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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 1934
 For the quarterly period ended September 30, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 For 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. Yes
þ No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).
Yes o No
þ Indicate the number of shares outstanding of each of the issuers classes
of common stock, as of the latest practicable date: 5,278,934 shares of Common Stock, par value $0.01 per share, outstanding
as of November 5, 2004.




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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
September 30, 2004 (Unaudited) and December 31, 2003
    
    
    2Condensed Consolidated Statements of Income for the Three and Nine
Months Ended September 30, 2004 and 2003 (Unaudited)
    
    
    3Condensed Consolidated Statements of Shareholders Equity and Comprehensive
Income for the Nine months ended September 30, 2004 (Unaudited)
and Year Ended December 31, 2003
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 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
    
    
    12Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    33Item 4.Controls and Procedures
    
    
    34Part II   Other InformationItem 1.Legal Proceedings
    
    
    35Item 2.Changes in Securities and Use of Proceeds
    
    
    35Item 3.Defaults upon Senior Securities
    
    
    35Item 4.Submission of Matters to a Vote of Security Holders
    
    
    35Item 5.Other Information
    
    
    35Item 6.Exhibits and Reports on Form 8-K
    
    
    35Signatures
    
    
    37Exhibit 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) 
 September 30, 2004
    
    December 31, 2003ASSETSCash and cash equivalents
    
    $
    15,873
    
    
    $
    22,856Trading account assets (including assets pledged of $1,322 and
$1,447, respectively)
    
    
    1,904
    
    
    
    2,111Securities available for sale (including assets pledged of
$218,024
and $160,599, respectively)
    
    
    431,503
    
    
    
    398,691Securities held to maturity
    
    
    121
    
    
    
    222Loans receivable, (net of allowance for loan losses of $5,128
and $4,587 at September 30, 2004 and December 31,
2003, respectively)
    
    
    598,070
    
    
    
    518,496Accrued interest receivable
    
    
    3,199
    
    
    
    2,928Premises and equipment, net
    
    
    7,581
    
    
    
    6,454Prepaid expenses and other assets
    
    
    2,339
    
    
    
    1,867Investment in FHLB stock, at cost
    
    
    14,570
    
    
    
    13,425Deferred tax asset
    
    
    2,337
    
    
    
    2,651Goodwill
    
    
    3,981
    
    
    
    3,981Core deposit intangible, net
    
    
    972
    
    
    
    1,117TOTAL ASSETS
    
    $
    1,082,450
    
    
    $
    974,799LIABILITIES & STOCKHOLDERS EQUITYDeposits:Interest bearing
    
    $
    577,511
    
    
    $
    541,533Non-interest bearing
    
    
    35,411
    
    
    
    29,164Total Deposits
    
    
    612,922
    
    
    
    570,697FHLB advances
    
    
    298,000
    
    
    
    262,500Securities sold under repurchase agreements
    
    
    80,090
    
    
    
    65,728Subordinated debt
    
    
    25,774
    
    
    
    15,464Due to broker
    
    
    5,696
    
    
    
    Accounts payable and accrued expenses
    
    
    8,677
    
    
    
    11,623Income taxes payable
    
    
    967
    
    
    
    711TOTAL LIABILITIES
    
    
    1,032,126
    
    
    
    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:
5,278,934 and 5,206,109 shares issued and outstanding as of
September 30, 2004 and December 31,
2003, respectively
    
    
    53
    
    
    
    43Additional paid-in capital
    
    
    31,225
    
    
    
    30,710Retained earnings
    
    
    21,979
    
    
    
    20,082Accumulated other comprehensive (loss), net of tax of $(119)
and $(2,024) at September 30, 2004 and
December 31, 2003, respectively
    
    
    (2,933
    )
    
    
    (2,759
    )Total Stockholders Equity
    
    
    50,324
    
    
    
    48,076TOTAL LIABILITIES & STOCKHOLDERS EQUITY
    
    $
    1,082,450
    
    
    $
    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 data 
 Three months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003INTEREST INCOMEInterest on loans
    
    $
    9,182
    
    
    $
    8,458
    
    
    $
    26,526
    
    
    $
    24,589Interest and dividends on securities
    
    
    4,089
    
    
    
    3,393
    
    
    
    11,720
    
    
    
    9,926Total interest income
    
    
    13,271
    
    
    
    11,851
    
    
    
    38,246
    
    
    
    34,515INTEREST EXPENSEInterest on deposits
    
    
    2,705
    
    
    
    2,555
    
    
    
    7,761
    
    
    
    7,866Interest on FHLB advances and other borrowings
    
    
    3,141
    
    
    
    2,410
    
    
    
    8,523
    
    
    
    7,269Total interest expense
    
    
    5,846
    
    
    
    4,965
    
    
    
    16,284
    
    
    
    15,135NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES
    
    
    7,425
    
    
    
    6,886
    
    
    
    21,962
    
    
    
    19,380PROVISION FOR LOAN LOSSES
    
    
    230
    
    
    
    100
    
    
    
    550
    
    
    
    710NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    7,195
    
    
    
    6,786
    
    
    
    21,412
    
    
    
    18,670OTHER INCOME (LOSS)Income from trading assets
    
    
    264
    
    
    
    380
    
    
    
    875
    
    
    
    2,249Loss on extinguishment of debt
    
    
    (0
    )
    
    
    (187
    )
    
    
    (189
    )
    
    
    (1,610
    )Other income (loss) gain
    
    
    (35
    )
    
    
    (2
    )
    
    
    (47
    )
    
    
    47Banking fee income
    
    
    734
    
    
    
    1,036
    
    
    
    2,342
    
    
    
    3,260Total other income
    
    
    963
    
    
    
    1,227
    
    
    
    2,981
    
    
    
    3,946OTHER EXPENSESSalaries & employee benefits
    
    
    2,589
    
    
    
    2,521
    
    
    
    7,977
    
    
    
    7,545Premises & equipment
    
    
    811
    
    
    
    679
    
    
    
    2,276
    
    
    
    2,003Insurance premiums
    
    
    128
    
    
    
    209
    
    
    
    397
    
    
    
    359Marketing
    
    
    83
    
    
    
    103
    
    
    
    312
    
    
    
    315Computer services
    
    
    184
    
    
    
    162
    
    
    
    507
    
    
    
    488Consulting fees
    
    
    274
    
    
    
    234
    
    
    
    854
    
    
    
    716Office expenses & supplies
    
    
    215
    
    
    
    172
    
    
    
    641
    
    
    
    533Other
    
    
    544
    
    
    
    499
    
    
    
    1,476
    
    
    
    1,385Total other expenses
    
    
    4,828
    
    
    
    4,579
    
    
    
    14,440
    
    
    
    13,344INCOME BEFORE INCOME TAXES
    
    
    3,330
    
    
    
    3,434
    
    
    
    9,953
    
    
    
    9,272INCOME TAXES
    
    
    1,351
    
    
    
    1,436
    
    
    
    3,935
    
    
    
    3,859NET INCOME
    
    $
    1,979
    
    
    $
    1,998
    
    
    $
    6,018
    
    
    $
    5,413BASIC EARNINGS PER SHARE
    
    $
    0.38
    
    
    $
    0.38
    
    
    $
    1.15
    
    
    $
    1.04DILUTED EARNINGS PER SHARE
    
    $
    0.35
    
    
    $
    0.37
    
    
    $
    1.08
    
    
    $
    1.00BASIC WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,276,774
    
    
    
    5,194,411
    
    
    
    5,248,339
    
    
    
    5,193,930DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING
    
    
    5,622,519
    
    
    
    5,472,539
    
    
    
    5,589,300
    
    
    
    5,424,126
 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 (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, 2003 (1)
    
    
    4,327,951
    
    
    $
    43
    
    
    $
    30,641
    
    
    $
    13,795
    
    
    
    
    
    
    $
    (2,007
    )
    
    $
    42,472(Note 2)Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,413
    
    
    $
    7,413
    
    
    
    
    
    
    
    7,413Other comprehensive
income,
net of tax
Unrealized (losses) 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Dividends 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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,018
    
    
    $
    6,018
    
    
    
    
    
    
    
    6,018Other comprehensive
income,
net of tax
Unrealized (losses) on
securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (164
    )
    
    
    (164
    )
    
    
    (164
    )Effective portion in
change in
fair value of cash
flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (10
    )
    
    
    (10
    )Total comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    5,844Stock dividend  6 for 5
stock split (Note 2)
    
    
    867,658
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9Stock options exercised
    
    
    72,825
    
    
    
    1
    
    
    
    515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    516Dividends on common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,121
    )
    
    
    
    
    
    
    
    
    
    
    (4,121
    )Balance, September 30,
2004
    
    
    5,278,934
    
    
    $
    53
    
    
    $
    31,225
    
    
    $
    21,979
    
    
    
    
    
    
    
    ($2,933
    )
    
    
    50,324
 (1) Previous year outstanding common stock has not been revised to reflect the
6 for 5 stock split (see Note 2) 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) Nine months endedSeptember 30,2004
    
    2003DISCLOSURE OF RECLASSIFICATION AMOUNT:Unrealized holding (loss) arising during period,
net of tax (benefit) expense of $(391) and $(835) for the
nine-months ending September 30, 2004 and 2003, respectively
    
    $
    (570
    )
    
    $
    (1,333
    )Less: Reclassification adjustment for gains included
in net income, net of tax (benefit) expense of $(279) and
$595 for the nine months ending September 30, 2004 and 2003,
respectively
    
    
    (406
    )
    
    
    (839
    )Net unrealized (loss) on securities, net of tax (benefit)
of $(112) and $(1,430) for the nine months ending,
September 30, 2004 and 2003, respectively
    
    $
    (164
    )
    
    $
    (494
    )Unrealized net (loss) on cash flow hedges, net of tax
(benefit) of $(61) and $(320) for the nine months
ending September 30, 2004 and 2003, respectively
    
    $
    (89
    )
    
    $
    (448
    )Less: Reclassification adjustment for net gains on cash
flow hedges included in net income, net of tax
(benefit) of $(54) and $8 for the nine months ending
September 30, 2004 and 2003, respectively.
    
    
    (79
    )
    
    
    (12
    )Net unrealized loss on cash flow hedges, net of tax (benefit)
of $(7) and $(312) for the nine months ending
September 30, 2004 and 2003, respectively
    
    $
    (10
    )
    
    $
    (460
    )
 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) 
 Nine months ended
    
    Nine months endedSeptember 30,
    
    September 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    6,018
    
    
    $
    5,413Adjustments to reconcile net income
to net cash provided by operating activities:Accretion of deferred loan fees and costs
    
    
    211
    
    
    
    (1,493
    )Depreciation and amortization
    
    
    839
    
    
    
    802Amortization of premiums and discounts on loans
receivable and securities
    
    
    2,218
    
    
    
    3,352Provision for loan losses
    
    
    550
    
    
    
    710(Gain) on sale of investment securities
    
    
    (685
    )
    
    
    (1,455
    )Activity in securities held for trading
    
    
    204
    
    
    
    (14
    )FHLB stock dividend
    
    
    (423
    )
    
    
    (434
    )(Increase) decrease in accrued interest receivable
    
    
    (271
    )
    
    
    569Increase (decrease) in income taxes payable
    
    
    256
    
    
    
    626Increase (decrease) in deferred income taxes
    
    
    314
    
    
    
    (730
    )(Increase) in prepaid expenses and other assets
    
    
    (472
    )
    
    
    (401
    )Increase in accounts payable
    
    
    108
    
    
    
    5,616Net cash provided by operating activities
    
    
    8,867
    
    
    
    12,561CASH FLOWS FROM INVESTING ACTIVITIES:Net (increase) in loans receivable
    
    
    (80,619
    )
    
    
    (55,850
    )Proceeds from sales of securities available for sale
    
    
    26,604
    
    
    
    30,757Principal paydowns on securities available for sale
    
    
    71,380
    
    
    
    119,494Principal paydowns on securities held to maturity
    
    
    102
    
    
    
    55Purchases of securities available for sale
    
    
    (132,198
    )
    
    
    (172,588
    )Purchase of premises and equipment
    
    
    (1,836
    )
    
    
    (2,070
    )(Purchase) of FHLB Stock
    
    
    (722
    )
    
    
    (986
    )Net cash used in investing activities
    
    
    (117,289
    )
    
    
    (81,188
    )CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    42,240
    
    
    
    14,906Increase in securities sold under agreements to repurchase
    
    
    14,362
    
    
    
    65,376Increase (decrease) in FHLB advances
    
    
    35,500
    
    
    
    (17,500
    )(Payments) on note payable
    
    
    
    
    
    
    (11,300
    )Increase trust preferred securities
    
    
    10,310
    
    
    
    15,000Exercise of stock options on common stock
    
    
    515
    
    
    
    69Dividends paid on common stock
    
    
    (1,488
    )
    
    
    (692
    )Net cash provided by financing activities
    
    
    101,439
    
    
    
    65,859NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    (6,983
    )
    
    
    (2,768
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    22,856
    
    
    
    19,212CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    15,873
    
    
    $
    16,444SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -Cash paid during the period for:Interest
    
    $
    13,254
    
    
    $
    12,422Income Taxes
    
    $
    3,502
    
    
    $
    3,301
 The accompanying notes are an integral part of these condensed statements. -6-




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HARRINGTON WEST FINANCIAL GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)  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 operating in multiple markets and 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 13 banking
facilities serving individuals and small to medium-sized businesses. Ten
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 name. On May 3, 2004, a thirteenth banking facility
opened in Ventura, California. The Company has a definitive purchase agreement
to acquire an existing 3,500 square-foot office building near the Scottsdale,
Arizona airport to be converted into a full service banking operation. The
Company also owns Harrington Wealth Management Company, a trust and investment
management company with $126.6 million in assets under management or custody. In June 2002, 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 to generate fee
income. In the September 2004 quarter, the Company terminated this joint
venture and retained selected employees to continue the origination of mortgage
loans in the Phoenix metro on the Banks platform. 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, 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). -7-




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The allowance is maintained at a level believed by management to be sufficient
to absorb estimated probable credit losses. Managements determination of the
adequacy of the allowance is based on periodic evaluations of the credit
portfolio and other relevant factors. This evaluation is inherently
subjective, as it requires material estimates, including, among others, the
amounts and timing of expected future cash flows on impaired loans, estimated
losses on consumer loans and residential mortgages, and general amounts for
historical loss experience, economic conditions, uncertainties in estimating
losses and inherent risks in the various credit portfolios, all of which may be
susceptible to significant change. In determining the adequacy of the allowance for loan losses, the Company makes
specific allocations to impaired loans in accordance with Statement of
Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for
Impairment of a Loan. Loans are identified as impaired when it is deemed
probable that the borrower will be unable to meet the scheduled principal and
interest payments under the terms of the loan agreement. Impairment is based
on the present value of expected future cash flows discounted at the loans
effective interest rate, except that as a practical expedient, a creditor may
measure impairment based on a loans observable market price or the fair value
of the collateral if the loan is collateral dependent. Allocations to non-homogenous loan pools are developed by loan type and risk
factor and are based on historical loss trends and managements judgment
concerning those trends and other relevant factors. These factors may include,
among others, trends in criticized assets, regional and national economic
conditions, changes in lending policies and procedures, trends in local real
estate values and changes in volumes and terms of the loan portfolio. Homogenous (consumer and residential mortgage) loan allocations are made at a
total portfolio level based on historical loss experience adjusted for
portfolio activity and economic conditions. Management believes the level of the allowance as of September 30, 2004 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 values 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. Had the Company recognized compensation expense over the expected life
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 and nine-month
periods ended September 30, 2004 and September 30, 2003 would have been as
follows: Pro Forma Results Three months endedSeptember 30,
    
    September 30,2004
    
    2003Net income:As reported
    
    $
    1,979
    
    
    $
    1,998Pro forma
    
    $
    1,943
    
    
    $
    1,979Earnings per share  basic:As reported
    
    $
    0.38
    
    
    $
    0.38Pro forma
    
    $
    0.37
    
    
    $
    0.38Earnings per share  diluted:As reported
    
    $
    0.35
    
    
    $
    0.37Pro forma
    
    $
    0.35
    
    
    $
    0.36
 Pro Forma Results Nine months endedSeptember 30,
    
    September 30,2004
    
    2003Net income:As reported
    
    $
    6,018
    
    
    $
    5,413Pro forma
    
    $
    5,946
    
    
    $
    5,357Earnings per share  basic:As reported
    
    $
    1.15
    
    
    $
    1.04Pro forma
    
    $
    1.13
    
    
    $
    1.03Earnings per share  diluted:As reported
    
    $
    1.08
    
    
    $
    1.00Pro forma
    
    $
    1.06
    
    
    $
    0.99
 For purposes of this computation, the significant assumptions used for the
nine-month periods ending September 30, 2004 and September 30, 2003, computed
on a weighted average basis, were: 2004
    
    2003Risk free interest rate:
    
    
    4.06
    %
    
    
    3.94
    %Expected life (years):
    
    
    9
    
    
    
    9Expected volatility 9 years
    
    
    32.67
    %
    
    
    29.03
    %
 -9-




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Recent Accounting Pronouncements 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 Securitiesand 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. This new guidance for determining whether impairment is
other-than-temporary is effective for reporting periods beginning after June
15, 2004. Adoption of EITF 03-1 may cause the Company to recognize impairment
losses in the Consolidated Statements of Income which would not have been
recognized under the current guidance or to recognize such losses in earlier
periods, especially those due to increases in interest rates. Since
fluctuations in the fair value for available-for-sale securities are already
recorded in accumulated other comprehensive income, adoption of this standard
is not expected to have a significant impact on stockholders equity.  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. -10-




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##### Table of Contents



3.
    EARNINGS PER SHARE The following tables represent the calculation of earnings per share (EPS)
for the periods presented. Three months ended September 30, 2004
    
    Nine months ended September 30, 2004Income
    
    Shares
    
    Per-Share
    
    Income
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    1,979
    
    
    
    5,276,774
    
    
    $
    .38
    
    
    $
    6,018
    
    
    
    5,248,339
    
    
    $
    1.15Effect of dilutive
stock options
    
    
    
    
    
    
    345,745
    
    
    
    (.03
    )
    
    
    
    
    
    
    340,961
    
    
    
    (.07
    )Diluted EPS
    
    $
    1,979
    
    
    
    5,622,519
    
    
    $
    .35
    
    
    $
    6,018
    
    
    
    5,589,300
    
    
    $
    1.08
 Three months ended September 30, 2003
    
    Nine months ended September 30, 2003Income
    
    Shares
    
    Per-Share
    
    Income
    
    Shares
    
    Per-Share(Numerator)
    
    (Denominator)
    
    Amount
    
    (Numerator)
    
    (Denominator)
    
    AmountBasic EPS
    
    $
    1,998
    
    
    
    5,194,411
    
    
    $
    .38
    
    
    $
    5,413
    
    
    
    5,193,930
    
    
    $
    1.04Effect of dilutive
stock options
    
    
    
    
    
    
    278,128
    
    
    
    (.01
    )
    
    
    
    
    
    
    230,196
    
    
    
    (.04
    )Diluted EPS
    
    $
    1,998
    
    
    
    5,472,539
    
    
    $
    .37
    
    
    $
    5,413
    
    
    
    5,424,126
    
    
    $
    1.00
  4.
    COMMITMENTS AND CONTINGENCIES In September 2004, the Company issued, through Harrington West Capital Trust
II, $10.3 million of trust-preferred securities in a private placement. In
September 2003, the Company issued, through Harrington West Capital Trust I,
$15.5 million of trust-preferred securities in a private placement. Both
Harrington West Capital Trust I and II are 100% owned unconsolidated
subsidiaries of Harrington West Financial Group and were established for
issuance of these trust preferred securities. In connection with the issuance
of the preferred securities, the Company has committed to irrevocably and
unconditionally guarantee the following payments or distributions with respect
to the preferred securities to the holders thereof to the extent that
Harrington West Trust I and II has not made such payments or distributions and
has the funds therefore: (i) accrued and unpaid distributions, (ii) the
redemption price, and (iii) upon a dissolution or termination of the trust, the
lesser of the liquidation amount and all accrued and unpaid distributions and
the amount of assets of the trust remaining available for distribution. The
issuance of the trust preferred securities are reflected in the Consolidated
Statement of Financial Condition as subordinated debt. -11-




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The following tables present our contractual obligations and commercial
commitments as of September 30, 2004. Payment due periodLess than
    
    One to
    
    Three to
    
    More thanTotal
    
    One Year
    
    Three Years
    
    Five Years
    
    Five Years(In Thousands)Contractual obligations:Certificates of deposit
    
    $
    433,928
    
    
    $
    394,344
    
    
    $
    29,658
    
    
    $
    7,877
    
    
    $
    2,049FHLB advances
    
    
    298,000
    
    
    
    279,000
    
    
    
    
    
    
    
    
    
    
    
    19,000Reverse Repurchase Agreements.
    
    
    80,090
    
    
    
    21,090
    
    
    
    14,000
    
    
    
    30,000
    
    
    
    15,000Leases
    
    
    19,474
    
    
    
    1,272
    
    
    
    2,504
    
    
    
    2,426
    
    
    
    13,272Subordinated debt.
    
    
    25,774
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,774Due to broker
    
    
    5,696
    
    
    
    5,696
    
    
    
    
    
    
    
    
    
    
    
    Accrued interest payable
    
    
    667
    
    
    
    667Total contractual
obligations
    
    $
    863,629
    
    
    $
    702,069
    
    
    $
    46,162
    
    
    $
    40,303
    
    
    $
    75,095
 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
    
    $
    23,748
    
    
    $
    9,106
    
    
    $
    1,813
    
    
    $
    11,834
    
    
    $
    995Consumer lines of credit(1)
    
    
    36,910
    
    
    
    1,450
    
    
    
    
    
    
    
    
    
    
    
    35,460Undisbursed portion of loans in process
    
    
    34,735
    
    
    
    801
    
    
    
    33,934
    
    
    
    
    
    
    
    Approved but, unfuned mortgage loans
    
    
    24,544
    
    
    
    24,544
    
    
    
    
    
    
    
    
    
    
    
    Approved but, unfunded commercial
loans
    
    
    7,661
    
    
    
    7,661
    
    
    
    
    
    
    
    
    
    
    
    Approved but unfunded consumer loans.
    
    
    760
    
    
    
    760
    
    
    
    
    
    
    
    
    
    
    
    Letters of credit
    
    
    791
    
    
    
    226
    
    
    
    105
    
    
    
    
    
    
    
    460Total commitments
    
    $
    129,149
    
    
    $
    44,548
    
    
    $
    35,852
    
    
    $
    11,834
    
    
    $
    36,915
   (1)
    
    Lines of credit with no stated maturity date are included in commitments
for less than one year. 
 Item 2: Managements Discussion and Analysis General We are a diversified, community-based, financial institution holding
company operating in multiple markets and headquartered in Solvang, California
with executive offices in Overland Park, Kansas. Mission Our mission is to develop diversified and highly profitable
community-focused, banking operations in the markets of the Central Coast of
California, the Kansas City metro, and the Phoenix/Scottsdale metro. Although
these markets are geographically dispersed, we have considerable market
knowledge of each of these areas, local management with extensive experience in
banking and the particular market, relationship development potential due to
our ties to the communities, and each market offers favorable demographic and
economic characteristics. All of these banking operations are operated under
the Los Padres Bank, FSB charter so that we can gain operating efficiencies
from centralized -12-




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##### Table of Contents



administration and operating systems. However, each regions banking
operation is distinct to its market and its clientele, and lead by a local
management team responsible for developing and expanding the banking operations
on a profitable basis. The Kansas City banking offices operate under the
Harrington Bank (dba) brand name, and the California and Arizona offices
operate under the Los Padres Bank brand name. We believe this multiple market banking strategy provides the following
benefits to our shareholders: 1. Diversification of the loan portfolio and economic and credit risk. 2. Options to capitalize on the most favorable growth markets and harvest
overvalued markets. 3. The capability to deploy the Companys diversified product mix and
emphasize those products that are best suited for the market 4. The ability to price products strategically among the markets in an attempt
to maximize profitability. We plan to grow the banking operations in these markets opportunistically and
expect the opening of two to three banking offices every 18 months through new
branching. We evaluate financial institution acquisition opportunities but are
value oriented. Acquisitions are expected to be accretive to earnings per share
within a 12 month period. Since 1997, we have grown from 4 banking offices to 14 banking offices. We have
10 full service banking offices on the Central Coast of California from Ventura
to Atascadero along Highway 101, 2 banking offices in Johnson County, Kansas in
the fastest growing area of the Kansas City metro, and 2 offices in Scottsdale,
Arizona, when the second office is completed and opened in the Scottsdale
Airpark in early 2005. We are working on additional expansion opportunities in
each market. Product Line Diversification We have broadened our product lines over the last 5 years to diversify our
revenue sources and to become a full service community banking company. In
1999, we added Harrington Wealth Management Company, a federally registered
trust and investment management company, to provide our customers a
consultative and customized investment process for their trust and investment
funds. In 2000, we added a full line of commercial banking and deposit products
for small to medium sized businesses and expanded our consumer lending lines to
provide Home Equity Lines of Credit. In 2001, we added internet banking and
bill pay services to augment our in-branch services and consultation. In 2002,
we further expanded our mortgage banking and brokerage activities in all of our
markets. Modern Financial Skills We believe we have considerable expertise in investment and asset liability
management from the CEOs background in this field for 20 years, wherein he
spent 13 years with Smith Breeden Associates, Inc. consulting on risk
management practices with banking institutions and advising on billions of
mortgage assets managed on a short duration basis. We attempt to control
interest rate risk to a low level through the use of interest rate risk
management tools, and we utilize excess capital in a low duration and high
credit quality investment portfolio of largely mortgage related securities to
enhance our earnings. Our goal is to produce a pre-tax return on these
investments of 1.25% to 1.50% over the related funding sources. We believe our
ability to price loans and investments on an option-adjusted spread basis and
then manage the interest rate risk of longer term, fixed rate loans allows us
to compete effectively against other institutions, who can not offer these
products due to their inability to manage the interest rate risk. -13-




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##### Table of Contents



Control Banking Risks We seek to control banking risks. We have established a
disciplined credit evaluation and underwriting environment that emphasizes the
assessment of collateral support, cash flows, guarantor support, and stress
testing. We manage operational risk through stringent policies,
procedures, and controls and interest rate risk through our modern financial
and hedging skills. Concentrate on Selected Performance Measures We evaluate our performance based upon the primary measures of return on
average equity, which we are trying to maintain in the mid teens, earnings per
share growth, and additional franchise value creation through the growth of
deposits, loans and wealth management assets. Profitability Drivers The factors that we expect to drive our profitability in the future are as
follows:  1.
    
    Changing the mix of our loans to higher risk-adjusted spread
earning categories such as business lending, commercial real estate
lending, small tract construction and construction-to-permanent loan
lending, and selected consumer lending activities such as HELOC loans.2.
    
    Growing our non-costing consumer and commercial deposits and
continuing to change the mix of deposits to less time based
certificates of deposit.3.
    
    Diversifying and growing our banking fee income through existing
and new fee income sources such as our overdraft protection program and
other deposit fees, loan fee income from mortgage banking, prepayment
penalty fees and other loan fees, Harrington Wealth Management trust
and investment fees, and other retail banking fees.4.
    
    Achieving a high level of performance on our investment portfolio
by earning a pre-tax total return over one month LIBOR of approximately
1.25% to 1.50% per annum.5.
    
    Controlling interest rate risk of the institution 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. Results of Operations The Company reported net income of $2.0 million for the three months ended
September 30, 2004, as compared to $2.0 million for the three months ended
September 30, 2003, a decrease of $19 thousand or 1.0%. The Company reported
net income of $6.0 million for the nine months ended September 30, 2004, as
compared to $5.4 million for the nine months ended September 30, 2003, an
increase of $605 thousand or 11.2%. The increase in net income was primarily
driven by an increase in net interest income and a decline in the provision for
loan losses, which was partially offset by an increase in non-interest expense
and a decrease in other income. The Companys overall tax rate was reduced in
the first quarter of 2004 due to the apportionment of taxable income to states
with lower income tax rates. On a diluted earnings per share basis, the
Company earned $.35 per share for the three months ended September 30, 2004,
compared to $.37 per share for the three months ended September 30, 2003. On a
diluted earnings per share basis, the Company earned $1.08 per share for the
nine months ended -14-




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##### Table of Contents



September 30, 2004, compared to $1.00 per share for the nine months ended
September 30, 2003. Return on average equity was 15.9% and 16.3% in the
September 2004 quarter and year-to-date periods compared to 17.5% and 16.3% in
the same periods in 2003, respectively. The Companys net interest income after provision for loan losses
increased by $409 thousand or 6.0% to $7.2 million in the three months ended
September 30, 2004 over the prior comparable period in 2003. The Companys net
interest income after provision for loan losses increased by $2.7 million or
14.7% to $21.4 million during the nine months ended September 30, 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 34 basis
points to 2.90% during the three months ended September 30, 2004, when compared
to 3.24% in the same period of 2003. The net interest margin decreased by 16
basis points to 2.95% during the nine months ended September 30, 2004, when
compared to the same period in 2003. The decline in the net interest margin is
due to the $95.8 million in average growth in lower margin investment
securities that exceeded the $67.1 million in average loan growth with higher
margins. Also, the decline in the margin is also due to some temporary lags in
the repricing of interest rates on loans relative to liabilities and hedge
instruments. -15-




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The following tables 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 September 30,2004
    
    2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield/ Cost
    
    Balance
    
    Interest
    
    Yield/ Cost(Dollars in thousands)Interest-earning assets:Loans receivable (1)
    
    $
    581,250
    
    
    $
    9,182
    
    
    
    6.36
    %
    
    $
    503,728
    
    
    $
    8,458
    
    
    
    6.72
    %FHLB stock
    
    
    14,406
    
    
    
    191
    
    
    
    5.29
    %
    
    
    13,245
    
    
    
    134
    
    
    
    4.02
    %Securities and trading account assets (2)
    
    
    425,735
    
    
    
    3,880
    
    
    
    3.65
    %
    
    
    325,143
    
    
    
    3,209
    
    
    
    3.95
    %Cash and cash equivalents (3)
    
    
    12,271
    
    
    
    18
    
    
    
    .59
    %
    
    
    16,980
    
    
    
    50
    
    
    
    1.17
    %Total interest-earning assets
    
    
    1,033,662
    
    
    
    13,271
    
    
    
    5.13
    %
    
    
    859,096
    
    
    
    11,851
    
    
    
    5.52
    %Noninterest-earning assets
    
    
    24,749
    
    
    
    
    
    
    
    
    
    
    
    20,645Total assets
    
    $
    1,058,411
    
    
    
    
    
    
    
    
    
    
    $
    879,741Interest-bearing liabilities:Deposits:NOW and money market accounts
    
    
    121,312
    
    
    
    298
    
    
    
    .97
    %
    
    
    125,587
    
    
    
    328
    
    
    
    1.03
    %Passbook accounts and certificates of
deposit
    
    
    451,051
    
    
    
    2,407
    
    
    
    2.12
    %
    
    
    386,148
    
    
    
    2,227
    
    
    
    2.29
    %Total deposits
    
    
    572,363
    
    
    
    2,705
    
    
    
    1.88
    %
    
    
    511,735
    
    
    
    2,555
    
    
    
    1.98
    %FHLB advances (4)
    
    
    298,989
    
    
    
    2,429
    
    
    
    3.18
    %
    
    
    211,929
    
    
    
    1,876
    
    
    
    3.46
    %Reverse Repurchase Agreements
    
    
    79,853
    
    
    
    524
    
    
    
    2.57
    %
    
    
    64,060
    
    
    
    421
    
    
    
    2.57
    %Other borrowings (5)
    
    
    15,435
    
    
    
    188
    
    
    
    4.78
    %
    
    
    12,310
    
    
    
    113
    
    
    
    3.60
    %Total interest-bearing liabilities
    
    
    966,640
    
    
    
    5,846
    
    
    
    2.39
    %
    
    
    800,034
    
    
    
    4,965
    
    
    
    2.45
    %Non-interest-bearing deposits
    
    
    33,077
    
    
    
    
    
    
    
    
    
    
    
    23,578Non-interest-bearing liabilities
    
    
    9,046
    
    
    
    
    
    
    
    
    
    
    
    10,529Total liabilities
    
    
    1,008,763
    
    
    
    
    
    
    
    
    
    
    
    834,141Stockholders equity
    
    
    49,648
    
    
    
    
    
    
    
    
    
    
    
    45,600Total liabilities and stockholders equity
    
    $
    1,058,411
    
    
    
    
    
    
    
    
    
    
    $
    879,741Net interest-earning assets (liabilities)
    
    $
    67,022
    
    
    
    
    
    
    
    
    
    
    $
    59,062Net interest income/interest rate spread
    
    
    
    
    
    $
    7,425
    
    
    
    2.74
    %
    
    
    
    
    
    $
    6,886
    
    
    
    3.07
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.90
    %
    
    
    
    
    
    
    
    
    
    
    3.24
    %Ratio of average interest-earnings assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    106.93
    %
    
    
    
    
    
    
    
    
    
    
    107.38
    %
  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 other debt and a note payable under a revolving
line of credit. -16-




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##### Table of Contents



The following tables 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 EndedSeptember 30, 2004 vs. September 30,2003Increase (decrease) due to
    
    Total NetIncreaseRate
    
    Volume
    
    Rate/ Volume
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable (1)
    
    $
    (2,042
    )
    
    $
    5,207
    
    
    $
    (2,441
    )
    
    $
    724FHLB stock
    
    
    168
    
    
    
    47
    
    
    
    (158
    )
    
    
    57Securities and trading account assets (2)
    
    
    (985
    )
    
    
    3,972
    
    
    
    (2,316
    )
    
    
    671Cash and cash equivalents (3)
    
    
    (99
    )
    
    
    (55
    )
    
    
    122
    
    
    
    (32
    )Total
Total net change in income on interest-
earning assets
    
    
    (2,958
    )
    
    
    9,171
    
    
    
    (4,793
    )
    
    
    1,420Interest-bearing liabilities:DepositsNOW and money market accounts
    
    
    (78
    )
    
    
    (44
    )
    
    
    92
    
    
    
    (30
    )Passbook accounts and certificates
of deposit
    
    
    (639
    )
    
    
    1,486
    
    
    
    (667
    )
    
    
    180Total deposits
    
    
    (717
    )
    
    
    1,442
    
    
    
    (575
    )
    
    
    150FHLB advances (4)
    
    
    (606
    )
    
    
    3,017
    
    
    
    (1,858
    )
    
    
    553Reverse Repurchase Agreements
    
    
    (1
    )
    
    
    407
    
    
    
    (303
    )
    
    
    103Other borrowings (5)
    
    
    145
    
    
    
    112
    
    
    
    (182
    )
    
    
    75Total net change in expense on interest-
bearing liabilities
    
    
    (1,179
    )
    
    
    4,978
    
    
    
    (2,918
    )
    
    
    881Change in net interest income
    
    $
    (1,779
    )
    
    $
    4,193
    
    
    $
    (1,875
    )
    
    $
    539
  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 other debt and a note payable under a
revolving line of credit. -17-




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##### Table of Contents



Nine months ended September 30,2004
    
    2003Average
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AverageBalance
    
    Interest
    
    Yield/ Cost
    
    Balance
    
    Interest
    
    Yield/ Cost(Dollars in thousands)Interest-earning assets:Loans receivable (1)
    
    $
    549,557
    
    
    $
    26,526
    
    
    
    6.44
    %
    
    $
    482,497
    
    
    $
    24,589
    
    
    
    6.79
    %FHLB stock
    
    
    14,001
    
    
    
    456
    
    
    
    4.34
    %
    
    
    12,946
    
    
    
    452
    
    
    
    4.66
    %Securities and trading account assets (2)
    
    
    414,908
    
    
    
    11,223
    
    
    
    3.61
    %
    
    
    319,092
    
    
    
    9,312
    
    
    
    3.89
    %Cash and cash equivalents (3)
    
    
    12,590
    
    
    
    41
    
    
    
    .43
    %
    
    
    16,881
    
    
    
    162
    
    
    
    1.28
    %Total interest-earning assets
    
    
    991,056
    
    
    
    38,246
    
    
    
    5.15
    %
    
    
    831,416
    
    
    
    34,515
    
    
    
    5.54
    %Noninterest-earning assets
    
    
    24,533
    
    
    
    
    
    
    
    
    
    
    
    23,173Total assets
    
    $
    1,015,589
    
    
    
    
    
    
    
    
    
    
    $
    853,589Interest-bearing liabilities:Deposits:NOW and money market accounts
    
    
    119,518
    
    
    
    815
    
    
    
    .91
    %
    
    
    128,464
    
    
    
    1,068
    
    
    
    1.11
    %Passbook accounts and certificates of deposit
    
    
    439,617
    
    
    
    6,946
    
    
    
    2.11
    %
    
    
    380,603
    
    
    
    6,798
    
    
    
    2.38
    %Total deposits
    
    
    559,135
    
    
    
    7,761
    
    
    
    1.85
    %
    
    
    509,067
    
    
    
    7,866
    
    
    
    2.06
    %FHLB advances (4)
    
    
    276,971
    
    
    
    6,549
    
    
    
    3.15
    %
    
    
    231,529
    
    
    
    6,439
    
    
    
    3.71
    %Reverse Repurchase Agreements
    
    
    74,074
    
    
    
    1,455
    
    
    
    2.62
    %
    
    
    25,246
    
    
    
    497
    
    
    
    2.62
    %Other borrowings (5)
    
    
    15,146
    
    
    
    519
    
    
    
    4.57
    %
    
    
    12,134
    
    
    
    333
    
    
    
    3.66
    %Total interest-bearing liabilities
    
    
    925,326
    
    
    
    16,284
    
    
    
    2.35
    %
    
    
    777,976
    
    
    
    15,135
    
    
    
    2.59
    %Non-interest-bearing deposits
    
    
    29,946
    
    
    
    
    
    
    
    
    
    
    
    20,492Non-interest-bearing liabilities
    
    
    11,117
    
    
    
    
    
    
    
    
    
    
    
    10,731Total liabilities
    
    
    966,389
    
    
    
    
    
    
    
    
    
    
    
    809,199Stockholders equity
    
    
    49,200
    
    
    
    
    
    
    
    
    
    
    
    44,390Total liabilities and stockholders equity
    
    $
    1,015,589
    
    
    
    
    
    
    
    
    
    
    $
    853,589Net interest-earning assets (liabilities)
    
    $
    65,730
    
    
    
    
    
    
    
    
    
    
    $
    53,440Net interest income/interest rate spread
    
    
    
    
    
    $
    21,962
    
    
    
    2.81
    %
    
    
    
    
    
    $
    19,380
    
    
    
    2.95
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    2.95
    %
    
    
    
    
    
    
    
    
    
    
    3.11
    %Ratio of average interest-earnings assets to
average interest-bearing liabilities
    
    
    
    
    
    
    
    
    
    
    107.10
    %
    
    
    
    
    
    
    
    
    
    
    106.87
    %
  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 other debt and a note payable under a revolving
line of credit. -18-




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##### Table of Contents



Nine Months EndedSeptember 30, 2004 vs.
September 30, 2003Increase (decrease) due to
    
    Total NetIncreaseRate
    
    Volume
    
    Rate/ Volume
    
    (Decrease)(In Thousands)Interest-earning assets:Loans receivable (1)
    
    $
    (1,732
    )
    
    $
    4,556
    
    
    $
    (887
    )
    
    $
    1,937FHLB stock
    
    
    (41
    )
    
    
    50
    
    
    
    (5
    )
    
    
    4Securities and trading account assets (2)
    
    
    (909
    )
    
    
    3,729
    
    
    
    (909
    )
    
    
    1,911Cash and cash equivalents (3)
    
    
    (143
    )
    
    
    (55
    )
    
    
    77
    
    
    
    (121
    )Total net change in income on interest-
earning assets
    
    
    (2,825
    )
    
    
    8,280
    
    
    
    (1,724
    )
    
    
    3,731Interest-bearing liabilities:DepositsNOW and money market accounts
    
    
    (256
    )
    
    
    (99
    )
    
    
    102
    
    
    
    (253
    )Passbook accounts and certificates
of deposit
    
    
    (1,047
    )
    
    
    1,406
    
    
    
    (211
    )
    
    
    148Total deposits
    
    
    (1,303
    )
    
    
    1,307
    
    
    
    (109
    )
    
    
    (105
    )FHLB advances (4)
    
    
    (1,284
    )
    
    
    1,684
    
    
    
    (290
    )
    
    
    110Reverse Repurchase Agreements
    
    
    (1
    )
    
    
    1,281
    
    
    
    (322
    )
    
    
    958Other borrowings (5)
    
    
    110
    
    
    
    110
    
    
    
    (34
    )
    
    
    186Total net change in expense on interest-
bearing liabilities
    
    
    (2,478
    )
    
    
    4,382
    
    
    
    (755
    )
    
    
    1,149Change in net interest income
    
    $
    347
    
    
    $
    3,897
    
    
    $
    (970
    )
    
    $
    2,582
  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 other debt and a note payable under a
revolving line of credit. The Company reported interest income of $13.3 million for the three months
ended September 30, 2004, compared to $11.9 million for the three months ended
September 30, 2003, an increase of $1.4 million or 12.0%. The Company reported
total interest income of $38.2 million for the nine months ended September 30,
2004, compared to $34.5 million for the nine months ended September 30, 2003,
an increase of $3.7 million or 10.8%. The primary reason for the increase
during the periods 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 due to falling interest rates and the refinancing of
higher rate loans and investments to lower rates. The Company reported total interest expense of $5.8 million for the three
months ended September 30, 2004, compared to $5.0 million for the three months
ended September 30, 2003, an increase of $881 thousand or 17.7%. For the nine
months ended September 30, 2004, the Company reported total interest expense of
$16.3 million, compared to $15.1 million for the nine months ended -19-




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##### Table of Contents



September 30, 2003, an increase of $1.1 million or 7.6%. The increase in
interest expense during both periods was attributable to an increase in the
volume of interest-bearing liabilities net of a decrease in the average rate on
interest-bearing liabilities as a result of the downward repricing of interest
bearing-liabilities due to falling interest rates and the increase in
non-costing deposits. The Company recorded its provision for loan losses of $230 thousand during
the three months ended September 30, 2004, compared to $100 thousand for the
three months ended September 30, 2003, a increase of $130 thousand. Provision
for loan losses of $550 thousand during the nine months ended September 30,
2004, compared to $710 thousand for the nine months ended September 30, 2003, a
decrease of $160 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 September 30, 2004, the Company had $380 thousand of
non-performing assets, as compared to $12 thousand of total loans as of
December 31, 2003. The following table sets forth the activity in our allowance for loan losses
for the periods indicated For the Quarter Ended
    
    For the Year EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Dollars in thousands)Balance at beginning of period
    
    $
    4,903
    
    
    $
    4,407
    
    
    $
    4,587
    
    
    $
    3,797Charge-offs:Real estate loansSingle-family
residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Multi-family residential
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer and other loans
    
    
    (5
    )
    
    
    
    
    
    
    (9
    )
    
    
    Total charge-offs
    
    
    (5
    )
    
    
    
    
    
    
    (9
    )
    
    
    Net charge-offs
    
    
    (5
    )
    
    
    
    
    
    
    (9
    )
    
    
    Provision (credit) for losses
on loans
    
    
    230
    
    
    
    100
    
    
    
    550
    
    
    
    710Balance at end of period
    
    $
    5,128
    
    
    $
    4,507
    
    
    $
    5,128
    
    
    $
    4,507Allowance for loan losses as
a percent of total loans
outstanding
    
    
    0.86
    %
    
    
    0.89
    %
    
    
    0.86
    %
    
    
    0.89
    %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 extinguishment of debt, loans, deposits,
borrowings, and trading assets, plus banking fee income amounted to $963
thousand for the quarter ending September 30, 2004 compared to $1.2 million
during the same quarter last year, a decrease of $264 thousand or 21.5%. The
Companys total other income -20-




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##### Table of Contents



amounted to $3.0 million for the nine month period ending September 30,
2004 compared to $3.9 million during the same period last year, a decrease of
$965 thousand or 24.5%. The decrease in other income was primarily
attributable to a decrease in mortgage brokerage and prepayment penalty fees as
refinancings slowed markedly, as well as slightly lower net gains on assets and
liabilities. 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 September 2004 quarter, the Company had $229 thousand
in net gains on trading assets, the sale of securities, other gains and losses
and the extinguishment of related borrowings compared to net gain on these
instruments of $191 thousand in the September 2003 quarter. For the
nine-months ended September 30, 2004, the net gains on trading assets, the sale
of securities, other gains and losses, and the extinguishment of related
borrowings was $639 thousand compared to $686 thousand in the same period in
2003. The decrease in net gains in the first nine months of 2004 over 2003 of
$47 thousand can be attributed largely to the greater degree of spread
narrowing of investment grade, commercial mortgage backed securities to
comparable duration LIBOR swap rates during the first nine-months of 2003 over
2004. 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 September 2004 quarter and year-to-date periods, the investment
portfolio has generated annualized net returns on this basis of 3.9% and 2.4%,
respectively. 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 $734 thousand for the quarter ending
September 30, 2004 compared to $1.0 million during the same quarter last year,
a decrease of $302 thousand or 29.2%. Banking fee income amounted to $2.3
million for the nine-month period ending September 30, 2004 compared to $3.3
million during the same period last year, a decrease of $918 thousand or 28.2%.
Loan fees decreased in the comparable 2004 to 2003 periods due to the slowdown
of mortgage loan refinancing activity, which decreased mortgage brokerage fees
by $798 thousand or 48.4% and prepayment penalty and other loan fees decreased
by $291 thousand or 48.3% when comparing the September 2004 nine-month period
to the same period in 2003. 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 $731 thousand for the nine months ending September 2004, an
increase of $71 thousand or 10.8% as compared to the nine-months ending
September 30 2003. Harrington Wealth Managements trust fee income contributed
$447 thousand for the nine-months ending September 2004, an increase of $100
thousand or 28.8%, compared to the same period in 2003. In the September 2004 quarter, the Company did start to realize positive
benefits from the implementation of its overdraft protection program in mid
August. In the September 2004 quarter, overdraft related fees were $109
thousand, compared to $82 thousand and $63 thousand in the June 2004 and
September 2003 quarters, respectively. The Company expects further growth in
this fee income source over the next few quarters. -21-




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##### Table of Contents



The following chart shows the comparison of banking fee income sources for the
September 2004 quarter and year-to-date periods over the same periods in 2003. (Dollars in thousands)September
    
    September
    
    
    
    
    
    September
    
    September2004
    
    2003
    
    
    
    
    
    2004
    
    2003
    
    %Banking Fee Type
    
    Quarter
    
    Quarter
    
    % Change
    
    YTD
    
    YTD
    
    ChangeMortgage Brokerage Fees
    
    $
    234
    
    
    $
    490
    
    
    
    (52.2
    )%
    
    $
    852
    
    
    $
    1,650
    
    
    
    (48.4
    )%Prepayment Penalties
and other Loan Fees
    
    
    81
    
    
    
    206
    
    
    
    (60.7
    )%
    
    
    312
    
    
    
    603
    
    
    
    (48.3
    )%Deposit & Other Retail
Banking Fees
    
    
    267
    
    
    
    222
    
    
    
    20.3
    %
    
    
    731
    
    
    
    660
    
    
    
    10.8
    %Harrington Wealth
Management Fees
    
    
    152
    
    
    
    118
    
    
    
    28.8
    %
    
    
    447
    
    
    
    347
    
    
    
    28.8
    %Total
    
    $
    734
    
    
    $
    1,036
    
    
    
    (29.2
    )%
    
    $
    2,342
    
    
    $
    3,260
    
    
    
    (28.2
    )%
 The Companys total other expenses were $4.8 million during the three
months ended September 30, 2004, as compared to $4.6 million for the three
months ended September 30, 2003, an increase of $249 thousand or 5.4%. The
Companys total other expenses were $14.4 million during the nine months ended
September 30, 2004, as compared to $13.3 million for the nine months ended
September 30, 2003, an increase of $1.1 million or 8.2%. 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. Net income was favorably impacted in the September 2004 quarter and
year-to-date periods 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% and 39.5% in the September 2004 quarter and
year-to-date periods, respectively, compared to 41.8% and 41.6% for the
September quarter and year-to-date in 2003. Financial Condition The Companys total assets increased to $1.1 billion at September 30,
2004, as compared to $974.8 million at December 31, 2003, an increase of $107.7
million or 11.0%. The increase was partially attributable to growth in net
loans of $79.6 million or 15.3% to $598.1 million as of September 30, 2004,
compared to $518.5 million at December 31, 2003. . 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 $99.8 million at September 30, 2004, compared to $93.7 million at
December 31, 2003, an increase of $6.1 million, while non-single-family loans
as a group increased to $505.0 million at September 30, 2004, compared to
$430.4 million at December 31, 2003, an increase of $74.6 million. The mix of
non-single family loans increased from 82.1% to 83.5% over the December 31,
2003 to September 30, 2004 period. -22-




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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. September 30, 2004
    
    December 31, 2003ChangeAmount
    
    Percent
    
    Amount
    
    Percent
    
    Amount(Dollars in thousands)Real Estate Loans:Single-family
    
    $
    99,826
    
    
    
    16.5
    %
    
    $
    93,725
    
    
    
    17.9
    %
    
    $
    6,101Multi-family
    
    
    90,160
    
    
    
    14.9
    
    
    
    82,090
    
    
    
    15.7
    
    
    
    8,070Commercial
    
    
    272,269
    
    
    
    45.0
    
    
    
    234,607
    
    
    
    44.8
    
    
    
    37,662Construction (1)
    
    
    21,300
    
    
    
    3.5
    
    
    
    30,835
    
    
    
    5.9
    
    
    
    (9,535
    )Land acquisition and
development
    
    
    24,073
    
    
    
    4.0
    
    
    
    8,312
    
    
    
    1.6
    
    
    
    15,761Commercial and industrial loans
    
    
    73,104
    
    
    
    12.1
    
    
    
    56,942
    
    
    
    10.8
    
    
    
    16,162Consumer loans
    
    
    23,051
    
    
    
    3.8
    
    
    
    16,612
    
    
    
    3.1
    
    
    
    6,439Other loans (2)
    
    
    994
    
    
    
    0.2
    
    
    
    1,035
    
    
    
    0.2
    
    
    
    (41
    )Total loans receivable
    
    
    604,777
    
    
    
    100.0
    %
    
    
    524,158
    
    
    
    100.0
    %
    
    
    80,619Less:Allowance for loan loss
    
    
    (5,128
    )
    
    
    
    
    
    
    (4,587
    )
    
    
    
    
    
    
    (541
    )Net deferred loan fees
    
    
    (1,640
    )
    
    
    
    
    
    
    (1,394
    )
    
    
    
    
    
    
    (246
    )Net premiums
    
    
    61
    
    
    
    
    
    
    
    319
    
    
    
    
    
    
    
    (258
    )(6,707
    )
    
    
    
    
    
    
    (5,662
    )
    
    
    
    
    
    
    (1,045
    )Loans receivable, net
    
    $
    598,070
    
    
    
    
    
    
    $
    518,496
    
    
    
    
    
    
    $
    79,574
  (1)
    
    Includes loans secured by residential, land and commercial
properties. At September 30, 2004, we had $14.3 million of
construction loans secured by residential properties, $3.0 million for
land development and $4.0 million secured by commercial properties(2)
    
    Includes loans collateralized by deposits and consumer line of
credit loans. Securities classified as available for sale increased to $431.5 million at
September 30, 2004, as compared to $398.7 million at December 31, 2003, an
increase of $32.8 million or 8.2%. 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. -23-




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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:September 30, 2004Mortgage-backed securities  pass through
    
    $
    125,013
    
    
    $
    453
    
    
    $
    (907
    )
    
    $
    124,559Collateralized mortgage obligations
    
    
    62,993
    
    
    
    23
    
    
    
    (441
    )
    
    
    62,575Commercial mortgage-backed securities
    
    
    49,637
    
    
    
    791
    
    
    
    (21
    )
    
    
    50,407Asset-backed securities
    
    
    191,613
    
    
    
    1,257
    
    
    
    (435
    )
    
    
    192,435Corporate debt securities
    
    
    1,530
    
    
    
    
    
    
    
    (23
    )
    
    
    1,527$
    430,806
    
    
    $
    2,524
    
    
    $
    (1,827
    )
    
    $
    431,503
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    Losses
    
    Value(Dollars in thousands)Securities Available for Sale:December 31, 2003Mortgage-backed securities  pass through
    
    $
    129,766
    
    
    $
    915
    
    
    $
    (307
    )
    
    $
    130,374Collateralized mortgage obligations
    
    
    48,704
    
    
    
    
    
    
    
    (123
    )
    
    
    48,581Commercial mortgage-backed securities
    
    
    59,927
    
    
    
    1,022
    
    
    
    (33
    )
    
    
    60,916Asset-backed securities
    
    
    157,821
    
    
    
    404
    
    
    
    (973
    )
    
    
    157,252Corporate debt securities
    
    
    1,489
    
    
    
    79
    
    
    
    
    
    
    
    1,568$
    397,707
    
    
    $
    2,420
    
    
    $
    (1,436
    )
    
    $
    398,691
 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. -24-




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##### Table of Contents



The following table discloses security balances by categories that are at
an unrealized loss at September 30, 2004 with the corresponding duration of the
loss. Included in the table are 53 securities that have been in an unrealized
loss position for less than a year and 25 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 September 30, 2004Fair
    
    
    
    
    
    Fair
    
    
    
    
    
    FairValue
    
    Unrealized Losses
    
    Value
    
    Unrealized Losses
    
    Value
    
    Unrealized LossesMortgage-backed
securities  pass
through
    
    $
    65,087
    
    
    $
    (523
    )
    
    $
    22,323
    
    
    $
    (384
    )
    
    $
    87,410
    
    
    $
    (907
    )Collateralized mortgage
obligations
    
    
    25,860
    
    
    
    (441
    )
    
    
    
    
    
    
    
    
    
    
    25,860
    
    
    
    (441
    )Commercial
mortgage-backed
securities
    
    
    61
    
    
    
    
    
    
    
    816
    
    
    
    (21
    )
    
    
    877
    
    
    
    (21
    )Asset-backed securities
    
    
    29,607
    
    
    
    (75
    )
    
    
    5,775
    
    
    
    (360
    )
    
    
    35,382
    
    
    
    (435
    )Corporate debt securities
    
    
    1,527
    
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    1,527
    
    
    
    (23
    )$
    122,142
    
    
    $
    (1,062
    )
    
    $
    28,914
    
    
    $
    (765
    )
    
    $
    151,056
    
    
    
    ($1,827
    )
 Less than 12 Months
    
    12 Months or More
    
    Total(Dollars in thousands)as of December 31, 2003Fair
    
    
    
    
    
    Fair
    
    
    
    
    
    FairValue
    
    Unrealized Losses
    
    Value
    
    Unrealized Losses
    
    Value
    
    Unrealized LossesMortgage-backed securities  pass through
    
    $
    49,450
    
    
    $
    (307
    )
    
    
    
    
    
    
    
    
    
    $
    49,450
    
    
    $
    (307
    )Collateralized mortgage obligations
    
    
    48,581
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    48,581
    
    
    
    (123
    )Commercial mortgage-backed securities
    
    
    2,766
    
    
    
    (33
    )
    
    
    
    
    
    
    
    
    
    
    2,766
    
    
    
    (33
    )Asset-backed securities
    
    
    29,092
    
    
    
    (973
    )
    
    
    
    
    
    
    
    
    
    
    29,092
    
    
    
    (973
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    129,889
    
    
    $
    (1,436
    )
    
    
    
    
    
    
    
    
    
    $
    129,889
    
    
    $
    (1,436
    )
 As of September 30, 2004, there were 25 securities in an unrealized loss
position for greater than twelve months: 20 mortgage backed securities, 1
commercial mortgage-backed security, and 4 asset-backed securities. Of the
four asset backed securities in an unrealized loss position for a period
greater than twelve months, 1 was mortgage related and 3 were non-mortgage
related. As to the one mortgage-related asset backed security, management
believes that the unrealized loss associated with this investment is
attributable to changes in interest rates and spreads, and accordingly, the
unrealized losses are not other-than-temporary impairments. The 3
non-mortgage related asset-backed positions all relate to the same security,
DVI 2002 A-3A, having a fair value and unrealized loss of $4.3 million and $358
thousand, respectively, at September 30, 2004. This security is collateralized
by a pool of loans and leases on medical equipment and medical business loans,
is of the senior tranches of the securities issued with priority cash flow
rights, and is rated B1 by Moodys and CCC by Fitch, as of September 30, 2004. -25-




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Management believes that the $358 thousand of unrealized loss on this
security is attributable to uncertainty surrounding the bankruptcy of the
servicer, DVI, Inc. (DVI) and therefore the ability of the loans to be
adequately monitored and serviced, as well as uncertainty about the future
delinquency and default rates on the underlying loans. On February 24, 2004,
an agreement was finalized to transfer the servicing of DVI securities to U.S.
Bank, NA. Since December 2003, U.S. Bank personnel have been assisting DVI
with the servicing of these securities and underlying loans. As of the
nine-months ending September 30, 2004, and as a result of our senior tranche
position, 21.5% of our outstanding principal has been returned, and the average
life of the security is estimated to be approximately two years. Management
performs a stress test of the delinquencies on the underlying loans and the
recovery rates of defaulted loans, and under these assumptions that are more
conservative than current experience, Management projects that all interest and
principal can be recovered on this security if held to maturity. The value of
the DVI securities increased by 9.5 points or $600 thousand from June 30, 2004
to September 30, 2004 due to the improvement in delinquencies, default rates
and the repayment of underlying loans. 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 September 30, 2004. 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
    
    $
    22,323
    
    
    $
    (384
    )
    
    $
    
    
    
    $
    
    
    
    $
    22,323
    
    
    $
    (384
    )Collateralized mortgage
obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial
mortgage-backed
securities
    
    
    816
    
    
    
    (21
    )
    
    
    
    
    
    
    
    
    
    
    816
    
    
    
    (21
    )Asset-backed securities
    
    
    1,480
    
    
    
    (1
    )
    
    
    4,295
    
    
    
    (359
    )
    
    
    5,775
    
    
    
    (360
    )Corporate debt securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,619
    
    
    $
    (406
    )
    
    $
    4,295
    
    
    $
    (359
    )
    
    $
    28,914
    
    
    $
    (765
    )
 Total deposits increased to $612.9 million as of September 30, 2004, as
compared to $570.7 million as of December 31, 2003, an increase of $42.2
million or 7.4%. The increase in deposits is primarily attributable to the
opening of the Overland Park, Kansas office in December 2003 that contributed
$20.5 million in deposits and the opening of the Ventura, California office in
April 2004 that contributed $22.5 million of deposits through September 30,
2004. Deposits in other markets slightly decreased due to the Companys
emphasis on reducing the cost of higher rate sensitive deposits. Non-costing
deposits reached $35.4 million at September 30, 2004 compared with $29.2
million at December 31, 2003. This increase in non-costing deposits has
contributed to overall deposit costs remaining relatively stable despite rising
interest rates in 2004. The cost of deposits was 1.80% in the September 2004
quarter versus 1.76% in December 2003. Advances from the Federal Home Loan Bank (FHLB) of San Francisco
increased to $298.0 million at September 30, 2004, compared to $262.5 million
at December 31, 2003, a $35.5 million or 13.5% increase. During the quarter,
the Company used FHLB advances and the growth of deposits in order to support the increase in new loan fundings. For additional
information concerning limitations on FHLB advances, see Liquidity and Capital
Resources. -26-




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##### Table of Contents



The Due to broker account increased to $5.7 million at September 30,
2004, as compared to $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. As part of our hedging strategy and management of interest rate risk, the
Company enters into repurchase agreements, cash flow hedges and other
off-balance sheet arrangements. On April 20, 2004, the Company engaged in a
$14.0 million, three year fixed rate term repurchase agreement at rate of 2.5%
with Citigroup. Also, the Company engaged in a $10.0 million interest rate
swap on May 11, 2004 with a fixed rate of 4.90% and another $10.0 million
interest rate swap on October 4, 2004 with a fixed rate of 4.59%both with
Citigroup. On September 27, 2004, the Company announced that it completed a $10.0
million, thirty year 3.87% floating rate capital trust offering. The Capital
Securities were issued through a newly formed subsidiary, Harrington West
Capital Trust II, in a private transaction. The capital trust securities bear
an interest rate of three-month LIBOR plus 1.90% and will mature on October 7,
2034. The proceeds from the offering will be used for funding further growth
of its banking franchises in all of our markets. On September 16, 2004, the Company renegotiated its Line of Credit with
Harris Bank and U.S. Bank on more favorable terms to provide further capital
for expansion. Stockholders equity increased to $50.3 million at September 30, 2004, as
compared to $48.1 million at December 31, 2003, an increase of $2.2 million or
4.7%. The $2.2 million increase in stockholders equity was positively
influenced by $6.0 million of net income recognized during the nine-month
period. and $516 thousand of incentive stock options exercised. A $174
thousand decrease in the unrealized gains on securities available for sale and
hedge contracts and $4.1 million in special and regular dividends paid on the
Companys common stock offset these increases. 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 24.8% at September 30, 2004. At September 30, 2004, Los
Padres Banks liquid assets totaled approximately $148.1 million. In
general, the Banks liquidity is represented by cash and cash
equivalents and 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 September 30, 2004, the Company had $298.0 million in FHLB
advances and had $80.4 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 $72.7 million based on excess
collateral pledged at the FHLB as of September 30, 2004. -27-




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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
September 30, 2004, the total approved loan commitments outstanding amounted to
$129.1 million. Certificates of deposit scheduled to mature in one year or
less at September 30, 2004 totaled $394.3 million, and FHLB borrowings and
repurchase agreements scheduled to mature within the same period amounted to
$300.1 million. Management believes the Company has adequate resources to fund
all of its commitments and the Company could either adjust the rate of
certificates of deposit in order to retain deposits in changing interest rate
environments or replace such deposits with advances from the FHLB of San
Francisco, or other borrowings, if it proved cost-effective to do so. 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 September 30, 2004 and December 31, 2003, 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, 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 September 30, 2004, Los Padres Bank met the capital
requirements of a well capitalized institution under applicable OTS
regulations. At September 30, 2004, the Banks Tier 1 (Core) Capital Ratio was
6.34%, Total Risk-Based Capital Ratio was 10.65%, Tier 1 Risk-Based Capital
Ratio was 9.91% and Tangible Equity Ratio was 6.34%. 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 -28-




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balance sheet. 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. 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, senior controller,
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. 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 -29-




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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. 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. At September 30, 2004, the Company had $140.0 million of these swaps,
and a 1 basis point spread change is expected to have a $64 thousand pre-tax
mark-to-market value effect. 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 -30-




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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 September 30, 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, which contains
amounts that are based on managements evaluation of conditions that are not
directly measured in the determination of the specific allowances.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 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 -31-




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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;
    
    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 yield spreads
and their impact on customer behavior, our interest margins, and
market values;
    
    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; -32-




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
    
    our ability to access cost-effective funding; including
non-costing consumer and commercial deposits, and thereby change the
mix of our deposits;
    
    our ability to change the mix of our loan portfolio;
    
    our ability to diversify and grow our fee income;
    
    our ability to maintain low rate risk and high credit quality;
    
    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. 
 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 September 30, 2004, these prepayment assumptions varied
from 7.5% to 53.2% for fixed-rate mortgages and mortgage-backed securities and
varied from 4.7% to 49.0% for adjustable-rate mortgages and mortgage-backed
securities. -33-




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The following table sets forth at September 30, 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
    
    $
    38,103
    
    
    $
    27,747
    
    
    $
    15,314
    
    
    
    
    
    
    $
    (18,576
    )
    
    $
    (39,891
    )
    
    $
    (62,865
    )Market value gain (loss) of liabilities
    
    
    (24,056
    )
    
    
    (17,293
    )
    
    
    (8,820
    )
    
    
    
    
    
    
    9,137
    
    
    
    18,406
    
    
    
    27,634Market value gain (loss) of net assets
before interest rate contracts
    
    
    14,047
    
    
    
    10,454
    
    
    
    6,494
    
    
    
    
    
    
    
    (9,439
    )
    
    
    (21,485
    )
    
    
    (35,231
    )Market value gain (loss) of interest
rate contracts before tax
    
    
    (20,730
    )
    
    
    (13,247
    )
    
    
    (6,415
    )
    
    
    
    
    
    
    6,013
    
    
    
    11,673
    
    
    
    16,999Total change in MVPE (2)
    
    $
    (6,683
    )
    
    $
    2,793
    
    
    $
    79
    
    
    
    
    
    
    $
    (3,426
    )
    
    $
    (9,812
    )
    
    $
    (18,232
    )Change in MVPE as a percent of:MVPE(2)
    
    
    -7.36
    %
    
    
    3.07
    %
    
    
    0.09
    %
    
    
    
    
    
    
    -3.77
    %
    
    
    -10.80
    %
    
    
    -20.07
    %MVPE post shock ratio (3)
    
    
    -0.87
    %
    
    
    0.44
    %
    
    
    0.12
    %
    
    
    
    
    
    
    -0.18
    %
    
    
    -0.63
    %
    
    
    -1.27
    %
   (1)
    
    Assumes an instantaneous parallel change in interest rates at all
maturities.(2)
    
    Based on the Companys pre-tax tangible MVPE of $85.3 million at September
30, 2004.(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 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 -34-




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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:Changes in Securities and Use of Proceeds We have the right to defer the payment of interest on both of
the outstanding series of trust preferred securities. If we were
to exercise such deferral right, we are restricted during such
deferral period from paying any dividends on our common stock. 
 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. 
 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.
 -35-




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b) Reports on Form 8-K The Company filed a Current Report on Form 8-K with the SEC on July 21,
2004 under items 7 and 12 announcing a press release of its earnings for the
quarter and year-to-date period of June 30, 2004 and a cash dividend to holders
of record on July 30, 2004. The Company filed a Current Report on Form 8-K with the SEC on August 18,
2004 under items 5 and 7 announcing the issuance of $10.0 million of Trust
Preferred Securities. -36-




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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: November 12, 2004
    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) -37-