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 June 30, 2003


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 July 29, 2003.

TABLE OF CONTENTS


PART 1-FINANCIAL INFORMATION
	Item 1: Condensed Consolidated Financial Statements
		CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		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
Exhibit 31.1
Exhibit 31.2
Exhibit 32

HARRINGTON WEST FINANCIAL GROUP, INC.

INDEX


		Page

Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements			2
	Condensed Consolidated Statements of Financial Condition as of June 30, 2003 (Unaudited) and December 31, 2002		2
	Condensed Consolidated Statements of Income for the Three Months Ended June 30, 2003 and 2002 and Six Months Ended June 30, 2003 and 2002 (Unaudited)		3
	Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Six Months Ended June 30, 2003 and Year Ended 2002 (Unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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			10
Item 3. Quantitative and Qualitative Disclosures about Market Risk			21
Item 4. Controls and Procedures			22
Part II - Other Information
Item 1. Legal Proceedings			23
Item 2. Changes in Securities and Use of Proceeds			23
Item 3. Defaults upon Senior Securities			23
Item 4. Submission of Matters to a Vote of Security Holders			23
Item 5. Other Information			23
Item 6. Exhibits and Reports on Form 8-K			24
Signatures			25

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PART 1-FINANCIAL INFORMATION

Item 1: Condensed Consolidated Financial Statements

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

(Dollars in thousands, except share data)


		June 30, 2003			December 31, 2002

		(unaudited)
ASSETS
Cash and cash equivalents		$	13,922		$	19,212
Trading account assets			2,127			1,934
Securities available for sale			318,479			324,530
Securities held to maturity			2,312			2,368
Loans receivable, (net of allowance for loan losses of $4,407 and $3,797 for June 30, 2003 and December 31, 2002, respectively)			497,254			448,050
Accrued interest receivable			2,975			3,526
Premises and equipment, net			5,427			4,469
Prepaid expenses and other assets			1,582			1,761
Investment in FHLB stock, at cost			13,496			11,750
Income taxes receivable			—			252
Deferred tax asset			1,352			1,187
Goodwill			3,981			3,981
Core deposit intangible, net			1,214			1,311

TOTAL ASSETS		$	864,121		$	824,331

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
	Interest bearing	$	508,216		$	505,165
	Non-interest bearing		30,661			20,106

Total Deposits			538,877			525,271
FHLB advances			224,000			235,000
Securities sold under repurchase agreements			16,076			517
Note payable			12,000			11,300
Due to broker			16,652			446
Accounts payable and accrued expenses			11,441			9,325
Income taxes payable			183			—

TOTAL LIABILITIES			819,229			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 June 30, 2003 and December 31, 2002			43			43
Additional paid-in capital			30,641			30,641
Retained earnings			16,863			13,795
Accumulated other comprehensive income, net of tax of $(2,161) and $(1,729) at June 30, 2003 and December 31, 2002, respectively			(2,655	)		(2,007	)

Total Stockholders’ Equity			44,892			42,472

TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY		$	864,121		$	824,331

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

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

Dollars in thousands, except share and per share data


			Three months ended						Six months ended
			June 30,						June 30,

			2003			2002			2003			2002

INTEREST INCOME
	Interest on loans		$	8,177		$	7,919		$	16,131		$	16,138
	Interest and dividends on securities			3,129			2,736			6,533			5,313

Total interest income				11,306			10,655			22,664			21,451

INTEREST EXPENSE
	Interest on deposits			2,647			3,559			5,312			7,772
	Interest on FHLB advances and other borrowings			2,402			1,742			4,858			3,398

Total interest expense				5,049			5,301			10,170			11,170

NET INTEREST INCOME BEFORE
		PROVISION FOR LOAN LOSSES		6,257			5,354			12,494			10,281
PROVISION FOR LOAN LOSSES				250			75			610			275

NET INTEREST INCOME AFTER PROVISION
		FOR LOAN LOSSES		6,007			5,279			11,884			10,006

OTHER INCOME (LOSS)
	Income (loss) from trading assets			1,294			(111	)		1,870			(95	)
	Loss on extinguishment of debt			(892	)		—			(1,423	)		—
	Other income gain (loss)			(40	)		—			50			—
	Banking fee income			1,200			376			2,224			908

Total other income				1,562			265			2,721			813

OTHER EXPENSES
	Salaries & employee benefits			2,555			1,942			5,024			3,941
	Premises & equipment			671			528			1,324			1,022
	Insurance premiums			82			63			151			122
	Marketing			113			65			212			126
	Computer services			166			128			326			256
	Consulting fees			236			187			482			332
	Office expenses & supplies			185			135			361			279
	Other			464			398			886			802

Total other expenses				4,472			3,446			8,766			6,880

INCOME BEFORE INCOME TAXES				3,097			2,098			5,839			3,939
INCOME TAXES				1,286			864			2,424			1,621

NET INCOME			$	1,811		$	1,234		$	3,415		$	2,318

BASIC EARNINGS PER SHARE			$	0.42		$	0.37		$	0.79		$	0.69

DILUTED EARNINGS PER SHARE			$	0.40		$	0.36		$	0.76		$	0.67

BASIC WEIGHTED AVERAGE SHARES OUTSTANDING				4,327,951			3,354,336			4,327,951			3,354,336

DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING				4,509,560			3,474,786			4,499,026			3,484,518

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

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HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(Dollars in thousands, except share data)


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

Balance, December 31, 2001				3,354,336	$	34	$	20,305	$	9,175					$	630		$	30,144
Comprehensive income:
	Net income									5,045		$	5,045						5,045
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:
	Net income									3,415		$	3,415						3,415
Other comprehensive income, net of tax
	Unrealized gains on securities												762			762			762
	Effective portion in change in fair value of cash flow hedges												(1,410	)		(1,410	)		(1,410	)

		Total comprehensive income										$	2,767

Dividends on common stock										(347	)								(347	)

BALANCE, JUNE 30, 2003				4,327,951	$	43	$	30,641	$	16,863						($2,655	)	$	44,892

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

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HARRINGTON WEST FINANCIAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(Dollars in thousands)


		Six months ended
		June 30,

		2003			2002

DISCLOSURE OF RECLASSIFICATION AMOUNT:
	Unrealized holding gains arising during period, net of tax expense of $1,046 and $314 for June 30, 2003 and 2002, respectively	$	1,473		$	433
	Less: Reclassification adjustment for gains included in net income, net of tax expense of $505 and $0 for June 30, 2003 and 2002, respectively		(711	)		—

	Net unrealized gain on securities, net of tax expense of $541 and $314 for June 30, 2003 and 2002, respectively	$	762		$	433

	Unrealized net (loss) gain on cash flow hedges, net of tax (benefit) expense of $(1,003) for June 30, 2003 and $(431) for June 30, 2002	$	(1,410	)	$	(630	)
	Less: Reclassification adjustment for net gains on cash flow hedges included in net income, net of tax expense of $0 for June 30, 2003 and $24 for June 30, 2002		—			34

	Net unrealized loss on cash flow hedges	$	(1,410	)	$	(596	)

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

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

(Dollars in thousands)


					Six months ended			Six months ended
					June 30,			June 30,
					2003			2002

CASH FLOWS FROM OPERATING ACTIVITIES:
	Net income				$	3,415		$	2,318
	Adjustments to reconcile net income to net cash provided by operating activities:
			Accretion of deferred loan fees and costs			(1,054	)		(445	)
			Depreciation and amortization			532			447
			Amortization of premiums and discounts on loans receivable and securities			2,616			1,972
			Provision for loan losses			610			275
			Activity in securities held for trading			(1,432	)		672
			Loss of sale of real estate			—			35
			FHLB stock dividend			(291	)		(109	)
			Decrease in accrued interest receivable			551			100
			Increase (decrease) in income taxes payable			436			(238	)
			Deferred income taxes			(165	)		(179	)
			Decrease in prepaid expenses			177			340
			Increase in accounts payable			706			34

				Net cash provided by operating activities		6,101			5,222

CASH FLOWS FROM INVESTING ACTIVITIES:
	Net (increase) decrease in loans receivable					(49,014	)		18,022
	Proceeds from sales of securities available for sale					26,385			0
	Principal paydowns on securities available for sale					89,862			41,336
	Principal paydowns on securities held to maturity					49			116
	Purchases of securities available for sale					(94,650	)		(72,801	)
	Purchase of premises and equipment					(1,393	)		(690	)
	(Purchase) sale of FHLB Stock					(1,456	)		1,892

				Net cash (used in) provided by investing activities		(30,217	)		(12,125	)

CASH FLOWS FROM FINANCING ACTIVITIES:
	Net increase (decrease) in deposits					13,913			(14,955	)
	Increase in securities sold under agreements to repurchase					15,559			957
	(Decrease) increase in FHLB advances					(11,000	)		27,000
	Advances (payments) on note payable					700			(1,400	)
	Dividends paid on common stock					(346	)		(179	)

	Net cash provided by (used in) financing activities					18,826			11,423

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS						(5,290	)		4,520
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD						19,212			11,107

CASH AND CASH EQUIVALENTS, END OF PERIOD					$	13,922		$	15,627

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMANTION -
	Cash paid during the period for:
		Interest			$	9,236		$	5,757
		Income Taxes			$	448		$	425

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

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

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business of the Company – Harrington West Financial Group, Inc. (the “Company”) is a diversified, community-based financial institution holding company incorporated on August 29, 1995 to acquire and hold all of the outstanding common stock of Los Padres Bank, FSB (the “Bank”), a federally chartered savings bank 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, which is operated as a division under the Harrington Bank brand. The Company also owns Harrington Wealth Management Company, a trust and investment management company with $118 million in assets under management or custody, and 51% of Los Padres Mortgage Company, LLC.

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.

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 June 30, 2003 is adequate to absorb losses inherent in the loan portfolio.

2. EARNINGS PER SHARE

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

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	Three months ended June 30, 2003							Six months ended June 30, 2003

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

Basic EPS	$	1,811		4,327,951	$	.42		$	3,415		4,327,951	$	.79
Effect of dilutive stock options				181,609		(.02	)				171,075		(.03	)

Diluted EPS	$	1,811		4,509,560	$	.40		$	3,415		4,499,026	$	.76


	Three months ended June 30, 2002							Six months ended June 30, 2002

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

Basic EPS	$	1,234		3,354,336	$	.37		$	2,318		3,354,336	$	.69
Effect of dilutive stock options				120,450		(.01	)				130,182		(.02	)

Diluted EPS	$	1,234		3,474,786	$	.36		$	2,318		3,484,518	$	.67

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 quarter and years ended June 30 would have been changed to the pro forma amounts indicated below:


			Three months ended				Six Months Ended

Pro Forma Results			June 30, 2003		June 30, 2002		June 30, 2003		June 30, 2002

Net income:
	As reported		$	1,811	$	1,234	$	3,415	$	2,318
	Pro forma		$	1,791	$	1,211	$	3,376	$	2,271
	Earnings per share - basic:
		As reported	$	0.42	$	0.37	$	0.79	$	0.69
		Pro forma	$	0.41	$	0.36	$	0.78	$	0.68
	Earnings per share - diluted:
		As reported	$	0.40	$	0.36	$	0.76	$	0.67
		Pro forma	$	0.40	$	0.35	$	0.75	$	0.65

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 29.03% and 27.58% for the six months ended June 30, 2003 and 2002, respectively; risk-free interest rates of 3.94% and 4.91% for the six months ended June 30, 2003 and 2002, respectively; and expected lives of 9 years for the six months ended June 30, 2003 and 2002. The weighted average fair values of the 63,950 and 59,025 options granted in the six months ended June 30, 2003 and 2002 were $3.61 and $3.73, respectively.

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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.

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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. In addition, in the third quarter of 2002, the Company established Los Padres Mortgage, 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 intends to open a second Harrington Bank office in the Kansas City metropolitan area in the fourth quarter 2003. In July 2003, Los Padres Bank announced that it had reached a definitive agreement to finance and lease a full service banking facility in Ventura, California. 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.

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 $864.1 million at June 30, 2003, as compared to $824.3 million at December 31, 2002, an increase of $39.8 million or 4.8%. The increase was primarily attributable to growth in net loans to $497.3 million as of June 30, 2003, compared to $448.1 million at December 31, 2002, an increase of $49.2 million or 11.0%. 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. 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, and commercial and industrial loans. Accordingly, single-family residential loan balances decreased to $93.7 million at June 30, 2003, compared to $116.7 million at December 31, 2002, a decrease of $23.0 million or 19.7%, while multi-family residential,

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commercial real estate, and commercial and industrial loans as a group increased to $353.1 million at June 30, 2003, compared to $282.8 million at December 31, 2002, an increase of $70.3 million or 24.9%.


		June 30, 2003						December 31, 2002
														Change
		Amount			Percent			Amount			Percent			Amount

		(Dollars in thousands)
Real Estate Loans:
	Single-family	$	93,739			18.6	%	$	116,714			25.8	%	$	(22,975	)
	Multi-family		78,593			15.6			71,856			15.9			6,737
	Commercial		241,103			48.1			183,264			40.6			57,839
	Construction (1)		30,552			6.1			19,666			4.3			10,886
	Land acquisition and development		6,616			1.3			14,948			3.3			(8,332	)
Commercial and industrial loans			33,392			6.6			27,676			6.1			5,716
Consumer loans			17,836			3.5			17,565			3.9			271
Other loans (2)			878			0.2			503			0.1			375

	Total loans receivable		502,709			100.0	%		452,192			100.0	%		50,517

Less:
	Allowance for loan loss		(4,407	)					(3,797	)					(610	)
	Net deferred loan fees		(1,562	)					(1,332	)					(230	)
	Net premiums		514						987						(473	)

			(5,455	)					(4,142	)					(1,313	)

	Loans receivable, net	$	497,254					$	448,050					$	49,204

(1) Includes loans secured by residential, land and commercial properties. At June 30, 2003, the Company had $18.9 million of construction loans secured by residential properties, $7.7 million of construction loans secured by land and $4.0 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 decreased to $318.5 million at June 30, 2003, as compared to $324.5 million at December 31, 2002, a decrease of $6.1 million or 1.9%. 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 $538.9 million as of June 30, 2003, as compared to $525.3 million as of December 31, 2002, an increase of $13.6 million. The increase in deposits was attributable to the new community banking office in Scottsdale, Arizona, 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 new community banking office in Scottsdale Arizona were $45.8 million at June 30, 2003, compared to $17.5 million at December 31, 2002, an increase of $28.3 million or 161.7%.

Advances from the Federal Home Loan Bank (“FHLB”) of San Francisco decreased to $224.0 million at June 30, 2003, compared to $235.0 million at December 31, 2002, a $11.0 million or 4.7% decrease. On May 7, 2003, the Company replaced $15.0 million of floating rate FHLB advances with a five year, 3.153% fixed rate term repurchase agreement for interest rate risk management purposes.

The due to broker account increased significantly to $16.7 million at June 30, 2003, as compared to $446,000 at December 31, 2002, an increase of $16.2 million 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.

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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.

Stockholders’ equity increased to $44.9 million at June 30, 2003, as compared to $42.5 million at December 31, 2002, an increase of $2.4 million or 5.7%. The increase in stockholders’ equity was due primarily to net income recognized during the six months ended June 30, 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 $1.8 million for the three months ended June 30, 2003, as compared to $1.2 million for the three months ended June 30, 2002, an increase of $577,000 or 46.8%. The Company reported net income of $3.4 million for the six months ended June 30, 2003, as compared to $2.3 million for the six months ended June 30, 2002, an increase of $1.1 million or 47.3%. The increase in net income during the three-month and six-month periods primarily reflected significant increases 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 $.40 per share for the three months ended June 30, 2003, compared to $.36 per share for the three months ended June 30, 2002, and $.76 per share for the six months ended June 30, 2003, compared to $.67 per share for the six months ended June 30, 2002.

The Company’s net interest income after provision for loan losses increased by $728,000 or 13.8% to $6.0 million during the three months ended June 30, 2003 over the prior comparable period in 2002. The Company’s net interest income after provision for loan losses increased by $1.9 million or 18.8% to $11.9 million during the six months ended June 30, 2003 over the prior comparable period in 2002. 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 to 3.04% or 27 basis points during the three months ended June 30, 2003, when compared to the same period in 2002 and the net interest margin decreased to 3.06% or 12 basis points during the six months ended June 30, 2003, when compared to the same period in 2002. The net interest margin declined slightly due to the growth in lower margin investment securities that were purchased in anticipation of the Company’s IPO. This decline was counterbalanced by the addition of higher margin loans.

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.

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				Three Months Ended June 30

				2003							2002

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

				(Dollars in thousands)
Interest-earning assets:
	Loans receivable (1)			$	482,347	$	8,177		6.78	%	$	430,470	$	7,919		7.36	%
	FHLB stock				13,221		158		4.80			5,698		82		5.74
	Securities and trading account assets (2)				311,481		2,913		3.74			195,233		2,597		5.32
	Cash and cash equivalents (3)				18,129		58		1.29			15,905		57		1.41

		Total interest-earning assets			825,178		11,306		5.48			647,306		10,655		6.58

Noninterest-earning assets					22,890							19,087

			Total assets	$	848,068						$	666,393

Interest-bearing liabilities:
	Deposits:
		NOW and money market accounts			126,828		362		1.14			87,772		420		1.92
		Passbook accounts and certificates of deposit			380,646		2,285		2.41			399,184		3,139		3.15

			Total deposits		507,474		2,647		2.09			486,956		3,559		2.93

	FHLB advances (4)				242,120		2,215		3.62			110,722		1,576		5.62
	Reverse Repurchase Agreements				10,128		73		2.86			1,326		4		1.26
	Other borrowings (5)				12,711		114		3.55			16,241		162		3.96

		Total interest-bearing liabilities			772,433		5,049		2.61			615,245		5,301		3.45

Non-interest-bearing deposits					20,388							14,079
Non-interest-bearing liabilities					10,834							5,232

			Total liabilities		803,655							634,556
Stockholders’ equity					44,413							31,837

	Total liabilities and stockholders’ equity			$	848,068						$	666,393

Net interest-earning assets (liabilities)				$	52,745						$	32,061

Net interest income/interest rate spread						$	6,257		2.87	%			$	5,354		3.14	%

Net interest margin									3.04	%						3.31	%

Ratio of average interest-earnings assets to average interest-bearing liabilities									106.83	%						105.21	%

[Additional columns below]

[Continued from above table, first column(s) repeated]

Six Months Ended June 30

2003 2002

Average Average

Average Yield/ Average Yield/

Balance Interest Cost Balance Interest Cost

(Dollars in thousands)

Interest-earning assets:

Loans receivable (1)
$ 471,705 $ 16,131 6.84 % $ 436,051 $ 16,138 7.40 %

FHLB stock
12,795 318 4.97 6,024 181 6.00

Securities and trading account assets (2)
316,016 6,103 3.86 188,886 5,014 5.31

Cash and cash equivalents (3)
16,830 112 1.33 15,801 118 1.49

Total interest-earning assets
817,346 22,664 5.55 646,762 21,451 6.63

Noninterest-earning assets
23,166 18,746

Total assets
$ 840,512 $ 665,508

Interest-bearing liabilities:

Deposits:

NOW and money market accounts
129,925 741 1.14 78,243 659 1.68

Passbook accounts and certificates of deposit
377,785 4,571 2.42 415,339 7,113 3.42

Total deposits
507,710 5,312 2.09 493,582 7,772 3.15

FHLB advances (4)
241,492 4,564 3.78 103,955 3,047 5.87

Reverse Repurchase Agreements
5,518 74 2.73 1,075 6 1.20

Other borrowings (5)
12,044 220 3.65 17,134 345 4.03

Total interest-bearing liabilities
766,764 10,170 2.65 615,746 11,170 3.63

Non-interest-bearing deposits
18,923 13,076

Non-interest-bearing liabilities
11,143 5,603

Total liabilities
796,830 634,425

Stockholders’ equity
43,682 31,083

Total liabilities and stockholders’ equity
$ 840,512 $ 665,508

Net interest-earning assets (liabilities)
$ 50,582 $ 31,016

Net interest income/interest rate spread
$ 12,494 2.90 % $ 10,281 3.00 %

Net interest margin
3.06 % 3.18 %

Ratio of average interest-earnings assets to average interest-bearing liabilities
106.60 % 105.04 %

(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 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).


				Three Months Ended
				June 30, 2003 vs June 30, 2002

				Increase (decrease) due to
													Total Net
				Rate			Volume			Rate/ Volume			Increase (Decrease)

				(In Thousands)
Interest-earning assets:
	Loans receivable				($2,487	)	$	3,817			($1,072	)	$	258
	FHLB stock				(54	)		432			(302	)		76
	Securities and trading account assets (1)				(3,085	)		6,186			(2,785	)		316
	Cash and cash equivalents (2)				(21	)		31			(9	)		1

Total net change in income on interest-earning assets					(5,647	)		10,466			(4,168	)		651

Interest-bearing liabilities:
	Deposits
		NOW and money market accounts			(681	)		750			(127	)		(58	)
		Passbook accounts and certificates of deposit			(2,979	)		(585	)		2,710			(854	)

			Total deposits		(3,660	)		165			2,583			(912	)
	FHLB advances (3)				(2,221	)		7,389			(4,529	)		639
	Reverse Repurchase Agreements				21			111			(63	)		69
	Other borrowings (4)				(65	)		(140	)		157			(48	)

Total net change in expense on interest-bearing liabilities					(5,925	)		7,525			(1,852	)		(252	)

Change in net interest income				$	278		$	2,941			($2,316	)	$	903

[Additional columns below]

[Continued from above table, first column(s) repeated]

Six Months Ended

June 30, 2003 vs June 30, 2002

Increase (decrease) due to

Total Net

Rate Volume Rate/
Volume Increase
(Decrease)

(In Thousands)

Interest-earning assets:

Loans receivable
($2,453 ) $ 2,639 ($194 ) ($8 )

FHLB stock
(62 ) 407 (207 ) 138

Securities and trading account assets (1)
(2,733 ) 6,750 (2,928 ) 1,089

Cash and cash equivalents (2)
(25 ) 15 4 (6 )

Total net change in income on interest-earning assets
(5,273 ) 9,811 (3,325 ) 1,213

Interest-bearing liabilities:

Deposits

NOW and money market accounts
(425 ) 870 (363 ) 82

Passbook accounts and certificates of deposit
(4,164 ) (1,285 ) 2,913 (2,536 )

Total deposits
(4,589 ) (415 ) 2,550 (2,454 )

FHLB advances (3)
(2,177 ) 8,080 (4,392 ) 1,511

Reverse Repurchase Agreements
16 53 (1 ) 68

Other borrowings (4)
(65 ) (205 ) 145 (125 )

Total net change in expense on interest-bearing liabilities
(6,815 ) 7,513 (1,698 ) (1,000 )

Change in net interest income
$ 1,542 $ 2,298 ($1,627 ) $ 2,213

(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 a note payable under a revolving line of credit.

- 15 -

The Company increased its provision for loan losses by $250,000 during the three months ended and $610,000 for the six months ended June 30, 2003, compared to $75,000 for the three months ended and $275,000 for the six months ended June 30, 2002, an increase of $175,000 and $335,000, respectively. The provision reflects the reserves required based upon, among other things, the $49.2 million in loan growth since December 31, 2002 and the Company’s analysis of the composition, credit quality and growth of its commercial real estate and commercial and industrial loan portfolios. At June 30, 2003, the Company had no non-performing assets, as compared to $218,000 or 0.05% of total loans as of December 31, 2002.

The Company reported interest income of $11.3 million for the three months ended June 30, 2003, compared to $10.7 million for the three months ended June 30, 2002, an increase of $651,000 or 6.1%. The Company reported interest income of $22.7 million for the six months ended June 30, 2003, compared to $21.5 million for the six months ended June 30, 2002, an increase of $1.2 million or 5.7%. The primary reason for the increase during both periods was the increase in the volume of interest-earning assets in the periods, which more than compensated for the decrease in the average rate on interest-earning assets.

The Company reported interest expense of $5.1 million for the three months ended June 30, 2003, compared to $5.3 million for the three months ended June 30, 2002, a decrease of $252,000 or 4.8%. The Company reported interest expense of $10.2 million for the six months ended June 30, 2003, compared to $11.2 million for the six months ended June 30, 2002, a decrease of $1.0 million or 9.0%. The decrease in interest expense during both periods was attributable to 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, which more than compensated for the increased volume of interest-bearing liabilities.

The Company’s total other income amounted to $1.6 million for the quarter ending June 30, 2003 compared to $265,000 during the same quarter last year, an increase of $1.3 million or 489.4%. The Company’s total other income for the six months ended June 30, 2003 amounted to $2.7 million compared to $813,000 for the same period last year, an increase of $1.9 million or 234.7%. The increase in other income was attributable to banking fee income, consisting primarily of fee income from wholesale banking, trust services, deposits and loans.

Banking fee income amounted to $1.2 million for the quarter ending June 30, 2003 compared to $376,000 during the same quarter last year, an increase of $824,000 or 219.1%. Banking fee income amounted to $2.2 million for the six months ended June 30, 2003 compared to $908,000 for the same period last year, an increase of $1.3 million or 144.9%. Banking fee income includes loan and deposit fees, mortgage-banking fees, and investment management fees through Harrington Wealth Management Company. All fee income sources showed growth in the three months and six months ended June 30, 2003 over the same periods a year ago.

• Loan and deposit fees were $424,000 and $833,000 for the three months and six months ended June 30, 2003, respectively, as compared to $137,000 and $372,000 for the three and six months ended June 30, 2002, respectively, an increase of $287,000 and $461,000 or 209.5% and 123.9%, respectively. Prepayment penalty fees remained strong with the lower interest rate environment and high refinancing levels.

• Mortgage banking fees were $664,000 and $1.2 million for the three and six months ended June 30, 2003, respectively, as compared to $146,000 and $358,000 for the three and six months ended June 30, 2002, respectively, an increase of $518,000 and $803,000 or 354.8% and 224.3%, respectively. These fees continued to build with the favorable real estate market and low interest rate environment contributing to heavy refinancings. Los Padres Mortgage Company, LLC (LPMC), a joint venture with the largest RE/MAX realty franchise in the Arizona market, continues to increase originations and added $285,000 to banking fee income for the three months ended June 30, 2003 and $494,000 for the six months ended June 30, 2003. LPMC began operations in September 2002.

- 16 -

• Investment management and custody fees though Harrington Wealth Management Company were $112,000 for the three months ended June 30, 2003, compared to $93,000 for the three months ended June 30, 2002, an increase of $19,000 or 20.4%. For the six months ended June 30, 2003, fees were $230,000 compared to $178,000 for the same period ending in 2002, an increase of $52,000 or 29.2%.

Gain on the sale of securities and income from trading assets was $1.3 million for the three months ended June 30, 2003, compared to a loss of $111,000 for the three months ended June 30, 2002, an increase of $1.4 million. Gain on sale of securities and income from trading assets was $1.9 million for the six months ended June 30, 2003, as compared to $95,000 loss for the six months ended June 30, 2002. In the current quarter, the $1.3 million of income from trading assets includes a $828,000 gain on the sale of $10.0 million of commercial mortgage-backed securities (CMBS) to capture the economic profit associated with the spread tightening on this A-rated investment. The balance of the income from trading assets in the current quarter was a result of favorable changes in market spreads associated with the hedged total return CMBS swaps. Related to the gain on the sale of the securities, the Company paid-off $30.0 million of fixed rate FHLB advances with a weighted average coupon rate of 4.80% and a weighted average remaining maturity of 11 months and incurred a $892,000 market-based prepayment loss on the extinguishment of the debt for a net loss of $64,000 on both transactions.

The Company’s total other expenses were $4.5 million during the three months ended June 30, 2003, as compared to $3.4 million for the three months ended June 30, 2002, an increase of $1.0 million or 29.8%. The Company’s total other expenses totaled $8.8 million during the six months ended June 30, 2003, as compared to $6.9 million for the six months ended June 30, 2002, an increase of $1.9 million or 27.4%. The general increase in expenses was largely due to commission related compensation relative to increased mortgage banking originations, the expenses associated with the start-up and ongoing operations of LPMC 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 32.1% at June 30, 2003. At June 30, 2003, Los Padres Bank’s “liquid” assets totaled approximately $143.8 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, securities sold under agreements to repurchase and a revolving line of credit loan facility which it maintains with two banks. At June 30, 2003, the Company had $224.0 million in FHLB advances and had $78.2 million of additional borrowing capacity with the FHLB of San Francisco. During the June 2003 quarter, the Bank entered into a $15.0 million term repurchase agreement that replaced the Company’s FHLB debt for interest rate risk management purposes. At June 30, 2003, the Company’s note payable under its revolving line of credit amounted to $12.0 million and with an additional borrowing capacity under this loan facility of $13 million.

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

- 17 -

dividends in an aggregate amount not to exceed the greater of (a) $300,000 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 not to exceed 0.3 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 covenant 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 June 30, 2003, the total approved loan commitments outstanding amounted to $40.9 million. Certificates of deposit scheduled to mature in one year or less at June 30, 2003 totaled $308.4 million and FHLB borrowings scheduled to mature within the same period amounted to $194.0 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. 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. On April 23, 2003, Los Padres Bank received approval from the OTS to pay up to $3.0 million in cash dividends during the twelve-month period ending March 31, 2004. 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.

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 June 30, 2003, Los Padres Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations.

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, the Company in April, 2000 had informally agreed with the OTS that Los Padres Bank would maintain a total risk-based capital ratio and a leverage ratio of at least 11% and 6%, respectively, which is in excess of the OTS’ minimum capital requirements. By letter dated June 16, 2003, the OTS eliminated the informal agreement.

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

- 18 -

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.

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

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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 June 30, 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

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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.

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 June 30, 2003, these prepayment assumptions varied from 8% to 56% for fixed-rate

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mortgages and mortgage-backed securities and varied from 1% to 41% for adjustable-rate mortgages and mortgage-backed securities.

The following table sets forth at June 30, 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		$	19,796		$	15,832		$	9,727				($12,459	)		($28,151	)		($46,546	)
Market value gain (loss) of liabilities			(13,062	)		(10,257	)		(6,171	)			6,389			13,047			20,002

Market value gain (loss) of net assets before interest rate contracts			6,734			5,575			3,556				(6,070	)		(15,104	)		(26,544	)
Market value gain (loss) of interest rate contracts			(13,529	)		(10,281	)		(4,980	)			4,726			9,208			13,458

Total change in MVPE (2)			($6,795	)		($4,706	)		($1,424	)			($1,344	)		($5,896	)		($13,086	)

Change in MVPE as a percent of:
	MVPE(2)		-9.62	%		-6.66	%		-2.02	%			-1.90	%		-8.35	%		-18.53	%
	Total assets of Los Padres Bank		-.79	%		-.54	%		-.16	%			-.16	%		-.68	%		-1.52	%

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

(2)		Based on the Company’s pre-tax MVPE of $70.6 million at June 30, 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.

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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

The Company held its Annual Meeting of Shareholders on May 28, 2003.

1. At the Annual Meeting, the following individuals were elected to serve as directors of the Company for a three year term or until their successors are elected and qualified.


	VOTES FOR		WITHHELD AUTHORITY

William W. Phillips, Jr.		2,813,149		41,436
William D. Ross		2,813,149		44,936

Other directors currently serving whose terms expire in the year listed:


Paul O. Halme			2004
Stanley J. Kon			2004
Craig J. Cerny			2005
John J. McConnell			2005

2. The appointment of Deloitte & Touche, LLP as independent auditors of the Company for the year ended December 31, 2003 was ratified at the 2003 Annual Meeting of Shareholders by the following:

FOR: 2,843,385 AGAINST: 10,600 ABSTAIN: 600

Item 5: Other Information

Not applicable.

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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)

31.1		Section 302 Certification by Chief Executive Officer filed herewith.

31.2		Section 302 Certification by Chief Financial Officer filed herewith.

32		Section 906 Certification by Chief Executive Officer and Chief Financial Officer furnished herewith.

(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 April 15, 2003 announcing a press release of its earnings for the quarter ended March 31, 2003.

The Registrant filed a Current Report on Form 8-K with the SEC on May 14, 2003 furnishing the transcripts of two interviews conducted with Craig J. Cerny, the Chairman and Chief Executive Officer of the Company, by each of The Wall Street Transcript and CEOCFOinterviews.com. Also included was an updated investor presentation including, among other things, a review of certain financial results and trends through the period ended March 31, 2003.

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SIGNATURES

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


	HARRINGTON WEST FINANCIAL GROUP, INC.

Date: August 4, 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)

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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.

(1)		Includes loans secured by residential, land and commercial properties. At June 30, 2003, the Company had $18.9 million of construction loans secured by residential properties, $7.7 million of construction loans secured by land and $4.0 million of construction loans secured by commercial properties.

(2)		Includes loans collateralized by deposits and consumer line of credit loans.


				Six Months Ended June 30

				2003							2002

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

				(Dollars in thousands)
Interest-earning assets:
	Loans receivable (1)			$	471,705	$	16,131		6.84	%	$	436,051	$	16,138		7.40	%
	FHLB stock				12,795		318		4.97			6,024		181		6.00
	Securities and trading account assets (2)				316,016		6,103		3.86			188,886		5,014		5.31
	Cash and cash equivalents (3)				16,830		112		1.33			15,801		118		1.49

		Total interest-earning assets			817,346		22,664		5.55			646,762		21,451		6.63

Noninterest-earning assets					23,166							18,746

			Total assets	$	840,512						$	665,508

Interest-bearing liabilities:
	Deposits:
		NOW and money market accounts			129,925		741		1.14			78,243		659		1.68
		Passbook accounts and certificates of deposit			377,785		4,571		2.42			415,339		7,113		3.42

			Total deposits		507,710		5,312		2.09			493,582		7,772		3.15

	FHLB advances (4)				241,492		4,564		3.78			103,955		3,047		5.87
	Reverse Repurchase Agreements				5,518		74		2.73			1,075		6		1.20
	Other borrowings (5)				12,044		220		3.65			17,134		345		4.03

		Total interest-bearing liabilities			766,764		10,170		2.65			615,746		11,170		3.63

Non-interest-bearing deposits					18,923							13,076
Non-interest-bearing liabilities					11,143							5,603

			Total liabilities		796,830							634,425
Stockholders’ equity					43,682							31,083

	Total liabilities and stockholders’ equity			$	840,512						$	665,508

Net interest-earning assets (liabilities)				$	50,582						$	31,016

Net interest income/interest rate spread						$	12,494		2.90	%			$	10,281		3.00	%

Net interest margin									3.06	%						3.18	%

Ratio of average interest-earnings assets to average interest-bearing liabilities									106.60	%						105.04	%

(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 a note payable under a revolving line of credit.

(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 a note payable under a revolving line of credit.

	•		Loan and deposit fees were $424,000 and $833,000 for the three months and six months ended June 30, 2003, respectively, as compared to $137,000 and $372,000 for the three and six months ended June 30, 2002, respectively, an increase of $287,000 and $461,000 or 209.5% and 123.9%, respectively. Prepayment penalty fees remained strong with the lower interest rate environment and high refinancing levels.

	•		Mortgage banking fees were $664,000 and $1.2 million for the three and six months ended June 30, 2003, respectively, as compared to $146,000 and $358,000 for the three and six months ended June 30, 2002, respectively, an increase of $518,000 and $803,000 or 354.8% and 224.3%, respectively. These fees continued to build with the favorable real estate market and low interest rate environment contributing to heavy refinancings. Los Padres Mortgage Company, LLC (LPMC), a joint venture with the largest RE/MAX realty franchise in the Arizona market, continues to increase originations and added $285,000 to banking fee income for the three months ended June 30, 2003 and $494,000 for the six months ended June 30, 2003. LPMC began operations in September 2002.

			2. The appointment of Deloitte & Touche, LLP as independent auditors of the Company for the year ended December 31, 2003 was ratified at the 2003 Annual Meeting of Shareholders by the following:

			FOR: 2,843,385 AGAINST: 10,600 ABSTAIN: 600

	(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.