Harrington West Financial (HWFG) 10-Q Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2005

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.                þYes                         oNo

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).               oYes                              þNo

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

5,363,853 shares of Common Stock, par value $0.01 per share, outstanding as of July 27, 2005.

HARRINGTON WEST FINANCIAL GROUP, INC.

TABLE OF CONTENTS

	Page
Part I — Financial Information
Item 1.Condensed Consolidated Financial Statements (Unaudited)		2
Condensed Consolidated Statements of Financial Condition as of June 30, 2005 and December 31, 2004		2
Condensed Consolidated Statements of Income for the Three and Six Months Ended June, 2005 and 2004		3
Condensed Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the Six months ended June 30, 2005 and Year Ended December 31, 2004		4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004		6
Notes to Condensed Consolidated Financial Statements		7
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3.Quantitative and Qualitative Disclosures about Market Risk		35
Item 4.Controls and Procedures		35
Part II — Other Information
Item 1.Legal Proceedings		36
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds		36
Item 3.Defaults upon Senior Securities		36
Item 4.Submission of Matters to a Vote of Security Holders		37
Item 5.Other Information		37
Item 6.Exhibits		37
Signatures		38
EX-31.1
EX-31.2
EX-32

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PART 1-FINANCIAL INFORMATION

Item 1:Condensed Consolidated Financial Statements

HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)

(Dollars in thousands, except share data)

	June 30, 2005			December 31, 2004
ASSETS
Cash and cash equivalents	$	14,271		$	13,238
Trading account assets (with amortized cost of $887 and $943 at June 30, 2005 and December 31, 2004, respectively)		1,112			1,046
Securities available for sale (with amortized cost of $401,496 and $430,782 at June 30, 2005 and December 31, 2004, respectively)		400,885			431,206
Securities held to maturity		88			93
Loans receivable, (net of allowance for loan losses of $5,576 and $5,228 at June 30, 2005 and December 31, 2004, respectively)		634,890			598,442
Accrued interest receivable		3,883			3,322
Premises and equipment, net		9,470			8,886
Prepaid expenses and other assets		2,299			3,745
Investment in FHLB stock, at cost		17,081			15,134
Bank owned life insurance		17,214			—
Deferred tax asset		1,290			1,314
Goodwill		4,025			3,981
Core deposit intangible, net		2,758			923
TOTAL ASSETS	$	1,109,266		$	1,081,330
LIABILITIES & STOCKHOLDERS’ EQUITY
Deposits:
Interest bearing	$	605,259		$	564,552
Non-interest bearing		40,056			33,630
Total Deposits		645,315			598,182
FHLB advances		296,000			316,000
Securities sold under repurchase agreements		79,180			79,689
Subordinated debt		25,774			25,774
Accounts payable and accrued expenses		6,851			8,563
Income taxes payable		44			462
TOTAL LIABILITIES		1,053,164			1,028,670
STOCKHOLDERS’ EQUITY
Preferred stock, $.01 par value: 1,200,000 shares authorized:
none issued and outstanding
Common stock, $.01 par value; 10,800,000 shares authorized:
5,363,853 shares issued and outstanding as of June 30, 2005 and 5,278,934 shares issued and outstanding December 31, 2004		54			53
Additional paid-in capital		31,932			31,225
Retained earnings		26,652			23,637
Accumulated other comprehensive loss, net of tax		(2,536	)		(2,255	)
Total Stockholders’ Equity		56,102			52,660
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	1,109,266		$	1,081,330

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

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

Dollars in thousands, except share data

	Three months ended					Six months ended
	June 30,					June 30,
	2005		2004			2005			2004
INTEREST INCOME
Interest on loans	$	10,598	$	8,752		$	20,506		$	17,344
Interest and dividends on securities		4,565		3,975			8,965			7,630
Total interest income		15,163		12,727			29,471			24,974
INTEREST EXPENSE
Interest on deposits		3,500		2,521			6,585			5,056
Interest on FHLB advances and other borrowings		4,180		2,711			7,842			5,384
Total interest expense		7,680		5,232			14,427			10,440
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES		7,483		7,495			15,044			14,534
PROVISION FOR LOAN LOSSES		200		230			350			320
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		7,283		7,265			14,694			14,214
OTHER INCOME (LOSS)
Income from trading assets		71		273			783			611
Loss on extinguishment of debt		—		(189	)		—			(189	)
Other income gain (loss)		1		(2	)		(6	)		(12	)
Banking fee income		974		848			1,832			1,608
Total other income		1,046		930			2,609			2,018
OTHER EXPENSES
Salaries & employee benefits		2,615		2,704			5,426			5,387
Premises & equipment		994		741			1,898			1,465
Insurance premiums		126		121			251			269
Marketing		73		119			172			229
Computer services		189		168			370			323
Consulting fees		351		336			713			580
Office expenses & supplies		227		214			441			425
Other		563		467			1,077			931
Total other expenses		5,138		4,870			10,348			9,609
INCOME BEFORE INCOME TAXES		3,191		3,325			6,955			6,623
INCOME TAXES		1,240		1,345			2,769			2,584
NET INCOME	$	1,951	$	1,980		$	4,186		$	4,039
BASIC EARNINGS PER SHARE	$	0.36	$	0.38		$	0.79		$	0.77
DILUTED EARNINGS PER SHARE	$	0.35	$	0.35		$	0.74		$	0.72
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING		5,360,331		5,258,765			5,326,363			5,233,966
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING		5,639,756		5,613,093			5,620,992			5,576,272

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

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

AND COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands, except share data)

													Accumulated Other
	Common Stock				Additional Paid-in		Retained			Comprehensive			Comprehensive			Total Stockholders’
	Stock		Amt		Capital		Earnings			Income			Loss			Equity
Balance, January 1, 2004		5,206,109	$	52	$	30,710	$	20,073						($2,759	)	$	48,076
Comprehensive income:
Net income								8,209		$	8,209						8,209
Other comprehensive income, net of tax
Unrealized (losses) on securities											(324	)		(324	)		(324	)
Effective portion in change in fair value of cash flow hedges											828			828			828
Total comprehensive income										$	8,713
Stock options		72,825		1		515											516
Dividends on common stock								(4,645	)								(4,645	)
Balance, December 31, 2004		5,278,934		53		31,225		23,637						(2,255	)		52,660
Comprehensive income:
Net income								4,186		$	4,186						4,186
Other comprehensive income, net of tax
Unrealized (losses) on securities											(612	)		(612	)		(612	)
Effective portion in change in fair value of cash flow hedges											331			331			331
Total comprehensive income										$	3,905
Stock options exercised		84,919		1		707											708
Dividends on common stock								(1,171	)								(1,171	)
Balance, June 30, 2005		5,363,853	$	54	$	31,932	$	26,652					$	(2,536	)	$	56,102

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

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Six months ended
	June 30,
	2005			2004
DISCLOSURE OF RECLASSIFICATION AMOUNT:
Unrealized holding (loss) arising during period, net of tax (benefit) of $(202) and $(847) for the six months ending June 30, 2005 and 2004, respectively	$	(306	)	$	(1,234	)
Less: Reclassification adjustment for gains included in net income, net of tax expense of $202 and $249 for the six months ended June 30, 2005 and 2004, respectively		306			363
Net unrealized (loss) on securities, net of tax (benefit) of $(404) and $(1,096) for the six months ended June 30, 2005 and 2004, respectively	$	(612	)	$	(1,597	)
Unrealized net gain on cash flow hedges, net of tax expense of $214 and $1,169 for the three months ending June 30, 2005 and 2004, respectively	$	324		$	1,703
Less: Reclassification adjustment for net gains on cash flow hedges included in net income, net of tax (benefit) expense of $(4) and $57 for the six months ended June 30, 2005 and 2004, respectively		(7	)	��	83
Net unrealized gain on cash flow hedges, net of tax expense of $218 and $1,112 for the six months ended June 30, 2005 and 2004, respectively	$	331		$	1,620
Total change in other comprehensive (loss) income	$	(281	)	$	23

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

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HARRINGTON WEST FINANCIAL GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Six months ended			Six months ended
	June 30,			June 30,
	2005			2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	4,186		$	4,039
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of net deferred loan fees		311			354
Depreciation and amortization		653			522
Amortization of premiums and discounts on loans receivable and securities		1,359			1,263
Provision for loan losses		350			320
(Gain) on sale of investment securities		(508	)		(613	)
Activity in securities held for trading		(66	)		194
FHLB stock dividend		(309	)		(260	)
(Increase) decrease in accrued interest receivable		(561	)		(194	)
(Decrease) increase in income taxes payable		(418	)		(521	)
Deferred income taxes		24			450
Decrease (increase) in prepaid expenses and other assets		981			(6,044	)
(Decrease) increase in accounts payable		(1,381	)		8,867
Net cash provided by operating activities		4,621			8,377
CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) in loans receivable		(37,257	)		(47,530	)
Proceeds from sales of securities available for sale		38,197			19,069
Principal paydowns on securities available for sale		37,448			52,707
Principal paydowns on securities held to maturity		5			60
Purchases of securities available for sale		(46,639	)		(102,084	)
Purchase bank owned life insurance		(17,000	)		—
Acquisition, net of cash acquired		(1,954	)		—
Purchase of premises and equipment		(932	)		(1,477	)
Purchase of FHLB Stock		(1,638	)		(400	)
Net cash used in investing activities		(29,770	)		(79,655	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		47,154			19,101
(Decrease) Increase in securities sold under agreements to repurchase		(509	)		13,782
(Decrease) increase in FHLB advances		(20,000	)		32,500
Exercise of stock options on common stock		708			420
Dividends paid on common stock		(1,171	)		(960	)
Net cash provided by financing activities		26,182			64,843
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,033			(6,435	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		13,238			22,856
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	14,271		$	16,421
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid during the period for:
Interest	$	13,123		$	8,415
Income Taxes	$	2,120		$	2,827

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

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HARRINGTON WEST FINANCIAL GROUP, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business of the Company-Harrington West Financial Group, Inc. (the “Company”) is a diversified, community-based financial institution holding company, 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. We provide a broad menu of financial services to individuals and small to medium sized businesses and operate 15 banking offices in three markets as follows: eleven Los Padres banking offices on the California Central Coast, two Los Padres banking offices in Scottsdale, Arizona, and two banking offices are located in the Kansas City metropolitan area, which are operated as a division under the Harrington Bank brand name. The Company also owns Harrington Wealth Management Company, a trust and investment management company with $142.6 million in assets under management or custody, which offers services to individuals and small institutional clients through a customized asset allocation approach by investing predominantly in low fee, indexed mutual funds and exchange traded funds.

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

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

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

The unaudited condensed consolidated interim financial statements of the Company and subsidiaries presented herein should be read in conjunction with the consolidated financial statements of the Company for the year ended December 31, 2004, 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 commercial loans, consumer loans and mortgages, and general amounts for historical loss experience, economic conditions, uncertainties in estimating losses and inherent risks in the various credit portfolios, all of which may be susceptible to significant change.

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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, 2005 is adequate to absorb future losses inherent in the loan portfolio.

Fair Value of Options —The Company issues stock options to certain employees, officers, and directors. SFAS No. 123,Accounting for Stock-based Compensation,encourages, but does not require, companies to account for stock options using the fair value method, which generally results in compensation expense recognition. As also permitted by SFAS No. 123, the Company accounts for its fixed stock options using the intrinsic-value method, prescribed in APB Opinion No. 25,Accounting for Stock Issued to Employees, which generally does not result in compensation expense recognition. Under the intrinsic value method, compensation cost for stock options is measured as of the date of grant as the excess, if any, of the quoted market price of the Company’s stock over the exercise price of the options.

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The fair value of options granted under the Company’s incentive stock option plan were estimated on the date of grant using the Black-Scholes option-pricing model based on the assumptions below. Had the Company recognized compensation expense over the vesting period of the options based on the fair value method as discussed above, the Company’s pro forma net income and earnings per share for the three and six month periods ended June 30, 2005 and June 30, 2004 would have been as follows:

	Three months ended
Pro Forma Results	June 30, 2005		June 30, 2004
Net income:
As reported	$	1,951	$	1,980
Pro forma	$	1,893	$	1,943
Earnings per share — basic:
As reported	$	0.36	$	0.38
Pro forma	$	0.35	$	0.37
Earnings per share — diluted:
As reported	$	0.35	$	0.35
Pro forma	$	0.34	$	0.35

	Six months ended
Pro Forma Results	June 30, 2005		June 30, 2004
Net income:
As reported	$	4,186	$	4,039
Pro forma	$	4,069	$	3,964
Earnings per share — basic:
As reported	$	0.79	$	0.77
Pro forma	$	0.76	$	0.75
Earnings per share — diluted:
As reported	$	0.74	$	0.72
Pro forma	$	0.72	$	0.71

For purposes of this computation, the significant assumptions used for the six-month periods ending June 30, 2005 and June 30, 2004 computed on a weighted average basis, were:

	2005			2004
Risk free interest rate:		4.31	%		4.06	%
Expected life (years):		9			9
Dividend yield		2.49	%		2.33	%
Estimated volatility:		41.12	%		32.67	%

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Recent Accounting Pronouncements

     In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 (“SOP 03-3”),Accounting for Certain Loans or Debt Securities Acquired in a Transfer.SOP 03-3 addresses the accounting for differences between contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality, SOP 03-3 requires purchased loans and debt securities to be recorded initially at fair value based on the present value of the cash flows expected to be collected with no carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows to be collected. To the extent that the purchased loans or debt securities experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 will be effective for loans and debt securities acquired after December 31, 2004. Upon adoption on January 1, 2005, there was no impact on the Company’s financial position or results of operations. Management does not expect the adoption of this statement to have a material impact on the Company’s future financial position or consolidated results of operation.

     In December 2004, the Financial Accounting Standards Board (FASB) revised SFAS No. 123 (R) (“SFAS 123 (R)”),Share Based Payment. SFAS 123 (R) replaced existing requirements under SFAS No. 123 and APB 25. SFAS 123 (R) requires companies to measure and recognize compensation expense equal to the fair value of stock options or other share based payments. SFAS 123 (R) is effective for all interim and annual periods beginning after June 15, 2005 and, thus, will be effective for the Company beginning with the first quarter of calendar year 2006. The Company is in the process of evaluating the impact of this standard on its consolidated results of operation and financial position.

     In December 2004, the FASB issued SFAS No. 153 (“SFAS 153”),Exchanges of Nonmonetary Assets, an amendment of APB 29,Accounting for Nonmonetary Transactions. This Statement amends the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged and more broadly provides for exceptions regarding exchanges of nonmonetary assets that do not have commercial substance. This Statement is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Management does not anticipate the issuance of this Statement to have a material impact on the Company’s consolidated results of operation and financial position.

     In May 2005, the FASB issued SFAS No. 154 (“SFAS 154”),Accounting Changes and Error Corrections,that addresses accounting for changes in accounting principle, changes in estimates, changes required by an accounting pronouncement in the instance that the pronouncement does not include specific transition provisions and error correction. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle and error correction unless impracticable to do so. SFAS 154 states an exception to retrospective application when a change in accounting principle, or the method of applying it, may be inseparable from the effect of a change in accounting estimate. When a change in principle is inseparable from a change in estimate, such as depreciation, amortization or depletion, the change to the financial statements is to be presented in a prospective manner. The Statement and the required disclosures are effective for accounting changes and error corrections in fiscal years beginning after December 15, 2005. Management does not expect the adoption of this statement to have a material impact on the Company’s future financial position or consolidated results of operation.

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     In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, and directed the staff to issue proposed FSP EITF 03-1-a,Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1, as final. The final FSP will supersede EITF Issue No. 03-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments, and EITF Topic No. D-44,Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value. The final FSP (retitled FSP FAS 115-1,The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments) will replace the guidance set forth in paragraphs 10-18 of EITF Issue 03-1 with references to existing other-than-temporary impairment guidance, such as SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities, SEC Staff Accounting Bulletin No. 59,Accounting for Noncurrent Marketable Equity Securities, and APB Opinion No. 18,The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made. FSP FAS 115-1 will be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. Since fluctuations in fair value for available-for-sale securities are already recorded in accumulative other comprehensive (income) loss, adoption of this standard is not expected to have a significant impact on stockholder’s equity.

2. EARNINGS PER SHARE

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

	Three months ended June 30, 2005							Six months ended June 30, 2005
	Income		Shares		Per-Share			Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount			(Numerator)		(Denominator)		Amount
Basic EPS	$	1,951		5,360,331	$	.36		$	4,186		5,326,363	$	.79
Effect of dilutive stock options				279,425		(.01	)				294,629		(.05	)
Diluted EPS	$	1,951		5,639,756	$	.35		$	4,186		5,620,992	$	.74

	Three months ended June 30, 2004							Six months ended June 30, 2004
	Income		Shares		Per-Share			Income		Shares		Per-Share
	(Numerator)		(Denominator)		Amount			(Numerator)		(Denominator)		Amount
Basic EPS	$	1,980		5,258,765	$	.38		$	4,039		5,233,966	$	.77
Effect of dilutive stock options				354,328		(.03	)				342,306		(.05	)
Diluted EPS	$	1,980		5,613,093	$	.35		$	4,039		5,576,272	$	.72

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3. COMMITMENTS AND CONTINGENCIES

The following tables present our contractual obligations and commercial commitments as of June 30, 2005.

			Payment due period
			Less than		One to		Three to		More than
	Total		One Year		Three Years		Five Years		Five Years
	(In Thousands)
Contractual obligations:
Certificates of deposit	$	457,540	$	408,727	$	37,083	$	11,583	$	147
FHLB advances		296,000		277,000		—		—		19,000
Reverse Repurchase Agreements		79,180		20,180		29,000		15,000		15,000
Leases		20,883		1,325		2,630		2,538		14,390
Subordinated debt		25,774		—		—		—		25,774
Due to broker		—		—		—		—		—
Interest expense for debt obligations		46,705		4,364		8,175		6,179		27,987
Total contractual obligations	$	926,082	$	711,596	$	76,888	$	35,300	$	102,298

			Amount of Commitment Expiration Per Period
	Unfunded		Less than		One to		Three to		After
	Commitments		One Year		Three Years		Five Years		Five Years
	(In Thousands)
Commitments:
Commercial lines of credit	$	28,504	$	21,348	$	1,881	$	690	$	4,585
Consumer lines of credit(1)		40,135		1,904		—		252		37,979
Undisbursed portion of loans in process		57,727		33,618		24,109		—		—
Approved but, unfunded mortgage loans		10,581		10,581		—		—		—
Approved but, unfunded commercial loans		6,421		6,421		—		—		—
Approved but unfunded consumer loans		3,290		3,290		—		—		—
Letters of credit		3,954		2,438		1,516		—		—
Total commitments	$	150,612	$	79,600	$	27,506	$	942	$	42,564

(1) Line of credit with no stated maturity date is included in commitments for less than one year.

Item 2:Management’s Discussion and Analysis

Corporate Profile

     Harrington West Financial Group, Inc. (NASDAQ: HWFG) is a diversified, community-based, financial institution holding company. Our primary business is delivering an array of financial products and services to commercial and retail consumers through our fifteen full-service banking offices in multiple markets. We also operate Harrington Wealth Management Company, our wholly owned subsidiary, which provides trust and investment management services to individuals and small institutional clients through customized investment allocations and a high service approach. The culture of our company emphasizes building long-term customer relationships through exemplary personalized service. Our corporate headquarters are in Solvang, California with executive offices in Scottsdale, Arizona.

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Mission and Philosophy

     Our mission is to increase shareholder value through the development of highly profitable, community-based banking operations that offer a broad range of high value loan alternatives, deposit products, and investment and trust services for commercial and retail customers in the markets of the California central coast and the metropolitan areas of Kansas City and Phoenix/Scottsdale.

Multiple Market Strategy

     Although our markets are geographically dispersed, we can compete effectively in each region due to our considerable market knowledge of each area, our placement of local management with extensive banking experience in the respective market, our strong community ties that enhance relationship development, the favorable demographic and economic characteristics specific to each market, and our broad product menu.

     We gain operating efficiency from centralized operations, administration, and systems. The banking operations of each region, however, are distinct to its market and its clientele and led by a local management team responsible for the region’s profitable development. We operate the Kansas City offices under the Harrington Bank (dba) brand name; California and Arizona offices operate under the Los Padres Bank brand name.

     We believe this multiple market banking strategy benefits our shareholders by providing the Company with the ability to:

1.	Diversify its loan portfolio and thus economic and credit risk
2.	Capitalize on the most favorable growth markets
3.	Deploy elements of our diverse product mix that are best suited for each market
4.	Price products strategically among the markets to maximize profitability.

     While employing this strategy, we have expanded our banking facilities from four to fifteen offices since 1996. We operate eleven full-service offices on the central coast of California from Thousand Oaks to Atascadero, two banking offices in Johnson County, Kansas, the fastest growing area of the Kansas City metro, and two offices in Scottsdale, Arizona. We are considering additional expansion opportunities in each region and plan to open two to three offices every eighteen months. We evaluate opportunities for acquiring entities, which offer financial services, but remain value-oriented. We expect acquisitions will be accretive to earnings per share within a twelve-month period.

Product Line Diversification

     Over the last six years, we have broadened our product lines to diversify revenue sources and to become a full service community banking company. In 1999, we added Harrington Wealth Management Company, a federally registered trust and investment management company, to provide our customers a consultative and customized investment process for their trust and investment funds. In 2000, we added a full line of commercial banking and deposit products for small-to-medium-sized businesses and developed our consumer lending lines to include home equity lines of credit. In 2001, we added Internet banking and bill pay services to augment our in-branch services. In 2003, we further expanded mortgage banking and security brokerage activities in all of our markets.

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Modern Financial and Investment Management Skills

     We have considerable expertise in investment and asset liability management. Our Chief Executive Officer spent thirteen years in this field consulting on risk management practices with banking institutions and advising on mortgage and related assets managed on a short duration basis. We utilize excess capital in a short duration and high credit quality investment portfolio comprised largely of mortgage and related securities. Our goal is to produce a pre-tax return on these investments of 1.25% to 1.50% over the related funding cost. We believe our ability to price loans and investments on an option-adjusted spread basis and manage the interest rate risk of longer term, fixed rate loans allows us to compete effectively against other institutions, that do not offer these products.

Control Banking Risks

     We seek to control banking risks. Our disciplined credit evaluation and underwriting environment emphasizes the assessment of collateral support, cash flows, guarantor support, and stress testing. We manage operational risk through stringent policies, procedures, and controls and manage interest rate risk through our modern financial and hedging skills and the application of risk management tools.

Concentrate on Selected Performance Measures

     We evaluate our performance based upon the primary measures of return on average equity, which we seek to maintain in the mid-teens, earnings per share growth, and franchise value creation through the growth of deposits, loans, and wealth management assets.

Profitability Drivers

     We expect these factors will drive more consistent and growing profitability in the future:

1.	Increasing loans, deposits, and investment management and trust accounts in all of our markets.
2.	Changing the loan mix from residential mortgage loans to higher risk-adjusted spread earning categories such as business lending, commercial real estate lending, small tract construction and construction-to-permanent loan lending, and selected consumer lending activities such as home equity lines of credit.
3.	Growing our non-interest bearing consumer and commercial deposits and continuing to shift the deposit mix toward core deposit accounts.
4.	Diversifying and increasing our banking fee income through existing and new fee income sources such as our overdraft protection program and other deposit fees, loan fee income, Harrington Wealth Management trust and investment fees, and other retail banking fees.
5.	Achieving a high level of performance on our investment portfolio by earning a pre-tax total return over one month LIBOR of approximately 1.25% to 1.50% per annum.

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6. Controlling interest rate risk of the institution and seeking high credit quality of the loan and investment portfolios.

Together, we believe these factors will contribute to consistent and growing profitability. The effect of these factors on our financial results is discussed further in the following sections:

Results of Operations

     The Company reported net income of $2.0 million for the three months ended June 30, 2005, as compared to $2.0 million for the three months ended June 30, 2004, a decrease of $29 thousand or 1.5%. The Company reported net income of $4.2 million for the six months ended June 30, 2005, as compared to $4.0 million for the six months ended June 30, 2004, an increase of $147 thousand or 3.6%. The year to date increase in net income was primarily due to an increase in net interest income and other income, which was partially offset by an increase in non-interest expense. On a diluted earnings per share basis, the Company earned $.35 per share for the three months ended June 30, 2005 and for the three months ended June 30, 2004. On a diluted earnings per share basis, the Company earned $.74 per share for the six months ended June 30, 2005, compared to $.72 per share for the six months ended June 30, 2004. Return on average equity was 13.9% and 15.4% in the June quarter and year-to-date periods compared to 16.1% and 16.7% in the same periods in 2004, respectively.

     The Company’s net interest income decreased by $12 thousand or 22 basis points to $7.5 million in the June 2005 quarter over the June 2004 quarter. For the six months ended June 30, 2005, net interest income increased by $510 thousand or 3.5% to $15.0 million over the prior comparable period in 2004. The net interest margin decreased by 22 basis points to 2.82% during the three months ended June 30, 2005, compared to 3.04% in the same period of 2004. The net interest margin decreased by 18 basis points to 2.82% during the six months ended June 30, 2005, compared to 3.00% in the same period of 2004. The margin declined as a result of the lag in the repricing of some floating rate assets (tied to the 11^th District Cost of Funds and trailing Prime or Constant Maturity Treasury indices), and three month LIBOR based interest rate swap hedges relative to the repricing of the Company’s daily floating rate borrowings. This lag is generally one to three months and is expected to correct once the Federal Reserve slows the pace of, or ceases, the nine .25% rate increases experienced over the last year and with the change in the mix of loans to higher spread earning categories. Also, in the June 2005 quarter, HWFG purchased $17.0 million of bank owned life insurance (BOLI), which is invested in investment grade fixed income securities, has a crediting rate of 7.15%, and includes a stable value wrap by an investment grade banking institution. The net revenue from this BOLI is recorded in banking fee income. This transaction, although expected to be accretive to net earnings, had the effect of reducing HWFG’s net interest margin by approximately 5 basis points in the June 2005 quarter. See “Asset and Liability Management” and Item 3 of this Part I – “Quantitative and Qualitative Disclosures about Market Risks.”

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     The following tables set 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. Information is based on average daily balances during the periods presented.

	Three months ended June 30,
	2005							2004
	Average				Average			Average				Average
	Balance		Interest		Yield/ Cost			Balance		Interest		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	631,198	$	10,598		6.72	%	$	542,073	$	8,752		6.46	%
FHLB stock		16,754		191		4.56	%		14,022		140		4.01	%
Securities and trading account assets (2)		408,233		4,338		4.25	%		416,360		3,824		3.67	%
Cash and cash equivalents (3)		9,389		36		1.52	%		11,611		11		.39	%
Total interest-earning assets		1,065,574		15,163		5.69	%		984,066		12,727		5.17	%
Noninterest-earning assets		40,675							25,959
Total assets	$	1,106,249						$	1,010,025
Interest-bearing liabilities:
Deposits:
NOW and money market accounts		116,105		454		1.57	%		115,118		239		.84	%
Passbook accounts and certificates of deposit		453,760		3,046		2.69	%		439,945		2,282		2.09	%
Total interest-bearing deposits		569,865		3,500		2.46	%		555,063		2,521		1.83	%
FHLB advances (4)		325,088		3,281		4.04	%		271,900		2,046		2.98	%
Reverse Repurchase Agreements		80,512		526		2.62	%		76,685		500		2.58	%
Other borrowings (5)		25,774		373		5.78	%		15,464		165		4.27	%
Total interest-bearing liabilities		1,001,239		7,680		3.07	%		919,112		5,232		2.28	%
Non-interest-bearing deposits		38,990							29,194
Non-interest-bearing liabilities		10,018							12,601
Total liabilities		1,050,247							960,907
Stockholders’ equity		56,002							49,118
Total liabilities and stockholders’ equity	$	1,106,249						$	1,010,025
Net interest-earning assets (liabilities)	$	64,335						$	64,954
Net interest income/interest rate spread			$	7,483		2.62	%			$	7,495		2.89	%
Net interest margin						2.82	%						3.04	%
Ratio of average interest-earning assets to average interest-bearing liabilities						106.43	%						107.07	%

1)	Includes non-accrual loans. Interest income includes fees earned on loans originated.
2)	Consists of securities classified as available for sale, held to maturity and trading account assets.
3)	Consists of cash and due from banks and federal funds sold.
4)	Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.
5)	Consists of subordinated debt and note payable under a revolving line of credit.

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	Six months ended June 30,
	2005							2004
					Average							Average
	Average				Yield/			Average				Yield/
	Balance		Interest		Cost			Balance		Interest		Cost
	(Dollars in thousands)
Interest-earning assets:
Loans receivable (1)	$	622,692	$	20,506		6.59	%	$	533,537	$	17,344		6.50	%
FHLB stock		16,071		336		4.18	%		13,796		264		3.83	%
Securities and trading account assets (2)		417,370		8,558		4.10	%		409,435		7,343		3.59	%
Cash and cash equivalents (3)		9,144		71		1.55	%		12,751		23		.36	%
Total interest-earning assets		1,065,277		29,471		5.53	%		969,519		24,974		5.15	%
Noninterest-earning assets		33,150							24,659
Total assets	$	1,098,427						$	994,178
Interest-bearing liabilities:
Deposits:
NOW and money market accounts		117,796		840		1.43	%		118,612		518		.87	%
Passbook accounts and certificates of deposit		451,432		5,745		2.55	%		433,837		4,538		2.09	%
Total interest-bearing deposits		569,228		6,585		2.31	%		552,449		5,056		1.83	%
FHLB advances (4)		322,994		6,093		3.77	%		265,841		4,124		3.10	%
Reverse Repurchase Agreements		80,062		1,040		2.60	%		71,153		930		2.62	%
Other borrowings (5)		25,774		709		5.50	%		15,464		330		4.27	%
Total interest-bearing liabilities		998,058		14,427		2.89	%		904,907		10,440		2.31	%
Non-interest-bearing deposits		37,077							28,363
Non-interest-bearing liabilities		8,907							12,384
Total liabilities		1,044,042							945,654
Stockholders’ equity		54,385							48,524
Total liabilities and stockholders’ equity	$	1,098,427						$	994,178
Net interest-earning assets (liabilities)	$	67,219						$	64,612
Net interest income/interest rate spread			$	15,044		2.64	%			$	14,534		2.84	%
Net interest margin						2.82	%						3.00	%
Ratio of average interest-earning assets to average interest-bearing liabilities						106.73	%						107.14	%

1)	Includes non-accrual loans. Interest income includes fees earned on loans originated.
2)	Consists of securities classified as available for sale, held to maturity and trading account assets.
3)	Consists of cash and due from banks and federal funds sold.
4)	Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.
5)	Consists of subordinated debt and note payable under a revolving line of credit.

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     The following tables set 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 in 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, 2005 vs. June 30, 2004
	Increase (decrease) due to:
										Total Net
							Rate/			Increase
	Rate			Volume			Volume			(Decrease)
	(In Thousands)
Interest-earning assets:
Loans receivable (1)	$	1,389		$	5,757		$	(5,300	)	$	1,846
FHLB stock		78			110			(137	)		51
Securities and trading account assets (2)		2,419			(298	)		(1,607	)		514
Cash and cash equivalents (3)		131			(9	)		(97	)		25
Total net change in income on interest- earning assets		4,017			5,560			(7,141	)		2,436
Interest-bearing liabilities:
Deposits
NOW and money market accounts		835			8			(628	)		215
Passbook accounts and certificates of deposit		2,619			289			(2,144	)		764
Total interest-bearing deposits		3,454			297			(2,772	)		979
FHLB advances (4)		2,874			1,585			(3,224	)		1,235
Reverse Repurchase Agreements		27			99			(100	)		26
Other borrowings (5)		234			440			(466	)		208
Total net change in expense on interest- bearing liabilities		6,589			2,421			(6,562	)		2,448
Change in net interest income	$	(2,572	)	$	3,139		$	(579	)	$	(12	)

1)	Includes non-accrual loans. Interest income includes fees earned on loans originated.
2)	Consists of securities classified as available for sale, held to maturity and trading account assets.
3)	Consists of cash and due from banks and federal funds sold.
4)	Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.
5)	Consists of subordinated debt and a note payable under a revolving line of credit.

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	Six Months Ended
	June 30, 2005 vs. June 30, 2004
	Increase (decrease) due to:
							Rate/			Total Net
	Rate			Volume			Volume			Increase
	(In Thousands)
Interest-earning assets:
Loans receivable (1)	$	460		$	5,795		$	(3,093	)	$	3,162
FHLB stock		48			87			(63	)		72
Securities and trading account assets (2)		2,092			285			(1,162	)		1,215
Cash and cash equivalents (3)		152			(13	)		(91	)		48
Total net change in income on interest- earning assets		2,752			6,154			(4,409	)		4,497
Interest-bearing liabilities:
Deposits
NOW and money market accounts		660			(7	)		(331	)		322
Passbook accounts and certificates of deposit		1,974			368			(1,135	)		1,207
Total interest-bearing deposits		2,634			361			(1,466	)		1,529
FHLB advances (4)		1,789			1,772			(1,592	)		1,969
Reverse Repurchase Agreements		(16	)		233			(107	)		110
Other borrowings (5)		191			440			(252	)		379
Total net change in expense on interest- bearing liabilities		4,598			2,806			(3,417	)		3,987
Change in net interest income	$	(1,846	)	$	3,348		$	(992	)	$	510

1)	Includes non-accrual loans. Interest income includes fees earned on loans originated.
2)	Consists of securities classified as available for sale, held to maturity and trading account assets.
3)	Consists of cash and due from banks and federal funds sold.
4)	Interest on FHLB advances is net of hedging costs. Hedging costs include interest income and expense and ineffectiveness adjustments for cash flow hedges. The Company uses pay-fixed, receive floating LIBOR swaps to hedge the short term repricing characteristics of the floating FHLB advances.
5)	Consists of subordinated debt and a note payable under a revolving line of credit.

     The Company reported interest income of $15.2 million for the three months ended June 30, 2005, compared to $12.7 million for the three months ended June 30, 2004, an increase of $2.4 million or 19.1%. The Company reported interest income of $29.5 million for the six months ended June 30, 2005, compared to $25.0 million for the six months ended June 30, 2004, an increase of $4.5 million or 18.0%. The primary reason for the increase during the period was the increase in the volume of net loans receivable and a higher yield on securities and loans due to higher interest rates.

     The Company reported total interest expense of $7.7 million for the three months ended June 30, 2005, compared to $5.2 million for the three months ended June 30, 2004, an increase of $2.4 million or 46.8%. For the six months ended June 30, 2005, the Company reported total interest expense of $14.4 million, compared to $10.4 million for the six months ended June 30, 2004, an increase of $4.0 million or 38.2%. The increase in interest expense during the period was attributable to an increase in the volume of

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interest-bearing liabilities and an increase in the average rate on interest-bearing liabilities as a result of the upward repricing of interest bearing-liabilities due to rising market interest rates.

     The Company recorded a provision for loan losses of $200 thousand during the three months ended June 30, 2005, compared to $230 thousand for the three months ended June 30, 2004, a decrease of $30 thousand. The provision for loan losses was $350 thousand during the six months ended June 30, 2005, compared to $320 thousand for the six months ended June 30, 2004, an increase of $30 thousand. The provision reflects the reserves required based upon, among other things, the Company’s analysis of the composition, credit quality and growth of its commercial real estate and commercial and industrial loan portfolios. At June 30, 2005, the Company had $608 thousand of non-performing assets, as compared to $95 thousand of non-performing assets as of December 31, 2004 and $5 thousand of non-performing assets as of June 30, 2004.

     The non-performing loans consist of two commercial credit relationships, which are collateralized by all the business assets of the companies. These businesses have experienced weaker sales and cash flow or the collateral support has deteriorated due to aging or valuation reasons. Management is closely monitoring these credits and working through a plan to minimize losses, if any, to the Company. Loan losses were nominal in the quarter, equaling less than $1 thousand. The allowance for loan losses was increased to $5.6 million based on the growth in the loan portfolio and HWFG’s reserve levels for the nature and rating of the loans.

     The following table sets forth the activity in our allowance for loan losses for the periods indicated.

	For the Quarter Ended						For the Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	5,376		$	4,677		$	5,228		$	4,587
Charge-offs:
Real estate loans
Single-family residential		—			—			—			—
Multi-family residential		—			—			—			—
Commercial		—			—			—			—
Commercial & Industrial		—			—			—			—
Consumer and other loans		(0	)		(4	)		(2	)		(4	)
Total charge-offs		(0	)		(4	)		(2	)		(4	)
Provision for losses on loans		200			230			350			320
Balance at end of period	$	5,576		$	4,903		$	5,576		$	4,903
Allowance for loan losses as a percent of total loans outstanding		0.87	%		0.86	%		0.87	%		0.86	%
Ratio of net charge-offs to average loans outstanding		0.00	%		0.00	%		0.00	%		0.00	%

     The Company’s total other income, which includes banking fee income from our loans, deposits and investment and trust accounts, gains and losses on securities, and extinguishment of debt amounted to $1.0 million for the quarter ending June 30, 2005 compared to $930 thousand during the same quarter last

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year, an increase of $116 thousand or 12.5%. The Company’s total other income amounted to $2.6 million for the six month period ending June 30, 2005 compared to $2.0 million during the same period last year, an increase of $591 thousand or 29.3%. The increase in other income was partly attributable to banking fee income which increased by $126 thousand or 14.9% in the June 2005 quarter over the June 2004 quarter and $224 thousand or 13.9% in the six month period of June 2005 over the six month period of June 2004. The net gain on trading assets and related hedges was $71 thousand in the June 2005 quarter and $783 thousand in the 2005 year to date period compared to $273 thousand and $611 thousand, respectively, in the same periods in 2004.

     The Company attempts to manage its investment securities and the related borrowings and hedges thereof on a duration-matched basis and thus profit from its selection of undervalued investments. As such, net gains and losses on these investments are primarily the result of the changes in interest rate spreads between the securities and the hedged borrowings and the related effect on net market values. Given that market spreads have tightened considerably on mortgage investments and home equity asset backed securities (ABS) over the last 18 months, management sold $34.7 million of these securities in the June 2004 quarter. Spreads did widen marginally during the June 2005 quarter on commercial mortgage backed securities (CMBS) and ABS, as well as HWFG’s related CMBS and ABS total return swaps, pegged and hedged to either the Lehman CMBS 8.5+ year index or specific ABS securities. The net effect of this activity was a $71 thousand gain on securities for the quarter. As of June 30, 2005, HWFG had $120.0 million notional amount of total return swaps in our trading portfolio, consisting of $75.0 million in notional amount of CMBS and $45.0 million notional amount of home equity asset-backed total return swaps, whereby the Bank receives the spread between the yield on the index or basket of securities and comparable duration LIBOR rates and receives or pays the market value change due to the spread changes. As of June 30, 2005, a 1 basis point spread change is expected to have a $73 thousand pre-tax mark-to-market value effect on the total return swaps, resulting in gains as spreads narrow and losses when spreads widen.

     Management measures the performance of the investment portfolio as the spread between its total return (interest income plus net gains and losses on securities and hedges) and one month LIBOR with a goal of achieving a spread of 1.25% and 1.50%. For the June 2005 quarter and six month period, the investment portfolio generated annualized net returns of 1.08% and 1.20%, respectively. Management expects to manage the size of the investment portfolio opportunistically as equity capital levels warrant and based on the growth of core banking assets and liabilities.

     Banking fee income amounted to $974 thousand for the quarter ending June 30, 2005 compared to $848 thousand during the same quarter last year, an increase of $126 thousand or 14.9%. Banking fee income amounted to $1.8 million for the six-month period ending June 30, 2005 compared to $1.6 million during the same period last year, an increase of $224 thousand or 13.9%. Loan fees decreased due to the slowdown of refinancing activity, which decreased mortgage brokerage fees by $217 thousand or 25.6% when comparing the June 2005 six-month period to same period in 2004. Fees on deposits and other fee income and investment and trust income from Harrington Wealth Management Company were the main sources of the growth in banking fee income. Deposit and other retail banking fee income contributed $634 thousand for the six months ending June 2005, an increase of $165 thousand or 35.2% over the same period last year. Harrington Wealth Management’s trust fee income contributed $353 thousand for the six months ended June 2005, an increase of $62 thousand or 21.3%, compared to the same period in 2004.

     The increase in fee income for the comparable periods is emanating from all categories except the more volatile mortgage brokerage and loan prepayment penalty categories. For the first six months of 2004, HWFG benefited from the high rate of refinancing activity and loan originations. The Company has since focused on purchase mortgage business through its branches and has reduced the cost of its

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mortgage operations to improve profitability. HWFG’s overdraft protection program has largely contributed to the growth in deposits and related fees in the 2005 year-to-date period over the same period in 2004. This program provides HWFG’s customers the privilege to overdraft their checking account up to a set limit, whereby the Bank earns a fee but the customer avoids the embarrassment of any additional fees from a vendor. On April 8, 2005, HWFG implemented a $17.0 million BOLI, whereby the Company earns the cash build-up from investing in a professionally managed separate account of investment grade, fixed income securities, on a tax deferred basis due to the intent to hold the BOLI until maturity, and also receives the death benefit on insured employees. The BOLI added $214 thousand in net revenue in the June 2005 quarter.

     The following chart shows the comparison of banking fee income sources for the June 2005 quarter and year-to-date period over the same periods in 2004:

			(Dollars in thousands)
	June			June					June		June
	2005			2004		%			2005		2004		%
Banking Fee Type	Quarter			Quarter		Change			YTD		YTD		Change
Mortgage Brokerage Fee, Prepayment Penalties & Other Loan Fees	$	254		$	472		(46.2	%)	$	631	$	848		(25.6	%)
Deposit, Other Retail Banking Fees & Other Fee Income		317			230		37.8	%		634		469		35.2	%
Harrington Wealth Management Fees		189			146		29.5	%		353		291		21.3	%
BOLI Income, net		214			—					214
Total Banking Fee Income	$	974		$	848		14.9	%	$	1,832	$	1,608		13.9	%

     The Company’s total other expenses were $5.1 million during the three months ended June 30, 2005, as compared to $4.9 million for the three months ended June 30, 2004, an increase of $268 thousand or 5.5%. The Company’s total other expenses were $10.3 million during the six months ended June 30, 2005, as compared to $9.6 million for the six months ended June 30, 2004, an increase of $739 thousand or 7.7%. The increase in expenses was largely due to the expenses associated with the initial start-up of the Company’s new banking operations in each of our three markets, the acquisition of the Thousand Oaks banking office and its deposits, and an increase in general corporate expenses associated with the Company implementing new corporate governance regulations, including Sarbanes Oxley Act (SOX 404). The Company estimates that each new office adds approximately $400 thousand in operating expenses per year, and profitability attainment takes from 6 to 18 months. The new corporate governance regulations are expected to add approximately $300 thousand in incremental annual expenditures to the Company’s operating expenses in 2005 and an additional $575 thousand in 2006 in order for the Company to fully implement SOX 404 by the end of 2006.

     Net income was favorably influenced by the deferred tax treatment of BOLI income resulting in a reduction in HWFG’s effective income tax rate in the June 2005 quarter, declining from 40.6% in the March 2005 quarter to 38.9% in the June 2005 quarter. HWFG estimates its full year income tax rate to be approximately 39.8%.

Financial Condition

     The Company’s total assets increased $27.9 million or 2.6% to $1.1 billion at June 30, 2005. The increase was attributable to growth in net loans of $36.4 million or 6.1% to $634.9 million as of June 30, 2005, compared to $598.4 million at December 31, 2004. The Company’s primary focus with respect to

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its lending operations has historically been the direct origination of single-family and multi-family residential, commercial real estate, business, and consumer loans. As part of its strategic plan to diversify its loan portfolio, the Company, starting in 2000, has been increasing its emphasis on loans secured by commercial and industrial loans and consumer loans.

     The Company recognizes that certain types of loans are inherently more risky than others. For instance, the commercial real estate loans that the Company makes are riskier than home mortgages because they are generally larger, often rely on income from small-business tenants, and historically have produced higher default rates on an industry wide basis. Likewise commercial loans are riskier than consumer and mortgage loans because they are generally larger and depend upon the success of often complex businesses. Furthermore construction loans and land acquisition and development loans present higher credit risk than do other real estate loans due to their speculative nature. Unsecured loans are also inherently more risky than collateralized loans. However, these loans also provide a higher risk adjusted margin and diversification benefits to the loan portfolio.

     Non-single-family loans as a group increased to $536.6 million at June 30, 2005, compared to $505.2 million at December 31, 2004, an increase of $31.4 million while single-family residential loan balances increased to $106.3 million at June 30, 2005, compared to $100.5 million at December 31, 2004, an increase of $5.8 million.

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

	June 30, 2005						December 31, 2004						Change
	Amount			Percent			Amount			Percent			Amount
(Dollars in thousands)
Real Estate Loans:
Single-family	$	106,329			16.5	%	$	100,485			16.6	%	$	5,844
Multi-family		79,963			12.4			84,937			14.0			(4,974	)
Commercial		266,764			41.5			260,759			43.1			6,005
Construction (1)		46,477			7.2			34,981			5.8			11,496
Land acquisition and development		30,076			4.7			27,460			4.5			2,616
Commercial and industrial loans		86,511			13.5			72,240			11.9			14,271
Consumer loans		25,559			4.0			23,757			3.9			1,802
Other loans (2)		1,241			.2			1,044			0.2			197
Total loans receivable		642,920			100.0	%		605,663			100.0	%		37,257
Less:
Allowance for loan loss		(5,576	)					(5,228	)					(348	)
Net deferred loan fees		(2,041	)					(1,730	)					(311	)
Net (discount) premiums		(413	)					(263	)					(150	)
		(8,030	)					(7,221	)					(809	)
Loans receivable, net	$	634,890					$	598,442					$	36,448

(1)	Includes loans secured by residential, land and commercial properties. At June 30, 2005, we had $23.1 million of construction loans secured by single-family residential properties, $12.2 million secured by commercial properties, $3.3 million for land development and $7.9 million secured by multi-family residential properties.
(2)	Includes loans collateralized by deposits and consumer line of credit loans.

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     Securities classified as available for sale decreased to $400.9 million at June 30, 2005, as compared to $431.2 million at December 31, 2004, a decrease of $30.3 million or 7.0%. With the narrowing spreads on mortgage and related investments in recent quarters, management sold $37.7 million of home equity asset backed securities since December 31, 2004 and has become more selective in investment purchases. 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.

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     The amortized carrying cost, market values and gross unrealized gains and losses of securities are as follows:

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
			(Dollars in thousands)
Securities Available for Sale:
June 30, 2005
Mortgage-backed securities — pass through	$	132,092	$	322	$	(1,310	)	$	131,104
Collateralized mortgage obligations		63,704		—		(630	)		63,074
Commercial mortgage-backed securities		44,161		55		(102	)		44,114
Asset-backed securities (underlying securities mortgages)		155,725		1,138		(93	)		156,770
Asset-backed securities		4,217		—		(114	)		4,103
Corporate debt securities		1,597		123		—			1,720
	$	401,496	$	1,638	$	(2,249	)	$	400,885

			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
	(Dollars in thousands)
Securities Available for Sale:
December 31, 2004
Mortgage-backed securities — pass through	$	114,365	$	294		($957	)	$	113,702
Collateralized mortgage obligations		73,894		—		(495	)		73,399
Commercial mortgage-backed securities		47,545		472		(96	)		47,921
Asset-backed securities (underlying securities mortgages)		187,949		1,504		(64	)		189,389
Asset-backed securities		5,460		34		(351	)		5,143
Corporate debt securities		1,569		83		—			1,652
	$	430,782	$	2,387		($1,963	)	$	431,206

     The fair values of securities can change due to underlying credit quality of the issuer or collateral, prepayment speed changes, and changes in interest rates. All of the available for sale securities held by the Company are carried at their fair value. Adjustments to the carrying amount for changes in fair value for securities classified as available-for-sale are not recorded in the Company’s income statement. Instead, the after-tax effect of the change is shown in other comprehensive income. Consequently, as shown in the tables above, there are unrealized gains and losses related to the available for sale securities held by the Company.

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     The following table discloses the available for sale balances by categories that have an unrealized loss at June 30, 2005 with the corresponding duration of the loss. Included in the table are 25 securities that have been in an unrealized loss position for less than a year and 45 securities that have been in an unrealized loss position for more than one year. Although the securities have varying levels of credit risk, the Company has concluded that none of these securities is other than temporarily impaired, and the full recovery of principal and interest is expected if held to maturity. The Company has the ability and intent to hold these securities until recovery.

	Less than 12 Months					12 Months or More					Total
	(Dollars in thousands)
As of June 30, 2005
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities — pass through	$	43,158	$	(147	)	$	55,263	$	(1,163	)	$	98,421	$	(1,310	)
Collateralized mortgage obligations		18,492		(139	)		20,675		(491	)		39,167		(630	)
Commercial mortgage-backed securities		4,735		(60	)		23,798		(42	)		28,533		(102	)
Asset-backed securities (underlying securities mortgages)		23,858		(93	)		—		—			23,858		(93	)
Asset-backed securities		—		—			3,084		(114	)		3,084		(114	)
Corporate debt securities		—		—			—		—			—		—
	$	90,243	$	(439	)	$	102,820	$	(1,810	)	$	193,063	$	(2,249	)

	Less than 12 Months					12 Months or More					Total
	(Dollars in thousands)
As of June 30, 2004
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Mortgage-backed securities — pass through	$	54,582		($350	)	$	29,319		($607	)	$	83,901		($957	)
Collateralized mortgage obligations		61,773		(271	)		11,626		(224	)		73,399		(495	)
Commercial mortgage-backed securities		7,090		(70	)		832		(26	)		7,922		(96	)
Asset-backed securities (underlying securities mortgages)		18,711		(64	)		1,302		—			20,013		(64	)
Asset-backed securities		—		—			4,216		(351	)		4,216		(351	)
	$	142,156		($755	)	$	47,295		($1,208	)	$	189,451		($1,963	)

     As of June 30, 2005, there were forty-five securities in an unrealized loss position for greater than twelve months: forty-one mortgage backed securities, two collateralized mortgage obligation securities,

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one commercial mortgage-backed security, and one asset-backed security. As to the forty-four mortgage related secured securities, management believes that the unrealized loss associated with these investments is attributable to changes in interest rates and spreads, and accordingly, the unrealized losses are not “other-than-temporary impairments.” The Company has the ability and intent to hold these securities until recovery.

     The asset-backed security is collateralized by a pool of loans and leases on medical equipment and related assets and it had a fair value of $4.1 million and $5.1 million as of June 30, 2005 and December 31, 2004, respectively. The security is of a senior tranche with priority cash flow rights. This security is rated CCC by Moody’s and B1 by Fitch, as of June 30, 2005. Management believes the improvement in the unrealized loss from $351 thousand as of December 31, 2004 to $114 thousand as of June 30, 2005 is attributed to the decrease in delinquencies and default rates of the underlying loans. The delinquencies on the underlying loans of these securities have declined from 13.4% as of the December 2004 servicer’s report to 10.5% per the June 2005 servicer report. As of the six-months ended June 30, 2005, and as a result of our senior tranche position, 45.2% or $3.6 million of our outstanding principal has been returned, and the average life of the security is estimated to be less than two years. The value of this security increased by 12 points or $529 thousand from June 30, 2004 to June 30, 2005 due to the improvement in delinquencies, default rates and the repayment of underlying loans. Furthermore, management performs a stress test of the cash flows based on conservative delinquency, default and recovery rates on the underlying loans. Based on this analysis, all payments can be made on this security and, as such, the current unrealized loss associated with this investment is not an “other-than-temporary impairment”. The Company has the ability and intent to hold these securities until recovery.

     As of June 30, 2005, the following table presents the available for sale securities in a loss position for greater than twelve months and summarizes by category those securities that are pledged versus securities that are not pledged against the Company’s borrowings. Securities are pledged as collateral for FHLB advances, repurchase agreements and for our swap agreements.

	Pledged Securities					Unpledged Securities					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(Dollars in thousands)
Mortgage-backed securities — pass through	$	55,263	$	(1,163	)	$	—	$	—		$	55,263	$	(1,163	)
Collateralized mortgage obligations		20,675		(491	)		—		—			20,675		(491	)
Commercial mortgage-backed securities		23,798		(42	)		—		—			23,798		(42	)
Asset-backed securities		—		—			3,084		(114	)		3,084		(114	)
	$	99,736	$	(1,696	)	$	3,084	$	(114	)	$	102,820	$	(1,810	)

     Prepaid expenses and other assets decreased to $2.3 million at June 30, 2005, compared to $3.7 million as of December 31, 2004, a decrease of $1.4 million or 38.6%. The decrease was attributed to several prepaid assets nearing their renewal periods and a decrease in accounts receivables during the comparable period.

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     On April 8, 2005, the company invested in $17.0 of BOLI, whereby the Company earns the cash build-up from investing in a separate account of investment grade, fixed income securities, professionally managed on a tax deferred basis due to the intent to hold the BOLI until maturity, and also receives the death benefit on insured employees. BOLI which is invested in investment grade fixed income securities, has a crediting rate of 7.15% and includes a stable value wrap by an investment grade banking institution. The net revenue from BOLI is recorded in banking fee income.

     Core deposit intangible increased to $2.8 million at June 30, 2005, compared to $923 thousand as of December 31, 2004, an increase of $1.8 million. The increase was due to the purchase and assumption of the Thousand Oaks banking office purchased on May 20, 2005 for a premium of $1.9 million in cash. HWFG is currently amortizing the premium over an estimated useful life of 10 years. HWFG will be assessing the 10 year period based on previous acquisitions and may adjust the estimated useful life once our assessment is complete. Additionally, the Company incurred capital expenditures of $44 thousand in conjunction with the purchase and assumption of the Thousand Oaks office, which increased Goodwill to $4.0 million at June 30, 2005.

     Total deposits increased to $645.3 million as of June 30, 2005, as compared to $598.2 million as of December 31, 2004, an increase of $47.1 million or 7.9%. During the June 2005 quarter, deposit growth attributed was to the purchase of $42.9 million of deposits in Thousand Oaks, California and an increase of non-interest bearing deposits. Non-interest bearing deposits reached $40.1 million at June 30, 2005 compared with $33.6 million at December 31, 2004, an increase of $6.4 million or 19.1%. This increase in non-interest bearing deposits has contributed to controlling deposit cost relative to rising market rates in 2005.

     Advances from the Federal Home Loan Bank (“FHLB”) of San Francisco decreased to $296.0 million at June 30, 2005, compared to $316.0 million at December 31, 2004, a $20.0 million or 6.3% decrease. During the quarter, the Company reduced FHLB advances with the purchase and assumption of the Thousand Oaks office deposits of $42.9 million in May 2005, but were increased subsequently with new loan fundings. For additional information concerning limitations on FHLB advances, see “Liquidity and Capital Resources.”

     Stockholders’ equity increased to $56.1 million at June 30, 2005, as compared to $52.7 million at December 31, 2004, an increase of $3.4 million or 6.5%. The $3.4 million increase in stockholders’ equity was positively influenced by $4.2 million of net income recognized and $707 thousand of additional paid in capital from options exercised. Other comprehensive income decreased by $281 thousand due to changes in value of securities held as available for sale and interest rate hedge contracts, and the Company paid $1.2 million in dividends during the six month period.

Liquidity and Capital Resources

     Liquidity.The liquidity of Los Padres Bank, a consolidated subsidiary of the Company is monitored closely for regulatory purposes at the Bank level by calculating the ratio of cash, cash equivalents (not committed, pledged or required to liquidate specific liabilities), investments and qualifying mortgage-backed securities to the sum of total deposits plus borrowings payable within one year, was 22.6% at June 30, 2005. At June 30, 2005, Los Padres Bank’s “liquid” assets totaled approximately $143.0 million.

     In general, the Los Padres Bank’s liquidity is represented by cash and cash equivalents and is a product of its operating, investing and financing activities. The Bank’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

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and funds provided from operations. The Bank’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, 2005, the Bank had $296.0 million in FHLB advances and had $91.8 million of additional borrowing capacity with the FHLB of San Francisco based on a 35% of total Bank asset limitation. Additional borrowing capacity from the FHLB is further limited to $87.0 million based upon the collateral pledged at the FHLB as of June 30, 2005. The Bank also has $131.6 million of unpledged “AA” and “A” rated home equity asset-backed securities that can be pledged for further borrowings of $105.3 million utilizing reverse repurchase agreements.

     The Company has a revolving line of credit with a maximum borrowing capacity of $15.0 million with a maturity of September 30, 2007. We may utilize this line of credit as growth opportunities develop and to provide working capital. At June 30, 2005 and December 31, 2004, the Company was not indebted under its revolving line of credit.

     A substantial source of the Company’s cash flow from which it services its debt and capital trust securities, pays its obligations, and pays dividends to its shareholders is the receipt of dividends from Los Padres Bank. The availability of dividends from Los Padres Bank is limited by various statutes and regulations. In order to make such dividend payment, Los Padres Bank is required to provide 30 days advance notice to the Office of Thrift Supervision (“OTS”), during which time the OTS may object to such dividend payment. It is possible, depending upon the financial condition of Los Padres Bank and other factors, the OTS could object to the payment of dividends by Los Padres Bank on the basis that the payment of such dividends is an unsafe or unsound practice. On June 27, 2005, the OTS approved the payment of $3.6 million in dividends from Los Padres Bank to the Company over the next four quarters.

     Capital Resources.Federally insured savings institutions such as Los Padres Bank are required to maintain minimum levels of regulatory capital. Under applicable regulations, an institution is well capitalized if it has a total risk-based capital ratio of at least 10.0%, a Tier 1 risk-based capital ratio of at least 6.0% and a leverage ratio of at least 5.0%, with no written agreement, order, capital directive, prompt corrective action directive or other individual requirement by the OTS to maintain a specific capital measure. An institution is adequately capitalized if it has a total risk-based capital ratio of at least 8.0% and a Tier 1 risk-based capital ratio of at least 4.0% and a leverage ratio of at least 4.0% (or 3.0% if it has a composite rating of “1”). The regulation also establishes three categories for institutions with lower ratios: undercapitalized, significantly undercapitalized and critically undercapitalized. At June 30, 2005, Los Padres Bank met the capital requirements of a “well capitalized” institution under applicable OTS regulations. At June 30, 2005, the Bank’s Tier 1 (Core) Capital Ratio was 6.61%, Total Risk-Based Capital Ratio was 10.76%, Tier 1 Risk-Based Capital Ratio was 10.00% and Tangible Equity Ratio was 6.61%.

     On May 3, 2005, the Company announced a share repurchase program of up to 200,000 shares over the next year as market conditions warrant. These shares will be purchased in the open market or privately negotiated transactions. No Company shares were repurchased in the June 2005 quarter.

     On May 24, 2005, HWFG’s stockholders approved a new equity based compensation plan (the “Plan”). The purpose of the Plan is to promote the success of the Company by attracting, motivating, and retaining key employees, including officers and directors of the Company, through the grant of stock-based compensation awards and incentives for high levels of individual performance and improved financial performance of the Company. This Plan replaces the 1996 Stock Option Plan of which 20,109 options were remaining and have now been canceled. Under the new plan, a maximum number of shares of common stock that may be delivered pursuant to awards granted under this plan shall not exceed at any time 10% of the Company’s then issued and outstanding shares of common stock. The Plan is included in

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Appendix A of the proxy statement filed with the Securities and Exchange Commission on April 14, 2005. No options have been granted from this plan.

Asset and Liability Management

     The Company evaluates the change in its market value of portfolio equity (“MVPE”) to changes in interest rates and seeks to manage these changes to relatively low levels through various risk management techniques. MVPE is defined as the net present value of the cash flows from an institution’s existing assets, liabilities and off-balance sheet instruments. The MVPE is estimated by valuing our assets, liabilities and off-balance sheet instruments under various interest rate scenarios. The extent to which assets gain or lose value in relation to the gains or losses of liabilities determines the appreciation or depreciation in equity on a market value basis. MVPE analysis is intended to evaluate the impact of immediate and sustained interest rate shifts of the current yield curve upon the market value of the current balance sheet. In general, financial institutions are negatively affected by an increase in interest rates to the extent that interest-bearing liabilities mature or reprice more rapidly than interest-earning assets. This factor causes the income and MVPE of these institutions to increase as rates fall and decrease as interest rates rise.

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

     The Company’s asset and liability management strategy is formulated and monitored by the board of directors of Los Padres Bank. The Board’s written policies and procedures are implemented by the Asset and Liability Committee of Los Padres Bank (“ALCO”), which is comprised of Los Padres Bank’s chief executive officer, president/chief financial officer, chief lending officer, president of the Kansas region/chief commercial lending officer, principal accounting 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

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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 as amended requires that an entity recognize all interest rate contracts as either assets or liabilities in the statement of financial condition and measure those instruments at fair value. If certain conditions are met, an interest rate contract may be specifically designated as a fair value hedge, a cash flow hedge, or a hedge of foreign currency exposure. The accounting for changes in the fair value of an interest rate contract (that is, gains and losses) depends on the intended use of the interest rate contract and the resulting designation. To qualify for hedge accounting, the Company must show that, at the inception of the interest rate contracts, and on an ongoing basis, the changes in the fair value of the interest rate contracts are expected to be highly effective in offsetting related changes in the cash flows of the hedged liabilities. The Company has entered into various interest rate swaps for the purpose of hedging certain of its short-term liabilities. These interest rate swaps qualify for hedge accounting. Accordingly, the effective portion of the accumulated change in the fair value of the cash flow hedges is recorded in a separate component of stockholders’ equity, net of tax, while the ineffective portion is recognized in earnings immediately.

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

Critical Accounting Policies

     General.The discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, and the notes thereto, which have been prepared in accordance with generally accepted accounting principles of the United States of America. The preparation of these consolidated financial statements requires us to make a number of estimates and

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assumptions that affect the reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we evaluate our estimates and assumptions based upon historical experience and various other factors and circumstances. We believe that our estimates and assumptions are reasonable in the circumstances; however, actual results may differ significantly from these estimates and assumptions, which could have a material impact on the carrying value of assets and liabilities at the balance sheet dates and our results of operations for the reporting periods.

     The financial information contained in our consolidated financial statements is, to a significant extent, based on approximate measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when recognizing income or expense, recovering an asset or relieving a liability. We use historical loss factors to determine the inherent loss that may be present in our loan portfolio. Actual losses could differ significantly from the historical factors that we use. We also calculate the fair value of our interest rate contracts and securities based on market prices and the expected useful lives of our depreciable assets. We enter into interest rate contracts that are classified as trading account assets or to accommodate our own risk management purposes. The interest rate contracts are generally interest rate swaps, although we could enter into other types of interest rate contracts. We value these contracts at fair value using readily available and market quoted prices. We have not historically entered into derivative contracts, which relate to credit, equity, commodity, energy or weather-related indices. Generally accepted accounting principles themselves may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. As of June 30, 2005, we have not created any additional special purpose entities to securitize assets or to obtain off-balance sheet funding. Although we have sold loans in past years, those loans have been sold to third parties without recourse, subject to customary representations and warranties.

     Allowance for loan losses. The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two principles of accounting: (i) Statement of Financial Accounting Standards, or SFAS, No. 5,“Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and estimable; and (ii) SFAS No. 114,“Accounting by Creditors for Impairment of a Loan”and SFAS No. 118,“Accounting by Creditors for Impairment of a Loan-Income Recognition and Disclosures,”which requires that losses be accrued based on the differences between the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance. Our allowance for loan losses has four components: (i) an allocated allowance for specifically identified problem loans, (ii) a formula allowance for non-homogenous loans, (iii) an allocated allowance for large groups of smaller balance homogenous loans and (iv) an unallocated allowance, which contains amounts that are based on management’s evaluation of conditions that are not directly measured in the determination of the specific allowances.Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses a model based on historical losses as an indicator of future losses and as a result could differ from the losses incurred in the future; however, since this history is updated with the most recent loss information, the differences that might otherwise occur may be mitigated. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, discounted cash flows, fair market value of collateral and secondary market information are all used to estimate those losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in either the formula or specific allowances.

     Trading and Investment Portfolio.Substantially all of our securities are classified as available for sale securities and, pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 115, are

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reported at fair value with unrealized gains and losses included in stockholders’ equity. We invest in a portfolio of mortgage-backed and related securities, interest rate contracts, U.S. Government agency and enterprises securities and, to a much lesser extent, equity securities. The Company has also entered into various total return swaps in an effort to enhance income, where cash flows are based on the level and changes in the yield spread on investment grade commercial mortgage backed security indexes and specific “A” rated asset backed home equity securities relative to similar duration LIBOR swap rates. These swaps do not qualify for hedge accounting treatment and are included in the trading account assets and are reported at fair value with realized and unrealized gains and losses on these instruments recognized in income (loss) from trading account assets, pursuant to SFAS No. 115.

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

Cautionary Statement Regarding Forward-Looking Statements.

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

• we may experience higher defaults on our loan portfolio than we expect;

• changes in management’s estimate of the adequacy of the allowance for loan losses;

• changes in management’s valuation of our mortgage-backed and related securities portfolio and interest rate contracts;

• increases in competitive pressure among financial institutions;

• general economic conditions, either nationally or locally in areas in which we conduct or will conduct our operations, or conditions in financial markets may be less favorable than we currently anticipate;

• our net income from operations may be lower than we expect;

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• natural disasters;

• we may lose more business or customers than we expect, or our operating costs may be higher than we expect;

• the availability of capital to fund our growth and expansion;

• changes in the interest rate environment and their impact on customer behavior and our interest margins;

• political and global changes arising from the war on terrorism;

• the impact of repricing and competitors’ pricing initiatives on loan and deposit products;

• our ability to adapt successfully to technological changes to meet customers’ needs and developments in the market place;

• our ability to access cost-effective funding;

• our ability to successfully complete our strategy to continue to grow our business in California, Kansas and Arizona;

• our returns from our securities portfolio may be lower than we expect; or

• legislative or regulatory changes or changes in accounting principles, policies or guidelines may adversely affect our ability to conduct our business.

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

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

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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, 2005, these prepayment assumptions varied from 7.4% to 56.7% for fixed-rate mortgages and mortgage-backed securities and varied from 7.3% to 39.6% for adjustable-rate mortgages and mortgage-backed securities.

     The following table sets forth at June 30, 2005 the estimated sensitivity of the 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	$	36,884		$	24,980		$	13,561		$	(16,736	)	$	(36,154	)	$	(57,357	)
Market value gain (loss) of liabilities		(23,131	)		(15,994	)		(8,281	)		8,554			17,214			26,004
Market value gain (loss) of net assets before interest rate contracts		13,753			8,986			5,280			(8,182	)		(18,940	)		(31,353	)
Market value gain (loss) of interest rate contracts before tax		(16,937	)		(10,954	)		(5,317	)		5,008			9,739			14,214
Total change in MVPE (2)	$	(3,184	)	$	(1,968	)	$	(37	)	$	(3,174	)	$	(9,201	)	$	(17,139	)
Change in MVPE as a percent of:
MVPE(2)		-3.43	%		-2.12	%		-0.04	%		-3.42	%		-9.91	%		-18.47	%
MVPE post shock ratio (3)		-0.54	%		-0.36	%		-0.10	%		-0.16	%		-0.57	%		-1.17	%

(1)	Assumes an instantaneous parallel change in interest rates at all maturities.
(2)	Based on the Company’s pre-tax tangible MVPE of $92.8 million at June 30, 2005.
(3)	Pre-tax tangible MVPE as a percentage of tangible assets.

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

Item 4:Controls and Procedures

     As of the end of the period covered by this report the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and

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operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). The evaluation was based on confirmations provided by a number of senior officers. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. For the quarter ended June 30, 2005, there have been no significant changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

     Disclosure controls and procedures are Company controls designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing these controls and procedures, management recognizes that they can only provide reasonable assurance of achieving the desired control objectives. Management also evaluated the cost-benefit relationship of possible controls and procedures.

PART II- OTHER INFORMATION

Item 1:Legal Proceedings

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

Item 2:Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

Item 3:Defaults Upon Senior Securities

Not applicable.

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

The following items were submitted to the security holders for approval at the annual meeting held on May 24, 2005 :

Election of the following two persons for a term of three years to the Board of Directors of the Company.

The results of the vote were as follows:

NAME	FOR		WITHHELD
Craig J. Cerny		4,839,872		182,745
Dr. John J. McConnell		4,836,579		186,038

Approval of the 2005 Equity Based Compensation Plan.

FOR	AGAINST		ABSTAIN
3,155,337		712,524		26,029

Ratification of independent auditors

FOR	AGAINST		ABSTAIN
4,955,406		62,991		4,220

Item 5:Other Information

Not applicable.

Item 6:Exhibits

EXHIBIT NO.	DESCRIPTION
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.

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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 12, 2005	By:	/S/ CRAIG J. CERNY
	Craig J. Cerny, Chief Executive Officer
	(Principal Executive Officer)
	By:	/S/ WILLIAM W. PHILLIPS
	William W. Phillips,
	President, Chief Operating Officer and
	Chief Financial Officer
	(Principal Financial and
	Accounting Officer)

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