
    
    
    262,500Securities sold under repurchase agreements
    
    
    65,699
    
    
    
    65,728Other debt
    
    
    15,464
    
    
    
    15,464Due to broker
    
    
    21,555
    
    
    
    Accounts payable and accrued expenses
    
    
    10,796
    
    
    
    11,623Income taxes payable
    
    
    890
    
    
    
    711TOTAL LIABILITIES
    
    
    955,669
    
    
    
    926,723STOCKHOLDERS EQUITYPreferred stock, $.01 par value: 1,000,000 shares
authorized: none issued and outstandingCommon stock, $.01 par value; 9,000,000 shares
authorized: 5,257, 484 shares issued and outstanding at of March 31, 2004
and 4,338,451 shares issued and outstanding at of December 31, 2003
    
    
    53
    
    
    
    43Additional paid-in capital
    
    
    31,062
    
    
    
    30,710Retained earnings
    
    
    21,698
    
    
    
    20,082Accumulated other comprehensive income (loss), net of tax of $(2,618)
and $(2,024) at March 31, 2004 and December 31, 2003, respectively
    
    
    (3,552
    )
    
    
    (2,759
    )Total Stockholders Equity
    
    
    49,261
    
    
    
    48,076TOTAL LIABILITIES & STOCKHOLDERS EQUITY
    
    $
    1,004,930
    
    
    $
    974,799
 The accompanying notes are an integral part of these condensed statements. - 2 -




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 Dollars in thousands, except share and per share data Three months endedMarch 31,2004
    
    2003INTEREST INCOMEInterest on loans
    
    $
    8,592
    
    
    $
    7,955Interest and dividends on securities
    
    
    3,655
    
    
    
    3,403Total interest income
    
    
    12,247
    
    
    
    11,358INTEREST EXPENSEInterest on deposits
    
    
    2,535
    
    
    
    2,666Interest on FHLB advances and other borrowings
    
    
    2,673
    
    
    
    2,455Total interest expense
    
    
    5,208
    
    
    
    5,121NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES
    
    
    7,039
    
    
    
    6,237PROVISION FOR LOAN LOSSES
    
    
    90
    
    
    
    360NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    6,949
    
    
    
    5,877OTHER INCOME (LOSS)Income (loss) from trading assets
    
    
    338
    
    
    
    576Loss on extinguishment of debt
    
    
    
    
    
    
    (531
    )Other income gain (loss)
    
    
    (10
    )
    
    
    89Banking fee income
    
    
    760
    
    
    
    1,024Total other income
    
    
    1,088
    
    
    
    1,158OTHER EXPENSESSalaries & employee benefits
    
    
    2,683
    
    
    
    2,391Premises & equipment
    
    
    724
    
    
    
    652Insurance premiums
    
    
    148
    
    
    
    68Marketing
    
    
    109
    
    
    
    99Computer services
    
    
    155
    
    
    
    160Consulting fees
    
    
    245
    
    
    
    247Office expenses & supplies
    
    
    211
    
    
    
    176Other
    
    
    464
    
    
    
    500Total other expenses
    
    
    4,739
    
    
    
    4,293INCOME BEFORE INCOME TAXES
    
    
    3,298
    
    
    
    2,742INCOME TAXES
    
    
    1,239
    
    
    
    1,138NET INCOME
    
    $
    2,059
    
    
    $
    1,604BASIC EARNINGS PER SHARE
    
    $
    0.40
    
    
    $
    0.31DILUTED EARNINGS PER SHARE
    
    $
    0.37
    
    
    $
    0.30BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,209,166
    
    
    
    5,193,541DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,545,816
    
    
    
    5,385,490
 The accompanying notes are an integral part of these condensed statements. - 3 -




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HARRINGTON WEST FINANCIAL GROUP, INC. 
 CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands, except share data)
 AccumulatedCommon Stock
    
    AdditionalPaid-in
    
    Retained
    
    Comprehensive
    
    OtherComprehensive
    

TotalStockholdersStock
    
    Amt
    
    Capital
    
    Earnings
    
    Income
    
    Income
    
    EquityBalance, January 1, 2003
    
    
    4,327,951
    
    
    $
    43
    
    
    $
    30,641
    
    
    $
    13,795
    
    
    
    
    
    
    $
    (2,007
    )
    
    $
    42,472Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,413
    
    
    $
    7,413
    
    
    
    
    
    
    
    7,413Other comprehensive
income,
net of taxUnrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,245
    )
    
    
    (1,245
    )
    
    
    (1,245
    )Effective portion in
change in
fair value of cash
flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    493
    
    
    
    493
    
    
    
    493Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    6,661Stock options
    
    
    10,500
    
    
    
    
    
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    694Dividends on common
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,126
    )
    
    
    
    
    
    
    
    
    
    
    (1,126
    )Balance, December 31,
2003
    
    
    4,338,451
    
    
    
    43
    
    
    
    30,710
    
    
    
    20,082
    
    
    
    
    
    
    
    (2,759
    )
    
    
    48,076Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,059
    
    
    $
    2,059
    
    
    
    
    
    
    
    2,059Other comprehensive
income,
net of taxUnrealized gains on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    824
    
    
    
    824
    
    
    
    824Effective portion in
change in
fair value of cash
flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,617
    )
    
    
    (1,617
    )
    
    
    (1,617
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,266Stock dividend  6 for 5
stock split
    
    
    867,658
    
    
    
    9
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    51,375
    
    
    
    1
    
    
    
    352
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    353Dividends on common
stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (434
    )
    
    
    
    
    
    
    
    
    
    
    (434
    )Balance, March 31, 2004
(Unaudited)
    
    
    5,257,484
    
    
    $
    53
    
    
    $
    31,062
    
    
    $
    21,698
    
    
    
    
    
    
    
    ($3,552
    )
    
    
    49,261
 The accompanying notes are an integral part of these condensed 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 31,2004
    
    2003DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding gains arising during period,
net of tax (benefit) expense of $389 and $319 for
March 31, 2004 and 2003, respectively
    
    $
    567
    
    
    $
    450Less: Reclassification adjustment for gains included
in net income, net of tax expense of $(177) and
$170 for March 31, 2004 and 2003, respectively
    
    
    (257
    )
    
    
    (240
    )Net unrealized gain on securities, net of tax (benefit)
expense of $566 and $149 for March 31,
2004 and 2003, respectively
    
    $
    824
    
    
    $
    210Unrealized net (loss) gain on cash flow hedges, net of tax
(benefit) expense of $(1,098) for March 31, 2004 and
$(135) for March 31, 2003
    
    $
    (1,600
    )
    
    $
    (180
    )Less: Reclassification adjustment for net gains on cash
flow hedges included in net income, net of tax
expense (benefit) of $12 for March 31, 2004 and
$0 for March 31, 2003.
    
    
    17
    
    
    
    Net unrealized loss on cash flow hedges, net of tax (benefit)
expense of $(1,110) and $(135) for March 31, 2004
and 2003, respectively
    
    $
    (1,617
    )
    
    $
    (180
    )
 The accompanying notes are an integral part of these condensed 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 31,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,059
    
    
    $
    1,604Adjustments to reconcile net income
to net cash provided by operating activities:Accretion of deferred loan fees and costs
    
    
    (134
    )
    
    
    (551
    )Depreciation and amortization
    
    
    260
    
    
    
    266Amortization of premiums and discounts on loans
receivable and securities
    
    
    734
    
    
    
    1,336Provision for loan losses
    
    
    90
    
    
    
    360Gain on sale of investment securities
    
    
    (434
    )
    
    
    (410
    )Activity in securities held for trading
    
    
    161
    
    
    
    (128
    )FHLB stock dividend
    
    
    (127
    )
    
    
    (145
    )Decrease in accrued interest receivable
    
    
    10
    
    
    
    115Increase in income taxes payable
    
    
    179
    
    
    
    855(Decrease) increase in deferred income taxes
    
    
    (228
    )
    
    
    316Decrease in prepaid expenses and other assets
    
    
    295
    
    
    
    370Decrease in accounts payable
    
    
    (2,451
    )
    
    
    (826
    )Net cash provided by operating activities
    
    
    414
    
    
    
    3,162CASH FLOWS FROM INVESTING ACTIVITIES:Net increase in loans receivable
    
    
    (14,666
    )
    
    
    (27,114
    )Proceeds from sales of securities available for sale
    
    
    6,772
    
    
    
    11,649Principal paydowns on securities available for sale
    
    
    20,531
    
    
    
    48,750Principal paydowns on securities held to maturity
    
    
    8
    
    
    
    30Purchases of securities available for sale
    
    
    (29,036
    )
    
    
    (46,108
    )Purchase of premises and equipment
    
    
    (1,027
    )
    
    
    (1,130
    )Purchase of FHLB Stock
    
    
    (400
    )
    
    
    (850
    )Net cash used in investing activities
    
    
    (17,818
    )
    
    
    (14,773
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    14,073
    
    
    
    81(Decrease) increase in securities sold under agreements to repurchase
    
    
    (29
    )
    
    
    539(Decrease) increase in FHLB advances
    
    
    (6,000
    )
    
    
    4,000Advances on note payable
    
    
    
    
    
    
    300Exercise of stock options on common stock
    
    
    352
    
    
    
    Dividends paid on common stock
    
    
    (434
    )
    
    
    (173
    )Net cash provided by financing activities
    
    
    7,962
    
    
    
    4,747NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (9,442
    )
    
    
    (6,864
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    22,856
    
    
    
    19,212CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    13,414
    
    
    $
    12,348SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -Cash paid during the period for:Interest
    
    $
    4,171
    
    
    $
    4,878Income Taxes
    
    $
    880
    
    
    $
    
 The accompanying notes are an integral part of these condensed statements. - 6 -




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##### Table of Contents



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 which operates 12 banking facilities serving individuals and small
to medium-sized businesses. Nine banking facilities are operated on the
California Central Coast, one banking facility is located in Scottsdale
Arizona, and two banking facilities in the Kansas City metropolitan area, which
are operated as a division under the Harrington Bank brand. On May 3, 2004, a
thirteenth banking facility opened in Ventura, California. The Company also
owns Harrington Wealth Management Company, a trust and investment management
company with $126.1 million in assets under management or custody, and 51% of
Los Padres Mortgage Company, LLC. In August 2003, the Bank entered into a joint venture agreement with Market
Resources, Inc., the owner of numerous RE/MAX brokerage agencies in the Phoenix
and Scottsdale, Arizona, metropolitan areas. Under the agreement, the Bank
established Los Padres Mortgage, LLC as a 51%-owned mortgage-banking
subsidiary. Los Padres Mortgage, LLC brokers single-family residential and
commercial real estate loans primarily to third party investors. The Bank also
has the opportunity to purchase select single-family and commercial real estate
loans from Los Padres Mortgage, LLC for its portfolio. Los Padres Mortgage,
LLC began operations in September 2002. 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 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, 2003, 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 consumer loans and residential mortgages, and - 7 -




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general amounts for historical loss experience, economic conditions,
uncertainties in estimating losses and inherent risks in the various credit
portfolios, all of which may be susceptible to significant change. In determining the adequacy of the allowance for loan losses, the Company makes
specific allocations to impaired loans in accordance with Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan. Loans are identified as impaired when it is deemed
probable that the borrower will be unable to meet the scheduled principal and
interest payments under the terms of the loan agreement. Impairment is based
on the present value of expected future cash flows discounted at the loans
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loans observable market price or the fair value
of the collateral if the loan is collateral dependent. Allocations to non-homogenous loan pools are developed by loan type and risk
factor and are based on historical loss trends and managements judgment
concerning those trends and other relevant factors. These factors may include,
among others, trends in criticized assets, regional and national economic
conditions, changes in lending policies and procedures, trends in local real
estate values and changes in volumes and terms of the loan portfolio. Homogenous (consumer and residential mortgage) loan allocations are made at a
total portfolio level based on historical loss experience adjusted for
portfolio activity and economic conditions. Management believes the level of the allowance as of March 31, 2004 is adequate
to absorb losses inherent in the loan portfolio. 2. SIX  FOR  FIVE STOCK SPLIT On February 11, 2004, the Company announced that its Board of Directors
approved a six-for-five stock split in the form of a 20% stock dividend. The
fractional shares distributed in connection with this stock dividend were paid
in cash based on the closing market price on the record date. The additional
shares were distributed to shareholders of record as of February 25, 2004 on
March 11, 2004. The effect of the stock split has been recognized and
reflected in all share and per share amounts for all periods presented. - 8 -




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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, 2004Income
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    2,059
    
    
    
    5,209,166
    
    
    $
    .40Effect of dilutive
stock options
    
    
    
    
    
    
    336,650
    
    
    
    (.03
    )Diluted EPS
    
    $
    2,059
    
    
    
    5,545,816
    
    
    $
    .37
 Three months ended March 31, 2003Income
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    1,604
    
    
    
    5,193,541
    
    
    $
    .31Effect of dilutive
stock options
    
    
    
    
    
    
    191,949
    
    
    
    (.01
    )Diluted EPS
    
    $
    1,604
    
    
    
    5,385,490
    
    
    $
    .30
 4. FAIR VALUE OF OPTIONS The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for its stock option plan. Had compensation cost for the Companys stock option plan been determined based
on the fair value at the grant dates for awards under the plan consistent with
the method of SFAS No. 123, Accounting for Stock-Based Compensation, the
Companys net income and earnings per share for the quarter and years ended
March 31 would have been changed to the pro forma amounts indicated below: Three months endedPro Forma Results
    
    March 31, 2004
    
    March 31, 2003Net income:As reported
    
    $
    2,059
    
    
    $
    1,604Pro forma
    
    $
    2,022
    
    
    $
    1,586Earnings per share  basic:As reported
    
    $
    0.40
    
    
    $
    0.31Pro forma
    
    $
    0.39
    
    
    $
    0.31Earnings per share  diluted:As reported
    
    $
    0.37
    
    
    $
    0.30Pro forma
    
    $
    0.36
    
    
    $
    0.29
 - 9 -




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##### Table of Contents



The fair values of options granted under the Companys fixed stock option plan
were estimated on the date of grant using the Black-Scholes option-pricing
model, with the following weighted-average assumptions used: expected
volatility of 32.7% and 29.0% for the three months ended March 31, 2004 and
2003, respectively; risk-free interest rates of 4.1% and 4.0% for the three
months ended March 31, 2004 and 2003, respectively; and expected lives of 9
years for the three months ended March 31, 2004 and 2003. The weighted average
fair values of the options granted during the three months ended were $5.96 and
$3.01 for March 31, 2004 and 2003, respectively. 
 Item 2: Managements Discussion and Analysis 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;
    
    changes in managements estimate of the adequacy of the allowance for loan losses;
    
    changes in managements valuation of our mortgage-backed and
related securities portfolio and interest rate contracts;
    
    increases in competitive pressure among financial
institutions;
    
    general economic conditions, either nationally or locally in
areas in which we conduct or will conduct our operations, or
conditions in financial markets may be less favorable than we
currently anticipate;
    
    our net income from operations may be lower than we expect;
    
    we may lose more business or customers than we expect, or our
operating costs may be higher than we expect;
    
    changes in the interest rate environment and their impact on
customer behavior and our interest margins;
    
    the impact of repricing and competitors pricing initiatives
on loan and deposit products;
    
    our ability to adapt successfully to technological changes to
meet customers needs and developments in the market place;
    
    our ability to access cost-effective funding;
    
    our ability to successfully complete our strategy to continue
to grow our business in California, Kansas and Arizona; - 10 -




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##### Table of Contents




    
    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. General The Company is a diversified, community-based, financial institution
holding company headquartered in Solvang, California with its executive offices
in Overland Park, Kansas. The Company conducts operations primarily through
Los Padres Bank, FSB, a federally chartered savings bank, and its division
located in the Kansas City metropolitan area, Harrington Bank. Los Padres Bank
has two subsidiaries, Harrington Wealth Management Company and Los Padres
Mortgage Company, LLC. Harrington Wealth Management Company is a wholly owned
subsidiary with offices in Richmond, Indiana, Solvang, California and Mission,
Kansas. Los Padres Mortgage Company, LLC is a 51% owned mortgage-banking
subsidiary located in the Phoenix/Scottsdale metropolitan area. The Company is focused on providing its diversified products and
personalized service approach in three distinct markets: (i) the central coast
of California, (ii) the Kansas City metropolitan area and (iii) the
Phoenix/Scottsdale metropolitan area. The Company has nine offices on the
central coast of California, two offices in the Kansas City metropolitan area,
and a community banking office in the Phoenix/Scottsdale, Arizona metropolitan
area. In addition, in the third quarter of 2002, the Company established Los
Padres Mortgage Company, LLC, a mortgage banking company engaged in a joint
venture with the largest RE/MAX franchise in Arizona to broker single-family
residential and commercial real estate loans in the Phoenix/Scottsdale
metropolitan area. The Company opened its tenth Los Padres Bank office on the
central coast of California in Ventura on May 3, 2004.Each of the Companys
markets has its own local independent management team operating under the Los
Padres Bank or Harrington Bank names. The Companys loan underwriting,
corporate administration, and treasury functions are centralized to create
operating efficiencies. Los Padres Bank and Harrington Bank provide an array of financial products
and services for businesses and retail customers by attracting deposits from
individuals and businesses and using these deposits, together with borrowed
funds, to originate single-family and multi-family residential, commercial real
estate, commercial business, and consumer loans. The Company also maintains a portfolio of highly liquid mortgage-backed
and related securities as a means of managing its excess liquidity and
enhancing its profitability. The Company utilizes various interest rate
contracts as a means of managing its interest rate risk. The Company also
operates Harrington Wealth Management Company, which provides trust and
investment management services to individuals and small institutional clients
by employing a customized asset allocation approach and investing predominantly
in low fee, indexed mutual funds and exchange traded indexed funds. - 11 -




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Critical Accounting Policies General.The following discussion and analysis of financial condition and
results of operations is based upon our consolidated financial statements, and
the notes thereto, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these consolidated financial statements requires us to make a number of
estimates and assumptions that affect the reported amounts and disclosures in
the consolidated financial statements. On an ongoing basis, we evaluate our
estimates and assumptions based upon historical experience and various other
factors and circumstances. We believe that our estimates and assumptions are
reasonable in the circumstances; however, actual results may differ
significantly from these estimates and assumptions which could have a material
impact on the carrying value of assets and liabilities at the balance sheet
dates and our results of operations for the reporting periods. The financial information contained in our consolidated financial
statements is, to a significant extent, based on approximate measures of the
financial effects of transactions and events that have already occurred. A
variety of factors could affect the ultimate value that is obtained either when
recognizing income or expense, recovering an asset or relieving a liability.
We use historical loss factors to determine the inherent loss that may be
present in our loan portfolio. Actual losses could differ significantly from
the historical factors that we use. We also calculate the fair value of our
interest rate contracts and securities based on market prices and the expected
useful lives of our depreciable assets. We enter into interest rate contracts
that are classified as trading account assets or to accommodate our own risk
management purposes. The interest rate contracts are generally interest swaps,
caps, floors and futures contracts, although we could enter into other types of
interest rate contracts. We value these contracts at fair value, using readily
available, 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, 2004, we have not
created any special purpose entities to securitize assets or to obtain
off-balance sheet funding. Although we have sold loans in past years, those
loans have been sold to third parties without recourse, subject to customary
representations and warranties. Allowance for loan losses. The allowance for loan losses is an estimate
of the losses that may be sustained in our loan portfolio. The allowance is
based on two principles of accounting: (i) Statement of Financial Accounting
Standards, or SFAS, No. 5, Accounting for Contingencies,which requires that
losses be accrued when they are probable of occurring and estimable; and (ii)
SFAS No. 114, Accounting by Creditors for Impairment of a Loanand SFAS No.
118, Accounting by Creditors for Impairment of a Loan-Income Recognition and
Disclosures,which requires that losses be accrued based on the differences
between the value of collateral, present value of future cash flows or values
that are observable in the secondary market and the loan balance. Our
allowance for loan losses has four components: (i) an allocated allowance for
specifically identified problem loans, (ii) a formula allowance for
non-homogenous loans, (iii) an allocated allowance for large groups of smaller
balance homogenous loans and (iv) an unallocated allowance. Each of these
components is determined based upon estimates that can and do change when the
actual events occur. The formula allowance uses a model based on historical
losses as an indicator of future losses and as a result could differ from the
losses incurred in the future; however, since this history is updated with the
most recent loss - 12 -




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##### Table of Contents



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. Financial Condition The Companys total assets increased to $1.0 billion at March 31, 2004, as
compared to $974.8 million at December 31, 2003, an increase of $30.1 million
or 3.1%. The increase was partially attributable to growth in net loans to
$533.1 million as of March 31, 2004, compared to $518.5 million at December 31,
2003, an increase of $14.6 million or 2.8%. 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, and commercial and
industrial loans. Single-family residential loan balances increased to $97.3
million at March 31, 2004, compared to $93.7 million at December 31, 2003, an
increase of $3.6 million, while non-single-family loans as a group increased to
$441.7 million at March 31, 2004, compared to $430.4 million at December 31,
2003, an increase of $11.3 million. - 13 -




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The following table sets forth the composition of our loan portfolio by type of
loan at the dates indicated. March 31, 2004
    
    December 31, 2003
    
    ChangeAmount
    
    Percent
    
    Amount
    
    Percent
    
    Amount(Dollars in thousands)Real Estate Loans:Single-family
    
    $
    97,325
    
    
    
    18.1
    %
    
    $
    93,725
    
    
    
    17.9
    %
    
    $
    3,600Multi-family
    
    
    83,642
    
    
    
    15.5
    
    
    
    82,090
    
    
    
    15.7
    
    
    
    1,552Commercial
    
    
    254,011
    
    
    
    47.1
    
    
    
    234,606
    
    
    
    44.6
    
    
    
    19,405Construction (1)
    
    
    25,062
    
    
    
    4.7
    
    
    
    30,835
    
    
    
    5.9
    
    
    
    (5,773
    )Land acquisition and
development
    
    
    10,874
    
    
    
    2.0
    
    
    
    8,312
    
    
    
    1.6
    
    
    
    2,562Commercial and industrial loans
    
    
    49,023
    
    
    
    9.1
    
    
    
    56,942
    
    
    
    10.9
    
    
    
    (7,919
    )Consumer loans
    
    
    18,047
    
    
    
    3.3
    
    
    
    16,613
    
    
    
    3.2
    
    
    
    1,434Other loans (2)
    
    
    1,040
    
    
    
    0.2
    
    
    
    1,035
    
    
    
    0.2
    
    
    
    5Total loans receivable
    
    
    539,024
    
    
    
    100
    %
    
    
    524,158
    
    
    
    100
    %
    
    
    14,866Less:Allowance for loan loss
    
    
    (4,677
    )
    
    
    
    
    
    
    (4,587
    )
    
    
    
    
    
    
    (90
    )Net deferred loan fees
    
    
    (1,434
    )
    
    
    
    
    
    
    (1,394
    )
    
    
    
    
    
    
    (40
    )Net premiums
    
    
    205
    
    
    
    
    
    
    
    319
    
    
    
    
    
    
    
    (114
    )(5,906
    )
    
    
    
    
    
    
    (5,662
    )
    
    
    
    
    
    
    (244
    )Loans receivable, net
    
    $
    533,118
    
    
    
    
    
    
    $
    518,496
    
    
    
    
    
    
    $
    14,622
  (1)
    
    Includes loans secured by residential, land and commercial
properties. At March 31, 2004, the Company had $10.7 million of
construction loans secured by residential properties, $5.4 million of
construction loans secured by land and $9.0 million of construction
loans secured by commercial properties.(2)
    
    Includes loans collateralized by deposits and consumer line of
credit loans. Securities classified as available for sale increased to $422.6 million at
March 31, 2004, as compared to $398.7 million at December 31, 2003, an increase
of $23.9 million or 6.0%. 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. Total deposits increased to $584.8 million as of March 31, 2004, as
compared to $570.7 million as of December 31, 2003, an increase of $14.1
million or 2.5%. The increase in deposits was attributable to the community
banking offices in Kansas, which include the new Overland Park office, while
deposits in other markets declined somewhat due to the Companys emphasis on
reducing the cost of highly rate sensitive deposits. The deposits of the
community banking offices in Kansas were $101.4 million at March 31, 2004,
compared to $76.6 million at December 31, 2003, an increase of $24.8 million or
32.4%. Advances from the Federal Home Loan Bank (FHLB) of San Francisco
decreased to $256.5 million at March 31, 2004, compared to $262.5 million at
December 31, 2003, a $6.0 million or 2.3% decrease. During the quarter, the
Company reduced FHLB advances with the increased collection of deposits. The due to broker account increased to $21.6 million at March 31, 2004, as
compared to $0.0 at December 31, 2003, as a result of the purchase of
securities classified as available for sale which were purchased in the quarter
but not settled until after quarter-end. In accordance with trade date
accounting, the securities were included in available for sale assets with a
corresponding liability in the due to broker account. - 14 -




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Stockholders equity increased to $49.3 million at March 31, 2004, as
compared to $48.1 million at December 31, 2003, an increase of $1.2 million or
2.5%. The $1.2 million increase in stockholders equity was positively
influenced by $2.1 million of net income recognized during the three-month
period, an $824 thousand increase in unrealized gains on securities available
for sale, and $353 thousand of incentive stock options exercised, offset
against a $1.6 million decrease in the value of the effective portion of the
interest rate swaps used as cash flow hedges to modify the interest rate
sensitivity of the Banks short-term FHLB advances and $434 thousand in
dividends paid on the Companys common stock. With respect to the pay fixed
rate, receive 3-month LIBOR swaps referred to above, the decrease in value was
attributable to the general decrease in interest rates during the quarter. Results of Operations The Company reported net income of $2.1 million for the three months ended
March 31, 2004, as compared to $1.6 million for the three months ended March
31, 2003, an increase of $455 thousand or 28.4%. The increase in net income in
the current quarter relative to the comparable period in 2003 primarily
reflects the significant increase in net interest income and income from
trading assets during the quarter. These increases were offset by a decrease
in banking fee income due to a slowdown in mortgage refinancings and prepayment
penalty fees and by higher administrative costs to support the growth in
banking fees and related infrastructure. The companys overall tax rate
declined in the quarter due to the apportioning of state income tax to states
with lower income tax rates. On a diluted earnings per share basis, the
Company earned $.37 per share for the three months ended March 31, 2004,
compared to $.30 per share for the three months ended March 31, 2003. The Companys net interest income after provision for loan losses
increased by $1.1 million or 18.2% to $6.9 million during the three months
ended March 31, 2004 over the prior comparable period in 2003. The increase in
the Companys net interest income during both periods 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 2.95% during the three months ended
March 31, 2004, when compared to the same period in 2003 but has stayed
relatively constant over the last year near the 3% mark. The net interest
margin declined primarily due to the $81.9 million in average growth in lower
margin investment securities and lower market rates, with the total yield on
investments decreasing by 48 basis points from the March 2004 quarter to the
March 2003 quarter. The investment growth was complimented by $64.1 million in
average loan growth, with the total yield on loans declining by 35 basis points
with the lower market rates. Over the same period, the cost of
interest-bearing liabilities decreased by 38 basis points. The total average
deposits increased by $41.9 million and total deposit cost decreased by 28
basis points or $131 thousand when comparing the March 2004 quarter to the same
quarter a year ago. - 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 31,2004
    
    2003Average
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    Yield/
    
    Average
    
    
    
    
    
    Yield/Balance
    
    Interest
    
    Cost
    
    Balance
    
    Interest
    
    Cost(Dollars in thousands)Interest-earning assets:Loans receivable (1)
    
    $
    525,001
    
    
    $
    8,592
    
    
    
    6.55
    %
    
    $
    460,945
    
    
    $
    7,955
    
    
    
    6.90
    %FHLB stock
    
    
    13,570
    
    
    
    125
    
    
    
    3.69
    
    
    
    12,364
    
    
    
    160
    
    
    
    5.25Securities and trading account assets (2)
    
    
    402,510
    
    
    
    3,519
    
    
    
    3.50
    
    
    
    320,602
    
    
    
    3,189
    
    
    
    3.98Cash and cash equivalents (3)
    
    
    13,891
    
    
    
    11
    
    
    
    .33
    
    
    
    15,517
    
    
    
    54
    
    
    
    1.39Total interest-earning assets
    
    
    954,972
    
    
    
    12,247
    
    
    
    5.13
    
    
    
    809,428
    
    
    
    11,358
    
    
    
    5.62Noninterest-earning assets
    
    
    23,359
    
    
    
    
    
    
    
    
    
    
    
    23,529Total assets
    
    $
    978,331
    
    
    
    
    
    
    
    
    
    
    $
    832,957Interest-bearing liabilities:Deposits:NOW and money market accounts
    
    
    122,105
    
    
    
    279
    
    
    
    .92
    
    
    
    133,058
    
    
    
    379
    
    
    
    1.16Passbook accounts and certificates of deposit
    
    
    427,730
    
    
    
    2,256
    
    
    
    2.12
    
    
    
    374,892
    
    
    
    2,287
    
    
    
    2.47Total deposits
    
    
    549,835
    
    
    
    2,535
    
    
    
    1.85
    
    
    
    507,950
    
    
    
    2,666
    
    
    
    2.13FHLB advances (4)
    
    
    259,781
    
    
    
    2,078
    
    
    
    3.20
    
    
    
    240,855
    
    
    
    2,348
    
    
    
    3.92Reverse Repurchase Agreements
    
    
    65,622
    
    
    
    430
    
    
    
    2.59
    
    
    
    857
    
    
    
    2
    
    
    
    .99Other borrowings (5)
    
    
    15,000
    
    
    
    165
    
    
    
    4.34
    
    
    
    11,370
    
    
    
    105
    
    
    
    3.71Total interest-bearing liabilities
    
    
    890,238
    
    
    
    5,208
    
    
    
    2.34
    
    
    
    761,032
    
    
    
    5,121
    
    
    
    2.72Non-interest-bearing deposits
    
    
    27,533
    
    
    
    
    
    
    
    
    
    
    
    17,443Non-interest-bearing liabilities
    
    
    11,889
    
    
    
    
    
    
    
    
    
    
    
    11,279Total liabilities
    
    
    929,660
    
    
    
    
    
    
    
    
    
    
    
    789,754Stockholders equity
    
    
    48,671
    
    
    
    
    
    
    
    
    
    
    
    43,203Total liabilities and stockholders equity
    
    $
    978,331
    
    
    
    
    
    
    
    
    
    
    $
    832,957Net interest-earning assets (liabilities)
    
    $
    64,734
    
    
    
    
    
    
    
    
    
    
    $
    48,396Net interest income/interest rate spread
    
    
    
    
    
    $
    7,039
    
    
    
    2.79
    %
    
    
    
    
    
    $
    6,237
    
    
    
    2.90
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.95
    %
    
    
    
    
    
    
    
    
    
    
    3.06
    %Ratio of average interest-earnings assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    107.27
    %
    
    
    
    
    
    
    
    
    
    
    106.36
    %
  (1)
    
    Includes non-accrual loans. Interest income includes fees earned on
loans originated.(2)
    
    Consists of securities classified as available for sale and held to
maturity and trading account assets.(3)
    
    Consists of cash and due from banks and federal funds sold.(4)
    
    Interest on FHLB advances is net of hedging costs. Interest rate
swaps are used to hedge the short-term repricing characteristics of the
floating-rate FHLB advances.(5)
    
    Consists of other debt and a note payable under a revolving line of
credit. - 16 -




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##### Table of Contents



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, 2004 vs March 31,Increase (decrease) due to
    
    Total NetRate/
    
    IncreaseRate
    
    Volume
    
    Volume
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable
    
    
    ($1,647
    )
    
    $
    4,422
    
    
    
    ($2,138
    )
    
    $
    637FHLB stock
    
    
    (192
    )
    
    
    63
    
    
    
    94
    
    
    
    (35
    )Securities and trading account assets (1)
    
    
    (1,546
    )
    
    
    3,259
    
    
    
    (1,383
    )
    
    
    330Cash and cash equivalents (2)
    
    
    (164
    )
    
    
    (23
    )
    
    
    144
    
    
    
    (43
    )Total net change in income on interest-earning assets
    
    
    (3,549
    )
    
    
    7,721
    
    
    
    (3,283
    )
    
    
    889Interest-bearing liabilities:DepositsNOW and money market accounts
    
    
    (316
    )
    
    
    (127
    )
    
    
    343
    
    
    
    (100
    )Passbook accounts and certificates
of deposit
    
    
    (1,316
    )
    
    
    1,307
    
    
    
    (22
    )
    
    
    (31
    )Total deposits
    
    
    (1,632
    )
    
    
    1,180
    
    
    
    321
    
    
    
    (131
    )FHLB advances (3)
    
    
    (1,734
    )
    
    
    742
    
    
    
    722
    
    
    
    (270
    )Reverse Repurchase Agreements
    
    
    14
    
    
    
    642
    
    
    
    (228
    )
    
    
    428Other borrowings (4)
    
    
    72
    
    
    
    135
    
    
    
    (147
    )
    
    
    60Total net change in expense on interest-bearing liabilities
    
    
    (3,280
    )
    
    
    2,699
    
    
    
    668
    
    
    
    87Change in net interest income
    
    
    ($269
    )
    
    $
    5,022
    
    
    
    ($3,951
    )
    
    $
    802
  (1)
    
    Consists of securities classified as available for sale and held
for maturity and trading account assets.(2)
    
    Consists of cash and due from banks and federal funds sold.(3)
    
    Interest on FHLB advances is net of cash flow hedging costs.
Interest rate swaps are used to hedge the short-term repricing
characteristics of the floating-rate advances.(4)
    
    Consists of other debt and a note payable under a revolving line of
credit. The Company reported interest income of $12.2 million for the three months
ended March 31, 2004, compared to $11.4 million for the three months ended
March 31, 2003, an increase of $889 thousand or 7.8%. The primary reason for
the increase during the period was the increase in the volume of
interest-earning assets in the periods, which was partially offset by a
decrease in the average rate on interest-earning assets. The Company reported interest expense of $5.2 million for the three months
ended March 31, 2004, compared to $5.1 million for the three months ended March
31, 2003, an increase of $87 thousand or 1.7%. The slight increase in interest
expense during the period was attributable to an increase in the volume of
interest-bearing liabilities and a decrease in the average rate on
interest-bearing liabilities as a result of the downward repricing of interest
bearing-liabilities during the respective periods. - 17 -




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The Company recorded its provision for loan losses of $90 thousand during
the three months ended March 31, 2004, compared to $360 thousand for the three
months ended March 31, 2003, a decrease of $270 thousand. The provision
reflects the reserves required based upon, among other things, the $14.6
million in loan growth since December 31, 2003 and 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, 2004, the Company had
$154 thousand or .03% of total loans of non-performing assets, as compared to
$12 thousand or 0.0% of total loans as of December 31, 2003. The Companys total other income, which includes gain and losses on
securities and extinguishment of debt, loans, deposits, borrowings, and trading
assets plus banking fee income amounted to $1.1 million for the quarter ending
March 31, 2004 compared to $1.2 during the same quarter last year, a decrease
of $70 thousand or 6.0%. The decrease in other income was primarily
attributable a decrease in mortgage brokerage and prepayment fees as
refinancings slowed markedly. Income from trading assets was $338 thousand for the three months ended
March 31, 2004, compared to a gain of $576 thousand for the three months ended
March 31, 2003, a decrease of $238 thousand or 41.3%. In the March 2004
quarter, the Company sold a $6.0 million CMBS commercial mortgage backed
security for a realized gain of $434 thousand dollars and had a net loss of $96
thousand dollars associated with the realized and unrealized gains and losses
for securities held in the trading portfolio. Related to the gain on the sale
of the securities during the March 2003 quarter, the Company paid-off $15.0
million of fixed rate FHLB advances with a coupon rate of 5.25% and a remaining
maturity of 10 months and incurred a $531 thousand market-based prepayment loss
on the extinguishment of the debt for a net gain of $45 thousand. Banking fee income amounted to $760 thousand for the quarter ending March
31, 2004 compared to $1.0 million during the same quarter last year, a decrease
of $264 thousand or 25.8%. Loan fees decreased due to the slowdown of
refinancing activity, which decreased mortgage brokerage fees by $214 thousand
or 43.0% and prepayment penalties decreased by $71 thousand or 65.7% when
comparing the March 2004 quarter to the March 2003 quarter. Trust fees from
the Companys subsidiary Harrington Wealth Management were the main source for
the growth in banking fee income, contributing $145 thousand for the three
months ending March 2004, an increase of $28 thousand or 23.6%, compared to the
same quarter last year. The Companys total other expenses were $4.7 million during the three
months ended March 31, 2004, as compared to $4.3 million for the three months
ended March 31, 2003, an increase of $446 thousand or 10.4%. 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 Overland Park, Kansas and
Ventura, California and higher costs for workers compensation insurance for
the California operations and other insurance coverages, as well as an increase
in general corporate expenses associated with the Company being a public
company and the growth in banking operations. Increasing net income for the March 2004 quarter was the reduction in the
effective tax rate for the March 31, 2004 quarter to 37.6% compared to 41.5% in
the March 31, 2003 quarter that is due to the taxable income being earned and
apportioned to states with lower tax rates. The Company expects the tax rate
in future quarters to be approximately 40.7%. Liquidity and Capital Resources Liquidity.The liquidity of Los Padres Bank, as measured by the ratio of
cash, cash equivalents (not committed, pledged or required to liquidate
specific liabilities), investments and qualifying mortgage-backed securities to
the sum of total deposits plus borrowings payable within one year, was 32.9% at
March 31, 2004. At March 31, 2004, Los Padres Banks liquid assets totaled
approximately $183.6 million. - 18 -




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The Companys liquidity, represented by cash and cash equivalents, is a
product of its operating, investing and financing activities. The Companys
primary sources of internal liquidity consist of deposits, prepayments and
maturities of outstanding loans and mortgage-backed and related securities,
maturities of short-term investments, sales of mortgage-backed and related
securities and funds provided from operations. The Company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, 2004,
the Company had $256.5 million in FHLB advances and had $95.2 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 $42.7 million based on excess collateral pledged at the FHLB as of
March 31, 2004. 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 the note payable as growth opportunities develop and it
also provided additional liquidity for internal company growth. At March 31,
2004 and December 31, 2003, the Company did not have a balance due on the
revolving line of credit. Liquidity management is both a daily and long-term function of business
management. Excess liquidity is generally used to pay down short-term
borrowings. On a longer-term basis, the Company maintains a strategy of
investing in various mortgage-backed and related securities and loans. At
March 31, 2004, the total approved loan commitments outstanding amounted to
$34.6 million. Certificates of deposit scheduled to mature in one year or less
at March 31, 2004 totaled $365.0 million and FHLB borrowings and repurchase
agreements scheduled to mature within the same period amounted to $236.5
million. Management believes that the Company has adequate resources to fund
all of its commitments and that the Company could either adjust the rate of
certificates of deposit in order to retain deposits in changing interest rate
environments or replace such deposits with advances from the FHLB of San
Francisco if it proved to be cost-effective to do so. A substantial source of 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. Capital Resources.Federally insured savings institutions such as Los
Padres Bank are required to maintain minimum levels of regulatory capital.
Under applicable regulations, an institution is well capitalized if it has a
total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital
ratio of at least 6.0% and a leverage ratio of at least 5.0%, with no written
agreement, order, capital directive, prompt corrective action directive or
other individual requirement by the OTS to maintain a specific capital measure.
An institution is adequately capitalized if it has a total risk-based capital
ratio of at least 8.0% and a Tier 1 risk-based capital ratio of at least 4.0%
and a leverage ratio of at least 4.0% (or 3.0% if 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, 2004, Los Padres Bank met the capital
requirements of a well capitalized institution under applicable OTS
regulations. At March 31, 2004, the Banks Tier 1 (Core) Capital Ratio was
6.1%, Total Risk-Based Capital Ratio was 10.8%, Tier 1 Risk-Based Capital Ratio
was 10.0% and Tangible Equity Ratio was 6.1%. - 19 -




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Asset and Liability Management In general, financial institutions are negatively affected by an increase
in interest rates to the extent that interest-bearing liabilities mature or
reprice more rapidly than interest-earning assets. The lending activities of
savings institutions have historically emphasized the origination of long-term,
fixed-rate loans secured by single-family residences, and the primary source of
funds of such institutions has been deposits, which largely mature or are
subject to repricing within a shorter period of time. This factor has
historically caused the income and market value of portfolio equity (MVPE) of
savings institutions to be more volatile than other financial institutions. MVPE is defined as the net present value of the cash flows from an
institutions existing assets, liabilities and off-balance sheet instruments.
The MVPE is estimated by valuing our assets, liabilities and off-balance sheet
instruments under various interest rate scenarios. The extent to which assets
gain or lose value in relation to the gains or losses of liabilities determines
the appreciation or depreciation in equity on a market value basis. MVPE
analysis is intended to evaluate the impact of immediate and sustained interest
rate shifts of the current yield curve upon the market value of the current
balance sheet. While having liabilities that reprice more frequently than
assets is generally beneficial to net interest income and MVPE in times of
declining interest rates, such an asset/liability mismatch is generally
detrimental during periods of rising interest rates. 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, director of financial
reporting and four non-employee directors of Los Padres Bank. The ALCO meets
at least eight times a year to review the sensitivity of Los Padres Banks
assets and liabilities to interest rate changes, investment opportunities, the
performance of the investment portfolios, and prior purchase and sale activity
of securities. The ALCO also provides guidance to management on reducing
interest rate risk and on investment strategy and retail pricing and funding
decisions with respect to Los Padres Banks overall asset and liability
composition. The ALCO reviews Los Padres Banks liquidity, cash flow needs,
interest rate sensitivity of investments, deposits and borrowings, core deposit
activity, current market conditions and interest rates on both a local and
national level in connection with fulfilling its responsibilities. 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. - 20 -




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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 requires that an
entity recognize all interest rate contracts as either assets or liabilities in
the statement of financial condition and measure those instruments at fair
value. If certain conditions are met, an interest rate contract may be
specifically designated as a fair value hedge, a cash flow hedge, or a hedge of
foreign currency exposure. The accounting for changes in the fair value of an
interest rate contract (that is, gains and losses) depends on the intended use
of the interest rate contract and the resulting designation. To qualify for
hedge accounting, the Company must show that, at the inception of the interest
rate contracts and on an ongoing basis, the changes in the fair value of the
interest rate contracts are expected to be highly effective in offsetting
related changes in the cash flows of the hedged liabilities. The Company has
entered into various interest rate swaps for the purpose of hedging certain of
its short-term liabilities. These interest rate swaps qualify for hedge
accounting. Accordingly, the effective portion of the accumulated change in
the fair value of the cash flow hedges is recorded in a separate component of
stockholders equity, net of tax, while the ineffective portion is recognized
in earnings immediately. The Company has also entered into various total return swaps where cash
flows are based on the level and changes in the yield spread on investment
grade commercial mortgage backed security indexes relative to similar duration
LIBOR swap rates. These swaps do not qualify for hedge accounting treatment
and are included in the trading account assets and are reported at fair value
with realized and unrealized gains and losses on these instruments recognized
in income (loss) from trading account assets. 
 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, 2004, these prepayment assumptions varied from
7.4% to 57.8% for fixed-rate mortgages and mortgage-backed securities and
varied from 6.9% to 27.7% for adjustable-rate mortgages and mortgage-backed
securities. - 21 -




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##### Table of Contents



The following table sets forth at March 31, 2004 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
    
    $
    32,411
    
    
    $
    25,353
    
    
    $
    14,636
    
    
    
    
    
    
    
    ($18,194
    )
    
    
    ($39,477
    )
    
    
    ($62,947
    )Market value gain (loss) of liabilities
    
    
    (17,727
    )
    
    
    (13,264
    )
    
    
    (7,564
    )
    
    
    
    
    
    
    7,743
    
    
    
    15,709
    
    
    
    23,911Market value gain (loss) of net assets
before interest rate contracts
    
    
    14,684
    
    
    
    12,089
    
    
    
    7,072
    
    
    
    
    
    
    
    (10,451
    )
    
    
    (23,768
    )
    
    
    (39,036
    )Market value gain (loss) of interest
rate contracts before tax
    
    
    (17,243
    )
    
    
    (12,060
    )
    
    
    (5,778
    )
    
    
    
    
    
    
    5,444
    
    
    
    10,577
    
    
    
    15,424Total change in MVPE (2)
    
    
    ($2,559
    )
    
    $
    29
    
    
    $
    1,294
    
    
    
    
    
    
    
    ($5,007
    )
    
    
    ($13,191
    )
    
    
    ($23,612
    )Change in MVPE as a percent of:MVPE(2)
    
    
    -3.09
    %
    
    
    0.04
    %
    
    
    1.56
    %
    
    
    
    
    
    
    -6.05
    %
    
    
    -15.95
    %
    
    
    -28.55
    %MVPE post shock ratio (3)
    
    
    -0.26
    %
    
    
    0.00
    %
    
    
    0.13
    %
    
    
    
    
    
    
    -0.50
    %
    
    
    -1.31
    %
    
    
    -2.35
    %
   (1)
    
    Assumes an instantaneous parallel change in interest rates at all
maturities.(2)
    
    Based on the Companys pre-tax MVPE of $82.7 million at March 31, 2004.(3)
    
    Pre-tax MVPE as a percentage of tangible assets. On April 2, 2004, the Company engaged in a $14.0 million, three year fixed
rate term repurchase agreement at rate of 2.5% to further reduce interest rate
risk. The table set forth above does not purport to show the impact of interest
rate changes on the Companys equity under generally accepted accounting
principles. Market value changes only impact the Companys income statement or
the balance sheet to the extent the affected instruments are marked to market,
and over the life of the instruments as an impact on recorded yields. 
 Item 4: Controls and Procedures As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer 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 - 22 -




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##### Table of Contents



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 Registrant. 
 Item 2:Changes in Securities and Use of Proceeds None. 
 Item 3:Defaults Upon Senior Securities Not applicable. 
 Item 4:Submission of Matters to a Vote of Security Holders Not applicable. 
 Item 5:Other Information Not applicable. 
 Item 6:Exhibits and Reports on Form 8-K a) 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.
 b) Reports on Form 8-K The Company filed a Current Report on Form 8-K with the SEC on January 22,
2004 under items 7 and 9 announcing a press release of its earnings for the
year and quarter ended December 31, 2003. The Company filed a Current Report on Form 8-K with the SEC on February
12, 2004 under items 7 and 12 announcing a six for five stock split in the form
of a stock dividend. The Company filed a Current Report on Firm 8-K with the SEC on March 5,
2004 under items 5 and 7 that contained a presentation used for investor
presentations. - 23 -




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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 11, 2004
    
    By:
    
    /S/ CRAIG J. CERNYCraig J. Cerny, Chief Executive Officer(Principal Executive Officer)By:
    
    /S/ SEAN CALLOWSean Callow,Senior Vice President andChief Financial Officer(Principal Financial andAccounting Officer)
 - 24 -