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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q (Mark One) x
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended March 31, 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 No.: 000-50545 SOUTHWEST COMMUNITY BANCORP Incorporated Under the Laws of the State of California I.R.S. EMPLOYER IDENTIFICATION NO.: 30-0136231 5810 EL CAMINO REAL
CARLSBAD, CALIFORNIA 92008
TELEPHONE: (760) 918-2616 Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or15(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. Yes x          No o Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). Yes o          No x Number of shares of Common Stock outstanding as of April 30, 2005: 3,570,716




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INDEX PART I  Financial Information Item 1 - Financial Statements
    
    
    3Consolidated Balance Sheets as of March 31, 2005 (Unaudited) and December 31, 2004
    
    
    3Consolidated Statements of Income for the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    4Consolidated Statements of Shareholders Equity and Comprehensive Income for the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and 2004 (Unaudited)
    
    
    6Notes to Consolidated Financial Statements (Unaudited)
    
    
    7Item 2- Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3- Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4- Controls and Procedures
    
    
    18PART II  Other InformationItem 1- Legal Proceedings
    
    
    19Item 2- Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3- Defaults upon Senior Securities
    
    
    19Item 4- Submission of Matters to a Vote of Security Holders
    
    
    19Item 5- Other Information
    
    
    19Item 6- Exhibits
    
    
    19SIGNATURES
    
    
    20Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
 2




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PART I  Financial Information 
 Item 1  Financial Statements
 
 SOUTHWEST COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
(dollars in thousands) March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)AssetsCash and due from banks
    
    $
    147,851
    
    
    $
    101,162Federal funds sold
    
    
    66,355
    
    
    
    69,190Cash and cash equivalents
    
    
    214,206
    
    
    
    170,352Interest-bearing deposits in financial institutions
    
    
    267
    
    
    
    267Investment securities available-for-sale
    
    
    82,506
    
    
    
    61,489Investment securities held-to-maturity
    
    
    286
    
    
    
    316Loans, net of unearned income
    
    
    287,312
    
    
    
    283,600Less allowance for loan losses
    
    
    4,062
    
    
    
    3,744Net loans
    
    
    283,250
    
    
    
    279,856Premises and equipment
    
    
    3,544
    
    
    
    3,784Federal Home Loan Bank stock at cost
    
    
    883
    
    
    
    1,301Cash surrender value of life insurance
    
    
    8,783
    
    
    
    6,306Other assets
    
    
    11,423
    
    
    
    9,203Total Assets
    
    $
    605,148
    
    
    $
    532,874Liabilities and Shareholders EquityNoninterest-bearing demand
    
    $
    413,852
    
    
    $
    362,617Money market and NOW
    
    
    121,238
    
    
    
    101,875Savings
    
    
    8,015
    
    
    
    7,831Time deposits under $100,000
    
    
    3,885
    
    
    
    3,827Time deposits $100,000 and over
    
    
    5,242
    
    
    
    6,612Total Deposits
    
    
    552,232
    
    
    
    482,762Accrued interest and other liabilities
    
    
    3,564
    
    
    
    2,976Junior subordinated debt
    
    
    8,248
    
    
    
    8,248Total Liabilities
    
    
    564,044
    
    
    
    493,986Shareholders EquityCommon stock, no par value, 28,125,000 shares
authorized, 3,570,716 and 3,484,266 shares issued
and outstanding in 2005 and 2004, respectively
    
    
    31,195
    
    
    
    29,901Retained earnings
    
    
    10,632
    
    
    
    9,107Accumulated other comprehensive income (loss)
    
    
    (723
    )
    
    
    (120
    )Total Shareholders Equity
    
    
    41,104
    
    
    
    38,888Total Liabilities and Shareholders Equity
    
    $
    605,148
    
    
    $
    532,874
 The accompanying notes are an integral part of these financial statements 3




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SOUTHWEST COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
(dollars in thousands, except per share data) Three Months EndedMarch 31,2005
    
    
    2004(Unaudited)Interest IncomeInterest and fees on loans
    
    $
    5,353
    
    
    $
    3,780Investment securities
    
    
    737
    
    
    
    217Federal funds sold and other
    
    
    339
    
    
    
    42Total interest income
    
    
    6,429
    
    
    
    4,039Interest ExpenseDeposits
    
    
    494
    
    
    
    164Borrowings
    
    
    119
    
    
    
    115Total interest expense
    
    
    613
    
    
    
    279Net interest income
    
    
    5,816
    
    
    
    3,760Provision for loan losses
    
    
    315
    
    
    
    300Net interest income after provision
    
    
    5,501
    
    
    
    3,460Noninterest IncomeFees and service charges
    
    
    713
    
    
    
    1,008Item processing income
    
    
    1,490
    
    
    
    1,242Gain on sale of SBA loans
    
    
    338
    
    
    
    256Other income
    
    
    203
    
    
    
    124Total noninterest income
    
    
    2,744
    
    
    
    2,630Noninterest ExpenseSalaries and employee benefits
    
    
    3,174
    
    
    
    2,390Occupancy and equipment
    
    
    1,083
    
    
    
    933Other
    
    
    1,473
    
    
    
    943Total noninterest expense
    
    
    5,730
    
    
    
    4,266Income before income taxes
    
    
    2,515
    
    
    
    1,824Income taxes
    
    
    990
    
    
    
    728Net income
    
    $
    1,525
    
    
    $
    1,096Basic earnings per common share
    
    $
    0.41
    
    
    $
    0.36Diluted earnings per common share
    
    $
    0.35
    
    
    $
    0.30
 The accompanying notes are an integral part of these financial statements 4




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SOUTHWEST COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated Statements of Shareholders Equity and Comprehensive Income
(dollars in thousands) AccumulatedOtherCommon Stock
    
    
    Comprehensive
    
    
    Retained
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Income
    
    
    Earnings
    
    
    Income (loss)
    
    
    TotalBalance, December 31, 2003
    
    
    2,902,462
    
    
    $
    14,676
    
    
    
    
    
    
    $
    4,362
    
    
    $
    (76
    )
    
    $
    18,962Options exercised
    
    
    15,563
    
    
    
    80
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    80Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    $
    1,096
    
    
    
    1,096
    
    
    
    
    
    
    
    1,096Net unrealized gain on securities
net of tax of $109
    
    
    
    
    
    
    
    
    
    
    156
    
    
    
    
    
    
    
    156
    
    
    
    156Total comprehensive income
    
    
    
    
    
    
    
    
    
    $
    1,252Balance, March 31, 2004 (unaudited)
    
    
    2,918,025
    
    
    $
    14,756
    
    
    
    
    
    
    $
    5,458
    
    
    $
    80
    
    
    $
    20,294Balance, December 31, 2004
    
    
    3,484,266
    
    
    $
    29,901
    
    
    
    
    
    
    $
    9,107
    
    
    $
    (120
    )
    
    $
    38,888Options exercised, including tax
benefit of $928
    
    
    84,650
    
    
    
    1,277
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,277Warrants exercised
    
    
    1,800
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    $
    1,525
    
    
    
    1,525
    
    
    
    
    
    
    
    1,525Net unrealized loss on securities
net of tax benefit of $421
    
    
    
    
    
    
    
    
    
    
    (603
    )
    
    
    
    
    
    
    (603
    )
    
    
    (603
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    $
    922Balance, March 31, 2005 (unaudited)
    
    
    3,570,716
    
    
    $
    31,195
    
    
    
    
    
    
    $
    10,632
    
    
    $
    (723
    )
    
    $
    41,104
 The accompanying notes are an integral part of these financial statements 5




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SOUTHWEST COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(dollars in thousands) Three Months EndedMarch 31,2005
    
    
    2004(Unaudited)Operating ActivitiesNet Income
    
    $
    1,525
    
    
    $
    1,096Depreciation and amortization
    
    
    423
    
    
    
    398Amortization/accretion of premiums/discounts on
investment securities, net
    
    
    226
    
    
    
    64Provision for loan losses
    
    
    315
    
    
    
    300Deferred income tax benefit
    
    
    (159
    )
    
    
    (213
    )Increase in cash value of life insurance
    
    
    (77
    )
    
    
    (44
    )Net change in other assets and liabilities
    
    
    (125
    )
    
    
    146Net Cash Provided by Operating Activities
    
    
    2,128
    
    
    
    1,747Investing ActivitiesChange in deposits in other financial institutions, net
    
    
    
    
    
    
    101Redemption (purchase) of FHLB stock, net
    
    
    418
    
    
    
    (428
    )Purchase of investment securities available-for-sale
    
    
    (24,267
    )
    
    
    Proceeds from maturities of investment securities available-for-sale
    
    
    2,001
    
    
    
    1,366Proceeds from maturities of investment securities held-to-maturity
    
    
    30
    
    
    
    111Purchases of premises and equipment
    
    
    (183
    )
    
    
    (280
    )Net increase in loans
    
    
    (3,709
    )
    
    
    (22,872
    )Purchase of life insurance
    
    
    (2,400
    )
    
    
    Purchase of minority interest in FDSI
    
    
    
    
    
    
    (3,350
    )Change in minority investment in subsidiary
    
    
    
    
    
    
    15Net Cash Used in Investing Activities
    
    
    (28,110
    )
    
    
    (25,337
    )Financing ActivitiesNet increase in deposits
    
    
    69,470
    
    
    
    21,754Proceeds from borrowing
    
    
    
    
    
    
    2,000Proceeds from exercise of stock options
    
    
    349
    
    
    
    80Proceeds from exercise of stock warrants
    
    
    17Net Cash Provided by Financing Activities
    
    
    69,836
    
    
    
    23,834Net Increase in Cash and Cash Equivalents
    
    
    43,854
    
    
    
    244Cash and Cash Equivalents at Beginning of Period
    
    
    170,352
    
    
    
    114,547Cash and Cash Equivalents at End of Period
    
    $
    214,206
    
    
    $
    114,791Supplemental Disclosures of Cash Flow InformationCash Paid for Interest
    
    $
    610
    
    
    $
    271Cash Paid for Taxes
    
    $
    
    
    
    $
    350Non-Cash Investing ActivitiesNet Change in Accumulated Other Comprehensive Income
    
    $
    (603
    )
    
    $
    156
 The accompanying notes are an integral part of these financial statements 6




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SOUTHWEST COMMUNITY BANCORP
Notes to Consolidated Financial Statements (Unaudited) Note 1  Summary of Significant Accounting Policies The accounting and reporting policies of Southwest Community Bancorp and subsidiaries conform
to accounting principles generally accepted in the United States of America and to general
practices followed by the banking industry. In the opinion of management, the unaudited
consolidated financial statements contain all (consisting of only normal recurring adjustments)
adjustments necessary to present fairly the Companys consolidated financial position at March 31,
2005 and results of operations and changes in cash flows for the three month periods ended March
31, 2005 and 2004. Certain information and footnote disclosures normally presented in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been omitted. These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements for the year ended December 31, 2004
included in the Companys Annual Report on Form 10-K. Nature of Operations Southwest Community Bancorp (Southwest Community or holding company on a parent -only
basis and the Company, we or our on a consolidated basis) is a bank holding company that was
incorporated on December 4, 2002, under the laws of the State of California for the purpose of
becoming the holding company for Southwest Community Bank (the Bank) and the Banks
majority-owned subsidiary, Financial Data Solutions, Inc. (FDSI). The holding company
reorganization was consummated on April 1, 2003. The Bank began operations on December 1, 1997, as a state-chartered bank and currently
operates eight branch offices within San Diego, Orange, Riverside and San Bernardino Counties and a
loan production office in Los Angeles County. The Banks primary source of revenue is from
providing loans to customers who are predominately small and middle-market businesses. In November
1998, the Bank began a subsidiary operation, FDSI, which provides item processing services to the
financial services industry. In May 2003, the Bank transferred its 51% equity interest in FDSI to
the holding company. In February 2004, the holding company acquired the 49% minority interest. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company, the
Bank and FDSI. All material intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements do not include the accounts of Southwest
Community Statutory Trust I (the Trust), a business trust formed to issue trust preferred
securities. Business trusts formed by bank holding companies to issue trust preferred securities
and lend the proceeds to the parent holding company have been determined to not meet the definition
of a variable interest entity and therefore may not be consolidated for financial reporting
purposes. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are subject to change include the carrying value of financial
instruments such as investment securities, loans, deposits, borrowings and commitments to extend
credit. Material estimates that are subject to change also include the allowance for loan losses
and the valuation of loan collateral and any foreclosed assets. If the values of financial instruments carried as assets become impaired due to the fair value
declining below the recorded value, we may be required to provide an allowance for loss or write
off the instrument by an expense charge in our income statement. Also, if our obligations to third
parties increased above our recorded liabilities, we 7




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may have to increase the carrying value of those liabilities by an expense charge in our income
statement. Allowance for Loan Losses The allowance for loan losses is maintained at a level which, in managements judgment, is
adequate to absorb credit losses inherent in the loan portfolio. The allowance is based on
managements continuing review and evaluation of the loan portfolio, including the nature of the
portfolio, credit concentrations, trends in historical loss experience, specific impaired loans,
and economic conditions. While management uses available information to provide for an allowance
for loan losses, additional provisions to the allowance may be necessary based on future changes in
the factors used to evaluate the loan portfolio. Note 2  Earnings Per Share The following is a reconciliation of net income and shares outstanding to the income and
number of shares used to compute net income per share for the periods presented: March 31, 2005
    
    
    March 31, 2004Income
    
    
    Shares
    
    
    Income
    
    
    Shares(dollars in thousands, except per share)Net income as reported
    
    $
    1,525
    
    
    
    
    
    
    $
    1,096
    
    
    
    Shares outstanding at period end
    
    
    
    
    
    
    3,749,252
    
    
    
    
    
    
    
    3,063,925Impact of weighting shares
issued during the period
    
    
    
    
    
    
    (72,679
    )
    
    
    
    
    
    
    (3,486
    )Used in basic earnings per share
    
    
    1,525
    
    
    
    3,676,573
    
    
    
    1,096
    
    
    
    3,060,439Dilutive Effect of Outstanding
Stock Options
    
    
    
    
    
    
    729,867
    
    
    
    
    
    
    
    651,634Used in diluted earnings per share
    
    $
    1,525
    
    
    
    4,406,440
    
    
    $
    1,096
    
    
    
    3,712,073Basic net income per share
    
    $
    0.41
    
    
    
    
    
    
    $
    0.36Diluted net income per share
    
    $
    0.35
    
    
    
    
    
    
    $
    0.30
 Shares and per share calculations have been adjusted for the 5% stock dividend
payable on May 18, 2005. Note 3  Stock-Based Compensation Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record compensation cost for
stock-based employee compensation plans at fair value. The Company has chosen to continue to
account for stock-based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related
Interpretations. Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Companys stock at the date of the grant over the amount an
employee must pay to acquire the stock. Had compensation cost for the Companys stock option plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the method of SFAS No. 123,
the net income and earnings per share would have been reduced to the pro forma amounts indicated in
the following table: 8




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Three Months EndedMarch 31,2005
    
    
    2004(dollars in thousands,except per share)Net income as reported
    
    $
    1,525
    
    
    $
    1,096Stock-based compensation using the intrinsic value method
    
    
    
    
    
    
    Stock-based compensation that would have been reported
using the fair value method of SFAS 123
    
    
    (146
    )
    
    
    (65
    )Pro forma net income
    
    $
    1,379
    
    
    $
    1,031Basic earnings per share:As reported
    
    $
    0.41
    
    
    $
    0.36Pro forma
    
    
    0.38
    
    
    
    0.34Diluted earnings per share:As reported
    
    $
    0.35
    
    
    $
    0.30Pro forma
    
    
    0.31
    
    
    
    0.28
 See Note 4  Recent Account Pronouncements below related to the revision of SFAS No. 123 which
will require the Company to record share based compensation cost at fair value for periods
beginning after December 15, 2005. Note 4  Recent Accounting Pronouncements In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (Revised 2004),
Share-Based Payment. SFAS No. 123R is a revision of SFAS No. 123 and supersedes APB Opinion No.
25, Accounting for Stock Issued to Employees. SFAS No. 123R requires all share-based payments to
employees, including grants of employee stock options, to be recognized in the financial statements
based on their fair values and is effective for the first interim or annual period beginning after
December 15, 2005. Adoption of SFAS No. 123R will result in the share-based compensation that was
previously reported as pro forma information in the footnotes, to be included in the Consolidated
Statements of Income. Note 5  Stock Dividend On March 23, 2005, the Board of Directors declared a five percent stock dividend on the
Companys common shares to shareholders of record as of April 25, 2005 and payable on May 18, 2005.
Per share earnings calculations in this report have been retroactively adjusted for the stock
dividend. 9




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Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations Managements discussion and analysis of financial condition and results of operations is
intended to provide a better understanding of the significant changes in trends relating to our
financial condition, results of operations, liquidity and interest rate sensitivity. The following
discussion and analysis should be read in conjunction with our consolidated financial statements
and notes thereto, included elsewhere herein, and with our Annual Report on Form 10-K. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q (this Quarterly Report) includes forward-looking
statements, as that term is used in the securities laws. All statements regarding our expected
financial position, business and strategies are forward-looking statements. In addition,
throughout this Quarterly Report the words anticipates, believes, estimates, seeks,
expects, plans, intends and similar expressions, as they relate to us, Southwest Community
Bancorp, Southwest Community Bank, Financial Data Solutions, Inc., or our management, are intended
to identify forward-looking statements. Although we believe that the expectations reflected in
these forward-looking statements are reasonable, and we have based these expectations on our
beliefs as well as the assumptions we have made, those expectations may prove to be incorrect.
Important factors that could cause actual results to differ materially from our expectations
include, without limitation, failure of a significant number of borrowers to repay their loans,
failure of our community banking strategy, changes in general economic conditions or the economic
conditions in Southern California, the monetary policies of the Federal Reserve, changes in
interest rates, and restrictions imposed on us by regulations or the banking industry regulators. For information about factors that could cause our actual results to differ from our
expectations, you should carefully read ITEM 1  DESCRIPTION OF BUSINESS  Material Risks
Affecting the Company and our Common Stock included in our Annual Report on Form 10-K. We urge
you to consider these factors carefully in evaluating the forward-looking statements contained in
this Quarterly Report. All future written or oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these cautionary
statements. The forward-looking statements included in this Quarterly Report are made only as of
the date of this Quarterly Report. We have no intention, and do not assume any obligation, to
update these forward-looking statements . FINANCIAL SUMMARY The primary source of the Companys earnings comes from banking services provided by the Bank
and to a lesser extent from item processing services provided by FDSI. Since the opening of the Bank in 1997, we have experienced continued growth in assets and
earnings. We have pursued and continue to pursue a growth strategy which depends primarily on
generating an increasing level of loans and deposits at acceptable risk levels. We have also
pursued growth through new branches and by expanding real estate and small business lending. We
believe that our continued growth results from the level of services we provide, as well as
favorable pricing for our banking products and services and the overall growth in the local economy
in which we operate. We cannot assure you of our success in implementing our growth strategy
without corresponding increases in our non-interest expenses. The Bank derives its income primarily from interest received on loans and investment
securities and from fees received from providing deposit services. The Banks expenses are the
interest it pays on deposits and borrowings, salaries and benefits for employees, occupancy costs
for its banking offices and general operating expenses. FDSI derives its income primarily from fees
for item processing services. The expenses of FDSI are salaries and benefits for employees,
occupancy and equipment costs for its processing facilities and general operating expenses. The
assets of the Company are primarily those of the Bank. 10




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The growth in Company assets and earnings and the contribution to earnings from our business
segments for the three months ended March 31, 2004 and 2003 is summarized below and discussed in
more detail in the following sections: Three Months Ended March 31,2005
    
    
    2004(dollars in thousands,except per share)Business Segment Earnings (Loss)Banking:Southwest Community Bank
    
    $
    1,636
    
    
    $
    1,169Southwest Community Bancorp
    
    
    (91
    )
    
    
    (105
    )Total Banking
    
    
    1,545
    
    
    
    1,064Item Processing:Financial Data Solutions, Inc.
    
    
    (20
    )
    
    
    32Total Company Earnings
    
    $
    1,525
    
    
    $
    1,096Diluted earnings per share
    
    $
    0.35
    
    
    $
    0.30Consolidated assets
    
    $
    605,148
    
    
    $
    362,890Average earning assets
    
    $
    416,428
    
    
    $
    241,360Return on average equity
    
    
    15.2
    %
    
    
    22.3
    %Return on average assets
    
    
    1.2
    %
    
    
    1.4
    %Efficiency ratio
    
    
    66.9
    %
    
    
    66.8
    %
 Results of Operations for the Three Months Ended March 31, 2005 Compared to 2004 The 39% increase in net income for the three months ended March 31, 2005 as compared to the
same period in 2004 was a result of several factors. Net interest income increased by $2,056,000,
or 55%, due primarily to a 72% increase in average interest-earning assets. Noninterest income
increased by $114,000, or 4%. Partially offsetting the increases in revenues, noninterest expense
increased by $1,464,000, or 34%, and the provision for loan losses increased $15,000, or 5%. The
increase in noninterest expenses was primarily due to increases in salaries and employee benefits
and occupancy and equipment related to the overall growth of the Bank, including adding two
additional banking offices. The loss at FDSI in 2005 as compared to the earnings in 2004 was
primarily the result of increased payroll and operating expenses incurred in expanding the northern
California office to accommodate a large new account and increased marketing expenses. Balance Sheet as of March 31, 2005 compared to December 31, 2004 As of March 31, 2005 consolidated total assets increased $72,274,000, or 14%, to $605,148,000
as compared to $532,874,000 at December 31, 2004. The increase in assets was primarily in cash and
due to banks, which increased $46,689,000, or 46% to $147,851,000 and in investment securities,
which increased $20,986,000, or 34%, to $83,058,000. The increase in assets was funded primarily
by the $69,470,000, or 14%, increase in total deposits to $552,232,000 as of March 31, 2005 as
compared to $482,762,000 at December 31, 2004. Shareholders equity increased, primarily due to net
income for the period and the exercise of stock options, to $41,104,000 at March 31, 2005 from
$38,888,000 as of December 31, 2004. 11




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##### Table of Contents



Critical Accounting Policies That May Affect Our Reported Income Our consolidated financial statements and the notes thereto have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
our financial statements requires us to make a number of estimates and assumptions that affect the
reported amounts and disclosures in the consolidated financial statements. On an ongoing basis, we
evaluate our estimates and assumptions based upon historical experience and other factors and
circumstances. We believe that our estimates are reasonable; 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 on our results of
operations for the reporting periods. Our significant accounting policies and practices are described in Note 1 to our Consolidated
Financial Statements and in Managements Discussion and Analysis of Financial Condition and Results
of Operation that are included our Annual Report on Form 10-K for the year ended December 31, 2004.
The accounting policies that involve our significant estimates and assumptions, which have a
material impact on the carrying value of certain assets and liabilities, are considered critical
accounting policies. We have identified our policies for allowance for loan losses and fair value
of financial instruments as critical accounting policies. 12




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##### Table of Contents



RESULTS OF OPERATIONS Net Interest Income Our earnings depend largely upon the difference between the income we receive from
interest-earning assets and the interest paid on our interest-bearing liabilities. This difference
is net interest income. Net interest margin is net interest income expressed as a percentage of
average total interest-earning assets. Net interest spread is the difference between the rate
earned on average total interest earning assets and the rate paid on average total interest-bearing
liabilities. The following tables provide information, for the periods indicated, on the average amounts
outstanding for the major categories of interest-earning assets and interest-bearing liabilities,
the amount of interest earned or paid, the annualized rates earned or paid, net interest income,
net interest margin and net interest spread: Analysis of Average Rates and Balances and Changes in Net Interest Income Three Months Ended March 31,2005
    
    
    2004Interest
    
    
    Rates
    
    
    
    
    
    
    Interest
    
    
    RatesAverage
    
    
    Income/
    
    
    Earned/
    
    
    Average
    
    
    Income/
    
    
    Earned/Balance
    
    
    Expense
    
    
    Paid (2)
    
    
    Balance
    
    
    Expense
    
    
    Paid (2)(dollars in thousands)AssetsInvestment securities
    
    $
    76,363
    
    
    $
    737
    
    
    
    3.86
    %
    
    $
    24,048
    
    
    $
    217
    
    
    
    3.61
    %Federal funds sold and other
    
    
    54,325
    
    
    
    339
    
    
    
    2.50
    %
    
    
    14,094
    
    
    
    42
    
    
    
    1.19
    %Loans (1)
    
    
    285,740
    
    
    
    5,353
    
    
    
    7.49
    %
    
    
    203,218
    
    
    
    3,780
    
    
    
    7.44
    %Total Interest-Earning Assets
    
    
    416,428
    
    
    
    6,429
    
    
    
    6.18
    %
    
    
    241,360
    
    
    
    4,039
    
    
    
    6.69
    %Noninterest-earning assets
    
    
    99,187
    
    
    
    
    
    
    
    
    
    
    
    79,196Total Assets
    
    $
    515,615
    
    
    
    
    
    
    
    
    
    
    $
    320,556LiabilitiesInterest-bearing demand
    
    $
    8,505
    
    
    
    4
    
    
    
    0.19
    %
    
    $
    5,464
    
    
    
    4
    
    
    
    0.29
    %Savings & money market
    
    
    107,726
    
    
    
    455
    
    
    
    1.69
    %
    
    
    51,856
    
    
    
    125
    
    
    
    0.96
    %Time deposits
    
    
    10,084
    
    
    
    35
    
    
    
    1.39
    %
    
    
    12,216
    
    
    
    35
    
    
    
    1.15
    %Borrowings
    
    
    8,248
    
    
    
    119
    
    
    
    5.77
    %
    
    
    12,819
    
    
    
    115
    
    
    
    3.59
    %Total Interest-Bearing Liabilities
    
    
    134,563
    
    
    
    613
    
    
    
    1.82
    %
    
    
    82,355
    
    
    
    279
    
    
    
    1.36
    %Demand deposits
    
    
    338,266
    
    
    
    
    
    
    
    
    
    
    
    216,898Other liabilities
    
    
    3,030
    
    
    
    
    
    
    
    
    
    
    
    1,660Total Liabilities
    
    
    475,859
    
    
    
    
    
    
    
    
    
    
    
    300,913Shareholders Equity
    
    
    39,756
    
    
    
    
    
    
    
    
    
    
    
    19,643Total Liabilities and Equity
    
    $
    515,615
    
    
    
    
    
    
    
    
    
    
    $
    320,556Net interest income/margin
    
    
    
    
    
    $
    5,816
    
    
    
    5.59
    %
    
    
    
    
    
    $
    3,760
    
    
    
    6.23
    %Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.36
    %
    
    
    
    
    
    
    
    
    
    
    5.33
    %
  (1)
    
    Loans, net of unearned income, include non-accrual loans, but do not reflect
average allowances for loan losses. Interest income from loans includes loan
fees of $490,000 in 2005 and $431,000 in 2004.(2)
    
    The rates have been annualized. No assurance can be given regarding the
actual results for the year ending December 31, 2005. 13




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##### Table of Contents



Net interest income is affected by changes in the level and the mix of interest-earning assets
and interest-bearing liabilities. The changes between periods in these assets and liabilities are
referred to as volume changes. The impact on net interest income of changes in average volume is
measured by multiplying the change in volume between the current period and the prior period by the
prior period rate. Net interest income is also affected by changes in the rates earned on assets and rates paid
on liabilities. These are referred to as rate changes and impact on net interest income of these
changes is measured by multiplying the change in rate between the current and prior period by the
average volume of the prior period. Changes in rate-volume between periods, which is measured by
the change in rate multiplied by the change in volume, are allocated on a pro rata bsis between the
volume and the rate changes in the table that follows: Analysis of Volume and Interest Rates 2005 from 2004Change due to
    
    
    TotalVolume
    
    
    Rate
    
    
    Change(dollars in thousands)Investment securities
    
    $
    504
    
    
    $
    16
    
    
    $
    520Federal funds sold
    
    
    195
    
    
    
    102
    
    
    
    297Loans
    
    
    1,545
    
    
    
    28
    
    
    
    1,573Total interest income
    
    
    2,244
    
    
    
    146
    
    
    
    2,390Interest-bearing demand
    
    
    2
    
    
    
    (2
    )
    
    
    Savings & Money Market
    
    
    194
    
    
    
    136
    
    
    
    330Time deposits
    
    
    (7
    )
    
    
    7
    
    
    
    Borrowings
    
    
    (50
    )
    
    
    54
    
    
    
    4Total interest expense
    
    
    139
    
    
    
    195
    
    
    
    334Net Interest Income
    
    $
    2,105
    
    
    $
    (49
    )
    
    $
    2,056
 Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004 For the three months ended March 31, 2005, net interest income was $5,816,000, an increase of
$2,056,000, or 55%, as compared to $3,760,000 for the three months ended March 31, 2004. The
increase in net interest income was primarily due to the increase in average loans, our highest
yielding interest-earning assets. The increase in net interest income can also be attributed to the
differential in the amount of growth in our interest-earning assets versus our interest-bearing
liabilities. Average interest-earning assets increased $175,068,000, versus an increase in average
interest-bearing liabilities of $52,208,000. Most of the earning asset growth was supported by the
$121,368,000, or 56%, growth in average noninterest-bearing demand deposits. The decrease in the
borrowing component of interest-bearing liabilities was due to repayment of Federal Home Loan Bank
borrowing that was outstanding in the first quarter of 2004. The increased volume of our
interest-earning assets contributed $2,244,000 towards the increase in net interest income. The
$82,522,000, or 41%, increase in average loans contributed $1,545,000 to the increase in interest
income. The increase in interest income from the increased volume of interest-earning assets was
partially offset by the $139,000 increase in interest expense due to the increased volume of
interest-bearing liabilities. Increased interest rates had an overall negative impact of only $49,000 on net interest
income. The average prime rate during the first quarter of 2005 was 5.44% as compared to 4.00%
during the first quarter of 2004. An increase of $146,000 from increased rates paid on
interest-earning assets was offset by a $195,000 increase in interest expense due to higher rates
on interest-bearing liabilities. The average rates paid on loans did not increase to the extent of
the increase in the prime rate as a significant amount of the loans had floor provisions and had
been earning at the floor levels. Future increases in interest rates are expected to increase the
rate earned on loans as the loans come off the floor levels. The floor provisions had tempered the
impact of declining rates in prior periods. 14




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##### Table of Contents



The net interest margin for the three months ended March 31, 2005 was 5.59%, a decrease of 64
basis points from 6.23% for the same period in 2004. The decrease in net interest margin was due to
a decrease in the rates earned on interest-earning assets and an increase in the rates paid on
interest-bearing liabilities. The rate earned on average total interest-earning assets was 6.18% for the first quarter of
2005, a decrease of 51 basis points as compared to 6.69% for the first quarter of 2004. The
decrease in the rate earned on earning assets was primarily due to the change in asset mix. The
average balances of the higher yielding loans decreased as a proportion of average total
interest-earning assets from 84% in the first quarter of 2004 to 69% in the 2005 quarter. The average rate paid on average total interest-bearing liabilities was 1.82% in the first
quarter of 2005, an increase of 46 basis points from 1.36% for the same period in 2004. The
overall increase in the average rate paid was due to higher rates paid on interest-bearing deposit
accounts and the increased rate paid on borrowings. Noninterest Income For the three months ended March 31, 2005, noninterest income was $2,744,000, an increase of
$114,000, or 4%, from $2,630,000 for the three months ended March 31, 2004. The major items
contributing to the increase were item processing income and gains on sale of SBA loans. These
increases were partially offset by lower fees and service charges. Item processing income from
FDSI, our item processing subsidiary, increased $248,000, or 20% to $1,490,000 for the three months
ended March 31, 2005 due to increased processing volumes. Increased loan origination activity
resulted in gains on sales of SBA loans of $338,000 during the first quarter of 2005, an increase
of $82,000, or 32% as compared to the first quarter of 2004. The decrease in fees and service
charges were due to lower deposit service charges and lower loan referral fees. Deposit service
charge income generally decreases during periods of increasing interest rates due to higher
earnings credits earned on business demand deposits. Noninterest Expense The major expense categories are for employees salaries and benefits and for occupancy and
equipment expense in our facilities. Together, these expenses constitute approximately 75% of total
noninterest expense. Growth in these expenses during the periods presented is consistent with our
growth in earning assets and revenues. Noninterest expense for the three months ended March 31, 2005, was $5,730,000, an increase of
$1,464,000, or 34%, from $4,266,000 for the first quarter of 2004. The major items contributing to
the increase were salaries and benefits increasing $784,000, or 33%, and occupancy expense and
equipment expense increasing $150,000, or 16%. The increases in all expense classifications are
attributable to growth of the Bank as well as the growth of FDSI, including increases in the number
of employees and in the number of offices. The 2005 quarter includes expenses for additional
branch offices in San Bernardino and Carlsbad that opened after the first quarter of 2004 as well
as additional staff added to FDSIs northern California processing center to accommodate a large
new account. FINANCIAL POSITION Our total assets increased $72,274,000, or 14%, to $605,148,000 at March 31, 2005 from
$532,874,000 at December 31, 2004. The increase in assets is primarily due to a $46,689,000
increase in cash and due from banks and a $20,986,000 increase in investment securities. The
increase in cash and due from banks at March 31, 2005, as compared to December 31, 2004, is
primarily due to timing in the collection process of checks deposited by our customers. The
increase in assets was funded primarily by a $69,470,000 increase in deposits, including
$51,235,000 in noninterest-bearing demand deposits. We emphasize seeking demand deposits from
business customers in our market area. The $2,216,000 million increase in shareholders equity was
from our earnings for the first quarter of 2005 and the exercise of stock options, partially offset
by the decrease in other comprehensive income caused by decreases in the market values on
investment securities as interest rates increased. 15




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##### Table of Contents



Loans The following table sets forth the components of net loans outstanding in each category at the
dates indicated: March 31, 2005
    
    
    December 31, 2004Percent
    
    
    
    
    
    
    PercentLoan Category
    
    Amount
    
    
    of Total
    
    
    Amount
    
    
    of Total(dollars in thousands)Real estate loans:Construction
    
    $
    111,026
    
    
    
    38
    %
    
    $
    99,478
    
    
    
    35
    %Residential
    
    
    11,658
    
    
    
    4
    %
    
    
    22,014
    
    
    
    7
    %Commercial
    
    
    84,932
    
    
    
    29
    %
    
    
    85,205
    
    
    
    30
    %Total real estate
    
    
    207,616
    
    
    
    71
    %
    
    
    206,697
    
    
    
    72
    %Commercial
    
    
    80,787
    
    
    
    28
    %
    
    
    77,855
    
    
    
    27
    %Consumer & Other
    
    
    1,413
    
    
    
    1
    %
    
    
    1,642
    
    
    
    1
    %Total Loans
    
    
    289,816
    
    
    
    100
    %
    
    
    286,194
    
    
    
    100
    %Less deferred
loan income
    
    
    (2,504
    )
    
    
    
    
    
    
    (2,594
    )Net Loans
    
    $
    287,312
    
    
    
    
    
    
    $
    283,600
 The $3,712,000, or 1%, growth in loans during the quarter was less than in prior periods
as the increases in construction and commercial loans was offset by pay-offs in residential and
commercial real estate loans. Capital Resources and Regulatory Requirements Under regulatory capital adequacy guidelines, capital adequacy is measured as a percentage of
risk-adjusted assets in which risk percentages are applied to assets on the balance sheet as well
as off-balance sheet, such as unused loan commitments and standby letters of credit. The guidelines
require that a portion of total capital be core, or Tier 1, capital consisting of common
shareholders equity and perpetual preferred stock, less goodwill and certain other deductions.
Tier 2 capital consists of other elements, primarily non-perpetual preferred stock, subordinated
debt and mandatory convertible debt, plus the allowance for loan losses, subject to certain
limitations. The guidelines also evaluate the leverage ratio, which is Tier I capital divided by
average assets. At March 31, 2005, our capital exceeded the minimum regulatory requirements and we were
considered to be well capitalized, as defined in the regulations issued by our regulatory
agencies. Our capital ratios, shown below for both the Company and SWCB, have been computed in
accordance with regulatory accounting guidelines. "Well
    
    
    Southwest
    
    
    SouthwestCapitalized"
    
    
    Community
    
    
    CommunityRequirement
    
    
    Bancorp
    
    
    BankAs of March 31, 2005:Tire 1 leverage capital ratio
    
    
    5.0
    %
    
    
    9.4
    %
    
    
    8.2
    %Tier 1 risk-based capital ratio
    
    
    6.0
    %
    
    
    12.4
    %
    
    
    11.0
    %Total risk-based capital ratio
    
    
    10.0
    %
    
    
    13.5
    %
    
    
    12.1
    %As of December 31, 2004:Tire 1 leverage capital ratio
    
    
    5.0
    %
    
    
    9.5
    %
    
    
    8.1
    %Tier 1 risk-based capital ratio
    
    
    6.0
    %
    
    
    12.8
    %
    
    
    10.9
    %Total risk-based capital ratio
    
    
    10.0
    %
    
    
    13.8
    %
    
    
    12.0
    %
 During the three months ended March 31, 2005 shareholders equity increased $2,216,000 to
$41,104,000. The increase included net income of $1,525,000, $1,292,000 from the exercise of stock
options (including an income tax benefit of $928,000) and warrants, partially offset by a $603,000
increase in the net unrealized loss on available-for-sale securities. 16




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##### Table of Contents



Liquidity and Liability Management Liquidity management for banks requires that funds always be available to pay anticipated
deposit withdrawals and maturing financial obligations in accordance with their terms and to meet
customer requests for loans. The acquisition of deposits has been our primary source of funds used to invest in earning
assets. Other sources of funds have been the cash provided from operations, the proceeds of common
stock sales and from borrowings. We expect that deposits will continue to be the primary source of
funds in future periods. We emphasize seeking demand deposits from business customers in our market
area. To meet liquidity needs, we maintain a portion of our funds in cash deposits in other banks,
Federal Funds sold, and investment securities. These funds are invested in financial instruments
over various maturities to insure that funds are readily available to fund loans or meet deposit
withdrawals. As of March 31, 2005, liquid assets (cash, Federal funds sold, interest bearing
deposits in other financial institutions and investment securities available-for-sale) as a
percentage of deposits were 54% as compared to 48% at December 31, 2004. The relatively high
proportion of demand deposits in SWCB, versus total deposits, requires that we maintain higher
levels of liquidity than might be required by other financial institutions. Short term management of liquidity requires managing the daily fluctuations in deposits along
with the net change in loans. To manage these fluctuations we invest in short term investments such
as Federal funds and maintain borrowing facilities that we can access on a daily basis. The Bank maintains lines of credit of $8,000,000 with correspondent banks for the purchase of
overnight Federal funds. The lines are subject to availability of funds and have restrictions as to
the number of days used during a month. The Bank also has a credit line with the Federal Home Loan
Bank of San Francisco which would allow the Bank to borrow up to 20% of its assets ($151,000,000 as
of March 31, 2005) on a collateralized basis. As of March 31, 2005, loans and securities pledged as
collateral for this facility would have allowed SWCB to borrow up to approximately $35,000,000.
These facilities have been used infrequently. The primary sources of liquidity for the Company, on a stand alone basis, include the receipt
of dividends from the subsidiaries and our ability to raise capital. The ability of the Company to
obtain funds for the payment of dividends is dependent upon the subsidiaries earnings. The
availability of dividends from the subsidiaries is also limited by various state and federal
statutes and regulations. 
 Item 3- Quantitative and Qualitative Disclosures about Market Risk Our market risk arises primarily from credit risk and interest rate risk inherent in our
lending and deposit taking activities. Risk management is an important part of our operations and a
key element of our overall financial results. Credit Risk Credit risk generally arises as a result of our lending activities and may be present with our
investment activities. To manage the credit risk inherent in our lending activities, we rely on
adherence to underwriting standards and loan policies as well as our allowance for loan losses. We
employ frequent monitoring procedures and take prompt corrective action when necessary.
Additionally, our loans are examined regularly by our regulatory agencies. Interest Rate Risk Interest rate risk is the exposure of a banks financial condition, both earnings and the
market value of assets and liabilities, to adverse movements in interest rates. The potential
impact of interest rate risk is significant because of the liquidity and capital adequacy
consequences that reduced earnings or losses could imply. We recognize and accept that interest
rate risks are a routine part of bank operations and will from time to time impact our profits and
capital position. The objective of interest rate risk management is to control exposure of net
interest income to risks associated with interest rate movements in the market, to achieve
consistent growth in net interest income and to profit from favorable market opportunities. 17




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##### Table of Contents



Changes in interest rates can affect the value of assets, liabilities and equity in a variety
of ways. Assets and liabilities with longer repricing characteristics may increase or decrease in
economic value as interest rates change. Assets with fixed interest rates and longer repricing
terms generally increase in value as interest rates decline and decrease in value as interest rates
increase. Conversely, liabilities with fixed interest rates and longer repricing terms generally
increase in value as interest rates increase and decline in value as interest rates decrease. Changes in interest rates may also affect customer behavior, such as by increasing or
decreasing loan prepayments, which can affect the economic value of a loan or investment security.
Because our earning assets have relatively short repricing terms and most of our liabilities are
non rate sensitive or have very short repricing terms, we do not expect significant changes in the
economic value of our assets, liabilities or net equity from changing interest rates. Since interest rate changes do not affect all categories of assets and liabilities equally or
simultaneously, we perform simulation modeling to estimate the potential effects of changing
interest rates. The process allows us to explore the complex relationships within the gap over time
and various interest rate environments. The following table summarizes the sensitivity of net
interest income to change over a one year period under alternative scenarios. Our policy is to
manage the interest rate risk exposure to less than a 15% decline in net interest income assuming a
200 basis point change in rates over a one year time period. At current interest rate levels, we do
not believe the down 300 basis point simulation to be a realistic scenario. Sensitivity of Net Interest Income Adjusted Net
    
    
    ChangeInterest Rate Scenario
    
    Interest Income
    
    
    From Base(dollars in thousands)Up 300 basis points
    
    $
    25,400
    
    
    
    7.6
    %Up 200 basis points
    
    
    24,800
    
    
    
    5.1
    %Up 100 basis points
    
    
    24,200
    
    
    
    2.5
    %Base
    
    
    23,600
    
    
    
    0.0
    %Down 100 basis points
    
    
    23,100
    
    
    
    (2.1
    %)Down 200 basis points
    
    
    22,500
    
    
    
    (4.7
    %)Down 300 basis points
    
    
    21,800
    
    
    
    (7.6
    %)
 
 Item 4  Controls and Procedures For the period covered by this report, management, with the participation of the Chief
Executive Officer and the Chief Financial Officer, evaluated the effectiveness of the Companys
disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of
the quarter ended March 31, 2005, these disclosure controls and procedures were effective. There has been no change in the Companys internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act) during our most recent fiscal quarter ending
March 31, 2005 that has materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 18




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##### Table of Contents



PART II  Other Information 
 Item 1  Legal Proceedings To the best of our knowledge, there are no pending legal proceedings to which Southwest
Community, the Bank or FDSI are a party and which may have a materially adverse effect upon
Southwest Community, the Bank or FDSIs property, business or results of operations. 
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds None 
 Item 3  Defaults Upon Senior Securities Not applicable. 
 Item 4  Submission of Matters to a Vote of Security Holders Not applicable. 
 Item 5  Other Information Not applicable 
 Item 6  Exhibits The following exhibits are furnished with this report: Reg. S-KItem 601Exhibit No.
    
    Description
    
    Page31.1
    
    Certification Pursuant to Section 302 by Chief Executive Officer
    
    
    2131.2
    
    Certification Pursuant to Section 302 by Chief Financial Officer
    
    
    2232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906
    
    
    2332.2
    
    Certification of Chief Financial Officer Pursuant to Section 906
    
    
    24
 19




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SOUTHWEST COMMUNITY BANCORPDate: May 12, 2005
    By:
    /s/ Frank J. MercardanteFrank J. MercardanteChief Executive OfficerDate: May 12, 2005
    By:
    /s/ James L. LemeryJames L. LemeryExecutive Vice President &
Chief Financial Officer 20