SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

OR

Commission File Number: 000-50066

HARRINGTON WEST FINANCIAL GROUP, INC.

610 Alamo Pintado Road
Solvang, California
(Address of principal executive offices)

93463
(Zip Code)

(805) 688-6644
(Registrant’s telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). o Yes x No

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

     5,258,234 shares of Common Stock, par value $0.01 per share, outstanding as of May 4, 2004.

HARRINGTON WEST FINANCIAL GROUP, INC.

INDEX

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PART 1-FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

HARRINGTON WEST FINANCIAL GROUP, INC.

The accompanying notes are an integral part of these condensed statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

Dollars in thousands, except share and per share data

The accompanying notes are an integral part of these condensed statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

The accompanying notes are an integral part of these condensed statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

The accompanying notes are an integral part of these condensed statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

(Dollars in thousands)

The accompanying notes are an integral part of these condensed statements.

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HARRINGTON WEST FINANCIAL GROUP, INC.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business of the Company – Harrington West Financial Group, Inc. (the “Company”) is a diversified, community-based financial institution holding company incorporated on August 29, 1995 to acquire and hold all of the outstanding common stock of Los Padres Bank, FSB (the “Bank”), a federally chartered savings bank which operates 12 banking facilities serving individuals and small to medium-sized businesses. Nine banking facilities are operated on the California Central Coast, one banking facility is located in Scottsdale Arizona, and two banking facilities in the Kansas City metropolitan area, which are operated as a division under the Harrington Bank brand. On May 3, 2004, a thirteenth banking facility opened in Ventura, California. The Company also owns Harrington Wealth Management Company, a trust and investment management company with $126.1 million in assets under management or custody, and 51% of Los Padres Mortgage Company, LLC.

In August 2003, the Bank entered into a joint venture agreement with Market Resources, Inc., the owner of numerous RE/MAX brokerage agencies in the Phoenix and Scottsdale, Arizona, metropolitan areas. Under the agreement, the Bank established Los Padres Mortgage, LLC as a 51%-owned mortgage-banking subsidiary. Los Padres Mortgage, LLC brokers single-family residential and commercial real estate loans primarily to third party investors. The Bank also has the opportunity to purchase select single-family and commercial real estate loans from Los Padres Mortgage, LLC for its portfolio. Los Padres Mortgage, LLC began operations in September 2002.

Basis of Presentation – The unaudited consolidated financial statements are condensed and do not contain all information required by accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) to be included in a full set of financial statements. The condensed consolidated financial statements include the Company and the accounts of its wholly owned subsidiaries.

All intercompany balances and transactions have been eliminated. Certain reclassifications have been made to make information comparable between years. The information furnished reflects all adjustments, which in the opinion of management are necessary for a fair statement of the financial position and the results of the operations of the Company. All such adjustments are of a normal and recurring nature.

The preparation of financial statements that are in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The unaudited consolidated interim financial statements of the Company and subsidiaries presented herein should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2003, included in the Annual Report on Form 10-K.

Allowance for Loan Losses - Allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).

The allowance is maintained at a level believed by management to be sufficient to absorb estimated probable credit losses. Management’s determination of the adequacy of the allowance is based on periodic evaluations of the credit portfolio and other relevant factors. This evaluation is inherently subjective, as it requires material estimates, including, among others, the amounts and timing of expected future cash flows on impaired loans, estimated losses on consumer loans and residential mortgages, and

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general amounts for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which may be susceptible to significant change.

In determining the adequacy of the allowance for loan losses, the Company makes specific allocations to impaired loans in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for Impairment of a Loan. Loans are identified as impaired when it is deemed probable that the borrower will be unable to meet the scheduled principal and interest payments under the terms of the loan agreement. Impairment is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, except that as a practical expedient, a creditor may measure impairment based on a loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

Allocations to non-homogenous loan pools are developed by loan type and risk factor and are based on historical loss trends and management’s judgment concerning those trends and other relevant factors. These factors may include, among others, trends in criticized assets, regional and national economic conditions, changes in lending policies and procedures, trends in local real estate values and changes in volumes and terms of the loan portfolio.

Homogenous (consumer and residential mortgage) loan allocations are made at a total portfolio level based on historical loss experience adjusted for portfolio activity and economic conditions.

Management believes the level of the allowance as of March 31, 2004 is adequate to absorb losses inherent in the loan portfolio.

2. SIX — FOR — FIVE STOCK SPLIT

On February 11, 2004, the Company announced that its Board of Directors approved a six-for-five stock split in the form of a 20% stock dividend. The fractional shares distributed in connection with this stock dividend were paid in cash based on the closing market price on the record date. The additional shares were distributed to shareholders of record as of February 25, 2004 on March 11, 2004. The effect of the stock split has been recognized and reflected in all share and per share amounts for all periods presented.

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3. EARNINGS PER SHARE

The following tables represent the calculation of earnings per share (“EPS”) for the periods presented.

4. FAIR VALUE OF OPTIONS

The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plan. Accordingly, no compensation cost has been recognized for its stock option plan.

Had compensation cost for the Company’s stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company’s net income and earnings per share for the quarter and years ended March 31 would have been changed to the pro forma amounts indicated below:

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The fair values of options granted under the Company’s fixed stock option plan were estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used: expected volatility of 32.7% and 29.0% for the three months ended March 31, 2004 and 2003, respectively; risk-free interest rates of 4.1% and 4.0% for the three months ended March 31, 2004 and 2003, respectively; and expected lives of 9 years for the three months ended March 31, 2004 and 2003. The weighted average fair values of the options granted during the three months ended were $5.96 and $3.01 for March 31, 2004 and 2003, respectively.

Item 2: Management’s Discussion and Analysis

Cautionary Statement Regarding Forward-Looking Statements.

     This Form 10-Q contains and incorporates by reference forward-looking statements about our financial condition, results of operations and business. These statements may include statements regarding projected performance for future periods. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” “intends,” “will,” “plans” or similar words or expressions. These forward-looking statements involve substantial risks and uncertainties. Some of the factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following:

•		we may experience higher defaults on our loan portfolio than we expect;
•		changes in management’s estimate of the adequacy of the allowance for loan losses;
•		changes in management’s valuation of our mortgage-backed and related securities portfolio and interest rate contracts;
•		increases in competitive pressure among financial institutions;
•		general economic conditions, either nationally or locally in areas in which we conduct or will conduct our operations, or conditions in financial markets may be less favorable than we currently anticipate;
•		our net income from operations may be lower than we expect;
•		we may lose more business or customers than we expect, or our operating costs may be higher than we expect;
•		changes in the interest rate environment and their impact on customer behavior and our interest margins;
•		the impact of repricing and competitors’ pricing initiatives on loan and deposit products;
•		our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place;
•		our ability to access cost-effective funding;
•		our ability to successfully complete our strategy to continue to grow our business in California, Kansas and Arizona;

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•		our returns from our securities portfolio may be lower than we expect; or
•		legislative or regulatory changes or changes in accounting principles, policies or guidelines may adversely affect our ability to conduct our business.

     Because these forward-looking statements are subject to risks and uncertainties, our actual results may differ materially from those expressed or implied by these statements. You are cautioned not to place undue reliance on our forward-looking statements, which speak only as of the date of this Form 10-Q. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and stockholder values of our common stock may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond our ability to control or predict.

     We do not undertake any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.

General

     The Company is a diversified, community-based, financial institution holding company headquartered in Solvang, California with its executive offices in Overland Park, Kansas. The Company conducts operations primarily through Los Padres Bank, FSB, a federally chartered savings bank, and its division located in the Kansas City metropolitan area, Harrington Bank. Los Padres Bank has two subsidiaries, Harrington Wealth Management Company and Los Padres Mortgage Company, LLC. Harrington Wealth Management Company is a wholly owned subsidiary with offices in Richmond, Indiana, Solvang, California and Mission, Kansas. Los Padres Mortgage Company, LLC is a 51% owned mortgage-banking subsidiary located in the Phoenix/Scottsdale metropolitan area.

     The Company is focused on providing its diversified products and personalized service approach in three distinct markets: (i) the central coast of California, (ii) the Kansas City metropolitan area and (iii) the Phoenix/Scottsdale metropolitan area. The Company has nine offices on the central coast of California, two offices in the Kansas City metropolitan area, and a community banking office in the Phoenix/Scottsdale, Arizona metropolitan area. In addition, in the third quarter of 2002, the Company established Los Padres Mortgage Company, LLC, a mortgage banking company engaged in a joint venture with the largest RE/MAX franchise in Arizona to broker single-family residential and commercial real estate loans in the Phoenix/Scottsdale metropolitan area. The Company opened its tenth Los Padres Bank office on the central coast of California in Ventura on May 3, 2004. Each of the Company’s markets has its own local independent management team operating under the Los Padres Bank or Harrington Bank names. The Company’s loan underwriting, corporate administration, and treasury functions are centralized to create operating efficiencies.

     Los Padres Bank and Harrington Bank provide an array of financial products and services for businesses and retail customers by attracting deposits from individuals and businesses and using these deposits, together with borrowed funds, to originate single-family and multi-family residential, commercial real estate, commercial business, and consumer loans.

     The Company also maintains a portfolio of highly liquid mortgage-backed and related securities as a means of managing its excess liquidity and enhancing its profitability. The Company utilizes various interest rate contracts as a means of managing its interest rate risk. The Company also operates Harrington Wealth Management Company, which provides trust and investment management services to individuals and small institutional clients by employing a customized asset allocation approach and investing predominantly in low fee, indexed mutual funds and exchange traded indexed funds.

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Critical Accounting Policies

     General. The following discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, and the notes thereto, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances; however, actual results may differ significantly from these estimates and assumptions which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

     The financial information contained in our consolidated financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when recognizing income or expense, recovering an asset or relieving a liability. We use historical loss factors to determine the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. We also calculate the fair value of our interest rate contracts and securities based on market prices and the expected useful lives of our depreciable assets. We enter into interest rate contracts that are classified as trading account assets or to accommodate our own risk management purposes. The interest rate contracts are generally interest swaps, caps, floors and futures contracts, although we could enter into other types of interest rate contracts. We value these contracts at fair value, using readily available, market quoted prices. We have not historically entered into derivative contracts which relate to credit, equity, commodity, energy or weather-related indices. Generally accepted accounting principles themselves may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. As of March 31, 2004, we have not created any special purpose entities to securitize assets or to obtain off-balance sheet funding. Although we have sold loans in past years, those loans have been sold to third parties without recourse, subject to customary representations and warranties.

     Allowance for loan losses. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two principles of accounting: (i) Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and estimable; and (ii) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures,” which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has four components: (i) an allocated allowance for specifically identified problem loans, (ii) a formula allowance for non-homogenous loans, (iii) an allocated allowance for large groups of smaller balance homogenous loans and (iv) an unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a model based on historical losses as an indicator of future losses and as a result could differ from the losses incurred in the future; however, since this history is updated with the most recent loss

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information, the differences that might otherwise occur may be mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, discounted cash flows, fair market value of collateral and secondary market information are all used to estimate those losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowances.

Financial Condition

     The Company’s total assets increased to $1.0 billion at March 31, 2004, as compared to $974.8 million at December 31, 2003, an increase of $30.1 million or 3.1%. The increase was partially attributable to growth in net loans to $533.1 million as of March 31, 2004, compared to $518.5 million at December 31, 2003, an increase of $14.6 million or 2.8%. The Company’s primary focus with respect to its lending operations has historically been the direct origination of single-family and multi-family residential, commercial real estate, business, and consumer loans. Although the Company continues to emphasize single-family residential loan products that meet its customers’ needs, the Company now generally brokers such loans on behalf of third party investors in order to generate fee income. As part of its strategic plan to diversify its loan portfolio, the Company has been increasing its emphasis on loans secured by commercial real estate, multi-family residential, and commercial and industrial loans. Single-family residential loan balances increased to $97.3 million at March 31, 2004, compared to $93.7 million at December 31, 2003, an increase of $3.6 million, while non-single-family loans as a group increased to $441.7 million at March 31, 2004, compared to $430.4 million at December 31, 2003, an increase of $11.3 million.

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     The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.

(1)		Includes loans secured by residential, land and commercial properties. At March 31, 2004, the Company had $10.7 million of construction loans secured by residential properties, $5.4 million of construction loans secured by land and $9.0 million of construction loans secured by commercial properties.
(2)		Includes loans collateralized by deposits and consumer line of credit loans.

     Securities classified as available for sale increased to $422.6 million at March 31, 2004, as compared to $398.7 million at December 31, 2003, an increase of $23.9 million or 6.0%. The Company manages the securities portfolio in order to enhance net interest income and net market value, as opportunities dictate, and deploys excess capital in investment assets until such time as the Company can reinvest into loans or other community banking assets that generate higher risk-adjusted returns.

     Total deposits increased to $584.8 million as of March 31, 2004, as compared to $570.7 million as of December 31, 2003, an increase of $14.1 million or 2.5%. The increase in deposits was attributable to the community banking offices in Kansas, which include the new Overland Park office, while deposits in other markets declined somewhat due to the Company’s emphasis on reducing the cost of highly rate sensitive deposits. The deposits of the community banking offices in Kansas were $101.4 million at March 31, 2004, compared to $76.6 million at December 31, 2003, an increase of $24.8 million or 32.4%.

     Advances from the Federal Home Loan Bank (“FHLB”) of San Francisco decreased to $256.5 million at March 31, 2004, compared to $262.5 million at December 31, 2003, a $6.0 million or 2.3% decrease. During the quarter, the Company reduced FHLB advances with the increased collection of deposits.

     The due to broker account increased to $21.6 million at March 31, 2004, as compared to $0.0 at December 31, 2003, as a result of the purchase of securities classified as available for sale which were purchased in the quarter but not settled until after quarter-end. In accordance with trade date accounting, the securities were included in available for sale assets with a corresponding liability in the due to broker account.

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     Stockholders’ equity increased to $49.3 million at March 31, 2004, as compared to $48.1 million at December 31, 2003, an increase of $1.2 million or 2.5%. The $1.2 million increase in stockholders’ equity was positively influenced by $2.1 million of net income recognized during the three-month period, an $824 thousand increase in unrealized gains on securities available for sale, and $353 thousand of incentive stock options exercised, offset against a $1.6 million decrease in the value of the effective portion of the interest rate swaps used as cash flow hedges to modify the interest rate sensitivity of the Banks short-term FHLB advances and $434 thousand in dividends paid on the Company’s common stock. With respect to the pay fixed rate, receive 3-month LIBOR swaps referred to above, the decrease in value was attributable to the general decrease in interest rates during the quarter.

Results of Operations

     The Company reported net income of $2.1 million for the three months ended March 31, 2004, as compared to $1.6 million for the three months ended March 31, 2003, an increase of $455 thousand or 28.4%. The increase in net income in the current quarter relative to the comparable period in 2003 primarily reflects the significant increase in net interest income and income from trading assets during the quarter. These increases were offset by a decrease in banking fee income due to a slowdown in mortgage refinancings and prepayment penalty fees and by higher administrative costs to support the growth in banking fees and related infrastructure. The company’s overall tax rate declined in the quarter due to the apportioning of state income tax to states with lower income tax rates. On a diluted earnings per share basis, the Company earned $.37 per share for the three months ended March 31, 2004, compared to $.30 per share for the three months ended March 31, 2003.

     The Company’s net interest income after provision for loan losses increased by $1.1 million or 18.2% to $6.9 million during the three months ended March 31, 2004 over the prior comparable period in 2003. The increase in the Company’s net interest income during both periods reflected the continued growth in its interest-earning assets and its increased focus on higher spread-earning loans, primarily commercial and industrial, commercial real estate, and multi-family residential real estate loans. The net interest margin decreased by 11 basis points to 2.95% during the three months ended March 31, 2004, when compared to the same period in 2003 but has stayed relatively constant over the last year near the 3% mark. The net interest margin declined primarily due to the $81.9 million in average growth in lower margin investment securities and lower market rates, with the total yield on investments decreasing by 48 basis points from the March 2004 quarter to the March 2003 quarter. The investment growth was complimented by $64.1 million in average loan growth, with the total yield on loans declining by 35 basis points with the lower market rates. Over the same period, the cost of interest-bearing liabilities decreased by 38 basis points. The total average deposits increased by $41.9 million and total deposit cost decreased by 28 basis points or $131 thousand when comparing the March 2004 quarter to the same quarter a year ago.

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     The following table sets forth, for the periods presented, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income before provision for loan losses; (iv) interest rate spread; and (v) net interest margin. No tax equivalent adjustments were made during the periods presented. Information is based on average daily balances during the presented periods.

(1)		Includes non-accrual loans. Interest income includes fees earned on loans originated.
(2)		Consists of securities classified as available for sale and held to maturity and trading account assets.
(3)		Consists of cash and due from banks and federal funds sold.
(4)		Interest on FHLB advances is net of hedging costs. Interest rate swaps are used to hedge the short-term repricing characteristics of the floating-rate FHLB advances.
(5)		Consists of other debt and a note payable under a revolving line of credit.

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     The following table sets forth the effects of changing rates and volumes on net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in rates (changes in rate multiplied by prior volume); (ii) effects on interest income attributable to changes in volume (changes in volume multiplied by prior rate); (iii) changes in rate/volume (change in rate multiplied by change in volume).

(1)		Consists of securities classified as available for sale and held for maturity and trading account assets.
(2)		Consists of cash and due from banks and federal funds sold.
(3)		Interest on FHLB advances is net of cash flow hedging costs. Interest rate swaps are used to hedge the short-term repricing characteristics of the floating-rate advances.
(4)		Consists of other debt and a note payable under a revolving line of credit.

     The Company reported interest income of $12.2 million for the three months ended March 31, 2004, compared to $11.4 million for the three months ended March 31, 2003, an increase of $889 thousand or 7.8%. The primary reason for the increase during the period was the increase in the volume of interest-earning assets in the periods, which was partially offset by a decrease in the average rate on interest-earning assets.

     The Company reported interest expense of $5.2 million for the three months ended March 31, 2004, compared to $5.1 million for the three months ended March 31, 2003, an increase of $87 thousand or 1.7%. The slight increase in interest expense during the period was attributable to an increase in the volume of interest-bearing liabilities and a decrease in the average rate on interest-bearing liabilities as a result of the downward repricing of interest bearing-liabilities during the respective periods.

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     The Company recorded its provision for loan losses of $90 thousand during the three months ended March 31, 2004, compared to $360 thousand for the three months ended March 31, 2003, a decrease of $270 thousand. The provision reflects the reserves required based upon, among other things, the $14.6 million in loan growth since December 31, 2003 and the Company’s analysis of the composition, credit quality and growth of its commercial real estate and commercial and industrial loan portfolios. At March 31, 2004, the Company had $154 thousand or .03% of total loans of non-performing assets, as compared to $12 thousand or 0.0% of total loans as of December 31, 2003.

     The Company’s total other income, which includes gain and losses on securities and extinguishment of debt, loans, deposits, borrowings, and trading assets plus banking fee income amounted to $1.1 million for the quarter ending March 31, 2004 compared to $1.2 during the same quarter last year, a decrease of $70 thousand or 6.0%. The decrease in other income was primarily attributable a decrease in mortgage brokerage and prepayment fees as refinancings slowed markedly.

     Income from trading assets was $338 thousand for the three months ended March 31, 2004, compared to a gain of $576 thousand for the three months ended March 31, 2003, a decrease of $238 thousand or 41.3%. In the March 2004 quarter, the Company sold a $6.0 million CMBS commercial mortgage backed security for a realized gain of $434 thousand dollars and had a net loss of $96 thousand dollars associated with the realized and unrealized gains and losses for securities held in the trading portfolio. Related to the gain on the sale of the securities during the March 2003 quarter, the Company paid-off $15.0 million of fixed rate FHLB advances with a coupon rate of 5.25% and a remaining maturity of 10 months and incurred a $531 thousand market-based prepayment loss on the extinguishment of the debt for a net gain of $45 thousand.

     Banking fee income amounted to $760 thousand for the quarter ending March 31, 2004 compared to $1.0 million during the same quarter last year, a decrease of $264 thousand or 25.8%. Loan fees decreased due to the slowdown of refinancing activity, which decreased mortgage brokerage fees by $214 thousand or 43.0% and prepayment penalties decreased by $71 thousand or 65.7% when comparing the March 2004 quarter to the March 2003 quarter. Trust fees from the Company’s subsidiary Harrington Wealth Management were the main source for the growth in banking fee income, contributing $145 thousand for the three months ending March 2004, an increase of $28 thousand or 23.6%, compared to the same quarter last year.

     The Company’s total other expenses were $4.7 million during the three months ended March 31, 2004, as compared to $4.3 million for the three months ended March 31, 2003, an increase of $446 thousand or 10.4%. The increase in expenses was largely due to the expenses associated with the initial start-up expenses for the Company’s new banking operations in Overland Park, Kansas and Ventura, California and higher costs for workers’ compensation insurance for the California operations and other insurance coverages, as well as an increase in general corporate expenses associated with the Company being a public company and the growth in banking operations.

     Increasing net income for the March 2004 quarter was the reduction in the effective tax rate for the March 31, 2004 quarter to 37.6% compared to 41.5% in the March 31, 2003 quarter that is due to the taxable income being earned and apportioned to states with lower tax rates. The Company expects the tax rate in future quarters to be approximately 40.7%.

Liquidity and Capital Resources

     Liquidity. The liquidity of Los Padres Bank, as measured by the ratio of cash, cash equivalents (not committed, pledged or required to liquidate specific liabilities), investments and qualifying mortgage-backed securities to the sum of total deposits plus borrowings payable within one year, was 32.9% at March 31, 2004. At March 31, 2004, Los Padres Bank’s “liquid” assets totaled approximately $183.6 million.

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     The Company’s liquidity, represented by cash and cash equivalents, is a product of its operating, investing and financing activities. The Company’s primary sources of internal liquidity consist of deposits, prepayments and maturities of outstanding loans and mortgage-backed and related securities, maturities of short-term investments, sales of mortgage-backed and related securities and funds provided from operations. The Company’s external sources of liquidity consist of borrowings, primarily advances from the FHLB of San Francisco, securities sold under agreements to repurchase and a revolving line of credit loan facility, which it maintains with two banks. At March 31, 2004, the Company had $256.5 million in FHLB advances and had $95.2 million of additional borrowing capacity with the FHLB of San Francisco based on a 35% of total Bank asset limitation. Borrowing capacity from the FHLB is further limited to $42.7 million based on excess collateral pledged at the FHLB as of March 31, 2004.

     The Company has a revolving line of credit with a maximum borrowing capacity of $15.0 million with a maturity of September 30, 2007. We anticipate that we will utilize the note payable as growth opportunities develop and it also provided additional liquidity for internal company growth. At March 31, 2004 and December 31, 2003, the Company did not have a balance due on the revolving line of credit.

     Liquidity management is both a daily and long-term function of business management. Excess liquidity is generally used to pay down short-term borrowings. On a longer-term basis, the Company maintains a strategy of investing in various mortgage-backed and related securities and loans. At March 31, 2004, the total approved loan commitments outstanding amounted to $34.6 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2004 totaled $365.0 million and FHLB borrowings and repurchase agreements scheduled to mature within the same period amounted to $236.5 million. Management believes that the Company has adequate resources to fund all of its commitments and that the Company could either adjust the rate of certificates of deposit in order to retain deposits in changing interest rate environments or replace such deposits with advances from the FHLB of San Francisco if it proved to be cost-effective to do so.

     A substantial source of the Company’s cash flow from which it services its debt and capital trust securities, pays its obligations, and pays dividends to its shareholders is the receipt of dividends from Los Padres Bank. The availability of dividends from Los Padres Bank is limited by various statutes and regulations. In order to make such dividend payment, Los Padres Bank is required to provide 30 days advance notice to the Office of Thrift Supervision (“OTS”), during which time the OTS may object to such dividend payment. It is possible, depending upon the financial condition of Los Padres Bank and other factors, the OTS could object to the payment of dividends by Los Padres Bank on the basis that the payment of such dividends is an unsafe or unsound practice.

     Capital Resources. Federally insured savings institutions such as Los Padres Bank are required to maintain minimum levels of regulatory capital. Under applicable regulations, an institution is well capitalized if it has a total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5.0%, with no written agreement, order, capital directive, prompt corrective action directive or other individual requirement by the OTS to maintain a specific capital measure. An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8.0% and a Tier 1 risk-based capital ratio of at least 4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a composite rating of “1”). The regulation also establishes three categories for institutions with lower ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At March 31, 2004, Los Padres Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations. At March 31, 2004, the Bank’s Tier 1 (Core) Capital Ratio was 6.1%, Total Risk-Based Capital Ratio was 10.8%, Tier 1 Risk-Based Capital Ratio was 10.0% and Tangible Equity Ratio was 6.1%.

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Asset and Liability Management

     In general, financial institutions are negatively affected by an increase in interest rates to the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. The lending activities of savings institutions have historically emphasized the origination of long-term, fixed-rate loans secured by single-family residences, and the primary source of funds of such institutions has been deposits, which largely mature or are subject to repricing within a shorter period of time. This factor has historically caused the income and market value of portfolio equity (“MVPE”) of savings institutions to be more volatile than other financial institutions.

     MVPE is defined as the net present value of the cash flows from an institution’s existing assets, liabilities and off-balance sheet instruments. The MVPE is estimated by valuing our assets, liabilities and off-balance sheet instruments under various interest rate scenarios. The extent to which assets gain or lose value in relation to the gains or losses of liabilities determines the appreciation or depreciation in equity on a market value basis. MVPE analysis is intended to evaluate the impact of immediate and sustained interest rate shifts of the current yield curve upon the market value of the current balance sheet. While having liabilities that reprice more frequently than assets is generally beneficial to net interest income and MVPE in times of declining interest rates, such an asset/liability mismatch is generally detrimental during periods of rising interest rates.

     The Company’s management believes that its asset and liability management strategy, as discussed below, provides it with a competitive advantage over other financial institutions. The Company believes that its ability to hedge its interest rate exposure through the use of various interest rate contracts provides it with the flexibility to acquire loans structured to meet its customer’s preferences and investments that provide attractive net risk-adjusted spreads, regardless of whether the customer’s loan or our investment is fixed-rate or adjustable-rate or short-term or long-term. Similarly, the Company can choose a cost-effective source of funds and subsequently engage in an interest rate swap or other hedging transaction so that the interest rate sensitivities of its interest-earning assets and interest-bearing liabilities are more closely matched.

     The Company’s asset and liability management strategy is formulated and monitored by the board of directors of Los Padres Bank. The Board’s written policies and procedures are implemented by the Asset and Liability Committee of Los Padres Bank (“ALCO”), which is comprised of Los Padres Bank’s chief executive officer, president, chief financial officer, director of financial reporting and four non-employee directors of Los Padres Bank. The ALCO meets at least eight times a year to review the sensitivity of Los Padres Bank’s assets and liabilities to interest rate changes, investment opportunities, the performance of the investment portfolios, and prior purchase and sale activity of securities. The ALCO also provides guidance to management on reducing interest rate risk and on investment strategy and retail pricing and funding decisions with respect to Los Padres Bank’s overall asset and liability composition. The ALCO reviews Los Padres Bank’s liquidity, cash flow needs, interest rate sensitivity of investments, deposits and borrowings, core deposit activity, current market conditions and interest rates on both a local and national level in connection with fulfilling its responsibilities.

     The ALCO regularly reviews interest rate risk with respect to the impact of alternative interest rate scenarios on net interest income and on Los Padres Bank’s MVPE. The Asset and Liability Committee also reviews analyses concerning the impact of changing market volatility, prepayment forecast error, and changes in option-adjusted spreads and non-parallel yield curve shifts.

     In the absence of hedging activities, the Company’s MVPE would decline as a result of a general increase in market rates of interest. This decline would be due to the market values of the Company’s assets being more sensitive to interest rate fluctuations than are the market values of its liabilities due to its investment in and origination of generally longer-term assets which are funded with shorter-term liabilities. Consequently, the elasticity (i.e., the change in the market value of an asset or liability as a result of a change in interest rates) of the Company’s assets is greater than the elasticity of its liabilities.

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     Accordingly, the primary goal of the Company’s asset and liability management policy is to effectively increase the elasticity of its liabilities and/or effectively contract the elasticity of its assets so that the respective elasticities are matched as closely as possible. This elasticity adjustment can be accomplished internally by restructuring the balance sheet or externally by adjusting the elasticities of assets and/or liabilities through the use of interest rate contracts. The Company’s strategy is to hedge either internally through the use of longer-term certificates of deposit or less sensitive transaction deposits and FHLB advances or externally through the use of various interest rate contracts.

     External hedging generally involves the use of interest rate swaps, caps, floors, options and futures. The notional amount of interest rate contracts represents the underlying amount on which periodic cash flows are calculated and exchanged between counterparties. However, this notional amount does not necessarily represent the principal amount of securities that would effectively be hedged by that interest rate contract.

     In selecting the type and amount of interest rate contract to utilize, the Company compares the elasticity of a particular contract to that of the securities to be hedged. An interest rate contract with the appropriate offsetting elasticity could have a notional amount much greater than the face amount of the securities being hedged.

     The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001. SFAS No. 133 requires that an entity recognize all interest rate contracts as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, an interest rate contract may be specifically designated as a fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure. The accounting for changes in the fair value of an interest rate contract (that is, gains and losses) depends on the intended use of the interest rate contract and the resulting designation. To qualify for hedge accounting, the Company must show that, at the inception of the interest rate contracts and on an ongoing basis, the changes in the fair value of the interest rate contracts are expected to be highly effective in offsetting related changes in the cash flows of the hedged liabilities. The Company has entered into various interest rate swaps for the purpose of hedging certain of its short-term liabilities. These interest rate swaps qualify for hedge accounting. Accordingly, the effective portion of the accumulated change in the fair value of the cash flow hedges is recorded in a separate component of stockholders’ equity, net of tax, while the ineffective portion is recognized in earnings immediately.

     The Company has also entered into various total return swaps where cash flows are based on the level and changes in the yield spread on investment grade commercial mortgage backed security indexes relative to similar duration LIBOR swap rates. These swaps do not qualify for hedge accounting treatment and are included in the trading account assets and are reported at fair value with realized and unrealized gains and losses on these instruments recognized in income (loss) from trading account assets.

Item 3: Quantitative and Qualitative Disclosures about Market Risk

     The OTS requires each thrift institution to calculate the estimated change in the institution’s MVPE assuming an instantaneous, parallel shift in the Treasury yield curve of 100 to 300 basis points either up or down in 100 basis point increments. The OTS permits institutions to perform this MVPE analysis using their own internal model based upon reasonable assumptions.

     In estimating the market value of mortgage loans and mortgage-backed securities, the Company utilizes various prepayment assumptions, which vary, in accordance with historical experience, based upon the term, interest rate, prepayment penalties, if applicable, and other factors with respect to the underlying loans. At March 31, 2004, these prepayment assumptions varied from 7.4% to 57.8% for fixed-rate mortgages and mortgage-backed securities and varied from 6.9% to 27.7% for adjustable-rate mortgages and mortgage-backed securities.

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     The following table sets forth at March 31, 2004 the estimated sensitivity of Los Padres Bank’s MVPE to parallel yield curve shifts using the Company’s internal market value calculation. The table demonstrates the sensitivity of the Company’s assets and liabilities both before and after the inclusion of its interest rate contracts.

     On April 2, 2004, the Company engaged in a $14.0 million, three year fixed rate term repurchase agreement at rate of 2.5% to further reduce interest rate risk.

     The table set forth above does not purport to show the impact of interest rate changes on the Company’s equity under generally accepted accounting principles. Market value changes only impact the Company’s income statement or the balance sheet to the extent the affected instruments are marked to market, and over the life of the instruments as an impact on recorded yields.

Item 4: Controls and Procedures

     As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There have been no significant changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Disclosure controls and procedures are Company controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the

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Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

PART II — OTHER INFORMATION

Item 1: Legal Proceedings

The Company is involved in various legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the Registrant.

Item 2: Changes in Securities and Use of Proceeds

None.

Item 3: Defaults Upon Senior Securities

Not applicable.

Item 4: Submission of Matters to a Vote of Security Holders

Not applicable.

Item 5: Other Information

Not applicable.

Item 6: Exhibits and Reports on Form 8-K

a) Exhibits

b) Reports on Form 8-K

     The Company filed a Current Report on Form 8-K with the SEC on January 22, 2004 under items 7 and 9 announcing a press release of its earnings for the year and quarter ended December 31, 2003.

     The Company filed a Current Report on Form 8-K with the SEC on February 12, 2004 under items 7 and 12 announcing a six for five stock split in the form of a stock dividend.

     The Company filed a Current Report on Firm 8-K with the SEC on March 5, 2004 under items 5 and 7 that contained a presentation used for investor presentations.

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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.

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