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Harrington West Announces Financial Results for the March 2008 Quarter and Declares a Regular Quarterly Dividend of 7 Cents Per Share

Business Wire, May 5, 2008

SOLVANG, Calif. -- Harrington West Financial Group, Inc. (Nasdaq: HWFG), the holding company for Los Padres Bank, FSB (LPB) and its division, Harrington Bank, today announced a $3.2 million loss or 58 cents per diluted share for the first quarter of 2008. This loss was due to $4.5 million in after-tax realized and unrealized losses on its $80 million notional amount of AAA-rated Commercial Mortgage Backed Securities (CMBS) total rate of return (TROR) swap position net of gains and losses on other CMBS and CMBS hedges. These financial results for the March 2008 quarter compare to the $1.9 million or 33 cents per diluted share earned in the March 2007 quarter. HWFG expects to return to profitability in the June 2008 quarter.

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AAA-rated CMBS spreads (Lehman AAA 8.5+ year index) widened markedly in the quarter to the duration matched LIBOR benchmark by 157 bps, from 104 bps at December 31, 2007 to 261 bps at March 31, 2008. Over the five year period leading up to the credit crisis which began in the second half of 2007, this AAA-rated CMBS index spread averaged 33 bps, and ranged from a low of 22 bps to a high of 60 bps. $70 million of HWFG's AAA-rated CMBS TROR swap positions expired by March 31, 2008 and were not renewed. The remaining $10 million notional amount expired at April 30, 2008 and was cross hedged until expiration. These positions were established to capitalize on a diversified portfolio of CMBS as spreads widened in the third quarter of 2007. In the period from 2003 to 2006, HWFG had earned $3.7 million after-tax on such positions. In early April 2008, HWFG purchased about $50 million of AAA-rated CMBS in its available for sale (AFS) portfolio on a hedged basis to earn the wide risk-adjusted spreads still available on these securities. The gains and losses on these securities will be reflected in equity (other comprehensive income) and not earnings. CMBS spreads tightened by 45 bps in April 2008 as measured by the Lehman 8.5+ year index.

Core banking income after-tax (a measure of recurring income, which excludes mark-to-market gains and losses and uses HWFG's effective tax rate of 37.5%) was $1.3 million or 24 cents per diluted share in the March 2008 quarter compared to $1.9 million or 33 cents per diluted share in the March 2007 quarter. The decline in after-tax core banking income in the March 2008 over March 2007 quarter is primarily due to a higher provision for loan losses and higher operating expenses (start-up of the Surprise, Arizona banking center and higher insurance costs) in the March 2008 quarter over the March 2007 quarter.

HWFG's Board of Directors declared a regular quarterly dividend of 7 cents per share, down from 12.5 cents per share in prior quarters due to the difficult operating conditions and HWFG's recent financial performance. This dividend will be paid on May 22, 2008 to holders of record on May 15, 2008. On April 23, 2008, HWFG completed its previously announced private placement of common stock, raising $4.3 million in proceeds by selling 550 thousand shares at $7.75 per share. $2.2 million of this offering closed as of March 31, 2008, and $2.1 million closed on April 23, 2008, after receiving regulatory approval for a rebuttal of control filing. This capital will be used to support the company's capital base in the current environment and for growth of the banking franchise. Los Padres Bank remained well capitalized at March 31, 2008 with a core tangible capital ratio of 6.7% and a risk based capital ratio of 10.2%.

HWFG is taking steps to further increase its capital base with an emphasis on strategies that are not dilutive to its book value per share. To that end, on April 25, 2008, it reached agreement to sell its real estate investment in Princeville, Hawaii for $1.2 million with an expected pre-tax gain of approximately $800 thousand. Furthermore, on April 30, 2008, HWFG sold $16.3 million of lower spread earning fixed rate single family mortgage loans with an approximate net pre-tax gain of $250 thousand.

Financial Performance Review and Developments

HWFG continues to be affected by the dislocations in the credit markets, the weak real estate market, and the overall slowdown in the economy. Although its investment portfolio is of high credit quality, spreads on these largely mortgage investments have widened greatly due to the severe illiquidity and credit crisis in the markets, and as a result, the prices have declined. HWFG performs independent analysis of the credit quality of the investment portfolio and its ability to earn all cash flows, and based on this analysis and the current state of the housing market, it expects to earn all the related principal and interest from these investments. However, a further weakening of the housing and general economy could affect this expected outcome adversely. Also, although HWFG has not experienced concentrated credit quality issues in its loan portfolio due to its diversification by market and loan type and underwriting standards, the weak real estate markets and economy have affected some borrowers and related credits, with deterioration of credit quality in some already classified credits. The financial results and developments for this quarter follow:

Business Services Industry

Harrington West Announces Financial Results for the March 2008 Quarter and Declares a Regular Quarterly Dividend of 7 Cents Per Share

Business Wire, May 5, 2008

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