##### Table of Contents



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 June 30, 2004 OR [  ]       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 [ ]
 Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
 Number of shares of Common Stock outstanding as of July 31, 2004: 2,996,762




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INDEX PART I  Financial InformationItem 1 Financial Statements
    
    
    3Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31, 2003
    
    
    3Consolidated Statements of Income for the Three Months Ended June 30, 2004 and 2003 And the Six Months Ended June 30, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income For the Six Months Ended June 30, 2004 and 2003 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2004 and 2003 (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
    
    
    19Item 4 Controls and Procedures
    
    
    20PART II  Other InformationItem 1 Legal Proceedings
    
    
    21Item 2- Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    21Item 3 Defaults upon Senior Securities
    
    
    21Item 4 Submission of Matters to a Vote of Security Holders
    
    
    21Item 5 Other Information
    
    
    21Item 6 Exhibits and Reports on Form 8-K
    
    
    22Exhibit 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)
 June 30,
    
    December 31,2004
    
    2003UnauditedAssetsCash and due from banks
    
    $
    63,598
    
    
    $
    110,372Federal funds sold
    
    
    82,575
    
    
    
    4,175Cash and cash equivalents
    
    
    146,173
    
    
    
    114,547Interest-bearing deposits in financial institutions
    
    
    367
    
    
    
    268Investment securities available-for-sale
    
    
    44,537
    
    
    
    23,203Investment securities held-to-maturity
    
    
    436
    
    
    
    649Loans, net of unearned income
    
    
    211,458
    
    
    
    188,715Less allowance for loan losses
    
    
    3,093
    
    
    
    2,511Net loans
    
    
    208,365
    
    
    
    186,204Premises and equipment
    
    
    4,143
    
    
    
    4,477Federal Home Loan Bank stock at cost
    
    
    864
    
    
    
    542Cash surrender value of life insurance
    
    
    4,215
    
    
    
    4,129Other assets
    
    
    8,053
    
    
    
    4,796Total Assets
    
    $
    417,153
    
    
    $
    338,815Liabilities and Shareholders EquityNoninterest-bearing demand
    
    $
    276,561
    
    
    $
    236,641Money market and NOW
    
    
    87,749
    
    
    
    51,954Savings
    
    
    7,001
    
    
    
    5,899Time deposits under $100,000
    
    
    4,187
    
    
    
    5,606Time deposits $100,000 and over
    
    
    7,978
    
    
    
    8,279Total Deposits
    
    
    383,476
    
    
    
    308,379Accrued interest and other liabilities
    
    
    1,952
    
    
    
    1,562Junior subordinated debt
    
    
    8,248
    
    
    
    8,248Notes payable
    
    
    2,138
    
    
    
    200Minority interest in subsidiary
    
    
    
    
    
    
    1,464Total Liabilities
    
    
    395,814
    
    
    
    319,853Shareholders EquityCommon stock, no par value, 28,125,000 shares
authorized, 2,948,887 and 2,902,462 shares issued
and outstanding in 2004 and 2003, respectively
    
    
    14,885
    
    
    
    14,676Retained earnings
    
    
    6,744
    
    
    
    4,362Accumulated other comprehensive income (loss)
    
    
    (290
    )
    
    
    (76
    )Total Shareholders Equity
    
    
    21,339
    
    
    
    18,962Total Liabilities and Shareholders Equity
    
    $
    417,153
    
    
    $
    338,815
 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Unaudited
    
    Unaudited
    
    Unaudited
    
    UnauditedInterest IncomeInterest and fees on loans
    
    $
    3,982
    
    
    $
    2,967
    
    
    $
    7,762
    
    
    $
    5,607Investment securities
    
    
    270
    
    
    
    192
    
    
    
    487
    
    
    
    378Federal funds sold and other
    
    
    175
    
    
    
    67
    
    
    
    217
    
    
    
    139Total interest income
    
    
    4,427
    
    
    
    3,226
    
    
    
    8,466
    
    
    
    6,124Interest ExpenseDeposits
    
    
    225
    
    
    
    164
    
    
    
    389
    
    
    
    334Borrowings
    
    
    122
    
    
    
    94
    
    
    
    237
    
    
    
    102Total interest expense
    
    
    347
    
    
    
    258
    
    
    
    626
    
    
    
    436Net interest income
    
    
    4,080
    
    
    
    2,968
    
    
    
    7,840
    
    
    
    5,688Provision for loan losses
    
    
    225
    
    
    
    210
    
    
    
    525
    
    
    
    400Net interest income after provision
    
    
    3,855
    
    
    
    2,758
    
    
    
    7,315
    
    
    
    5,288Noninterest IncomeFees and service charges
    
    
    1,010
    
    
    
    630
    
    
    
    2,018
    
    
    
    1,374Data processing income
    
    
    1,524
    
    
    
    1,171
    
    
    
    2,766
    
    
    
    2,274Gain on sale of SBA loans
    
    
    429
    
    
    
    309
    
    
    
    685
    
    
    
    520Gain on sale of securities
    
    
    
    
    
    
    154
    
    
    
    
    
    
    
    228Other income
    
    
    88
    
    
    
    70
    
    
    
    212
    
    
    
    178Total noninterest income
    
    
    3,051
    
    
    
    2,334
    
    
    
    5,681
    
    
    
    4,574Noninterest ExpenseSalaries and employee benefits
    
    
    2,611
    
    
    
    2,283
    
    
    
    5,001
    
    
    
    4,404Occupancy & Equipment
    
    
    992
    
    
    
    872
    
    
    
    1,925
    
    
    
    1,667Other
    
    
    1,135
    
    
    
    808
    
    
    
    2,078
    
    
    
    1,541Total noninterest expense
    
    
    4,738
    
    
    
    3,963
    
    
    
    9,004
    
    
    
    7,612Income before income taxes
    
    
    2,168
    
    
    
    1,129
    
    
    
    3,992
    
    
    
    2,250Income taxes
    
    
    882
    
    
    
    460
    
    
    
    1,610
    
    
    
    912Net income
    
    $
    1,286
    
    
    $
    669
    
    
    $
    2,382
    
    
    $
    1,338Basic earnings per common share
    
    $
    0.43
    
    
    $
    0.23
    
    
    $
    0.81
    
    
    $
    0.46Diluted earnings per common share
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.66
    
    
    $
    0.39
 The accompanying notes are an integral part of these financial statements. 4




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SOUTHWEST COMMUNITY BANCORP AND SUBSIDIARIES 
 Consolidated Statements of Changes in Shareholders Equity and Comprehensive Income
 (dollars in thousands)
 AccumulatedCommon Stock
    
    
    
    
    
    
    
    
    
    OtherComprehensive
    
    Retained
    
    ComprehensiveShares
    
    Amount
    
    Income
    
    Earnings
    
    Income (Loss)
    
    TotalBalance, December 31, 2002
    
    
    2,888,994
    
    
    $
    14,595
    
    
    
    
    
    
    $
    1,427
    
    
    $
    155
    
    
    $
    16,177Options exercised
    
    
    11,400
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61Warrants exercised
    
    
    1,500
    
    
    
    14
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    $
    1,338
    
    
    
    1,338
    
    
    
    
    
    
    
    1,338Net unrealized loss on securities
net of tax benefit of $5
    
    
    
    
    
    
    
    
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )Reclassification adjustment for
realized gains, net of tax of $94
    
    
    
    
    
    
    
    
    
    
    (134
    )
    
    
    
    
    
    
    (134
    )
    
    
    (134
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    $
    1,197Balance, June 30, 2003 (Unaudited)
    
    
    2,901,894
    
    
    $
    14,670
    
    
    
    
    
    
    $
    2,765
    
    
    $
    14
    
    
    $
    17,449Balance, December 31, 2003
    
    
    2,902,462
    
    
    $
    14,676
    
    
    
    
    
    
    $
    4,362
    
    
    $
    (76
    )
    
    $
    18,962Options exercised
    
    
    44,625
    
    
    
    192
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    192Warrants exercised
    
    
    1,800
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    $
    2,382
    
    
    
    2,382
    
    
    
    
    
    
    
    2,382Net unrealized gain on securities
net of tax benefit of $150
    
    
    
    
    
    
    
    
    
    
    (214
    )
    
    
    
    
    
    
    (214
    )
    
    
    (214
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    $
    2,168Balance, June 30, 2004 (Unaudited)
    
    
    2,948,887
    
    
    $
    14,885
    
    
    
    
    
    
    $
    6,744
    
    
    $
    (290
    )
    
    $
    21,339
 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)
 Six Months Ended June 30,2004
    
    2003(Unaudited)Operating ActivitiesNet Income
    
    $
    2,382
    
    
    $
    1,338Depreciation and amortization
    
    
    802
    
    
    
    699Amortization/accretion of premiums/discounts on
investment securities, net
    
    
    146
    
    
    
    98Provision for loan losses
    
    
    525
    
    
    
    400Gain on sale of investment securities
    
    
    
    
    
    
    (228
    )Deferred income tax benefit
    
    
    (381
    )
    
    
    (239
    )Increase in cash value of life insurance
    
    
    (86
    )
    
    
    (92
    )Net change in other assets and liabilities
    
    
    (528
    )
    
    
    (81
    )Net Cash Provided by Operating Activities
    
    
    2,860
    
    
    
    1,895Investing ActivitiesChange in deposits in other financial institutions, net
    
    
    (99
    )
    
    
    (300
    )Purchase/redemption of FHLB stock, net
    
    
    (322
    )
    
    
    (424
    )Purchase of investment securities available-for-sale
    
    
    (24,922
    )
    
    
    (29,268
    )Proceeds from sales and maturities of investment securities
available-for-sale
    
    
    3,087
    
    
    
    14,588Proceeds from maturities of investment securities held-to-maturity
    
    
    205
    
    
    
    539Purchases of premises and equipment
    
    
    (468
    )
    
    
    (1,869
    )Net increase in loans
    
    
    (22,686
    )
    
    
    (23,802
    )Investment in trust
    
    
    
    
    
    
    (248
    )Purchase of minority interest in
    
    
    (3,350
    )
    
    
    Change in minority investment in subsidiary
    
    
    15
    
    
    
    31Net Cash Used in Investing Activities
    
    
    (48,540
    )
    
    
    (40,753
    )Financing ActivitiesNet increase in deposits
    
    
    75,097
    
    
    
    14,923Proceeds from issuance of junior subordinated debt
    
    
    
    
    
    
    8,248Net proceeds from borrowing
    
    
    2,000
    
    
    
    9,919Proceeds from exercise of stock options
    
    
    192
    
    
    
    61Proceeds from exercise of stock warrants
    
    
    17
    
    
    
    14Net Cash Provided by Financing Activities
    
    
    77,306
    
    
    
    33,165Net Increase in Cash and Cash Equivalents
    
    
    31,626
    
    
    
    (5,693
    )Cash and Cash Equivalents at Beginning of Period
    
    
    114,547
    
    
    
    99,032Cash and Cash Equivalents at End of Period
    
    $
    146,173
    
    
    $
    93,339Supplemental Disclosures of Cash Flow InformationCash Paid for Interest
    
    $
    622
    
    
    $
    431Cash Paid for Taxes
    
    $
    1,930
    
    
    $
    991Non-Cash Investing ActivitiesNet Change in Accumulated Other Comprehensive Income
    
    $
    (290
    )
    
    $
    14
 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
June 30, 2004 and results of operations for the three and six month periods
ended June 30, 2004 and 2003 and changes in cash flows for the six month
periods ended June 30, 2004 and 2003. 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, 2003
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 a variety of data
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. Minority interest in prior
periods represented a minority shareholders 49% share of the equity of FDSI.
On February 26, 2004, the Company purchased the minority interest for
$3,350,000 in cash. 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. The Companys investment in
the Trust is carried as an investment in other assets and the funds borrowed
from the Trust are presented as junior subordinated debt. For regulatory
purposes the proceeds from issuance of the junior subordinated debt, subject to
percentage limitations, are considered Tier 1 capital. 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 7




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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 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: Three Months Ended June 30, 2004
    
    Three Months Ended June 30, 2003Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per Share(dollars in thousands, except per share data)Net income as reported
    
    $
    1,286
    
    
    
    
    
    
    
    
    
    
    $
    669
    
    
    
    Shares outstanding at period end
    
    
    
    
    
    
    2,948,887
    
    
    
    
    
    
    
    
    
    
    
    2,901,894Impact of weighting shares
issued during the period
    
    
    
    
    
    
    (8,126
    )
    
    
    
    
    
    
    
    
    
    
    (3,765
    )Basic net income per share
    
    
    1,286
    
    
    
    2,940,761
    
    
    $
    0.43
    
    
    
    669
    
    
    
    2,898,129
    
    
    $
    0.23Dilutive Effect of Outstanding:Stock Options
    
    
    
    
    
    
    624,824
    
    
    
    
    
    
    
    
    
    
    
    524,918Warrants
    
    
    
    
    
    
    78,264
    
    
    
    
    
    
    
    
    
    
    
    60,093Diluted net income per share
    
    $
    1,286
    
    
    
    3,643,849
    
    
    $
    0.35
    
    
    $
    669
    
    
    
    3,483,140
    
    
    $
    0.19
 Six Months Ended June 30, 2004
    
    Six Months Ended June 30, 2003Income
    
    Shares
    
    Per Share
    
    Income
    
    Shares
    
    Per Share(dollars in thousands, except per share data)Net income as reported
    
    $
    2,382
    
    
    
    
    
    
    
    
    
    
    $
    1,338
    
    
    
    Shares outstanding at period end
    
    
    
    
    
    
    2,948,887
    
    
    
    
    
    
    
    
    
    
    
    2,901,894Impact of weighting shares
issued during the period
    
    
    
    
    
    
    (21,139
    )
    
    
    
    
    
    
    
    
    
    
    (7,537
    )Basic net income per share
    
    
    2,382
    
    
    
    2,927,748
    
    
    $
    0.81
    
    
    
    1,338
    
    
    
    2,894,357
    
    
    $
    0.46Dilutive Effect of Outstanding:Stock Options
    
    
    
    
    
    
    586,355
    
    
    
    
    
    
    
    
    
    
    
    500,375Warrants
    
    
    
    
    
    
    73,630
    
    
    
    
    
    
    
    
    
    
    
    53,054Diluted net income per share
    
    $
    2,382
    
    
    
    3,587,733
    
    
    $
    0.66
    
    
    $
    1,338
    
    
    
    3,447,786
    
    
    $
    0.39
 8




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Note 3  Stock-Based Compensation 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 below: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands, except per share data)Net income as reported
    
    $
    1,286
    
    
    $
    669
    
    
    $
    2,382
    
    
    $
    1,338Stock-based compensation using
the intrinsic value method
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock-based compensation that
would have been reported using
the fair value method of SFAS 123
    
    
    (104
    )
    
    
    (35
    )
    
    
    (169
    )
    
    
    (69
    )Pro forma net income
    
    $
    1,182
    
    
    $
    634
    
    
    $
    2,213
    
    
    $
    1,269Basic earnings per share:As reported
    
    $
    0.43
    
    
    $
    0.23
    
    
    $
    0.81
    
    
    $
    0.46Pro forma
    
    
    0.40
    
    
    
    0.22
    
    
    
    0.76
    
    
    
    0.44Diluted earnings per share:As reported
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.66
    
    
    $
    0.39Pro forma
    
    
    0.32
    
    
    
    0.18
    
    
    
    0.62
    
    
    
    0.37
 Note 4  Recent Accounting Pronouncements In March 2004, the Financial Accounting Standards Board (FASB) issued an
exposure draft entitled Share-Based Payment, an amendment of FASB Statements
No. 123 and 95. This proposed statement would eliminate the ability to
account for stock-based compensation using APB 25 and require such transactions
be recognized as compensation expense in the income statement based on their
fair values at the date of grant. Companies transitioning to fair value based
accounting for stock-based compensation will be required to use the modified
prospective method whereby companies must recognize equity compensation cost
from the beginning of the year in which the recognition provisions are first
applied as if the fair value method had been used to account for all equity
compensation awards granted, modified, or settled in fiscal years beginning
after December 31, 1994. As proposed, this statement would be effective for
the Company on January 1, 2005. The proposal is controversial and subject to
public comment. Accordingly, the provisions of the final statement, which the
FASB expects to issue in late 2004, could significantly differ from those
proposed in the exposure draft. Note 5  Stock Split On April 21, 2004, the Board of Directors declared a three-for-two split
of the Companys common shares to shareholders of record as of May 20, 2004 and
paid on June 4, 2004. All outstanding shares, stock options and related per
share earnings calculations in this report have been retroactively adjusted for
this stock split. 9




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##### Table of Contents



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 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 On July 8, 2004, we commenced a best-efforts offering of our common
stock to raise an aggregate of $15,000,000 to fund our continued growth. The primary source of the Companys earnings comes from banking services
provided by SWCB and to a lesser extent from data processing services provided
by FDSI. Since the opening of SWCB 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. SWCB derives its income primarily from interest received on loans and
investment securities and from fees received from providing deposit services.
SWCBs expenses are the interest it pays on deposits and
borrowings, salaries and benefits for employees, occupancy costs for its
banking offices and general 10




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##### Table of Contents



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 SWCB. The growth in Company assets and earnings and the contribution to earnings
from our business segments for the three and six month periods ended June 30,
2004 and 2003 is summarized below and discussed in more detail in the following
sections: Three Months Ended June 30,
    
    Six Months Ended June 30,2004
    
    2003
    
    2004
    
    2003(dollars in thousands, except per share data)Business Segment
Banking:Southwest Community Bank
    
    $
    1,239
    
    
    $
    729
    
    
    $
    2,408
    
    
    $
    1,381Southwest Community Bancorp
    
    
    (189
    )
    
    
    (52
    )
    
    
    (294
    )
    
    
    (52
    )Total Banking
    
    
    1,050
    
    
    
    677
    
    
    
    2,114
    
    
    
    1,329Data Processing:Financial Data Solutions, Inc.
    
    
    236
    
    
    
    (8
    )
    
    
    268
    
    
    
    9Total Company
    
    $
    1,286
    
    
    $
    669
    
    
    $
    2,382
    
    
    $
    1,338Diluted earnings per share
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.66
    
    
    $
    0.39Consolidated assets
    
    $
    417,153
    
    
    $
    285,574
    
    
    $
    417,153
    
    
    $
    285,574Average earning assets
    
    $
    307,764
    
    
    $
    193,573
    
    
    $
    276,531
    
    
    $
    183,631Return on average equity
    
    
    24.7
    %
    
    
    15.4
    %
    
    
    23.6
    %
    
    
    15.7
    %Return on average assets
    
    
    1.3
    %
    
    
    1.0
    %
    
    
    1.4
    %
    
    
    1.0
    %Net interest margin
    
    
    5.30
    %
    
    
    6.13
    %
    
    
    5.67
    %
    
    
    6.20
    %Efficiency ratio
    
    
    66.4
    %
    
    
    74.7
    %
    
    
    66.6
    %
    
    
    74.2
    %
 Results of Operations for the Three Months Ended June 30, 2004 Compared to 2003 The 92% increase in net income for the three months ended June 30, 2004 as
compared to the same period in 2003 was a result of several factors. Net
interest income increased by $1,112,000, or 38%, due primarily to a 59%
increase in average interest-earning assets; and noninterest income increased
by $717,000, or 31%, due to increases in fees and service charges related to
the overall growth at SWCB and data processing fees at FDSI. Partially
offsetting the increases in revenues, noninterest expense increased by
$775,000, or 20%, and the provision for loan losses increased $15,000, or 7%.
The increase in noninterest expenses was primarily due to increases in salaries
and employee benefits, occupancy, and equipment and data processing that were
related to our growth in offices. The increase in the provision for loan losses
was primarily due to the increase in outstanding loans. Results of Operations for the Six Months Ended June 30, 2004 Compared to 2003 The 78% increase in net income for the six months ended June 30, 2004 as
compared to the same period in 2003 was a result of several factors. Net
interest income increased by $2,152,000, or 38%, due primarily to a 51%
increase in average interest-earning assets; and noninterest income increased
by $1,107,000, or 24%, due to increases in fees and service charges related to
the overall growth at SWCB and data
processing fees at FDSI. Partially offsetting the increases in revenues,
noninterest expense increased by $1,392,000, or 18%, and the provision for loan
losses increased $125,000, or 31%. The increase in 11




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##### Table of Contents



noninterest expenses was
primarily due to increases in salaries and employee benefits, occupancy, and
equipment and data processing that were related to our growth in offices. The
increase in the provision for loan losses was primarily due to the increase in
outstanding loans. Balance Sheet as of June 30, 2004 compared to December 31, 2003 As of June 30, 2004 consolidated total assets increased $78,338,000, or
23%, to $417,153,000 as compared to $338,815,000 at December 31, 2003. The
increase in assets included a $31,726,000, or 28%, increase in cash and cash
equivalents, a $21,334,000, or 92%, increase in investment securities
available-for-sale and a $22,743,000, or 12%, increase in total loans to
$211,458,000. The increase in assets was funded primarily by the $75,097,000,
or 24%, increase in total deposits to $383,476,000 as of June 30, 2004 as
compared to $308,379,000 at December 31, 2003. Shareholders equity increased,
primarily due to net income for the period, to $21,339,000 at June 30, 2004
from $18,962,000 as of December 31, 2003. 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, 2003. 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 interest earning assets and the rate paid on
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 yields and rates, net interest income, net interest margin and
net interest spread: Three Months Ended June 30,2004
    
    2003Interest
    
    Rates
    
    
    
    
    
    Interest
    
    RatesAverage
    
    Income/
    
    Earned/
    
    Average
    
    Income/
    
    Earned/Balance
    
    Expense
    
    Paid (3)
    
    Balance
    
    Expense
    
    Paid (3)(dollars in thousands)AssetsInvestment Securities (1)
    
    $
    30,313
    
    
    $
    270
    
    
    
    3.56
    %
    
    $
    21,805
    
    
    $
    192
    
    
    
    3.52
    %Federal funds sold and other
    
    
    67,078
    
    
    
    175
    
    
    
    1.04
    %
    
    
    20,457
    
    
    
    67
    
    
    
    1.31
    %Loans (2)
    
    
    210,373
    
    
    
    3,982
    
    
    
    7.57
    %
    
    
    151,311
    
    
    
    2,967
    
    
    
    7.84
    %Total Interest-Earning Assets
    
    
    307,764
    
    
    
    4,427
    
    
    
    5.75
    %
    
    
    193,573
    
    
    
    3,226
    
    
    
    6.67
    %Noninterest-earning assets
    
    
    75,215
    
    
    
    
    
    
    
    
    
    
    
    85,716Total Assets
    
    $
    382,979
    
    
    
    
    
    
    
    
    
    
    $
    279,289LiabilitiesInterest-bearing demand
    
    $
    4,447
    
    
    
    3
    
    
    
    0.27
    %
    
    $
    5,085
    
    
    
    2
    
    
    
    0.16
    %Savings & Money Market
    
    
    74,312
    
    
    
    189
    
    
    
    1.02
    %
    
    
    36,347
    
    
    
    84
    
    
    
    0.92
    %Time deposits
    
    
    11,696
    
    
    
    33
    
    
    
    1.13
    %
    
    
    15,267
    
    
    
    78
    
    
    
    2.04
    %Borrowings
    
    
    10,394
    
    
    
    122
    
    
    
    4.70
    %
    
    
    11,323
    
    
    
    94
    
    
    
    3.32
    %Total Interest-Bearing Liabilities
    
    
    100,849
    
    
    
    347
    
    
    
    1.38
    %
    
    
    68,022
    
    
    
    258
    
    
    
    1.52
    %Demand deposits
    
    
    259,334
    
    
    
    
    
    
    
    
    
    
    
    189,769Other liabilities
    
    
    1,982
    
    
    
    
    
    
    
    
    
    
    
    4,633Total Liabilities
    
    
    362,165
    
    
    
    
    
    
    
    
    
    
    
    262,424Shareholders Equity
    
    
    20,814
    
    
    
    
    
    
    
    
    
    
    
    16,865Total Liabilities and
Shareholders Equity
    
    $
    382,979
    
    
    
    
    
    
    
    
    
    
    $
    279,289Net interest income/margin
    
    
    
    
    
    $
    4,080
    
    
    
    5.30
    %
    
    
    
    
    
    $
    2,968
    
    
    
    6.13
    %Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.37
    %
    
    
    
    
    
    
    
    
    
    
    5.15
    %
  (1)
    
    The yield for investment securities reflects that securities totaling $29,832,000 in 2004 and 20,635,000
in 2003 were classified as available-for-sale and carried at market value while $481,000 in 2004 and
$1,170,000 in 2003 were classified as held-to-maturity and carried at cost.(2)
    
    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 $513,000 in 2004 and $326,000 in 2003.(3)
    
    The ratios have been annualized. 13




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##### Table of Contents



Six Months Ended June 30,2004
    
    2003Interest
    
    Rates
    
    
    
    
    
    Interest
    
    RatesAverage
    
    Income/
    
    Earned/
    
    Average
    
    Income/
    
    Earned/Balance
    
    Expense
    
    Paid (3)
    
    Balance
    
    Expense
    
    Paid (3)(dollars in thousands)AssetsInvestment securities (1)
    
    $
    26,750
    
    
    $
    487
    
    
    
    3.64
    %
    
    $
    18,470
    
    
    $
    378
    
    
    
    4.09
    %Federal funds sold & other
    
    
    41,464
    
    
    
    217
    
    
    
    1.05
    %
    
    
    22,480
    
    
    
    139
    
    
    
    1.24
    %Loans (2)
    
    
    208,317
    
    
    
    7,762
    
    
    
    7.45
    %
    
    
    142,681
    
    
    
    5,607
    
    
    
    7.86
    %Total Interest-Earning Assets
    
    
    276,531
    
    
    
    8,466
    
    
    
    6.12
    %
    
    
    183,631
    
    
    
    6,124
    
    
    
    6.67
    %Noninterest-earning assets
    
    
    75,041
    
    
    
    
    
    
    
    
    
    
    
    79,845Total Assets
    
    $
    351,572
    
    
    
    
    
    
    
    
    
    
    $
    263,476LiabilitiesInterest-bearing demand
    
    $
    5,285
    
    
    
    7
    
    
    
    0.26
    %
    
    $
    4,937
    
    
    
    4
    
    
    
    0.16
    %Savings & Money Market
    
    
    63,083
    
    
    
    314
    
    
    
    1.00
    %
    
    
    35,067
    
    
    
    162
    
    
    
    0.92
    %Time deposits
    
    
    12,006
    
    
    
    68
    
    
    
    1.13
    %
    
    
    15,204
    
    
    
    168
    
    
    
    2.21
    %Borrowings
    
    
    11,093
    
    
    
    237
    
    
    
    4.27
    %
    
    
    5,898
    
    
    
    102
    
    
    
    3.46
    %Total Interest-Bearing Liabilities
    
    
    91,467
    
    
    
    626
    
    
    
    1.37
    %
    
    
    61,106
    
    
    
    436
    
    
    
    1.43
    %Demand deposits
    
    
    238,116
    
    
    
    
    
    
    
    
    
    
    
    182,062Other liabilities
    
    
    1,770
    
    
    
    
    
    
    
    
    
    
    
    3,450Total Liabilities
    
    
    331,353
    
    
    
    
    
    
    
    
    
    
    
    246,618Shareholders Equity
    
    
    20,219
    
    
    
    
    
    
    
    
    
    
    
    16,858Total Liabilities and
Shareholders Equity
    
    $
    351,572
    
    
    
    
    
    
    
    
    
    
    $
    263,476Net interest income/margin
    
    
    
    
    
    $
    7,840
    
    
    
    5.67
    %
    
    
    
    
    
    $
    5,688
    
    
    
    6.20
    %Net interest spread
    
    
    
    
    
    
    
    
    
    
    4.75
    %
    
    
    
    
    
    
    
    
    
    
    5.24
    %
  (1)
    
    The yield for investment securities reflects that securities totaling $26,215,000 in 2004 and $17,168,000
in 2003 were classified as available-for-sale and carried at market value while $535,000 in 2004 and
$1,302,000 in 2003 were classified as held-to-maturity and carried at cost.(2)
    
    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 $944,000 in 2004 and $616,000 in 2003.(3)
    
    The ratios have been annualized. 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 yields earned on
assets and rates paid on liabilities. These are referred to as rate changes and
the 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 basis between the volume and the rate changes in the table that
follows: 14




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2004 from 2003
    
    2004 from 2003Change due to
    
    
    
    
    
    Change due toTotal
    
    
    
    
    
    
    
    
    
    TotalVolume
    
    Rate
    
    Change
    
    Volume
    
    Rate
    
    Change(dollars in thousands)Investment securities
    
    $
    76
    
    
    $
    2
    
    
    $
    78
    
    
    $
    154
    
    
    $
    (45
    )
    
    $
    109Federal funds sold and other
    
    
    182
    
    
    
    (74
    )
    
    
    108
    
    
    
    103
    
    
    
    (25
    )
    
    
    78Loans
    
    
    1,120
    
    
    
    (105
    )
    
    
    1,015
    
    
    
    2,458
    
    
    
    (303
    )
    
    
    2,155Total interest income
    
    
    1,378
    
    
    
    (177
    )
    
    
    1,201
    
    
    
    2,715
    
    
    
    (373
    )
    
    
    2,342Interest-bearing demand
    
    
    
    
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    3
    
    
    
    3Savings & Money Market
    
    
    98
    
    
    
    7
    
    
    
    105
    
    
    
    139
    
    
    
    13
    
    
    
    152Time deposits
    
    
    (15
    )
    
    
    (30
    )
    
    
    (45
    )
    
    
    (30
    )
    
    
    (70
    )
    
    
    (100
    )Borrowings
    
    
    (9
    )
    
    
    37
    
    
    
    28
    
    
    
    107
    
    
    
    28
    
    
    
    135Total interest expense
    
    
    74
    
    
    
    15
    
    
    
    89
    
    
    
    216
    
    
    
    (26
    )
    
    
    190Net Interest Income
    
    $
    1,304
    
    
    $
    (192
    )
    
    $
    1,112
    
    
    $
    2,499
    
    
    $
    (347
    )
    
    $
    2,152
 Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003 For the three months ended June 30, 2004, net interest income was
$4,080,000, an increase of $1,112,000, or 38%, as compared to $2,968,000 for
the three months ended June 30, 2003. 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 $114,191,000, versus an increase in
average interest-bearing liabilities of $32,827,000. Most of the earning asset
growth was supported by the $69,565,000, or 37%, growth in average
noninterest-bearing demand deposits. The increased volume of our
interest-earning assets contributed $1,378,000 towards the increase in net
interest income. The $59,062,000, or 39%, increase in average loans contributed
$1,120,000 to the increase in interest income. The increase in interest income
from the increased volume of interest-earning assets was partially offset by
the $74,000 increase in interest expense due to the increased volume of
interest-bearing liabilities. Lower interest rates had an overall negative impact of $192,000 on net
interest income. The average prime rate during the second quarter of 2004 was
4.00% as compared to 4.23% during the second quarter of 2003. The decrease was
primarily due to $177,000 from lower yields on interest-earning assets. In
addition, interest expense increased $15,000 as lower rates on time deposits
were offset by higher rates on borrowings. The overall decrease included
$105,000 due to lower loan yields and $74,000 due to lower yields on Federal
funds sold and other. The net interest margin for the three months ended June 30, 2004 was
5.30%, a decrease of 83 basis points from 6.13% for the same period in 2003.
The decrease in net interest margin was due to a larger decrease in the yield
on interest-earning assets than the decrease in the cost of interest-bearing
liabilities. . The yield on interest-earning assets was 5.75% for the second quarter of
2004, a decrease of 92 basis points as compared to 6.67% for the second quarter
of 2003. The decrease in the yield on interest-earning assets was due to lower
yields on earnings assets and a change in the mix of earnings assets. Despite
the 39% increase in average loans, the percentage of loans to average
interest-earning assets decreased from 78% for the second quarter of 2003 to
68% for the second quarter of 2004. The average cost of total interest-bearing liabilities was 1.38% in the
second quarter of 2004, a decrease of 14 basis points from 1.52% for the same
period in 2003. The overall decrease in the average cost was primarily due to
a change in mix. The net increase in average interest-bearing liabilities was
primarily due to the increase in the lower cost savings & money market deposits
while the average balances of the higher cost time deposits and borrowings
decreased. 15




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##### Table of Contents



Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003 For the six months ended June 30, 2004, net interest income was
$7,840,000, an increase of $2,152,000, or 38%, as compared to $5,688,000 for
the six months ended June 30, 2003. 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 $92,900,000, versus an increase in average interest-bearing
liabilities of $30,361,000. Most of the earning asset growth was supported by
the $56,054,000, or 31%, growth in average noninterest-bearing demand deposits.
The increased volume of our interest-earning assets contributed $2,715,000
towards the increase in net interest income. The $65,636,000, or 46%, increase
in average loans contributed $2,458,000 to the increase in interest income.
The increase in interest income from the increased volume of interest-earning
assets was partially offset by the $216,000 increase in interest expense due to
the increased volume of interest-bearing liabilities. Lower interest rates had an overall negative impact of $347,000 on net
interest income. The average prime rate during the first six months of 2004
was 4.00% as compared to 4.25% during the same period in 2003. A decrease of
$373,000 from lower yields on interest-earning assets was partially offset by a
$26,000 decrease in interest expense due to lower rates on interest-bearing
liabilities. Decreased loan yields account for $303,000 of the overall
decrease. The net interest margin for the six months ended June 30, 2004 was 5.67%,
a decrease of 53 basis points from 6.20% for the same period in 2003. The
decrease in net interest margin was due to a larger decrease in the yield on
interest-earning assets than the decrease in the cost of interest-bearing
liabilities. The yield on interest-earning assets was 6.12% for the first six months of
2004, a decrease of 55 basis points as compared to 6.67% for the same period in
2003. The decrease in the yield on interest-earning assets was due to lower
yields on earnings assets and a change in the mix of earnings assets. Despite
the 46% increase in average loans, the percentage of loans to average
interest-earning assets decreased from 78% in 2003 to 75% in 2004. The average cost of total interest-bearing liabilities was 1.37% for the
six months ended June 30, 2004, a decrease of 6 basis points from 1.43% for the
same period in 2003. The overall decrease in the average cost was primarily
due to a change in mix. The net increase in average interest-bearing
liabilities was primarily due to the increase in the lower cost savings & money
market deposits. Noninterest Income For the three months ended June 30, 2004, noninterest income was
$3,051,000, an increase of $717,000, or 31%, from $2,334,000 for the three
months ended June 30, 2003. The major items contributing to the increase were
fees and service charges and data processing income. Fees and service charges
increased $380,000, or 60%, as a result of the growth in deposits. Data
processing income from FDSI, our data processing subsidiary, increased
$353,000, or 30% to $1,524,000 for the three months ended June 30, 2004 due to
increased processing volumes. Gains on sales of securities totaled $154,000
during the second quarter of 2003. There were no sales of securities during the
second quarter of 2004. For the six months ended June 30, 2004, noninterest income was $5,681,000,
an increase of $1,107,000, or 24%, from $4,574,000 for the six months ended
June 30, 2003. The major items contributing to the increase were fees and
service charges and data processing income. Fees and service charges increased
$644,000, or 47%, as a result of the growth in deposits. Data processing
income from FDSI, our data
processing subsidiary, increased $492,000, or 22% to $2,766,000 for the six
months ended June 30, 2004 due to increased processing volumes. Gains on sales
of securities totaled $228,000 during the first six months of 2003. There were
no sales of securities during the same period of 2004. 16




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##### Table of Contents



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 over 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 June 30, 2004, was
$4,738,000, an increase of $775,000, or 20%, from $3,963,000 for the second
quarter of 2003. The major items contributing to the increase were salaries and
benefits increasing $328,000, or 14%, and occupancy expense and equipment
expense increasing $120,000, or 14%. The increases in all expense
classifications are attributable to growth of SWCB as well as the growth of
FDSI, including increases in the number of employees and in the number of
offices. During the second quarter of 2004, SWCB opened a branch office in San
Bernardino. Noninterest expense for the six months ended June 30, 2004, was
$9,004,000, an increase of $1,392,000, or 18%, from $7,612,000 for the first
six months of 2003. The major items contributing to the increase were salaries
and benefits increasing $597,000, or 14%, and occupancy expense and equipment
expense increasing $258,000, or 16%. The increases in all expense
classifications are attributable to growth of SWCB as well as the growth of
FDSI, including increases in the number of employees and in the number of
offices. FINANCIAL POSITION Our total assets increased $78,338,000, or 23%, to $417,153,000 at June
30, 2004 from $338,815,000 at December 31, 2003. The increase in assets is
primarily due to a $22,161,000 increase in net loans. The decrease in cash and
due from banks and increase in Federal funds sold at June 30, 2004, as compared
to December 31, 2003, is due to the increase in deposits and the timing in the
collection process of checks deposited by our customers. The increase in assets
was funded primarily by a $75,097,000 increase in deposits, which included a
$39,920,000 increase in noninterest-bearing demand deposits and a $35,795,000
increase in money market and NOW account deposits. We emphasize seeking demand
deposits from business customers in our market area. In addition, we opened a
new branch office in San Bernardino in May 2004. The $2,377,000 increase in
shareholders equity was primarily from our earnings for the first six months
of 2004. Loans The following table sets forth the components of net loans outstanding in
each category at the dates indicated: June 30, 2004
    
    December 31, 2003Percent
    
    
    
    
    
    PercentLoan Category
    
    Amount
    
    of Total
    
    Amount
    
    of Total(dollars in thousands)Real estate loans:Construction
    
    $
    65,727
    
    
    
    31
    %
    
    $
    69,087
    
    
    
    36
    %Residential
    
    
    5,964
    
    
    
    3
    %
    
    
    8,499
    
    
    
    5
    %Commercial
    
    
    74,883
    
    
    
    35
    %
    
    
    51,495
    
    
    
    27
    %Total real estate
    
    
    146,574
    
    
    
    69
    %
    
    
    129,081
    
    
    
    68
    %Commercial
    
    
    65,408
    
    
    
    30
    %
    
    
    59,669
    
    
    
    31
    %Consumer & Other
    
    
    1,453
    
    
    
    1
    %
    
    
    1,890
    
    
    
    1
    %Total Loans
    
    
    213,435
    
    
    
    100
    %
    
    
    190,640
    
    
    
    100
    %Less deferred
loan income
    
    
    (1,977
    )
    
    
    
    
    
    
    (1,925
    )Net Loans
    
    $
    211,458
    
    
    
    
    
    
    $
    188,715
 17




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##### Table of Contents



The growth in loans was primarily in commercial real estate loans as
construction loans decreased due to loan payoffs as a result of completion of
the construction projects. Construction activity and real estate investment
have remained strong in our market area due to continued economic growth and
continuing low interest rates. Construction lending is generally considered to involve a higher degree of
risk than permanent mortgage lending because of the inherent difficulty in
estimating both a propertys value at completion of the project and the cost of
the project. If the estimate of construction cost proves to be inaccurate, we
may be required to advance funds beyond the amount originally committed to
permit completion of the project. If the estimate of value upon completion
proves to be inaccurate, we may be confronted with a project the value of which
is insufficient to assure full repayment. Disagreements between borrowers and
builders and the failure of builders to pay subcontractors may also jeopardize
projects. Loans to builders to construct projects for which no purchaser has
been identified carry additional risk because the payoff for the loan may be
dependent on the contractors ability to sell the property prior to the due
date of the loan. We address these risks by adhering to strict underwriting
policies, disbursement procedures and monitoring practices. 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 June 30, 2004, 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 June 30, 2004:Tire 1 leverage capital ratio
    
    
    5.0
    %
    
    
    6.9
    %
    
    
    6.8
    %Tier 1 risk-based capital ratio
    
    
    6.0
    %
    
    
    9.5
    %
    
    
    9.5
    %Total risk-based capital ratio
    
    
    10.0
    %
    
    
    11.1
    %
    
    
    10.7
    %As of December 31, 2003:Tire 1 leverage capital ratio
    
    

    5.0
    %
    
    
    8.7
    %
    
    
    8.0
    %Tier 1 risk-based capital ratio
    
    
    6.0
    %
    
    
    11.9
    %
    
    
    11.0
    %Total risk-based capital ratio
    
    
    10.0
    %
    
    
    13.5
    %
    
    
    12.1
    %
 During the six months ended June 30, 2004 shareholders equity increased
$2,377,000 to $21,339,000. The net increase included net income of $2,382,000,
$209,000 from the exercise of stock options and warrants and a $214,000
decrease in the unrealized gain on available-for-sale securities. Effective July 8, 2004 we began an offering to raise up to $15,000,000 in
equity through the sale of 500,000 additional common shares of the Company to
fund the continuing expansion of our subsidiaries. For additional information,
please refer to our Registration Statement on Form S-1 declared effective by
the Securities and Exchange Commission on that date. 18




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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 June 30, 2004, 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 50% as compared to 45% at
December 31, 2003. 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. The demand deposits
are primarily from businesses and are not expected to be significantly affected
by a sudden change in the local housing market. 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. SWCB 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.
SWCB also has a credit line with the Federal Home Loan Bank of San Francisco
which would allow SWCB to borrow up to 20% of its assets ($67,000,000 as of
June 30, 2004) on a collateralized basis. As of June 30, 2004, loans and
securities pledged as collateral for this facility would have allowed SWCB to
borrow up to approximately $60,000,000. 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 internal auditors and
regulatory agencies. 19




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##### Table of Contents



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. 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 200 and 300 basis point simulations to be realistic scenarios. Sensitivity of Net Interest Income Adjusted Net
    
    ChangeInterest Rate Scenario
    
    Interest Income
    
    From Base(dollars in thousands)Up 300 basis points
    
    $
    17,025
    
    
    
    12.0
    %Up 200 basis points
    
    
    16,425
    
    
    
    8.1
    %Up 100 basis points
    
    
    15,825
    
    
    
    4.1
    %Base
    
    
    15,200
    
    
    
    0.0
    %Down 100 basis points
    
    
    14,675
    
    
    
    (3.5
    %)Down 200 basis points
    
    
    14,250
    
    
    
    (6.3
    %)Down 300 basis points
    
    
    13,850
    
    
    
    (8.9
    %)
 
 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 June 30, 2004, these disclosure controls and procedures were
effective. 20




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##### Table of Contents



There have been no changes 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 June 30, 2004 that have materially
affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting. 
 PART II  Other Information 
 Item 1  Legal Proceedings To the best of our knowledge, there are no pending legal proceedings to
which Southwest Community, SWCB or FDSI are a party and which may have a
materially adverse effect upon Southwest Community, SWCB or FDSIs property,
business or results of operations. 
 Item 2  Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities None 
 Item 3  Defaults Upon Senior Securities Not applicable. 
 Item 4  Submission of Matters to a Vote of Security Holders The Companys Annual Meeting of Shareholders was held on May 19, 2004. At
the Annual Meeting shareholders elected each of the nominees for election to
the Board of directors and ratified the employment of Vavrinek, Trine, Day &
Co., LLP as independent accountants. The following chart shows the names of the directors elected and results
of the voting: Name
    
    Votes For
    
    Votes WithheldAllan W. Arendsee
    
    
    1,645,111
    
    
    
    1,872Carol M. Beres
    
    
    1,645,111
    
    
    
    1,872Richard T. L. Chan
    
    
    1,645,111
    
    
    
    1,872Karen J. Estes
    
    
    1,645,111
    
    
    
    1,872Philip H. Holtkamp
    
    
    1,645,111
    
    
    
    1,872Howard B. Levenson
    
    
    1,645,111
    
    
    
    1,872Frank J. Mercardante
    
    
    1,645,111
    
    
    
    1,872Paul M. Weil
    
    
    1,645,111
    
    
    
    1,872
 With respect to the ratification of the independent accountants, 1,645,111
shares voted in favor, 1,872 voted against and 0 shares abstained. 
 Item 5  Other Information Not applicable 21




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##### Table of Contents



Item 6  Exhibits and Reports on Form 8-K a) Exhibits Reg. S-KItem 601Exhibit No.
    
    Description
    
    Page31.1
    
    Certification Pursuant to Section 302 by Chief Executive Officer
    
    
    2331.2
    
    Certification Pursuant to Section 302 by Chief Financial Officer
    
    
    2432.1
    
    Certification of Chief Executive Officer Pursuant to Section 906
    
    
    2532.2
    
    Certification of Chief Financial Officer Pursuant to Section 906
    
    
    26
 b) Reports on Form 8-K The following Current Reports on Form 8-K were filed during the second
quarter of 2004: Description
    
    Date of ReportEarnings Release
    
    April 19, 2004Announcement of 3 for 2 stock split
    
    April 21, 2004
 
 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: August 12, 2004
    
    By:
    
    /s/ Frank J. MercardanteFrank J. MercardantePresident & Chief Executive OfficerDate: August 12, 2004
    
    By:
    
    /s/ James L. LemeryJames L. LemeryExecutive Vice President &Chief Financial Officer
 22