HARRINGTON WEST FINANCIAL GROUP INC/CA - 10-Q Quarterly Report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
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.
(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		48-1175170 (I.R.S. Employer Identification No.)

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

93463
(Zip Code)

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

(Former name, former address and former fiscal year, if changed since last report)

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:

4,327,951 shares of Common Stock, par value $0.01 per share, outstanding as of May 9, 2003.

TABLE OF CONTENTS


PART 1-FINANCIAL INFORMATION
Item 1: Condensed Consolidated Financial Statements
	Condensed Consolidated Statements of Financial Condition as of March 31, 2003 (Unaudited) and December 31, 2002
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002 (Unaudited)
	Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2003 and Year Ended 2002 (Unaudited)
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (Unaudited)
	Notes to Unaudited Condensed Consolidated Financial Statements
Item 2: Management’s Discussion and Analysis
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Item 4: Controls and Procedures
PART II — OTHER INFORMATION
Item 1: Legal Proceedings
Item 2: Changes in Securities and Use of Proceeds
Item 3: Defaults Upon Senior Securities
Item 4: Submission of Matters to a Vote of Security Holders
Item 5: Other Information
Item 6: Exhibits and Reports on Form 8-K
	SIGNATURES
	CERTIFICATIONS
EXHIBIT 99.1

HARRINGTON WEST FINANCIAL GROUP, INC.

INDEX

Part I — Financial Information


		Page

Item 1.	Condensed Consolidated Financial Statements	2
	Condensed Consolidated Statements of Financial Condition as of March 31, 2003 (Unaudited) and December 31, 2002	3
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2003 and 2002 (Unaudited)	4
	Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Three Months Ended March 31, 2003 and Year Ended 2002 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 (Unaudited)	6
	Notes to Unaudited Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	18
Item 4.	Controls and Procedures	19
Part II — Other Information
Item 1.	Legal Proceedings	20
Item 2.	Changes in Securities and Use of Proceeds	20
Item 3.	Defaults upon Senior Securities	20
Item 4.	Submission of Matters to a Vote of Security Holders	20
Item 5.	Other Information	21
Item 6.	Exhibits and Reports on Form 8-K	21
Signatures		22
Certification		23

PART 1-FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION


(Dollars in thousands, except share data)
		March 31, 2003			December 31, 2002

		(unaudited)
ASSETS
Cash and cash equivalents		$	12,348		$	19,212
Trading account assets			2,061			1,934
Securities available for sale			313,965			324,530
Securities held to maturity			2,334			2,368
Loans receivable, (net of allowance for loan losses of $4,157 and $3,797 for March 31, 2003 and December 31, 2002, respectively)			475,241			448,050
Accrued interest receivable			3,411			3,526
Premises and equipment, net			5,382			4,469
Prepaid expenses and other assets			1,389			1,761
Investment in FHLB stock, at cost			12,745			11,750
Income taxes receivable			—			252
Deferred tax asset			871			1,187
Goodwill			3,981			3,981
Core deposit intangible, net			1,263			1,311

TOTAL ASSETS		$	834,991		$	824,331

Deposits:
	Interest bearing		505,094			505,165
	Non-interest bearing		20,026			20,106

Total Deposits			525,120			525,271
FHLB advances			239,000			235,000
Securities sold under repurchase agreements			1,056			517
Note payable			11,600			11,300
Accounts payable and accrued expenses			13,679			9,771
Income taxes payable			603			—

TOTAL LIABILITIES			791,058			781,859

STOCKHOLDERS’ EQUITY Preferred stock, $.01 par value: 1,000,000 shares authorized:
none issued and outstanding
Common stock, $.01 par value; 9,000,000 shares authorized:
4,327,951 shares issued and outstanding as of March 31, 2003 and December 31, 2002			43			43
Additional paid-in capital			30,641			30,641
Retained earnings			15,226			13,795
Accumulated other comprehensive income, net of tax of $(1,680) and $(1,759) at March 31, 2003 and December 31, 2002, respectively			(1,977	)		(2,007	)

Total Stockholders’ Equity			43,933			42,472

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY		$	834,991		$	824,331

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

HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME


Dollars in thousands, except per share data
		Three months ended
		March 31,

		2003			2002

Interest income
	Interest on loans	$	7,955		$	8,219
	Interest and dividends on securities		3,403			2,578

Total interest income			11,358			10,797

Interest expense
	Interest on deposits		2,666			4,206
	Interest on FHLB advances and other borrowings		2,455			1,665

Total interest expense			5,121			5,871

NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES			6,237			4,926
PROVISION FOR LOAN LOSSES			360			200

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES			5,877			4,726

Other income (loss)
	Income (loss) from trading assets		576			23
	Loss on extinguishment of debt		(531	)		—
	Other income gain (loss)		89			(6	)
	Banking fee income		1,024			532

Total other income			1,158			549

Other expenses
	Salaries & employee benefits		2,391			1,915
	Premises & equipment		652			494
	Insurance premiums		68			58
	Marketing		99			61
	Computer services		160			129
	Consulting fees		247			145
	Office expenses & supplies		176			144
	Other		500			487

Total other expenses			4,293			3,433

Income before income taxes			2,742			1,842
Income taxes			1,138			757

NET INCOME		$	1,604		$	1,085

Basic earnings per share		$	.37		$	.32

Diluted earnings per share		$	.36		$	.31

Basic weighted average shares outstanding			4,327,951			3,354,336

Diluted weighted average shares outstanding			4,487,908			3,467,037

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

HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME


							Additional								Other			Total
			Common		Stock		Paid-in		Retained			Comprehensive			Comprehensive			Shareholders’
			Stock		Amt		Capital		Earnings			Income			Income			Equity

Balance, December 31, 2001				3,354,336	$	34	$	20,305	$	9,175					$	630		$	30,144
Comprehensive income										5,045		$	5,045						5,045
	Net income
Other comprehensive income, net of tax
	Unrealized gains on securities												671			671			671
	Effective portion in change in fair value of cash flow hedges												(3,308	)		(3,308	)		(3,308	)

Total comprehensive income												$	2,408

Initial public offering				973,615		9		10,212											10,221
Stock options								124											124
Dividends on common stock										(425	)								(425	)

Balance, December 31, 2002				4,327,951		43		30,641		13,795						(2,007	)		42,472
Comprehensive income										1,604			1,604						1,604
Net income
Other comprehensive income, net of tax
	Unrealized gains on securities												210			210			210
	Effective portion in change in fair value of cash flow hedges												(180	)		(180	)		(180	)

		Total comprehensive income										$	1,634

Dividends on common stock										(173	)								(173	)

Balance, March 31, 2003				4,327,951	$	43	$	30,641	$	15,226						($1,977	)	$	43,933

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

HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


(Dollars in thousands, except share data)
			Three months ended
			March 31,

			2003			2002

DISCLOSURE OF RECLASSIFICATION AMOUNT:
	Unrealized holding gains arising during period,
		net of tax expense of $319 and $106 for	$	450		$	147
		March 31, 2003 and 2002, respectively
Less: Reclassification adjustment for gains included
		in net income, net of tax expense of $170 and
		$0 for March 31, 2003 and 2002, respectively		(240	)		—

Net unrealized gain on securities, net of tax expense of
		$149 and $106 for March 31, 2003 and 2002, respectively	$	210		$	147

Unrealized net (loss) gain on cash flow hedges, net of tax
		(benefit) expense of $(135) for March 31, 2003 and $280 for
		March 31, 2002	$	(180	)	$	381
Less: Reclassification adjustment for net gains on cash flow hedges included in net income, net of tax
		expense of $0 for March 31, 2003 and $5 for
		March 31, 2002		—			6

Net unrealized loss on cash flow hedges			$	(180	)	$	387

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

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


Dollars in thousands
					Three months ended			Three months ended
					March 31,			March 31,
					2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	1,604		$	1,085
	Adjustments to reconcile net income to net cash provided by operating activities:
			Accretion of deferred loan fees and costs			(551	)		(189	)
			Depreciation and amortization			266			571
			Amortization of premiums and discounts on loans receivable and securities			1,336			1,044
			Provision for loan losses			360			200
			Activity in securities held for trading			(538	)		528
			FHLB stock dividend			(145	)		(118	)
			Decrease in accrued interest receivable			115			11
			Increase in income taxes payable			855			762
			Deferred income taxes			316			(58	)
			Decrease in prepaid expenses			370			311
			Decrease in accounts payable			(826	)		(1,127	)

				Net cash provided by operating activities		3,162			3,020

CASH FLOWS FROM INVESTING ACTIVITIES:
	Net (increase) decrease in loans receivable					(27,114	)		14,535
	Proceeds from sales of securities available for sale					11,649			0
	Principal paydowns on securities available for sale					48,750			21,454
	Principal paydowns on securities held to maturity					30			103
	Purchases of securities available for sale					(46,108	)		(28,354	)
	Purchase of premises and equipment					(1,130	)		(569	)
	(Purchase) sale of FHLB Stock					(850	)		2,300

				Net cash (used in) provided by investing activities		(14,773	)		9,469

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net increase (decrease) in deposits					81			(15,153	)
	Increase (decrease) in securities sold under agreements to repurchase					539			(560	)
	Increase in FHLB advances					4,000			5,000
	Advances on note payable					300			300
	Dividends paid on common stock					(173	)		(90	)

	Net cash provided by (used in) financing activities					4,747			(10,503	)

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS						(6,864	)		1,985
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD						19,212			11,107

CASH AND CASH EQUIVALENTS, END OF PERIOD					$	12,348		$	13,093

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION — Cash paid during the period for:
		Interest			$	4,878		$	5,757
		Income Taxes			$	0		$	425

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

HARRINGTON WEST FINANCIAL GROUP, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business of the Company — Harrington West Financial Group, Inc. (the “Company”) is a diversified, community-based financial institution holding company incorporated on August 29, 1995 to acquire and hold all of the outstanding common stock of Los Padres Bank, FSB (the “Bank”), a federally chartered savings bank which operates 11 branches 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 one banking facility is located in Shawnee Mission, Kansas, and operated as a division under the Harrington Bank brand. The Company also owns Harrington Wealth Management Company, a trust and investment management company with $123 million in assets under management or custody, and 51% of Los Padres Mortgage Company.

On November 3, 2001, the Bank purchased from Harrington Bank, FSB, a $75 million bank located in Shawnee Mission, Kansas, in the heart of the Kansas City metropolis.

In August 2002, the Bank entered into a joint venture agreement with Market Resources, Inc., the owner of numerous 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 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, 2002, included in the Annual Report on Form 10-K.

2. EARNINGS PER SHARE

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


	Three months ended March 31, 2003

	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount

Basic EPS	$	1,604		4,327,951	$	.37
Effect of dilutive stock options				159,957		(.01	)

Diluted EPS	$	1,604		4,487,908	$	.36


	Three months ended March 31, 2002

	Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount

			(unaudited)
Basic EPS	$	1,085		3,354,336	$	.32
Effect of dilutive stock options				112,701		(.01	)

Diluted EPS	$	1,085		3,467,037	$	.31

3. 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 years ended December 31 would have been changed to the pro forma amounts indicated below:


				Three months ended

				March 31, 2003		March 31, 2002

Pro Forma Results
	Net income:
		As reported		$	1,604	$	1,085
		Pro forma		$	1,593	$	1,062
		Earnings per share — basic:
			As reported	$	0.37	$	0.32
			Pro forma	$	0.37	$	0.32
		Earnings per share — diluted:
			As reported	$	0.36	$	0.31
			Pro forma	$	0.35	$	0.31

The fair values of options granted under the Company’s fixed stock option plan were estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions used: expected volatility of 29.02% and 27.58% for the three months ended March 31, 2003 and 2002, respectively; risk-free interest rates of 3.95% and 4.89% for the three months ended March 31, 2003 and 2002, respectively; and expected lives of 9 years for the three months ended March 31, 2003

and 2002, respectively. The fair values of the 62,950 and 60,525 options granted in the three months ended March 31, 2003 and 2002 were $3.61 and $3.74, respectively.

Item 2: Management’s Discussion and Analysis

Cautionary Statement Regarding Forward-Looking Statements

A number of the presentations and disclosures in this Form 10-Q, including, without limitation, statements regarding the level of allowance for loan losses, the rate of delinquencies and amounts of charge-offs, and the rates of loan growth, and any statements preceded by, followed by or which include the words “may,” “could,” “should,” “will,” “would,” “hope,” “might,” “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “assume” or similar expressions constitute forward-looking statements. These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to our beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business, including our expectations and estimates with respect to our revenues, expenses, earnings, return on equity, return on assets, efficiency ratio, asset quality and other financial data and capital and performance ratios.

Although we believe that the expectations reflected in our forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors (some of which are beyond our control). The following factors, among others, could cause our financial performance to differ materially from our goals, plans, objectives, intentions, expectations and other forward-looking statements:

• the strength of the United States economy in general and the strength of the regional and local economies within our markets in California, Kansas and Arizona;

• adverse changes in the local real estate market, as most of the Company’s loans are concentrated in the central coast of California and a substantial portion of these loans have real estate as collateral;

• the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

• inflation, interest rate, market and monetary fluctuations;

• adverse changes in asset quality and the resulting credit risk-related losses and expenses;

• our timely development of new products and services in a changing environment, including the features, pricing and quality of our products and services compared to the products and services of our competitors;

• the willingness of users to substitute competitors’ products and services for our products and services;

• the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

• technological changes;

• changes in consumer spending and savings habits; and

• regulatory or judicial proceedings.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

We do not intend to update our forward-looking information and statements, whether written or oral, to reflect change. All forward-looking statements attributable to us are expressly qualified by these cautionary statements.

General

Harrington West Financial Group, Inc. (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 in the Kansas City metropolitan area, Harrington Bank.

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, one office in Mission, Kansas and a new community banking office in the Phoenix/Scottsdale, Arizona metropolitan area which opened in November 2002. It has also established in the September 2002 quarter, Los Padres Mortgage, LLC, a mortgage banking company, which is 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 will open a second Harrington Bank office in the Kansas City metropolitan area in the latter half of 2003. Each of the Company’s markets has its own local independent management team operating under the Los Padres or Harrington names. The Company’s loan underwriting, corporate administration, and treasury functions are centralized in Solvang, California to create operating efficiencies.

Los Padres Bank provides 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.

On November 12, 2002, the Company completed its initial public offering. An aggregate of 1,120,000 shares were sold to the public at $12.00 per share, comprised of 973,615 shares sold by the Company and 146,385 shares sold by certain stockholders of the Company.

Financial Condition

The Company’s total assets increased to $835.0 million at March 31, 2003, as compared to $824.3 million at December 31, 2002, an increase of $10.7 million or 1.3%. The increase was primarily attributable to an increase loan balances to $475.2 million at March 31, 2003, compared to $448.1 million at December 31, 2002, an increase of $27.2 million or 6.1%. The Company’s primary focus with respect to its lending operations has historically been the direct origination of single-family residential, multi-family residential, commercial real estate, and consumer loans. While we continue to emphasize single-family residential loan products that meet our customers’ needs, we now generally broker such loans on behalf of third party investors in order to generate fee income and have been increasing our emphasis on loans secured by commercial real estate, multi-family, and commercial and industrial loans. Single-family residential loan balances decreased to $104.0 million at March 31, 2003, compared to $116.7 million at December 31, 2002, a decrease of $12.7 million or 10.9%, while multi-family residential, commercial real estate, and commercial and industrial loans as a group increased to $323.2 million at

March 31, 2003, compared to $282.8 million at December 31, 2002, an increase of $40.4 million or 14.3%.


		March 31, 2003						December 31, 2002						Change

		Amount			Percent			Amount			Percent			Amount

Real Estate Loans:
	Single-family	$	103,970			21.6	%	$	116,714			25.8	%	$	(12,744	)
	Multi-family		81,129			16.9	%		71,856			15.9	%		9,273
	Commercial		212,340			44.3	%		183,264			40.6	%		29,076
	Construction (1)		28,970			6.0	%		19,666			4.3	%		9,304
	Land acquisition and development		5,389			1.1	%		14,948			3.3	%		(9,559	)
Commercial and industrial loans			29,722			6.2	%		27,676			6.1	%		2,046
Consumer loans			18,204			3.8	%		17,565			3.9	%		639
Other loans (2)			507			0.1	%		503			0.1	%		4

	Total loans receivable		480,231			100.0	%		452,192			100.0	%	$	28,039

Less:
	Allowance for loan loss		(4,157	)					(3,797	)					(360	)
	Net deferred loan fees		(1,487	)					(1,332	)					(155	)
	Net premiums		654						987						(333	)

			(4,990	)					(4,142	)					(848	)

Loans receivable, net		$	475,241					$	448,050					$	27,191

(1)		Includes loans secured by residential and commercial properties. At March 31, 2003 we had $16.9 of construction loans secured by residential properties and $12.1 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 decreased to $314.0 million at March 31, 2003, as compared to $324.5 million at December 31, 2002, a decrease of $10.6 million or 3.3%. The Company manages the securities portfolio in order to enhance net interest income and net market value on a risk-adjusted basis and deploys excess capital until such time as the Company can reinvest such assets into loans or other community banking assets that generate higher risk-adjusted returns and, accordingly, the investment portfolio was decreased to provide for loan growth capacity.

Total deposits decreased slightly to $525.1 million as of March 31, 2003, as compared to $525.3 million as of December 31, 2002, a decrease of $200,000. The decrease in deposits was attributable to the Company’s emphasis on reducing deposit costs and the resulting decline in highly rate sensitive deposits. The deposits of the new community banking office in Scottsdale Arizona were $26.0 million at March 31, 2003, compared to $17.5 million at December 31, 2002, an increase of $8.5 million or 48.6%. Advances from the Federal Home Loan Bank (“FHLB”) of San Francisco increased to $239.0 million at March 31, 2003, as compared to $235.0 million at December 31, 2002, a $4.0 million or 1.7% increase to partially fund the loan growth. Accounts payable and accrued expenses increased significantly to $13.7 million at March 31, 2003, as compared to $9.8 million at December 31, 2002, an increase of $3.9 million primarily as a result of a $5.0 million increase in the “due to broker” account 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.

Stockholders’ equity increased to $43.9 million at March 31, 2003, as compared to $42.5 million at December 31, 2002, an increase of $1.5 million or 3.4%. The increase in stockholders’ equity was due primarily to net income recognized during the three months ended March 31, 2003. The Company’s stockholders’ equity was also affected by unrealized gains and losses on securities and interest rate contracts and dividends paid on the Company’s common stock.

Results of Operations

The Company reported net income of $1.6 million for the three months ended March 31, 2003, as compared to $1.1 million for the three months ended March 31, 2002, an increase of $519,000 or 47.8%. The increase in net income during the three-month periods primarily reflected significant increase in net interest income and banking fee income, which were partially offset by increases in total other expenses during such periods. On a diluted earnings per share basis, the Company earned $.36 for the three months ended March 31, 2003, as compared to $0.31 for the three months ended March 31, 2002.

The Company’s net interest income after provision for loan losses increased by $1.2 million or 24.4% to $5.9 million during the three months ended March 31, 2003 over the prior comparable period in 2002. The increase in the Company’s net interest income during the three-month periods reflected the continued growth in its 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. In addition, the Company recognized a 7 basis point increase in its interest rate spread during the three months ended March 31, 2003, when compared to the same period in 2002. The increase in the interest rate spread reflects the change in the Company’s loan mix to higher spread-earning loans and, to a lesser extent, the benefit of the Company’s liabilities repricing faster than its assets as market interest rates declined.

The following table sets forth, for the periods indicated, information regarding (i) the total dollar amount of interest income from interest-earning assets and the resultant average yields; (ii) the total dollar amount of interest expense on interest-bearing liabilities and the resultant average rate; (iii) net interest income 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 indicated periods.


				Three Months Ended March 31,

				2003							2002

								Average								Average
				Average				Yield/				Average				Yield/
				Balance		Interest		Cost				Balance		Interest		Cost

						(Dollars in Thousands)
Interest-earning assets:
	Loans receivable (1)			$	460,945	$	7,955		6.90	%		$	441,694	$	8,219		7.44	%
	FHLB stock				12,364		160		5.25	%			6,354		99		6.32	%
	Securities and trading account assets (2)				320,602		3,189		3.98	%			182,468		2,417		5.30	%
	Cash and cash equivalents (3)				15,517		54		1.39	%			15,696		62		1.57	%

		Total interest-earning assets			809,428		11,358		5.62	%			646,212		10,797		6.69	%

Noninterest-earning assets					23,529								18,412

			Total assets	$	832,957							$	664,624

Interest-bearing liabilities:
	Deposits:
		NOW and money market accounts			133,058		379		1.16	%			68,609		237		1.40	%
		Passbook accounts and certificates of deposit			374,892		2,287		2.47	%			431,673		3,969		3.73	%

			Total deposits		507,950		2,666		2.13	%			500,282		4,206		3.41	%

	FHLB advances (4)				240,855		2,348		3.92	%			97,114		1,480		5.97	%
	Reverse Repurchase Agreements				857		2		0.99	%			821		2		1.10	%
	Other borrowings (5)				11,370		105		3.71	%			18,038		183		4.05	%

		Total interest-bearing liabilities			761,032		5,121		2.72	%			616,255		5,871		3.86	%

Non-interest-bearing deposits					17,443								12,063
Non-interest-bearing liabilities					11,279								5,408

			Total liabilities		789,754								633,726
Stockholders’ equity					43,203								30,898

	Total liabilities and stockholders’ equity			$	832,957							$	664,624

Net interest-earning assets (liabilities)				$	48,396							$	29,957

Net interest income/interest rate spread						$	6,237		2.90	%				$	4,926		2.83	%

Net interest margin									3.06	%							3.01	%

Ratio of average interest-earnings assets to average interest-bearing liabilities									106.36	%							104.86	%

(1)		Includes non-accrual loans. Interest income includes fees earned on loans originated.

(2)		Consists of securities classified as available for sale and held to maturity and trading account assets.

(3)		Consists of cash and due from banks and federal funds sold.

(4)		Interest on FHLB advances is net of hedging costs. We use interest rate swaps to hedge the short-term repricing characteristics of our floating-rate FHLB advances.

(5)		Consists of a note payable under a revolving line of credit.

The following table sets forth the effects of changing rates and volumes on our net interest income. Information is provided with respect to (i) effects on interest income attributable to changes in 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 Ended
				March 31, 2003 vs March 31, 2002

				Increase (decrease) due to									Total Net

										Rate/			Increase
				Rate			Volume			Volume			(Decrease)

							(In Thousands)
Interest -earning assets:
	Loans receivable				($2,385	)	$	1,433		$	689			($263	)
	FHLB stock				(68	)		380			(251	)		61
	Securities and trading account assets (1)				(2,408	)		7,319			(4,140	)		771
	Cash and cash equivalents (2)				(29	)		(3	)		24			(8	)

Total net change in income on interest-earning assets					(4,890	)		9,129			(3,678	)		561

Interest-bearing liabilities:
	Deposits NOW and money market accounts				(169	)		902			(592	)		141
		Passbook accounts and certificates of deposit			(5,419	)		(2,117	)		5,855			(1,681	)

			Total deposits		(5,588	)		(1,215	)		5,263			(1,540	)
	FHLB advances (3)				(1,986	)		8,575			(5,721	)		868
	Reverse Repurchase Agreements				(1	)		0			0			(1	)
	Other borrowings (4)				(62	)		(270	)		255			(77	)

Total net change in expense on interest-bearing liabilities					(7,637	)		7,090			(203	)		(750	)

Change in net interest income				$	2,747		$	2,039			($3,475	)	$	1,311

(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. We use interest rate swaps to hedge the short-term repricing characteristics of our floating-rate advances.

(4)		Consists of a note payable under a revolving line of credit.

The Company increased its provisions for loan losses by $360,000 during the three months ended March 31, 2003, as compared to $200,000 for the three months ended March 31, 2002, an increase of $160,000. The provision reflects the required reserves based upon, among other things, the $27.2 million in loan growth during the current quarter 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, 2003, the Company’s non-performing assets amounted to $197,000 or 0.04% of total loans, as compared to $218,000 or 0.05% of total loans as of December 31, 2002.

The Company reported interest income of $11.4 million for the three months ended March 31, 2003, as compared to $10.8 million for the three months ended March 31, 2002, an increase of $561,000 or 5.2%. The primary reason for the increase during the period was the increase in earning assets in the period, which more than compensated for the decrease in the average yield on interest-bearing assets.

The Company reported interest expense of $5.1 million for the three months ended March 31, 2003, as compared to $5.9 million for the three months ended March 31, 2002, a decrease of $750,000 or 12.8%. The decrease in interest expense during both periods was attributable to a decrease in the average yield on interest-bearing liabilities as a result of the repricing of interest costing liabilities during the respective periods, which more than compensated for the increased volume of interest-bearing liabilities.

The Company’s total other income amounted to $1.2 million during the three months ended March 31, 2003, as compared to $549,000 during the three months ended March 31, 2002, an increase of $609,000 or 111.0%. Banking fee income, consisting primarily of fee income from wholesale banking, trust services and deposits and loans, increased by $492,000 or 92.5% to $1.0 million for the three months ended March 31, 2003, as compared to $532,000 for the three months ended March 31, 2002. Improving banking fee income, including loan and deposit fees, mortgage banking fees, and investment management fees through Harrington Wealth Management Company, is a strategic goal of the Company. All of these sources of fee income showed growth in the three months ended March 31, 2003 over the same quarter a year ago.

• Loan and deposit fees were $410,000 for the three months ended March 31, 2003, as compared to $236,000 for the three months ended March 31, 2002, an increase of $174,000 or 73.7%. Prepayment penalty fees remained strong with the lower interest rate environment and high refinancing levels.

• Mortgage banking fees were $497,000 for the three months ended March 31, 2003, as compared to $212,000 for the three months ended March 31, 2002, an increase of $285,000 or 134.4%. These fees continued to build with the favorable real estate markets and heavy refinancings. Los Padres Mortgage Company (LPMC), a joint venture with the largest RE/MAX realty franchise in the Arizona market, continues to increase originations and added $209,000 to banking fee income in three months ended March 31, 2003. LPMC began operations in September 2002.

• Investment management and custody fees though Harrington Wealth Management Company were $117,000 for the three months ended March 31, 2003, as compared to $84,000 for the three months ended March 31, 2002, an increase of $33,000 or 39.3%.

Gain on the sale of securities and income from trading assets was $576,000 for the three months ended March 31, 2003, as compared to $23,000 for the three months ended March 31, 2002, an increase of $553,000. The $576,000 figure includes a $431,000 gain on the sale of a low duration, high-coupon mortgage backed security which the Company received a price of 5 points higher than the Company valued the security at the previous month-end. The $145,000 balance of the income from trading assets in the three months ended March 31, 2003 was a result of favorable changes in market spreads. Related to the gain on the sale of the security, the Company paid-off a $15 million FHLB advance with a 5.25% fixed rate coupon scheduled to mature on January 14, 2004 and incurred a $531,000 market-based prepayment loss on the extinguishment of debt during the three months ended March 31, 2003.

Other gain was $89,000 for the three months ended March 31, 2003, as compared to ($6,000) for the three months ended March 31, 2002, a $95,000 increase. The $89,000 gain related to a recapture of a $160,000 charge relating to the write-off of computer equipment in connection with an operating system upgrade incurred in the three months ended September 30, 2002.

The Company’s total other expenses totaled $4.3 million during the three months ended March 31, 2003, as compared to $3.4 million for the three months ended March 31, 2002, an increase of $860,000 or 25.1%. The general increase in expenses is due largely to commission related compensation relative to increased mortgage banking originations, the expenses associated with the start-up and ongoing operations of Los Padres Mortgage Company and the new Scottsdale banking operations, as well as some increases in corporate expenses to support the Company’s growth.

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 28.62% at March 31, 2003. At March 31, 2003, Los Padres Bank’s “liquid” assets totaled approximately $121.3 million.

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 and a revolving line of credit loan facility which it maintains with two banks. At March 31, 2003, the Company had $239.0 million in FHLB advances and had $53.1 million of additional borrowing capacity with the FHLB of San Francisco. At March 31, 2003, the Company’s note payable under its revolving line of credit amounted to $11.6 million and the Company had $13.7 million of additional borrowing capacity under this loan facility.

On September 17, 2002, the terms of the Company’s line of credit under its loan facility were renegotiated to expand the revolving line of credit commitment from $20 million to $25 million, and modify certain covenants. Specifically, the covenant that restricts our ability to invest in mortgage derivative securities has been revised to allow us to maintain a larger balance as of the last day of the month. The covenant that restricts payment of cash dividends has been revised to allow us to pay dividends in an aggregate amount not to exceed the greater of (a) $300 during any fiscal quarter, or (b) up to a maximum of 25% of consolidated net income for the quarter. Additionally, the minimum core profitability requirements have been slightly increased, and a new covenant requiring a ratio of non-performing assets to stockholders’ equity plus loan loss reserves to not exceed .3 to 1 has been added. On February 19, 2003, the Company’s line of credit under its loan facility was further amended (1) allowing the Company to repurchase $2 million of its own capital stock during the term of the agreement, and (2) increasing the minimum core profitability from $5.0 to $6.0 million per quarter.

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, 2003, the total approved loan commitments outstanding amounted to $92.9 million. Certificates of deposit scheduled to mature in one year or less at March 31, 2003 totaled $297.7 million and FHLB borrowings that are scheduled to mature within the same period amounted to $199.0 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 income from which it services its debt, pays its obligations and from which the Company can pay dividends is the receipt of dividends from Los Padres Bank. The availability of dividends from Los Padres Bank is limited by various statutes and regulations. At March 31, 2003, Los Padres Bank was permitted to pay up to $2.1 million of dividends to the Company. 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, that the OTS could object to the payment of dividends by Los Padres Bank on the basis that the payment of such dividends is an unsafe or unsound practice. In addition, the Company’s ability to pay dividends is restricted under its revolving loan facility.

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, 2003, Los Padres Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations.

In addition, due to the Company’s business strategy which has concentrated on growth of lending operations, a shift in the Company’s lending focus to more commercial lending, and the size of the Company’s securities portfolio activities, the Company has informally agreed with the OTS that Los Padres Bank will maintain a total risk-based capital ratio and a leverage capital ratio of at least 11% and 6%, respectively, which is in excess of the OTS’ minimum regulatory requirements. Management does not believe that Los Padres Bank’s agreement with the OTS to maintain increased ratios of total risk-based and leverage capital will limit or restrict the Company’s operations. At March 31, 2003, Los Padres Bank was in compliance with these additional requirements. To the extent that Los Padres Bank fails to comply with these additional increased capital ratios, the OTS could take such failure to comply into consideration in connection with further requests to have Los Padres Bank pay dividends to the Company and in additional future branch applications. Los Padres Bank’s failure to comply could also impact its overall assessment by the OTS in future regulatory examinations, which, if adverse, could also impact its FDIC insurance assessment.

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, controller 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 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 interest rate swaps which hedge a portion of its securities portfolio. These swaps do not qualify for hedge accounting treatment and are included in the trading account assets and are reported at fair value with realized and unrealized gains and losses on these instruments recognized in income (loss) from trading account assets.

Critical Accounting Policies

General. The financial information contained in the Company’s 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. The Company uses historical loss factors to determine the inherent loss that may be present in its loan portfolio. Actual losses could differ significantly from these historical factors. As of March 31, 2003, the Company has not created any special purpose entities to securitize assets or to obtain off-balance sheet funding. Although the Company has sold loans in the past two 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 the Company’s 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. The Company’s allowance for loan losses has four components: (i) an allocated allowance for specifically identified problem loans, (ii) a formula allowance for non-homogenous loans, (iii) an allocated allowance for large groups of smaller balance homogenous loans and (iv) an unallocated allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a model based on historical losses as an indicator of future losses and as a result could differ from the losses incurred in the future; however, since this history is updated with the most recent loss information, the differences that might otherwise occur may be mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, discounted cash flows, fair market value of collateral and secondary market information are all used to estimate those losses. The use of these values is inherently subjective and 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.

Recent Legislation

On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOA”). The stated goals of the SOA are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

The SOA is the most far-reaching U.S. securities legislation enacted in some time. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (“SEC”), under the Securities Exchange Act of 1934 (the “Exchange Act”). Given the extensive SEC role in implementing rules relating to many of the SOA’s new requirements, the final scope of these requirements remains to be determined.

The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues by the SEC and the Comptroller General. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees.

This SOA addresses, among other matters: audit committees; certification of financial statements by the chief executive officer and the chief financial officer; the forfeiture of bonuses and profits made by directors and senior officers in the twelve month period covered by restated financial statements; a prohibition on insider trading during pension plan black out periods; disclosure of off-balance sheet transactions; a prohibition on personal loans to directors and officers; expedited filing requirements for Forms 4s; disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; “real time” filing of periodic reports; the formation of a public accounting oversight board; auditor independence; and various increased criminal penalties for violations of securities laws.

The SOA contains provisions which became effective upon enactment on July 30, 2002 and provisions which will become effective from within 30 days to one year from enactment. The SEC has been delegated the task of enacting rules to implement various of the provisions with respect to, among other matters, disclosure in periodic filings pursuant to the Exchange Act.

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, 2003, these prepayment assumptions varied from 10% to 54% for fixed-rate mortgages and mortgage-backed securities and varied from 9% to 36% for adjustable-rate mortgages and mortgage-backed securities.

The following table sets forth at March 31, 2003 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		$	21,650		$	16,635		$	10,271				($12,742	)		($28,345	)		($46,845	)
Market value gain (loss) of liabilities			(12,719	)		(10,078	)		(5,957	)			6,192			12,653			19,386

Market value gain (loss) of net assets before interest rate contracts			8,931			6,557			4,314				(6,550	)		(15,692	)		(27,459	)
Market value gain (loss) of interest rate contracts			(15,779	)		(10,650	)		(5,149	)			4,868			9,475			13,837

Total change in MVPE (2)			($6,848	)		($4,093	)		($835	)			($1,682	)		($6,217	)		($13,622	)

Change in MVPE as a percent of:
	MVPE(2)		-10.32	%		-6.17	%		-1.26	%			-2.54	%		-9.37	%		-20.54	%
	Total assets of Los Padres Bank		-.83	%		-.50	%		-.10	%			-.20	%		-.75	%		-1.65	%

(1)		Assumes an instantaneous parallel change in interest rates at all maturities.

(2)		Based on the Company’s pre-tax MVPE of $66.3 million at March 31, 2003.

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

Within the 90 days prior to the date of 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 along with 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-14 under the Exchange Act. Based upon that evaluation, the Company’s Chief Executive Officer along with 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 or in other factors which could significantly affect these controls subsequent to the date the Company carried out its evaluation.

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 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 Registrant is involved in routine 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

None.

Item 5: Other Information

Not applicable.

Item 6: Exhibits and Reports on Form 8-K

a) Exhibits


EXHIBIT NO.		DESCRIPTION
3.1		Certificate of Incorporation of Harrington West Financial Group, Inc. (1)
3.1.1		Certificate of Amendment to Certificate of Incorporation. (1)
3.1.2		Second Certificate of Amendment to Certificate of Incorporation. (1)
3.2		Bylaws of Harrington West Financial Group, Inc. (1)
3.2.1		Amendment to Bylaws. (1)
4.0		Specimen stock certificate of Harrington West Financial Group, Inc. (1)
10.1		Harrington West Financial Group 1996 Stock Option Plan, as amended. (1)
10.2		Amended and Restated Credit Agreement dated as of October 30, 1997 among Harrington West Financial Group, Inc., the lenders party thereto and Harris Trust and Savings Bank, as amended on October 1, 1999, May 2, 2000 and November 1, 2001. (1)
10.2.1		Fourth Amendment to Amended and Restated Credit Agreement. (1)
10.3		Investment and Interest Rate Advisory Agreement between Los Padres Savings Bank, FSB and Smith Breeden Associates, Inc., dated February 3, 1997. (1)
10.4		Purchase and Assumption Agreement by and between Los Padres Bank, FSB and Harrington Bank, FSB dated as of May 30, 2001. (1)
10.5		Los Padres Mortgage Company, LLC Operating Agreement by and between Resource Marketing Group, Inc. and Los Padres Bank FSB dated June 13, 2002. (1)
10.6		Option Agreement, dated as of April 4, 1996 by and between Smith Breeden Associates, Inc. and Harrington West Financial Group, Inc. Assignment of Option, dated as of January 19, 2001, by and between Craig Cerny. (1)


10.7		Stock Purchase Agreement by and between Harrington Bank, FSB and Los Padres Bank, FSB dated as of May 30, 2001. (1)
99.1		Section 906 Certification by Chief Executive Officer and Chief Financial Officer (1) Incorporated by reference to the Registrant’s Form S-1 (File No. 333-99031) filed with the Securities and Exchange Commission (the “SEC”) on August 30, 2002, as amended.

b) Reports on Form 8-K

The Registrant filed a Current Report on Form 8-K with the SEC on January 22, 2003, announcing a press release of its earnings for the fourth quarter of the year ended December 31, 2002.

The Registrant filed and amended a Current Report on Form 8-K with the SEC on March 19, 2003, containing the chief executive officer and chief financial officer certification of the Annual Report on Form 10-K for the year ended December 31, 2002, as required by Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


			HARRINGTON WEST FINANCIAL GROUP, INC.

Date: May 12, 2003			By: /S/ CRAIG J. CERNY

			Craig J. Cerny, Chief Executive Officer (Principal Executive Officer)

			By: /S/ SEAN CALLOW

			Sean Callow, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

CERTIFICATIONS

I, Craig J. Cerny, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Harrington West Financial Group, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

(a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the periodic report is being prepared;

(b) Evaluated the effectiveness of the registrant ‘s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and to the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Date: May 12, 2003
		/s/ Craig J. Cerny

		Craig J. Cerny, Chief Executive Officer

I, Sean Callow, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Harrington West Financial Group, Inc.;

(c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: May 12, 2003

/s/ Sean Callow

Sean Callow,
Senior Vice President and Chief Financial Officer

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	•		the strength of the United States economy in general and the strength of the regional and local economies within our markets in California, Kansas and Arizona;

	•		adverse changes in the local real estate market, as most of the Company’s loans are concentrated in the central coast of California and a substantial portion of these loans have real estate as collateral;

	•		the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;

	•		inflation, interest rate, market and monetary fluctuations;

	•		adverse changes in asset quality and the resulting credit risk-related losses and expenses;

	•		our timely development of new products and services in a changing environment, including the features, pricing and quality of our products and services compared to the products and services of our competitors;

	•		the willingness of users to substitute competitors’ products and services for our products and services;

	•		the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, securities and insurance, and the application thereof by regulatory bodies;

	•		technological changes;

	•		changes in consumer spending and savings habits; and

	•		regulatory or judicial proceedings.

	•		Loan and deposit fees were $410,000 for the three months ended March 31, 2003, as compared to $236,000 for the three months ended March 31, 2002, an increase of $174,000 or 73.7%. Prepayment penalty fees remained strong with the lower interest rate environment and high refinancing levels.

	•		Mortgage banking fees were $497,000 for the three months ended March 31, 2003, as compared to $212,000 for the three months ended March 31, 2002, an increase of $285,000 or 134.4%. These fees continued to build with the favorable real estate markets and heavy refinancings. Los Padres Mortgage Company (LPMC), a joint venture with the largest RE/MAX realty franchise in the Arizona market, continues to increase originations and added $209,000 to banking fee income in three months ended March 31, 2003. LPMC began operations in September 2002.

	•		Investment management and custody fees though Harrington Wealth Management Company were $117,000 for the three months ended March 31, 2003, as compared to $84,000 for the three months ended March 31, 2002, an increase of $33,000 or 39.3%.