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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-KSB

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

For the year ended December 31, 2000 Commission File Number 0-15982

NATIONAL MERCANTILE BANCORP
(Exact name of registrant as specified in its charter)

California
(State or other jurisdiction of
incorporation or organization)

1840 Century Park East
Los Angeles, California
(Address to principal executive offices)

95-3819685
(I.R.S. Employer
Identification No.)

90067
(Zip Code)

Registrant's telephone number, including area code: (310) 277-2265
No securities registered pursuant to Section 12(b) of the Act
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, No Par Value
Series A Noncumulative Convertible Perpetual Preferred Stock
(Title of Class)

   Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. /x/ Yes / / No

   Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB. / /

   The aggregate market value of the voting common equity held by nonaffiliates of the registrant, based upon the closing sale price of its Common Stock as reported by the National Association of Securities Dealers Automated Quotation System on March 7, 2001, was approximately $10.5 million.

   The number of shares of Common Stock, no par value, of the registrant outstanding as of March 7, 2001 was 1,590,515.

DOCUMENTS INCORPORATED BY REFERENCE:

   Certain portions of the Company's Proxy Statement to be filed with the Commission pursuant to Rule 14a-6 under the Securities Exchange Act of 1934 in connection with the Company's 2001 Annual Meeting of Shareholders are incorporated by reference in Part III, Items 10-13 of this Annual Report on Form 10-KSB.

This Report Includes a Total of 62 Pages
Index to Exhibits on Page 60

NATIONAL MERCANTILE BANCORP

Table of Contents

Form 10-KSB
For the Fiscal Year Ended December 31, 2000

		Page(s) in Form 10-KSB
PART I
Item 1.	Business	1
Item 2.	Properties	7
Item 3.	Legal Proceedings	7
Item 4.	Submission Of Matters To A Vote Of Security Holders	7
PART II
Item 5.	Market For Registrant's Common Equity And Related Shareholder Matters	8
Item 6.	Management's Discussion And Analysis Of Financial Condition And Results Of Operations	9
Item 7.	Financial Statements And Supplementary Data	36
Item 8.	Changes In And Disagreements With Accountants On Accounting And Financial Disclosure	36
PART III
Item 9.	Directors And Executive Officers Of The Registrant	36
Item 10.	Executive Compensation	36
Item 11.	Security Ownership Of Certain Beneficial Owners And Management	36
Item 12.	Certain Relationships And Related Transactions	36
PART IV
Item 13.	Exhibits, Financial Statement Schedules, And Reports On Form 8-K	37
Signatures		38
Financial Statements		40
Exhibit Index		61

    Certain matters discussed in this Form 10-KSB may constitute forward-looking statements within the meaning of the Securities Exchange Act of 1934 (the "Exchange Act") and as such may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which the Company operates, projections of future performance, perceived opportunities in the market and statements regarding the Company's mission and vision. The Company's actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such forward-looking statements. For discussion of the factors that might cause such a difference, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations — Factors Which May Affect Future Operating Results".

PART I

ITEM 1. BUSINESS

    National Mercantile Bancorp (the "Company") is a corporation which was organized under the laws of the State of California in 1983 and is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). The Company's principal asset is the capital stock of Mercantile National Bank (the "Bank"), its wholly owned subsidiary. The Company's principal business is to serve as a holding company for the Bank, and for other banking or banking-related subsidiaries which the Company may establish or acquire. Because the Bank comprises substantially all of the business of the Company, unless the content requires otherwise references in this Form 10-KSB to the "Company" reflect the consolidated activities of the Company and Bank. The Company has been authorized by the Federal Reserve Bank of San Francisco (the "Reserve Bank") to engage in lending activities separate from the Bank but to date has not done so.

    The Bank was organized in 1981 as a national banking association and obtained a Certificate of Authority to commence the business of banking from the Office of the Comptroller of the Currency (the "OCC") in 1982. The Bank's primary business activities are to generate loans and deposits.

    The Company's present business strategy is to attract individual and small to mid-sized business borrowers in specific market niches located in its primary service area by offering a variety of loan products and a full range of banking services coupled with highly personalized service. The Company's lending products include revolving lines of credit, term loans and consumer and home equity loans, which often contain terms and conditions tailored to meet the specific demands of the market niche in which the borrower operates, including the ability to evaluate the revenue streams and other sources of repayment supporting the loan. Additionally, the Company provides a wide array of deposit and investment products that are also designed to meet specific customer needs. In order to provide the personalized service required by these customers, the Company uses a team approach to customer service combining an experienced relationship management officer with operations support personnel.

    During the past several years the market niches targeted by the Company have included principally the entertainment industry and professional services providers. In the beginning of 2000 the Company expanded its targeted market niches to include healthcare and community based nonprofit organizations. Entertainment industry customers include television, music and film production companies, talent agencies, individual performers, directors and producers (whom the Company attracts by establishing relationships with business management firms) and others affiliated with the entertainment industry. Professional service customers include legal, accounting, insurance, advertising firms and their individual directors, officers, partners and shareholders. Healthcare organizations include primarily outpatient healthcare providers such as physician medical groups, independent practice associations and surgery centers.

    The Company received regulatory approval in December 2000 to open its first regional office in Encino, California which will expand its client focused niche banking services to the San Fernando Valley area of Los Angeles. The Encino regional office, which was opened in March 2001, will focus on

1

providing banking services to those affiliated with the healtcare industry as well as expanding the Bank's existing client base associated with entertainment, professional service providers and community based nonprofit organizations.

    In order to grow and expand its array of products and services, the Company may from time to time acquire other financial service-related companies including "in-market' acquisitions with banks of similar size and market presence. The Company has no current arrangements, understandings or agreements regarding any such acquisition. No assurance can be made that the Company will identify a company which can be acquired on terms and conditions acceptable to the Company or that the Company could obtain the necessary regulatory approvals for such acquisition.

Competition

    The banking business is highly competitive. The Company's primary service area is dominated by a relatively small number of major banks which have many offices operating over a wide geographical area. The Company competes for loans and deposits primarily with other commercial banks, savings and loan associations, credit unions, and thrift and loan companies, as well as with nondepository institutions, including mortgage companies, commercial finance lenders and providers of money market mutual funds. Nondepository institutions can be expected to increase the extent to which they act as financial intermediaries. Large institutional users and sources of credit may also increase the extent to which they interact directly, meeting business credit needs outside the banking system. Furthermore, the geographic constraints on portions of the financial services industry can be expected to erode. In addition, many of the major commercial banks operating in the Company's primary service area offer services, such as trust services, which are not offered directly by the Company and, by virtue of their greater total capitalization, such banks have substantially higher lending limits than the Company.

    To compete with other financial institutions in its primary service area, the Bank relies principally upon personal contact by its officers, directors and employees and providing, through third parties, specialized services such as messenger, accounting and other related services. For clients whose loan demands exceed the Company's legal lending limit, the Company will arrange for such loans on a participation basis with other banks. The Company also assists clients requiring other services not offered by the Company in obtaining such services from other providers.

Monetary Policy

    The net income of the Bank is affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities in the U.S. and abroad. In particular, the Board of Governors of the Federal Reserve System ("Federal Reserve Board") exerts a substantial influence on interest rates and credit conditions, primarily through open market operations in United States government securities, varying the discount rate on member bank borrowings and setting reserve requirements against deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future.

Supervision and Regulation

    Bank holding companies, banks and their nonbank affiliates are extensively regulated under both federal and state law. The following is not intended to be an exhaustive description of the statutes and regulations applicable to the Company's or the Bank's business. The description of statutory and regulatory provisions is qualified in its entirety by reference to the particular statutory or regulatory provisions.

    Moreover, new legislation and other regulatory changes affecting bank holding companies, banks and the financial services industry in general have occurred in the last several years and can be

2

expected to occur in the future. The nature, timing and impact of new and amended laws and regulations cannot be accurately predicted.

Bank Holding Companies

    Bank holding companies are regulated under the BHC Act and are supervised by the Federal Reserve Board. Under the BHC Act, the Company files reports of its operations and other information with the Federal Reserve Board. The Federal Reserve Board may conduct examinations of the Company and the Bank.

    The BHC Act requires, among other things, the Federal Reserve Board's prior approval whenever a bank holding company proposes to (i) acquire all or substantially all the assets of a bank, (ii) acquire direct or indirect ownership or control of more than 5% of the voting shares of a bank, (iii) merge or consolidate with another bank holding company, (iv) with certain exceptions, from acquiring more than 5% of the voting shares of any company that is not a bank and (v) from engaging in any activities without the Federal Reserve Board's prior approval other than (1) managing or controlling banks and other subsidiaries authorized by the BHC Act, (2) furnishing services to, or performing services for, its subsidiaries, or (3) conducting a safe deposit business. The BHC Act authorizes the Federal Reserve Board to approve the ownership of shares in any company, the activities of which have been determined to be so closely related to banking or to managing or controlling banks as to be a proper incident thereto.

    Consistent with its "source of strength" policy (see "Capital Adequacy Requirements," below), the Federal Reserve Board has stated that, as a matter of prudent banking, a bank holding company generally should not pay cash dividends unless its net income available to common shareholders has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the company's capital needs, asset quality and overall financial condition.

    Under the BHC Act and regulations adopted by the Federal Reserve Board, a bank holding company and its subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, lease or sale of property or financing of services.

    The Federal Reserve Board may, among other things, issue cease-and-desist orders with respect to activities of bank holding companies and nonbanking subsidiaries that represent unsafe or unsound practices or violate a law, administrative order or written agreement with a federal banking regulator. The Federal Reserve Board can also assess civil money penalties against companies or individuals who violate the BHC Act or other federal laws or regulations, order termination of nonbanking activities by nonbanking subsidiaries of bank holding companies and order termination of ownership and control of a nonbanking subsidiary by a bank holding company.

    A bank holding company may become a "financial holding company" which may engage in a range of activities that are financial in nature, including insurance and securities underwriting, insurance sales, merchant banking, providing financial, investment, or economic advisory services, any activity that a bank holding company may engage in outside of the United States, and additional activities that the Federal Reserve Board, in consultation with the Secretary of the Treasury, determines to be financial in nature, incidental to a financial activity, or complementary to a financial activity. The Federal Reserve Board is the primary regulator of financial holding companies.

    In order for a bank holding company to be treated as a financial holding company, all of the depository institution subsidiaries of the bank holding company must be well capitalized and well managed, and must have achieved a rating of satisfactory or better at the most recent Community Reinvestment Act examination of each such institution. In addition, a bank holding company must file with the Federal Reserve Board a declaration that the bank holding company elects to be a financial holding company to engage in activities or acquire and retain shares of a company that were not permissible for a bank holding company to engage in or acquire before the enactment of the Gramm-Leach-Bliley Act, and a certification that all of the depository institution subsidiaries of the bank

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holding company are well capitalized and well managed. The Board and management have determined that "financial holding company" status is not necessary at this time.

National Banks

    OCC.  As a national bank, the Bank is subject to supervision and examination by the OCC and requirements and restrictions under federal and state law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and limitations on the types of investments that may be made and services that may be offered. Various consumer laws and regulations also affect the Bank's operations. These laws primarily protect depositors and other customers of the Bank, rather than the Company and its shareholders.

    The Company's principal asset is its investment in the Bank. The Bank's ability to pay dividends to the Company is limited by certain statutes and regulations. OCC approval is required for a national bank to pay a dividend if the total of all dividends declared in any calendar year exceeds the total of the bank's net profits (as defined) for that year combined with its retained net profits for the preceding two calendar years, less any required transfer to surplus or a fund for the retirement of any preferred stock. A national bank may not pay any dividend that exceeds its retained net profits then on hand after deducting its loan losses and bad debts, as defined by the OCC. The OCC and the Federal Reserve Board have also issued banking circulars emphasizing that the level of cash dividends should bear a direct correlation to the level of a national bank's current and expected earnings stream, the bank's need to maintain an adequate capital base and other factors. National banks that are not in compliance with regulatory capital requirements generally are not permitted to pay dividends. The OCC also can prohibit a national bank from engaging in an unsafe or unsound practice in its business. Depending on the bank's financial condition, payment of dividends could be deemed to constitute an unsafe or unsound practice. Except under certain circumstances and with prior regulatory approval, a bank may not pay a dividend if, after so doing, it would be undercapitalized. The Bank's ability to pay dividends in the future is, and could be, further influenced by regulatory policies or agreements and by capital guidelines.

    The Bank's ability to make funds available to the Company is also subject to restrictions imposed by federal law on the Bank's ability to extend credit to the Company to purchase assets from it, to issue a guarantee, acceptance or letter of credit on its behalf (including an endorsement or standby letter of credit), to invest in its stock or securities, or to take such stock or securities as collateral for loans to any borrower. Such extensions of credit and issuances generally must be secured and are generally limited, with respect to the Company, to 10% of the Bank's capital stock and surplus.

    The OCC regulations incorporate guidelines establishing standards for safety and soundness, including operational and managerial standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits, and prohibit compensation deemed excessive. If the OCC finds that a bank has failed to meet any applicable standard, it may require the institution to submit an acceptable plan to achieve compliance and, if the bank fails to comply, the OCC must, by order, require it to correct the deficiency.

    The OCC has enforcement powers with respect to national banks for violations of federal laws or regulations that are similar to the powers of the Federal Reserve Board with respect to bank holding companies and nonbanking subsidiaries. See "Bank Holding Companies," above.

    FDIC.  The Bank is subject to examination and regulation by the Federal Deposit Insurance Corporation (the "FDIC") under the Federal Deposit Insurance Act ("FDIA") because its deposit accounts are insured by the FDIC under the Bank Insurance Fund ("BIF").

    Under FDIC regulations, insured depository institution's are assigned to one of three capital groups for insurance premium purposes — "well capitalized," "adequately capitalized" and "undercapitalized" — which are defined in the same manner as the regulations establishing the prompt

4

corrective action system under Section 38 of the FDIA, as discussed under "Capital Adequacy Requirements" below. These three groups are then divided into subgroups which are based on supervisory evaluations by the institution's primary federal regulator, resulting in nine assessment classifications. Assessment rates for BIF-insured banks range from 0% of insured deposits for well-capitalized banks with minor supervisory concerns to 0.027% of insured deposits for undercapitalized banks with substantial supervisory concerns.

    The FDIC may terminate the deposit insurance of any insured depository institution if the FDIC determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices which, as with the OCC's enforcement authority, are not limited to cases of capital inadequacy, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation or order or any condition imposed in writing by the FDIC. In addition, FDIC regulations provide that any insured institution that falls below a 2% minimum leverage ratio (see below) will be subject to FDIC deposit insurance termination proceedings unless it has submitted, and is in compliance with, a capital plan with its primary federal regulator and the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process if the institution has no tangible capital. The FDIC is additionally authorized by statute to appoint itself as conservator or receiver of an insured depository institution (in addition to the powers of the institution's primary federal regulatory authority) in cases, among others and upon compliance with certain procedures, of unsafe or unsound conditions or practices or willful violations of cease and desist orders.

    CRA.  Banks and bank holding companies are also subject to the Community Reinvestment Act of 1977, as amended ("CRA"). CRA requires the Bank to ascertain and meet the credit needs of the communities it serves, including low- and moderate-income neighborhoods. The Bank's compliance with CRA is reviewed and evaluated by the OCC, which assigns the Bank a publicly available CRA rating at the conclusion of the examination. Further, an assessment of CRA compliance is also required in connection with applications for OCC approval of certain activities, including establishing or relocating a branch office that accepts deposits or merging or consolidating with, or acquiring the assets or assuming the liabilities of, a federally regulated financial institution. An unfavorable rating may be the basis for OCC denial of such an application, or approval may be conditioned upon improvement of the applicant's CRA record. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal Reserve Board will assess the CRA record of each subsidiary bank of the applicant, and such records may be the basis for denying the application.

    In the most recently completed CRA compliance examination, conducted in March 1998 the OCC assigned the Bank a rating of "satisfactory," the second highest of four possible ratings. The CRA regulations governing the Company and the Bank emphasize measurements of performance in the area of lending (specifically, the bank's home mortgage, small business, small farm and community development loans), investment (the bank's community development investments) and service (the bank's community development services and the availability of its retail banking services), although examiners are still given a degree of flexibility in taking into account unique characteristics and needs of the bank's community and its capacity and constraints in meeting such needs. The regulations also require certain levels of collection and reporting of data regarding certain kinds of loans.

Capital Adequacy Requirements

    Both the Federal Reserve Board and the OCC have adopted similar, but not identical, "risk-based" and "leverage" capital adequacy guidelines for bank holding companies and national banks, respectively. Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, ranging from zero percent for risk-free assets (e.g., cash) to 100% for relatively high-risk assets (e.g., commercial loans). These risk weights are multiplied by corresponding asset balances to determine a risk-adjusted asset base. Certain off-balance sheet items (e.g., standby letters of credit) are added to the risk-adjusted asset base. The minimum required ratio of total capital to risk-weighted assets for both bank holding companies and national banks is presently 8%. At least half of the total

5

capital is required to be "Tier 1 capital," consisting principally of common shareholders' equity, a limited amount of perpetual preferred stock and minority interests in the equity. The remainder (Tier 2 capital) may consist of a limited amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general loan-loss allowance

    The minimum Tier 1 leverage ratio, consisting of Tier 1 capital to average adjusted total assets, is 3% for bank holding companies and national banks that have the highest regulatory examination rating and are not contemplating significant growth or expansion. All other bank holding companies and national banks are expected to maintain a ratio of at least 1% to 2% or more above the stated minimum. As of December 31, 2000, the Company had a Tier 1 leverage ratio of 10.73% and the Bank's Tier 1 leverage ratio was 9.31%.

    The OCC has adopted regulations establishing capital categories for national banks and prompt corrective actions for undercapitalized institutions. The regulations create five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. The following table shows as of December 31, 2000 the minimum total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage ratios, all of which must be satisfied for a bank to be classified as well capitalized, adequately capitalized or undercapitalized, respectively, together with the Company's and Bank's ratios which in all cases exceed the well capitalized minimums:

	Total risk-based capital ratio		Tier 1 risk-based capital ratio		Tier 1 leverage ratio
Actual:
National Mercantile Bancorp	18.26	%	17.00	%	10.73	%
Mercantile National Bank	16.00	%	14.74	%	9.31	%
Minimum:
Well capitalized (1)	10.00	%	6.00	%	5.00	%
Adequately capitalized	8.00	%	4.00	%	4.00	%(2)
Undercapitalized	6.00	%	4.00	%	3.00	%

(1)

A bank may not be classified as well capitalized if it is subject to a specific agreement with OCC to meet and maintain a specific level of capital.

(2)

3% for institutions having a composite rating of "1" in the most recent OCC examination.

    If any one or more of a bank's ratios are below the minimum ratios required to be classified as undercapitalized, it will be classified as significantly undercapitalized provided that if its ratio of tangible equity to total assets is 2% or less, it will be classified as critically undercapitalized. A bank may be reclassified by the OCC to the next level below that determined by the criteria described above if the OCC finds that it is in an unsafe or unsound condition or if it has received a less-than-satisfactory rating for any of the categories of asset quality, management, earnings or liquidity in its most recent examination and the deficiency has not been corrected, except that a bank cannot be reclassified as critically undercapitalized for such reasons.

    The OCC may subject national banks to a broad range of restrictions and regulatory requirements. A national bank may not pay management fees to any person having control of the institution, nor, except under certain circumstances and with prior regulatory approval, make any capital distribution if, after doing so, it would be undercapitalized. Undercapitalized banks are subject to increased monitoring by the OCC, are restricted in their asset growth, must obtain regulatory approval for certain corporate activities, such as acquisitions, new branches and new lines of business, and, in most cases, must submit to the OCC a plan to bring their capital levels to the minimum required in order to be classified as adequately capitalized. The OCC may not approve a capital restoration plan unless each company that controls the bank guarantees that the bank will comply with it. Significantly and critically

6

undercapitalized banks are subject to additional mandatory and discretionary restrictions and, in the case of critically undercapitalized institutions, must be placed into conservatorship or receivership unless the OCC and the FDIC agree otherwise.

    Under Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit resources to support each such bank. In addition, a bank holding company is required to guarantee that its subsidiary bank will comply with any capital restoration plan. The amount of such a guarantee is limited to the lesser of (i) 5% of the bank's total assets at the time it became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all applicable capital standards as of the time the bank fails to comply with the capital restoration plan. A holding company guarantee of a capital restoration plan results in a priority claim to the holding company's assets ahead of its other unsecured creditors and shareholders that is enforceable even in the event of the holding company's bankruptcy or the subsidiary bank's insolvency.

Employees

    As of February 28, 2001, the Company had six officers but no employees and the Bank had 56 full-time equivalent employees (including three of whom were also officers of the Company). The Company and the Bank believe that the Bank's relations with its employees are good and it has not encountered a strike or material work stoppage.

ITEM 2. PROPERTIES

    The Bank leases approximately 24,000 square feet in an office building at 1840 Century Park East, Century City, California, the location of its principal banking office and administrative headquarters. The effective rent under this lease was $2.33 per square feet or $55,666 per month for the period November 1, 1995 to October 31, 2000. The effective rent for the period November 1, 2000 to October 31, 2004 is $2.83 per square foot or $67,607 per month. The rent is subject to annual adjustments for changes in property taxes and operating costs.

    In connection with the lease, the Company issued the landlord a warrant to purchase up to 9.9% of the outstanding shares of capital stock of the Company at December 31, 1997. The exercise price of the warrant is currently $5.00 per share of Common Stock and $10.00 per share of Series A Noncumulative Convertible Perpetual Preferred Stock. The warrant expires on December 31, 2002. The Company also granted the landlord registration rights with respect to capital stock purchased by the landlord (or its assignee) pursuant to the warrant.

    The Bank also leases approximately 1,650 square foot facility in Encino, California for the primary purpose of providing branch banking operations in the San Fernando Valley.

ITEM 3. LEGAL PROCEEDINGS

    The Company is from time to time a party to lawsuits in the ordinary course of business. The Company does not believe that any lawsuit pending at December 31, 2000 will have a material adverse effect on the financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    There was no submission of matters to a vote of shareholders during the quarter ended December 31, 2000.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

    The Common Stock and Series A Noncumulative Convertible Perpetual Preferred Stock (the "Series A Preferred") of the Company are traded on the Nasdaq SmallCap Market, under the symbols MBLA and MBLAP, respectively. The following table shows the high and low trade prices of the Common Stock and Series A Preferred for each quarter of 1999 and 2000 as reported by the Nasdaq. Additionally, there may have been transactions at prices other than those shown during that time.

	Common Stock				Series A Preferred
Quarter Ended:	High		Low		High		Low
March 31, 1999	$	5.25	$	4.00	$	10.63	$	8.75
June 30, 1999		5.25		3.75		10.25		7.38
September 30, 1999		5.25		4.50		10.00		9.00
December 31, 1999		5.00		3.75		9.88		8.00
March 31, 2000		8.88		4.38		16.00		8.50
June 30, 2000		8.00		5.50		16.25		12.50
September 30, 2000		8.31		6.00		15.88		13.00
December 31, 2000		7.61		6.25		14.75		13.00

    At March 7, 2001, the Company had 208 shareholders of record for its Common Stock and 20 shareholders of record for its Series A Preferred. The number of beneficial owners for the Common Stock and Series A Preferred is higher as many people hold their shares in "street" name. At March 7, 2001, approximately 83% and 19% of the Common Stock and Series A Preferred, respectively, were held in street name.

    The Company has not paid a cash dividend on the Common Stock since July 1990, and has never paid a cash dividend on the Series A Preferred. The Series A Preferred is entitled to a noncumulative cash dividend at a rate of 6.5% of its liquidation preference quarterly on the first day of January, April, July, and October of each year, commencing October 1, 2000, before any dividend may be declared upon or paid upon the Common Stock. As a California corporation, under the California General Corporation Law, generally the Company may not pay dividends in cash or property except (ii) out of positive retained earnings or (ii) if, after giving effect to the distribution, the Company's assets would be at least 1.25 times its liabilities and its current assets would exceed its current liabilities (determined on a consolidated basis under generally accepted accounting principles). At December 31, 2000, the Company had an accumulated deficit of $15.0 million. Further, it is unlikely the Company's assets will ever be at least 1.25 times its liabilities. Accordingly, the Company must generate net income of in excess of $15.0 million before it can pay a dividend in cash or property.

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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

    The Company recorded net income of $2.9 million or $1.08 diluted earnings per share during 2000, compared with net income of $1.0 million or $0.41 diluted earnings per share during 1999. The improvement in net income principally resulted from an increase in net interest income of $2.4 million, brought about by the growth in average loans, and a $576,000 negative provision for credit losses. These operating results reflected a continuation of the trends since 1997, including increasing profitability, growth in total assets and the reduction of nonperforming and classified assets. The 2000 results were the consequence of management's continuing plan to restructure the balance sheet in order to increase operating revenues while containing the growth of operating expenses.

    The Company's total assets increased to $204.8 million at December 31, 2000 representing a $48.7 million or 31.2% increase from $156.2 million at December 31, 1999. This growth was funded by an increase of $17.6 million in deposits and an increase of $21.3 million in other borrowed funds. Substantially all asset growth was in the loan portfolio. Loans receivable increased 49.3% to $110.2 million at December 31, 2000 from $73.8 million at December 31, 1999. This $36.4 million increase was reflected by a growth in the commercial loans, primarily loans to entertainment and healthcare industry related clients. Securities available-for-sale decreased 7.3% to $64.4 million at December 31, 2000 compared to $69.5 million at December 31, 1999.

    The allowance for credit losses was $2.6 million or 2.4% of loans receivable at December 31, 2000 compared to $1.9 million or 2.6% of loans receivable at December 31, 1999. This increase in the allowance was primarily the result of a net loan recovery of $1.3 million related to a loan previously charged off, which in turn was partially offset by a $576,000 negative provision for credit losses, during 2000. Nonaccrual loans decreased to $683,000 or 0.6% of loans receivable at December 31, 2000, compared to $932,000 or 1.3% of loans receivable at December 31, 1999. The Company had no other real estate owned at December 31, 2000, a decrease of $382,000 from a year earlier.

Table 1
Operations Summary

		Year Ended December 31, 2000			Increase (Decrease)				Year Ended December 31, 1999
					Amount			%
		(Dollars in thousands)
Interest income		$	14,460		$	3,915		37.1%	$	10,545
Interest expense			5,023			1,465		41.2%		3,558
Net interest income			9,437			2,450		35.1%		6,987
Provision for credit losses			(576	)		(576	)			—
Other operating income			868			170		24.4%		698
Other operating expense			7,870			1,246		18.8%		6,624
Income before income taxes			3,011			1,950		183.8%		1,061
Income taxes			67			20		42.6%		47
	Net income	$	2,944		$	1,930		190.3%	$	1,014

9

OPERATIONS SUMMARY ANALYSIS

Net Interest Income

    The Company's earnings depend largely upon the difference between the income earned on its loans and other investments and the interest paid on its deposits and borrowed funds. This difference is net interest income. The Company's ability to generate net interest income is largely dependent on its ability to maintain sound asset quality and appropriate levels of capital and liquidity. The Company's inability to maintain strong asset quality, capital or liquidity may adversely affect (i) the ability to accommodate desirable borrowing customers, thereby inhibiting growth in quality higher-yielding earning assets; (ii) the ability to attract comparatively stable, lower-cost deposits; and (iii) the costs of wholesale funding sources.

    Net interest income increased $2.4 million to $9.4 million during 2000 compared to $7.0 million during 1999. The components of net interest income continued to reflect increased interest income from loans, compared to 1999. Average interest earning assets increased during 2000 to $172.1 million compared to $139.5 million during 1999. This $32.6 million or 23.4% increase in average interest earning assets resulted primarily from a $29.1 million increase in average loans receivable. This increase was funded by an increase in average deposits of $17.6 million combined with a $13.1 million increase in average borrowed funds.

    The weighted average yield on interest earning assets was 8.40% during 2000, an increase of 84 basis points from the weighted average yield of 7.56% during 1999. This increase was a result of loans receivable which representing a higher proportion of average interest earning assets during 2000 compared to 1999, combined with an increase in short term interest rates during 2000. The weighted average rates paid on interest bearing liabilities increased during 2000, compared with 1999, averaging 4.71% in 2000 against 4.08% in 1999. This increase resulted from increased average volume of higher cost other borrowings combined with an increase in average volume and rates paid for money market deposits, during 2000. The increase in rates paid for other borrowings and money market deposits reflected the increase in short term interest rates during 2000. As a result, the net yield on interest earning assets increased 47 basis points to 5.48% during 2000, from 5.01% during 1999.

    Average loans receivable increased 47.1% to $90.9 million in 2000 from $61.8 million in 1999. This increase reflected the Company's emphasis on continued growth of the commercial loan portfolio, particularly loans to entertainment and healthcare industry related clients.

    Average total securities increased 2.3% to $71.7 million during 2000 from $70.1 million during 1999. The average yield on securities increased 45 basis points to 6.70% during 2000 compared to 6.25% during 1999 reflecting an increase in the average yield on the Company's portfolio of adjustable rate securities which were affected by the increase in short term rates during 2000.

    Average noninterest bearing deposits increased 24.8% to $56.8 million during 2000 compared to $45.5 million during 1999. In addition, average interest bearing deposits increased $6.3 million or 9.4% to $73.2 million during 2000 compared to $66.9 million during 1999. Average deposit increases resulted from increased marketing efforts particularly to entertainment, professional business providers and special deposits clients. These increases were offset by a planned switch from higher rate nonrelationship "money desk" deposits to lower cost relationship related deposits.

    Average borrowed funds, represented collectively by federal funds purchased, securities sold under agreements to repurchase and other borrowings, increased to $33.4 million during 2000 compared to $20.3 million during 1999. This increase was due to the need for funds to support loan orginations, which grew faster than the Company was able to prudently grow its deposits.

10

Table 2
Ratios to Average Assets

		2000		1999
Net interest income		5.26%		4.78%
Other operating income		0.48%		0.48%
Provision for credit losses		0.32%		0.00%
Other operating expense		(4.39%	)	(4.53%	)
Income before income taxes		1.68%		0.73%
	Net income	1.64%		0.69%

Interest Rate Spread and Net interest Margin

    The Company analyzes its earnings performance using, among other measures, the interest rate spread and net interest margin. The interest rate spread represents the difference between the weighted average yield received on interest earning assets and the weighted average rate paid on interest bearing liabilities. Net interest margin (also called the net yield on interest earning assets) is net interest income expressed as a percentage of average total interest earning assets. The Company's net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes and changes relative to amount of interest earning assets and interest bearing liabilities. Interest rates charged on the Company's loans are affected principally by the demand for such loans, the supply of money available for lending purposes, and other competitive factors. These factors are in turn affected by general economic conditions and other factors beyond the Company's control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and actions of the Federal Reserve Board. Table 3 presents information concerning the change in interest income and interest expense attributable to changes in average volume and average rate. Table 4 presents the weighted average yield on each category of interest earning assets, the weighted average rate paid on each category of interest bearing liabilities, and the resulting interest rate spread and net yield on interest earning assets for 2000 and 1999. Yields on tax-exempt investment securities presented in Table 4 have not been adjusted to a fully taxable equivalent to recognize the income tax savings and to facilitate comparison of taxable and tax-exempt assets because the Company does not realize a substantial tax benefit due to the utilization of net operating loss carryforwards.

    The Company's net interest margin remains high in comparison with the interest rate spread due to the continued significance of noninterest bearing demand deposits relative to total funding sources. Average noninterest bearing demand deposits totaled $56.8 million, representing 43.7% of average deposits, during 2000, compared to $45.5 million, representing 40.5% of average deposits, during 1999. Of these noninterest bearing demand deposits during 2000, $14.8 million or 26.1% of average noninterest bearing deposits were represented by real estate title and escrow company deposits, compared to $14.7 million or 32.2% of average noninterest bearing deposits during 1999. While these deposits are noninterest bearing, they are not cost free funds. Customer service expenses, primarily costs related to external accounting and data processing services provided to title and escrow company depositors are incurred by the Company to the extent that such depositors maintain certain average noninterest bearing deposits. Customer service expense is classified as other operating expense. If customer service expenses related to escrow customers had been classified as interest expense, the Company's reported net interest income for 2000 and 1999, would have been reduced by $550,000 and $435,000, respectively. Similarly, this would create identical reductions in other operating expense. The net interest margin for 2000 and 1999, would have decreased 32 basis points and 31 basis points, respectively.

11

Table 3
Increase (Decrease) in Interest Income/Expense Due to Change in
Average Volume and Average Rate (1)

			2000 vs 1999								1999 vs 1998
			Increase (decrease) due to:								Increase (decrease) due to:
								Net Increase (Decrease)									Net Increase (Decrease)
			Volume			Rate					Volume			Rate
			(Dollars in thousands)
Interest Income:
Federal funds sold and securities purchased under agreement to resell			$	98		$	129	$	227		$	(371	)	$	(26	)	$	(397	)
Interest-bearing deposits with other financial institutions				—			—		—			(13	)		—			(13	)
Securities held-to-maturity				—			—		—			(134	)		—			(134	)
Securities available-for-sale				100			320		420			1,220			(56	)		1,164
Loans receivable (2)				2,723			545		3,268			213			(369	)		(156	)
	Total interest-earning assets			2,921			994		3,915			915			(451	)		464
Interest Expense:
Interest-bearing deposits:
	Demand		$	15		$	7	$	22		$	(7	)	$	3		$	(4	)
	Money market			239			186		425			121			(85	)		36
	Savings			(4	)		1		(3	)		(45	)		(1	)		(46	)
Time certificates of deposit:
		$100,000 or more		58			49		107			322			(114	)		208
		Under $100,000		(222	)		41		(181	)		(478	)		(46	)		(524	)
	Total time certificates of deposit			(164	)		90		(74	)		(156	)		(160	)		(316	)
	Total interest-bearing deposits			86			284		370			(87	)		(243	)		(330	)
Other borrowings				699			378		1,077			(64	)		(21	)		(85	)
Federal funds purchased and securities sold under agreements to repurchase				(8	)		26		18			549			(61	)		488
		Total interest-bearing liabilities		777			688		1,465			398			(325	)		73
	Net interest income		$	2,144		$	306	$	2,450		$	517		$	(126	)	$	391

(1)

The change in interest income or interest expense that is attributable to both changes in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of changes in each.

(2)

Table does not include interest income that would have been earned on nonaccrual loans.

12

Table 4
Average Balance Sheet and
Analysis of Net Interest Income

			2000						1999
			Average Amount			Interest Income/ Expense		Average Yield/ Rate	Average Amount			Interest Income/ Expense		Average Yield/ Rate
			(Dollars in thousands)
Assets:
Federal funds sold and securities purchased under agreements to resell			$	9,566		$	612	6.40%	$	7,623		$	385	5.05%
Securities available-for-sale				71,662			4,799	6.70%		70,068			4,379	6.25%
Loans receivable (1) (2)				90,909			9,049	9.95%		61,799			5,781	9.35%
	Total interest earning assets			172,137			14,460	8.40%		139,490			10,545	7.56%
Noninterest earning assets:
	Cash and due from banks — demand			9,462						7,103
	Other assets			2,571						2,811
	Allowance for credit losses and net unrealized (loss) gain on sale of securities available-for-sale			(4,778	)					(3,080	)
Total assets			$	179,392					$	146,324
Liabilities and shareholders' equity:
Interest-bearing deposits:
	Demand		$	8,066		$	113	1.40%	$	6,918		$	91	1.32%
	Money market			36,312			1,230	3.39%		27,999			805	2.88%
	Savings			1,348			28	2.08%		1,526			31	2.03%
	Time certificates of deposit:
		$100,000 or more		20,809			1,103	5.30%		19,664			996	5.07%
		Under $100,000		6,647			399	6.00%		10,769			580	5.39%
	Total time certificates of deposit			27,456			1,502	5.47%		30,433			1,576	5.18%
	Total interest-bearing deposits			73,182			2,873	3.93%		66,876			2,503	3.74%
Other borrowings				32,424			2,082	6.42%		19,121			1,005	5.26%
Federal funds purchased and securities sold under agreements to repurchase				998			68	6.81%		1,194			50	4.19%
	Total interest-bearing liabilities			106,604			5,023	4.71%		87,191			3,558	4.08%
Noninterest-bearing liabilities:
	Noninterest bearing demand deposits			56,787						45,495
	Other liabilities			1,630						1,094
Shareholders' equity				14,371						12,544
Total liabilities and shareholders' equity			$	179,392					$	146,324
Net interest income (spread)						$	9,437	3.69%				$	6,987	3.48%
	Net yield on earning assets (2)							5.48%						5.01%

(1)

The average balance of nonperforming loans has been included in loans receivable.

(2)

Yields and amounts earned on loans receivable include loan fees of $222,000 and $145,000 for the years ended December 31, 2000 and 1999, respectively.

13

Provision for Credit Losses

    Provisions for credit losses charged to operations reflect management's judgment of the adequacy of the allowance for credit losses and are determined through periodic analysis of the loan portfolio. This analysis includes a detailed review of the classification and categorization of problem loans and loans to be charged off; an assessment of the overall quality and collectibility of the loan portfolio; and consideration of the loan loss experience, trends in problem loan concentrations of credit risk, as well as current and expected future economic conditions (particularly Southern California). Management, in combination with an outside firm, performs a periodic risk and credit analysis, the results of which are reported to the Board of Directors.

    During 2000 the Company realized a net recovery of $1.3 million related to a previously charged off loan. The entire recovery was accounted for as an increase to the allowance for credit losses. Based on the resulting level of the allowance for credit losses after giving effect for this recovery, management recognized $576,000 as a negative provision for credit losses during 2000. Management determined that an increase in the allowance for credit losses was warranted due to: (i) an increasing portion of the loan portfolio being represented by larger loans (loans with balances greater than $1.0 million); and (ii) the recent growth in loans receivable. During 1999 the Company did not record a provision for credit losses. In 2000 net loan recoveries were $1.3 million compared to net charge offs of $248,000 in 1999.

    Based on continued loan growth, the level of nonperforming loans and a relatively constant level of charge offs, it is anticipated that the level of the allowance will remain adequate through the first half of 2001 without a provision for credit losses. However, credit quality will be influenced by underlying trends in the economic cycle, particularly Southern California, and other factors which are beyond management's control. Accordingly, no assurance can be given that the Company will not sustain loan losses that in any particular period are sizable in relation to the allowance for credit losses. Additionally, subsequent evaluation of the loan portfolio, in light of factors then prevailing, by the Company and its regulators may indicate a requirement for increases in the allowance for credit losses through changes to the provision for credit losses.

Other Operating Income

    Other operating income was $868,000 and $698,000 in 2000 and 1999, respectively. A breakdown of other operating income by category is reflected below:

Table 5
Other Operating Income

			2000		1999
			(Dollars in thousands)
Other operating (losses) income:
	Securities transactions:
	Net gain (loss) on sale of securities available-for-sale		$	18	$	(1	)
	Fee income:
	International services			110		87
	Investment services			88		60
	Deposit and other customer services			583		552
	Other:
	Gain on other real estate owned and fixed assets			69		—
		Total other operating income	$	868	$	698

14

    During 2000 the Company recorded a net gain on the sale of securities available-for-sale of $18,000 compared to a net loss of $1,000 during 1999.

    Fee income related to international, investment and deposit related services increased 11.7% to $781,000 during 2000, compared to similar fee income of $699,000 in 1999. The increase in fee income related to international services was primarily attributable to entertainment industry clients, which continue to increase film and television production outside of the U.S. The increase in investment and deposit related services was primarily due to deposit growth of "transaction" and money market type accounts during 2000.

    Other income during 2000 included a $69,000 gain on the sale of other real estate owned. No such gain was realized during 1999.

Other Operating Expenses

    Other operating expense increased $1.3 million to $7.9 million in 2000, compared to $6.6 million during 1999. A breakdown of other operating expense by category is reflected below:

Table 6
Other Operating Expenses

			2000		1999
			(Dollars in thousands)
Other operating expenses:
	Salaries and related benefits		$	3,906	$	3,229
	Net occupancy			966		1,002
	Furniture and equipment			323		217
	Printing and communications			280		265
	Insurance and regulatory assessments			296		297
	Customer services			835		673
	Computer data processing			416		311
	Legal services			170		70
	Other professional services			396		301
	Other real estate owned expenses			3		45
	Promotion and other expenses			279		214
		Total other operating expenses	$	7,870	$	6,624

    The increase of 21.0% in salaries and related benefits was due to the Company's expansion of banking services including additional staffing for the new market niches of healthcare, community based nonprofit organizations and a new branch office. Furniture and equipment expenses increased 48.9% during 2000 to $323,000, compared to $217,000 during 1999 from costs associated with the Company's refurbishment project of existing facilities. Client service expenses increased 24.1% during 2000 to $835,000 from $673,000 during 1999, caused primarily by an increase in volume of special deposits combined with an increase in the overall crediting rate associated with special deposits brought about by the increase in short term market rates during 2000. Computer data processing expenses increased $105,000 during 2000 to $416,000 from $311,000 during 1999 as a result of the planned conversion to a new data service provider. This conversion is scheduled to be completed during the first half of 2001 and will enable the Company to provide an array of expanded services, including internet banking. Legal expenses increased 142.9% to $170,000 during 2000 from $70,000 during 1999 primarily due to the fact that in 1999 a significant portion of these expenses were recovered due to loan collections.

15

Income Taxes

    Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting basis of assets and liabilities, as well as for operating losses and tax credit carryforwards, using enacted tax laws and rates. Deferred tax assets will be reduced through a valuation allowance whenever it becomes more likely than not that all or some portion will not be realized. Deferred income tax (benefit) represents the net change in the deferred tax asset or liability balance during the year. This amount, together with income taxes currently payable or refundable in the current year, represents the total tax expense (benefit) for the year. At December 31, 2000, the Company's net deferred tax asset totaled $7.0 million, which was fully reserved.

    The Company's deferred tax asset consists primarily of federal and state net operating loss carryforwards ("NOL") that total $18.4 and $1.5 million, respectively. The federal NOL's expire beginning in 2009 and the California NOL's continue to expire through 2002.

    No income tax provision was recorded during 2000 and 1999 other than alternative minimum tax ("AMT") of $67,000 and $47,000, respectively, due to the utilization of previously unrecognized tax benefits to offset current period tax liability. At December 31, 2000, the Company has federal and state AMT credits of $278,000 and $17,000, respectively, which may be carried forward indefinitely.

    Additionally, federal and state income tax laws provide that following an ownership change of a corporation with a NOL, a net unrealized built-in loss or tax credit carryovers, the amount of annual post-ownership change taxable income that can be offset by pre-ownership change NOLs, built-in losses or tax credit carryovers generally cannot exceed a prescribed annual limitation. The annual limitation generally equals the product of the fair market value of the corporation immediately before the ownership change (subject to certain adjustments) and the federal long-term tax-exempt rate prescribed monthly by the Internal Revenue Service. If such limitations were to apply to the Company, the ability of the Company to reduce future taxable income by the NOL's could be severely limited.

Accumulated Other Comprehensive Income

    Changes in the unrealized loss on available-for-sale securities is the only component of other comprehensive income for the Company. At December 31, 2000 the unrealized loss on available-for-sale securities was $536,000 compared to an unrealized loss of $2.5 million at December 31, 1999.

    During 2000 the U.S. economy experienced an increase in short term interest rates while medium and long term interest rates declined. This created an overall "inverted" yield curve, where short term interest rates were higher than long term interest rates, for the majority of 2000. Accordingly, this decline in medium and long term interest rates, caused by overall market anticipation that the Federal Reserve Open Market Committee would reduce interest rates in the future, created an increase in the estimated fair value of the Company's portfolio of fixed rate available-for-sale securities of approximately $2.0 million at December 31, 2000 compared to December 31, 1999.

16

FINANCIAL CONDITION

Regulatory Capital

    At December 31, 2000, the Company's and Bank's Tier 1 capital, which is comprised of shareholders' equity as modified by certain regulatory adjustments, amounted to $21.2 million and $18.2 million, respectively. At December 31, 1999, the Company's and the Bank's Tier 1 capital amounted to $14.1 million and $12.9 million, respectively. In September 2000, the Company sold 602,081 shares of its common stock at $7.25 per share through a public offering and raised net proceeds of approximately $4.2 million. The Company contributed $2.4 million of these proceeds to the Bank, which enabled it to increase its legal lending limit and provide capital for continued growth. The following table sets forth the regulatory standards for well capitalized institutions and the capital ratios for the Company and the Bank as of December 31, 2000 and 1999.

Table 7
Regulatory Capital Information
of the Company and Bank

		December 31,
	Well Capitalized Standards
		2000	1999
Company:
Tier 1 leverage	5.00%	10.73%	8.98%
Tier 1 risk-based capital	6.00%	17.00%	16.21%
Total risk-based capital	10.00%	18.26%	17.47%
Bank:
Tier 1 leverage	5.00%	9.31%	8.32%
Tier 1 risk-based capital	6.00%	14.74%	15.03%
Total risk-based capital	10.00%	16.00%	16.29%

Liquidity Management

    The objective of liquidity management is the ability to maintain cash flow adequate to fund the Company's operations and meet obligations and other commitments on a timely and cost effective basis. The Company manages to this objective through the selection of asset and liability maturity mixes. The Company's liquidity position is enhanced by its ability to raise additional funds as needed through available borrowings or accessing the wholesale deposit market.

    The Company's deposit base provides the majority of the Company's funding requirements. This relatively stable and low-cost source of funds has, along with shareholders' equity, provided 80.5% and 85.4% of funding for average total assets during 2000 and 1999, respectively. This reduction of 4.9% was directly attributable to the increased volume of loans receivable, which outpaced the growth in deposits, and required an increase in borrowed funds.

    A significant portion of remaining funding of average total assets is provided by other borrowings, specifically FHLB advances, which averaged $32.4 million during 2000 compared to $19.1 million during 1999.

    Liquidity is also provided by assets such as federal funds sold and securities purchased under resale agreements which may be immediately converted to cash at minimal cost. The aggregate of these assets averaged $9.6 million during 2000, as compared to $7.6 million during 1999. This increase resulted primarily from the growth in the Company's average deposits and borrowed funds during 2000.

17

    Liquidity is also provided by the portfolio of available-for-sale securities, which averaged $71.7 million during 2000. In addition, the unpledged portion of investment securities at December 31, 2000 totaled $8.0 million and would be available as collateral for borrowings. Maturing loans also provide liquidity, of which $39.5 million of the Bank's loans are scheduled to mature in 2001.

    At December 31, 2000, the balance of cash and cash equivalents was $27.6 million, an increase of $17.4 million from the end of the prior year.

    Net cash provided by operating activities totaled $2.9 million in 2000 compared to $1.4 million in 1999. The primary source of funds is net income from operations adjusted for: provision for loan losses and depreciation and amortization. Net cash used in investing activities totaled $28.7 million in 2000 compared to $19.3 million in 1999. The increase in usage resulted from a higher net increase in loans receivable. Net cash provided by financing activities amounted to $43.1 million in 2000 compared to $15.9 million in 1999. The increase in 2000 resulted primarily from an increase in borrowed funds and deposits and the issuance of common stock.

Asset Liability Management

    Based on the Company's business, market risk is primarily limited to interest rate risk which is the impact that changes in interest rates would have on future earnings. Interest rate risk, including interest rate sensitivity and the repricing characteristics of assets and liabilities, is managed by the Interest Rate Risk Management Committee ("IRRMC"). The principal objective of IRRMC is to maximize net interest income within acceptable levels of risk established by policy. Interest rate risk is measured using financial modeling techniques, including stress tests, to measure the impact of changes in interest rates on future earnings. Net interest income, the primary source of earnings, is affected by interest rate movements. Changes in interest rates have lesser impact the more that assets and liabilities reprice in approximately equivalent amounts at basically the same time intervals. Imbalances in these repricing opportunities at any point in time constitute interest sensitivity gaps, which is the difference between interest sensitive assets and interest sensitive liabilities. These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate exposures.

    An asset sensitive gap means an excess of interest sensitive assets over interest sensitive liabilities, whereas a liability sensitive gap means an excess of interest sensitive liabilities over interest sensitive assets. In a changing rate environment, a mismatched gap position generally indicates that changes in the income from interest earning assets will not be completely proportionate to changes in the cost of interest bearing liabilities, resulting in net interest income volatility. This risk can be reduced by various strategies, including the administration of liability costs and the reinvestment of asset maturities.

    Table 8 compares the Company's interest rate gap position as of December 31, 2000 and 1999. The gap report shows the Company's cumulative one year interest rate asset sensitivity gap of $40.2 million at December 31, 2000, an increase from an asset sensitivity gap of $12.7 million at December 31, 1999. The Company has increased its loan receivable portfolio that reprice within one year to $82.8 million at December 31, 2000 compared to $48.8 million at December 31, 1999 and its federal funds sold and securities purchased under agreements to resell that reprice within one year to $19.7 million at December 31, 2000 compared to $4.4 million at December 31, 1999. This change was offset by an increase in borrowings, which reprice within one year to $45.0 million at December 31, 2000 compared to $23.7 million at December 31, 1999 along with an increase in time certificates of deposits which reprice within one year to $30.9 million at December 31, 2000 compared to $24.7 million at December 31, 1999.

    Since interest rate changes do not affect all categories of assets and liabilities equally or simultaneously, a cumulative gap analysis alone cannot be used to evaluate the Company's interest rate sensitivity position. To supplement traditional gap analysis, interest rate sensitivities are also monitored

18

through the use of simulation modeling techniques which apply alternative interest rate scenarios to periodic forecasts of future business activity and estimate the related impact on net interest income. The use of simulation modeling assists management in its continuing efforts to achieve earnings growth in varying interest environments.

    Key assumptions in the model include anticipated prepayments on mortgage-related instruments, contractual cash flow and maturities of all financial instruments, anticipated future business activity, deposit sensitivity and changes in market conditions. These assumptions are inherently uncertain and, as a result, these models cannot precisely estimate the impact that higher or lower rate environments will have on net interest income. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, changes in cash flow patterns and market conditions, as well as changes in management's strategies.

    Based on the results of the interest simulation model as of December 31, 2000, the Company would expect an increase of approximately 3.3% in net interest income and a decrease of approximately 4.0% in net interest income if interest rates increase or decrease by 100 basis points, respectively, from current rates in an immediate and parallel shock over a twelve-month period.

    At December 31, 2000 and 1999, the Company's distribution of rate sensitive assets and liabilities was as follows:

Table 8
Rate-Sensitive Assets and Liabilities

			December 31, 2000
			Maturing or repricing in
			Less than three months		After three months but within one year		After one year but within 5 years		After 5 years		Total
			(Dollars in thousands)
Rate-Sensitive Assets:
Federal funds sold and securities purchased under agreements to resell			$	19,700	$	—	$	—	$	—	$	19,700
Securities available-for-sale, at amortized cost				18,014		10,227		24,728		11,984		64,953
FRB and other stock, at cost				—		—		—		2,733		2,733
Loans receivable				68,667		14,149		23,871		3,561		110,248
		Total rate-sensitive assets		106,381		24,376		48,599		18,278		197,634
Rate-Sensitive Liabilities: (1)
Interest bearing deposits:
	Demand, money market and savings			4,512		10,152		15,457		12,378		42,499
	Time certificates of deposit			21,150		9,782		753		428		32,113
Other borrowings				45,000		—		2,500		—		47,500
		Total rate-sensitive liabilities		70,662		19,934		18,710		12,806		122,112
Interest rate-sensitivity gap				35,719		4,441		29,889		5,472		75,522
Cumulative interest rate-sensitivity gap			$	35,719	$	40,160	$	70,049	$	75,522
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities				151%		144%		164%		162%

(1)

Deposits which are subject to immediate withdrawal are presented as repricing within three months or less.
The distribution of other time deposits is based on scheduled maturities.

19

Table 8 (continued)
Rate-Sensitive Assets and Liabilities

			December 31, 1999
			Maturing or repricing in
			Less than three months		After three months but within one year			After one year but within 5 years		After 5 years		Total
			(Dollars in thousands)
Rate-Sensitive Assets:
Federal funds sold and securities purchased under agreements to resell			$	4,450	$	—		$	—	$	—	$	4,450
Securities available-for-sale, at amortized cost				15,991		5,214			30,283		20,476		71,964
FRB and other stock, at cost				—		—			—		1,746		1,746
Loans receivable				40,617		8,197			13,018		12,011		73,843
		Total rate-sensitive assets		61,058		13,411			43,300		34,233		152,003
Rate-Sensitive Liabilities: (1)
Interest bearing deposits:
	Demand, money market and savings			4,111		9,250			13,406		10,357		37,124
	Time certificates of deposit			11,299		13,425			1,309		—		26,033
Other borrowings				23,700		—			2,500		—		26,200
		Total rate-sensitive liabilities		39,110		22,675			17,215		10,357		89,357
Interest rate-sensitivity gap				21,948		(9,264	)		26,085		23,876		62,646
Cumulative interest rate-sensitivity gap			$	21,948	$	12,684		$	38,770	$	62,646
Cumulative ratio of rate-sensitive assets to rate-sensitive liabilities				156%		121%			149%		170%

(1)

Deposits which are subject to immediate withdrawal are presented as repricing within three months or less.
The distribution of other time deposits is based on scheduled maturities.

Investment Securities

    The Company invests in investment securities consisting primarily of mortgage-related securities to: (i) generate interest income pending the ability to deploy those funds in loans meeting the Company's lending strategies; (ii) increase net interest income where the rates earned on such investments exceed the related cost of funds, consistent with the management of interest rate risk; and (iii) provide sufficient liquidity in order to maintain cash flow adequate to fund the Company's operations and meet obligations and other commitments on a timely and cost efficient basis.

    The Company generally classifies its investment securities as available-for-sale except for investment securities which the Company has the ability and the positive intent to hold to maturity which are classified as held-to-maturity securities. There were no held-to-maturity securities at December 31, 2000 and 1999.

    Table 9 provides certain information regarding the Company's investment securities

20

Table 9
Estimated Fair Values of and Unrealized
Gains and Losses on Investment Securities

	December 31, 2000								December 31, 1999
	Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value		Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)								(Dollars in thousands)
U.S. Treasury securities	$	2,008	$	9	$	—	$	2,017	$	2,015	$	—	$	13	$	2,002
GNMA-issued/guaranteed mortgage pass through certificates		5,288		118		—		5,406		7,646		15		126		7,535
Other U.S. government and federal agency securities		1,952		42		—		1,994		1,937		3		—		1,940
FHLMC/FNMA-issued mortgage pass through certificates		15,172		86		36		15,222		15,185		—		448		14,737
CMO's and REMIC's issued by U.S. government-sponsored agencies		36,532		1		669		35,864		40,174		—		1,827		38,347
Privately issued Corporate bonds, CMO's and REMIC's securities		4,001		—		87		3,914		5,007		—		79		4,928
FRB and other equity stocks		2,733		—		—		2,733		1,746		—		—		1,746
	$	67,686	$	256	$	792	$	67,150	$	73,710	$	18	$	2,493	$	71,235

    At December 31, 2000, the Company held no more securities from any issuer other than by the U.S. government and U.S. government agencies and corporations in which the aggregate book value exceeded 10% of the Company's shareholders' equity.

    The Company's present strategy is to stagger the maturities of its investment securities to meet overall liquidity requirements of the Company. The average duration of total securities at December 31, 2000 was 2.75 years compared with 2.57 years at December 31, 1999. Table 10 sets forth information concerning the maturity of and weighted average yield of the Company's investment securities at December 31, 2000.

21

Table 10
Maturities of and Weighted Average Yields on
Investment Securities

					After one but within five years			After five but within ten years
		Within one year									After ten years
																Weighted Average Yield
		Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Total
		(Dollars in thousands)
Securities available-for-sale:
	U.S Treasury Securities	$	—	—	$	2,017	5.90%	$	—	—	$	—	—	$	2,017	5.90%
	GNMA-issued/guaranteed mortgage pass-through certificates		—	—		—	—		—	—		5,406	7.41%		5,406	7.41%
	Other U.S. government and federal agencies		—	—		1,994	7.14%		—	—		—	—		1,994	7.14%
	FHLMC/FNMA-issued mortgage pass-through certificates		35	6.86%		1,290	6.67%		—	—		13,897	6.69%		15,222	6.69%
	CMO's and REMIC's issued by U.S. government-sponsored agencies		—	—		—	—		—	—		35,864	6.72%		35,864	6.72%
	Privately issued Corporate bonds, CMO's and REMIC's securities		—	—		—	—		—	—		3,914	6.78%		3,914	6.78%
	FRB and other equity stocks		—	—		—	—		—	—		2,733	6.50%		2,733	6.50%
		$	35	6.86%	$	5,301	6.55%	$	—	—	$	61,814	6.77%	$	67,150	6.75%
Amortized Cost		$	35		$	5,246		$	—		$	62,405		$	67,686

    Actual maturities may differ from contractual maturities to the extent that borrowers have the right to call or prepay obligations with or without call or repayment penalties.

Lending Activities

    The Company's present lending strategy is to attract individual and small to mid-sized business borrowers in specific market niches located in Century City and San Fernando Valley area of Los Angeles, by offering a variety of loan products and a full range of banking services coupled with highly personalized service. Loan products include revolving lines of credit, term loans and consumer and home equity loans, along with array of deposits and investment accounts and often contain terms and conditions tailored to meet the specific demands of market niche in which the borrower operates, including the ability to evaluate the revenue streams and other sources of repayment supporting the loan. In order to provide the personalized service required by these customers, the Company uses a team approach to customer service combining an experienced relationship management officer with operations support personnel.

    During the past several years the market niches targeted by the Company have included the entertainment industry and professional services providers. In the beginning of 2000 the Company expanded its targeted market niches to include healthcare and community based nonprofit organizations. Entertainment industry customers include television, music and film production companies, talent agencies, individual performers, directors and producers (whom the Company attracts by establishing relationships with business management firms), and others affiliated with the entertainment industry. Professional service customers include legal, accounting, insurance, advertising firms and their individual directors, officers, partners and shareholders. Healthcare organizations include primarily outpatient healthcare providers such as physician medical groups, independent practice associations and surgery centers.

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Loan Portfolio

    The following table sets forth the composition of the Company's loan portfolio at the dates indicated:

Table 11
Loan Portfolio Composition

			December 31,
			2000					1999					1998					1997					1996
			Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent		Amount			Percent
			(Dollars in thousands)
Commercial loans:
	Secured by one to four family residential properties		$	6,578		6	%	$	4,405		6	%	$	5,005		9	%	$	6,545		11	%	$	6,233		10	%
	Secured by multifamily residential properties			3,765		3			5,355		7			3,111		5			2,494		4			2,879		5
	Secured by commercial real properties			40,540		37			28,233		38			20,839		36			22,324		36			26,629		42
	Other—secured and unsecured			53,433		48			33,221		45			24,337		43			21,264		35			16,508		26
Real estate construction and land development				1,890		2			6		0			—		—			3,148		5			3,441		6
Home equity lines of credit				644		1			367		1			271		0			252		0			581		1
Consumer installment and unsecured loans to individuals				3,729		3			2,496		3			3,707		7			5,508		9			6,545		10
		Total loans outstanding		110,579		100	%		74,083		100	%		57,270		100	%		61,535		100	%		62,816		100	%
Deferred net loan origination fees and purchased loan discount				(331	)				(240	)				(298	)				(283	)				(269	)
Loans receivable, net			$	110,248				$	73,843				$	56,972				$	61,252				$	62,547

    Most of the Company's commercial loans are generally within $100,000 to $2.2 million and its consumer and home equity loans generally are less than $100,000. The Company may not make any loan, with certain limited exceptions, in excess of its loan to one borrower limit under applicable regulations ($3.6 million at December 31, 2000). If a borrower requests a loan in excess of that amount the Company may originate the loan with the participation of one or more other lenders.

    Commercial Loans.  The Company offers adjustable and fixed rate secured and unsecured commercial loans for working capital, the purchase of assets and other business purposes. The Company underwrites these loans primarily on the basis that borrower's cash flow and the ability to service the debt without reliance on the liquidation of the underlying collateral, where applicable.

    Collateral for commercial loans may include commercial or residential real property, accounts receivable, inventory, equipment, marketable securities or other assets. Real estate secured loans generally have terms ranging from five to ten years and payments based on a 15 to 25 year amortization schedule. Real estate secured loans frequently have a maturity date shorter than the amortization period. The original principal amount of a real estate secured loan generally does not exceed 65% to 75% of the appraised value of the property (or the lesser of the appraised value or the purchase price for the property if the loan is made to finance the purchase of the property).

    Unsecured commercial loans include short-term term loans and lines of credit. The Company's underwriting guidelines for these loans generally require that the borrower have low levels of existing debt, working capital sufficient to cover the loan and a history of earnings and cash flow. Typically, unsecured lines of credit must be unused for a continuous 30-day period within each year to demonstrate the borrower's ability to have sufficient funds to operate without the credit line.

23

    Real Estate Construction and Land Development Loans.  Real estate construction and land development loans are short-term secured loans made to finance the construction of commercial and single-family residential properties or for improvements to raw land. Over the past several years, the Company has deemphasized its focus on this type of lending to emphasize relationship oriented commercial loans. From time to time for existing relationships the Company will make construction loans, subject to normal underwriting criteria.

    Consumer Loans and Home Equity Lines of Credit.  The Company offers consumer loans and home equity lines of credit principally as an accommodation to individuals associated with the Company's business borrowers. Home equity lines of credit provide the borrower with a line of credit in an amount which generally does not exceed 80% of the appraised value of the borrower's residence net of senior mortgages. Consumer loans are primarily adjustable rate open ended unsecured loans (such as credit card loans) but also include fixed rate term loans (generally under five years) to purchase personal property which are secured by that personal property. These loans (other than purchase money loans) generally provide for monthly payments of interest and a portion of the outstanding principal balance.

Loan Concentrations

    The Company provides banking services to the entertainment industry in Southern California. Table 12 below presents information about the Company's loans outstanding to entertainment related customers at December 31, 2000 and 1999.

Table 12
Industry Concentrations of Loans

	December 31,
	2000		1999
	(Dollars in thousands)
Entertainment industry-related loans (1):
Loans for single productions of motion picture and television feature films	$	6,677	$	2,001
Other loans to entertainment-related enterprises, such as television, music, film and talent agencies		18,970		13,632
Loans to individuals involved primarily in the entertainment industry		4,072		4,623
Loans to business management, legal and accounting firms, including their principals and employees, serving primarily the entertainment industry		205		262
Total entertainment industry-related loans	$	29,924	$	20,518
Percent of total loans outstanding		27.1%		27.7%

(1)

Included are loans secured by liens on residential and commercial real property amounting to $2.6 million at December 31, 2000 and $2.9 million at December 31, 1999.

    The concentration of loans to the entertainment related industry at December 31, 2000 increased to $29.9 million or 27.1% of the total portfolio compared to $20.5 million or 27.7% at December 31, 1999. The increase during 2000 was attributable to management plans to expand the entertainment division following the growth of production staff in this area, in response to the prominence of entertainment related companies in the Company's primary service area.

    The Company believes that the varying nature of customers represented within this group, as set forth in Table 12, indicates reasonable diversification, although significant increases occurred during 2000 with respect to loans to entertainment related enterprises, such as television, music, film and talent agencies. Single customer concentration risk is evident by the existence of ten borrowers with

24

individual loan balances greater than $1.0 million, aggregating $17.3 million or 57.9% of entertainment industry loans at December 31, 2000. Management believes its underwriting standards, collateral and guarantees supporting such borrowings are sufficient to mitigate the risk of credit concentration. In addition, loans for the production of independently produced motion picture and television feature films presented in Table 12, are generally supported during production by performance bonds from highly-rated insurers and either distribution commitments from major studios or, in the case of smaller studios, standby letters of credit from large commercial banks.

Loan Rate Composition and Maturities

    Of the Company's total loans outstanding, 64.1% and 56.8% had adjustable rates at December 31, 2000 and 1999, respectively. Adjustable rate loans have interest rates tied to the prime rate and generally adjust with changes in the rate on a monthly or quarterly basis.

    Of the Company's total loans outstanding at December 31, 2000, 35.7% were due in one year or less, 40.8% were due in 1-5 years and 23.5% were due after 5 years. As is customary in the banking industry, loans can be renewed by mutual agreement between the Company and the borrower. Because the Company is unable to estimate the extent to which its borrowers will renew their loans, Table 13 is based on contractual maturities.

Table 13
Loan Maturities

			December 31, 2000
			Interest rates are floating or adjustable		Interest rates are fixed or predetermined		Total
			(Dollars in thousands)
Aggregate maturities of total loans outstanding:
	Commercial secured by real estate
		In one year or less	$	2,086	$	565	$	2,651
		After one year but within five years		12,261		16,340		28,601
		After five years		9,005		13,160		22,165
	Commercial other secured and unsecured
		In one year or less		27,180		6,600		33,780
		After one year but within five years		14,099		1,902		16,001
		After five years		3,652		—		3,652
	Other							—
		In one year or less		2,100		931		3,031
		After one year but within five years		293		234		527
		After five years		171		—		171
Total loans outstanding			$	70,847	$	39,732	$	110,579

Credit Risk Management

    The Company assesses and manages credit risk on an ongoing basis through diversification guidelines, lending limits, credit review and approval policies and internal monitoring. As part of the control process, an independent credit review firm regularly examines the Company's loan portfolio and other credit processes, the Company's loan portfolio and other related products, including unused commitments and letters of credit. In addition to this credit review process, the Company's loan portfolio is subject to examination by external regulators in the normal course of business. Underlying trends in the economic and business cycle will influence credit quality. The Company seeks to manage

25

and control its risk through diversification of the portfolio by type of loan, industry concentration and type of borrower.

Nonperforming Assets

    Nonperforming assets consist of nonperforming loans and other real estate owned. Nonperforming loans are (i) loans which have been placed on nonaccrual status, (ii) troubled debt restructurings ("TDR's"), or (iii) loans which are contractually past due ninety days or more with respect to principal or interest, and have not been restructured or placed on nonaccrual status, and are accruing interest as described below. Other real estate owned consists of real properties securing loans of which the Company has taken title in partial or complete satisfaction of the loan. Information about nonperforming assets is presented in Table 14.

Table 14
Nonperforming Assets

	December 31,
	2000			1999			1998			1997			1996
	(Dollars in thousands)
Nonaccrual loans	$	683		$	932		$	1,505		$	1,201		$	928
Troubled debt restructurings		—			—			—			5,422			5,016
Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest		—			—			—			—			300
Nonperforming loans		683			932			1,505			6,623			6,244
Other real estate owned		—			382			593			777			556
Other assets-SBA guaranteed loan		—			150			—			—			—
Total nonperforming assets	$	683		$	1,464		$	2,098		$	7,400		$	6,800
Allowance for credit losses as a percent of nonaccrual loans		380.2	%		203.4	%		142.5	%		168.4	%		319.9	%
Allowance for credit losses as a percent of nonperforming loans		380.2	%		203.4	%		142.5	%		30.5	%		47.5	%
Total nonperforming assets as a percent of loans receivable		0.6	%		2.0	%		3.7	%		12.1	%		10.9	%
Total nonperforming assets as a percent of total shareholders' equity		3.3	%		12.6	%		15.8	%		59.5	%		140.4	%

    Nonaccrual Loans.  Nonaccrual loans are those loans for which management has discontinued accrual of interest because there exists reasonable doubt as to the full and timely collection of either principal or interest. It is the Company's policy that a loan will be placed on nonaccrual status if either principal or interest payments are past due in excess of ninety days unless the loan is both well secured and in process of collection, or if full collection of interest or principal becomes uncertain, regardless of the time period involved.

    When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against current period operating results. Income on such loans is then recognized only to the extent that cash is received, and, where the ultimate collection of the carrying amount of the loan is

26

probable, after giving consideration to the borrower's current financial condition, historical repayment performance and other factors. Accrual of interest is resumed only when (i) principal and interest are brought fully current, and (ii) such loans are either considered, in management's judgment, to be fully collectible or otherwise become well secured and in the process of collection. (See "Net Interest Income" for a discussion of the effects on operating results of nonperforming loans.)

    Nonaccrual loans at December 31, 2000, decreased to $683,000 from $932,000 at December 31, 1999. Nonaccrual loans at December 31, 2000 were comprised primarily of Small Business Administration ("SBA") loans, including $584,000 which is guaranteed by the SBA. The additional interest income that would have been recorded from nonaccrual loans, if the loans had not been on nonaccrual status, was $83,000 and $131,000 for 2000 and 1999, respectively. Interest payments received on nonaccrual loans are applied to principal unless there is no doubt as to ultimate full repayment of principal, in which case, the interest payment is recognized as interest income. Interest income not recognized on nonaccrual loans reduced the net yield on earning assets by 5 and 9 basis points for 2000 and 1999, respectively.

    Troubled Debt Restructurings.  A TDR is a loan for which the Company has, for economic or legal reasons related to a borrower's financial difficulties, granted a concession to the borrower it would not otherwise consider, including modifications of loan terms to alleviate the burden of the borrower's near-term cash flow requirements in order to help the borrower to improve its financial condition and eventual ability to repay the loan. At December 31, 2000 and 1999, the Company had no TDR's.

    Loans Contractually Past Due 90 or More Days.  Loans contractually past due 90 or more days are those loans which have become contractually past due at least ninety days with respect to principal or interest. Interest accruals may be continued for loans that have become contractually past due ninety days when such loans are well secured and in the process of collection and, accordingly, management has determined such loans to be fully collectible as to both principal and interest.

    For this purpose, a loan is considered well secured if the collateral has a realizable value in excess of the amount of principal and accrued interest outstanding and/or is guaranteed by a financially capable party. A loan is considered to be in the process of collection if collection of the loan is proceeding in due course either through legal action or through other collection efforts which management reasonably expects to result in repayment of the loan or its restoration to a current status in the near future.

    There were no loans contractually past due 90 or more days and still accruing interest at December 31, 2000 and 1999.

    Other Real Estate Owned.  The Company carries OREO at the lesser of the Bank's recorded investment or the fair value less selling costs. The Company periodically revalues OREO properties and charges other expenses for any further write-downs. During 2000, the Company sold all of its outstanding OREO for a net gain of $69,000.

    Other Assets — SBA Guaranteed Loan.  During 2000, the Company was paid an amount approximating the carrying value by the SBA as full settlement.

Impaired Loans

    Due to the size and nature of the Bank's loan portfolio, impaired loans are determined by a periodic evaluation on an individual loan basis. At December 31, 2000 and 1999, the Bank had classified $683,000 of its loans as impaired for which no related specific reserves was provided. The average recorded investment in, and the amount of interest income recognized on impaired loans during the year ended December 31, 2000, were $665,000 and $2,000, respectively.

27

    Foregone interest income attributable to nonperforming loans amounted to $83,000 in 2000 and $131,000 in 1999. This resulted in a reduction in yield on average loans receivable of 10 basis points and 22 basis points for the years ended December 31, 2000 and 1999, respectively.

Allowance for Credit Losses

    The Company has a process by which it reviews and manages the credit quality of the loan portfolio. This process includes a risk rating system, uniform underwriting criteria, early identification of problem credits, regular monitoring of any classified assets graded as "criticized" by the Company's internal grading system, and an independent loan review process. The loan approval process is also tied to the risk rating system. The Classified Asset Committee ("CAC") meets on a quarterly basis to review, monitor, take corrective action upon all criticized assets, and review the adequacy of the allowance for credit losses. The CAC is currently chaired by the Bank's Chief Credit Officer, with the results of the CAC's meetings reviewed by the Officers and Directors' Loan Committee quarterly.

    The calculation of the adequacy of the allowance for credit losses is based on a variety of factors, including loan classifications, migration trends and underlying cash flow and collateral values. On a periodic basis (two times per year), management engages an outside loan review firm to review the Company's loan portfolio, risk grade accuracy and the reasonableness of loan evaluations. Annually, this outside loan review team analyzes the Company's methodology for calculating the allowance for credit losses based on the Company's loss histories and policies. The Company uses a migration analysis as part of its allowance for credit losses evaluation which is a method by which specific charge-offs are related to the prior life of the same loan compared to the total loan pools in which the loan was graded. This method allows for management to use historical trends that are relative to the Company's portfolio rather than use outside factors that may not take into consideration trends relative to the specific loan portfolio. In addition, this analysis takes into consideration other trends that are qualitative relative to the Company's marketplace, demographic trends, amount and trends in nonperforming assets and concentration factors.

    The Board of Directors reviews the adequacy of the allowance for credit losses on a quarterly basis. Management utilizes its judgment to determine the provision for credit losses and establish the allowance for credit losses. Management believes, based on information known to management, that the allowance for credit losses at December 31, 2000 was adequate to absorb estimated losses in the existing loan portfolio. However, credit quality is affected by many factors beyond the control of the Company, including local and national economies, and facts may exist which are not known to the Company which adversely affect the likelihood of repayment of various loans in the loan portfolio and realization of collateral upon a default. Accordingly, no assurance can be given that the Company will not sustain loan losses materially in excess of the allowance for credit losses. In addition, the OCC, as an integral part of its examination process, periodically reviews the allowance for credit losses and could require additional provisions for credit losses.

    Table 15 presents, at December 31, 2000 and 1999, the composition of the Company's allocation of the allowance for credit losses to specific loan categories designated by management for this purpose. The Company's current practice is to make specific allocations of the allowance for credit losses to criticized and classified loans, and unspecified allocations to each loan category based on management's risk assessment. This allocation should not be interpreted as an indication that loan charge-offs will occur in the future in these amounts or proportions, or as an indication of future charge-off trends. In addition, the portion of the allowance for credit losses allocated to each loan category does not represent the total amount available for future losses that may occur within such categories, since the total allowance for credit losses is applicable to the entire portfolio.

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Table 15
Allocation of Allowance For Credit Losses

		December 31,
		2000		%(1)		1999		%(1)		1998		%(1)		1997		%(1)		1996		%(1)
		(Dollars in thousands)
Allocation of the Allowance for Credit Losses:
Commercial loans:
	Secured by one to four family residential properties	$	155	6	%	$	102	6	%	$	132	9	%	$	154	11	%	$	479	10	%
	Secured by multifamily residential properties		73	3			103	7			73	5			49	4			41	5
	Secured by commercial real properties		842	37			659	38			590	36			512	36			590	42
	Other—secured and unsecured		1,355	48			938	45			1,061	43			1,056	35			1,643	26
Real estate construction and land development			47	2			—	—			—	—			63	5			42	6
Home equity lines of credit			12	1			3	1			4	0			2	0			13	1
Consumer installment and unsecured loans to individuals(1)			113	3			91	3			284	7			187	9			161	10
	Allowance allocable to loans receivable	$	2,597	100	%	$	1,896	100	%	$	2,144	100	%	$	2,023	100	%	$	2,969	100	%

⁽¹⁾

Percentage of loans in each category to total loans.

29

    Table 16 presents an analysis of changes in the allowance for credit losses during the periods indicated:

Table 16
Analysis of Changes in Allowance for Credit Losses

			December 31,
			2000			1999			1998			1997			1996
			(Dollars in thousands)
Balance, beginning of period			$	1,896		$	2,144		$	2,023		$	2,969		$	3,805
Loan charged off:
	Real estate construction and land development			—			—			—			—			—
	Commercial loans:
		Secured by one to four family residential properties		—			—			4			310			9
		Secured by multifamily residential properties		—			—			—			256			—
		Secured by commercial real properties		—			128			31			56			—
		Other—secured and unsecured		7			344			176			350			1,183
	Home equity lines of credit			—			—			—			—			—
	Consumer installment and unsecured loans to individuals			111			105			196			343			108
	Total loan charge-offs			118			577			407			1,315			1,300
Recoveries of loans previously charged off:
	Real estate construction and land development			—			—			—			—			—
	Commercial loans:
		Secured by one to four family residential properties		—			30			1			71			26
		Secured by multifamily residential properties		—			—			10			—			—
		Secured by commercial real properties		—			144			—			4			—
		Other—secured and unsecured		1,350			100			216			202			398
	Home equity lines of credit			—			—			—			—			—
	Consumer installment and unsecured loans to individuals			45			55			301			92			40
	Total recoveries of loans previously charged off			1,395			329			528			369			464
	Net (recoveries) charge-offs			(1,277	)		248			(121	)		946			836
	Provision for credit losses			(576	)		—			—			—			—
	Balance, end of period		$	2,597		$	1,896		$	2,144		$	2,023		$	2,969
	Net loan (recoveries) charge-offs as a percentage of allowance for credit losses			-49.17	%		13.08	%		-5.66	%		46.76	%		28.16	%
	Net loan (recoveries) charge-offs as a percentage of average gross loans outstanding during the period			-1.40	%		0.40	%		-0.20	%		1.59	%		1.19	%
	Recoveries of loans previously charged off as a percentage of loans charged off in the previous year			241.77	%		80.84	%		40.16	%		28.38	%		17.60	%

30

Off-Balance Sheet Credit Commitments and Contingent Obligations

    The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. In addition to undisbursed commitments to extend credit under loan facilities, these instruments include conditional obligations under standby and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by customers is represented by the contractual amount of the instruments.

    Standby letters of credit are conditional commitments issued by the Company to secure the financial performance of a customer to a third party and are primarily issued to support private borrowing arrangements. The credit risk involved in issuing a letter of credit for a customer is essentially the same as that involved in extending a loan to that customer. The Company uses the same credit underwriting policies in accepting such contingent obligations as it does for loans. When deemed necessary, the Company holds appropriate collateral supporting those commitments. The nature of collateral obtained varies and may include deposits held in financial institutions and real properties.

    At December 31, 2000 and 1999, standby letters of credit amounted to $731,000 and $422,000, respectively, and there were no commercial letters of credit outstanding.

    Undisbursed commitments under revocable and irrevocable loan facilities amounted to $26.1 million and $14.7 million at December 31, 2000 and 1999, respectively. Many of these commitments are expected to expire without being drawn upon and, as such, the total commitment amounts do not necessarily represent future cash requirements.

Deposits

    As indicated in Table 17, the Bank experienced a 15.7% increase in average total deposits during 2000 compared to 1999. This increase in deposits occurred primarily as a result of growth in noninterest bearing demand deposits of $11.1 million and growth in money market deposits of $8.3 million, offset by a planned decline in higher cost money desk deposits of $6.2 million.

Table 17
Deposit Composition
(Balances are averages)

			December 31,
			2000				1999
			Amount		Percent		Amount		Percent
			(Dollars in thousands)
Noninterest-bearing demand deposits:
	Real estate title and escrow company customers		$	14,806	11	%	$	14,652	13	%
	Other noninterest-bearing demand			41,981	32			30,843	27
Interest-bearing demand				8,066	6			6,918	6
Money market				36,312	28			27,999	25
Savings				1,348	1			1,526	1
Time certificates of deposit:
	Money Desk			5,867	5			12,072	11
	Other:
		$100,000 or more		17,023	13			14,123	13
		Under $100,000		4,566	4			4,238	4
Total time certificates of deposit				27,456	22			30,433	28
		Total Deposits	$	129,969	100	%	$	112,371	100	%

31

Table 18
Maturities of Time Certificates of Deposit
$100,000 or more

			December 31, 2000
			Money Desk		All Other		Total
			(Dollars in thousands)
Aggregate maturities of time certificates of deposit:
	In three months or less		$	2,033	$	16,911	$	18,944
	After three months but within six months			300		3,261		3,561
	After six months but within twelve months			—		3,160		3,160
	After twelve months			100		100		200
		Total time certificates of deposit $100,000 or more	$	2,433	$	23,432	$	25,865

			December 31, 1999
			Money Desk		All Other		Total
			(Dollars in thousands)
Aggregate maturities of time certificates of deposit:
	In three months or less		$	—	$	8,373	$	8,373
	After three months but within six months			2,574		2,992		5,566
	After six months but within twelve months			2,674		2,875		5,549
	After twelve months			—		—		—
		Total time certificates of deposit $100,000 or more	$	5,248	$	14,240	$	19,488

Borrowed Funds

    Borrowed funds and related weighted average rates are summarized below in Table 19.

Table 19
Borrowed Funds

	2000								1999
	Year-end				Average				Year-end				Average
	Balance		Rate		Balance		Rate		Balance		Rate		Balance		Rate
	(Dollars in thousands)
Federal funds purchased and securities sold under repurchase agreements	$	7,500	6.71	%	$	998	6.81	%	$	—	—		$	1,194	4.19	%
Other borrowings		40,000	6.59	%		32,424	6.42	%		26,200	5.79	%		19,121	5.26	%

    The maximum amount of securities sold with agreements to repurchase at any month end was $7.5 million, and $2.0 million during 2000 and 1999, respectively.

    The maximum amount of other borrowings at any month end was $40.0 million during 2000 and $26.2 million during 1999.

    At December 31, 2000, $45.0 million of borrowed funds were scheduled to mature during 2000, and $2.5 million were scheduled to mature during 2002.

32

Selected Financial Ratios

    The following Table 20 sets forth selected financial ratios:

Table 20
Selected Performance Ratios

	For the Year Ended December 31,
	2000	1999
Return on average assets	1.64%	0.69%
Return on average shareholders' equity	20.49%	8.08%
Average shareholders' equity to average assets	8.01%	8.57%

Recent Accounting Pronouncements

    The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment of SFAS No. 133". SFAS Nos. 133 and 138 establish accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or as a liability measured at its fair value and that changes in the fair value be recognized currently in the statements of operations. The Company adopted SFAS Nos. 133 and 138 on January 1, 2001. The impact of the adoption did not have a material effect on the Company's financial position or result of operations.

    In September of 2000, the FASB issued SFAS No. 140, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125". As of December 31, 2000, the Company has adopted accounting and disclosure requirements of SFAS No. 140 as set forth in paragraphs 15 and 17 of the Statement, respectively. The adoption of SFAS No. 140 did not have an impact on the financial condition or the results of operations of the Company.

33

FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS

We face risk from changes in interest rates.

    The success of our business depends, to a large extent, on our net interest income. Changes in market interest rates can affect our net interest income by affecting the spread between our interest-earning assets and interest-bearing liabilities. This may be due to the different maturities of our interest-earning assets and interest-bearing liabilities, as well as an increase in the general level of interest rates. Changes in market interest rates also affect, among other things:

•

Our ability to originate loans;



•

The ability of our borrowers to make payments on their loans;



•

The value of our interest-earning assets and our ability to realize gains from the sale of these assets;



•

The average life of our interest-earning assets;



•

Our ability to generate deposits instead of other available funding alternatives; and



•

Our ability to access the wholesale funding market.

    Interest rates are highly sensitive to many factors, including governmental monetary policies, domestic and international economic and political conditions and other factors beyond our control.

We face risk from possible declines in the quality of our assets.

    Our financial condition depends significantly on the quality of our assets. While we have developed and implemented underwriting policies and procedures to guide us in the making of loans, compliance with these policies and procedures in making loans does not guarantee repayment of the loans. If the level of our non-performing assets rises, our results of operations and financial condition will be affected. A borrower's ability to pay its loan in accordance with its terms can be adversely affected by a number of factors, such as a decrease in the borrower's revenues and cash flows due to adverse changes in economic conditions or a decline in the demand for the borrower's products and/or services.

Our allowances for credit losses may be inadequate.

    We establish allowances for credit losses against each segment of our loan portfolio. At December 31, 2000, our allowance for credit losses equaled 2.4% of loans receivable and 380.2% of nonperforming loans. Although we believed that we had established adequate allowances for credit losses as of December 31, 2000, the credit quality or our assets is affected by many factors beyond our control, including local and national economic conditions, and the possible existence of facts which are not known to us which adversely affect the likelihood of repayment of various loans in our loan portfolio and realization of the collateral upon a default. Accordingly, we can give no assurance that we will not sustain loan losses materially in excess of the allowance for credit losses. In addition, the Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews our allowance for credit losses and could require additional provisions for credit losses. Material future additions to the allowance for credit losses may also be necessary due to increases in the size and changes in the composition of our loan portfolio. Increases in our provisions for credit losses would adversely affect our results of operations.

Economic conditions may worsen.

    Our business is strongly influenced by economic conditions in our market area (principally, the Greater Los Angeles metropolitan area) as well as regional and national economic conditions and in our niche markets, including the entertainment industry in Southern California. During the past several

34

years economic conditions in these areas have been favorable. Should the economic condition in these areas deteriorate, the financial condition of our borrowers could weaken, which could lead to higher levels of loan defaults or a decline in the value of collateral for our loans. In addition, an unfavorable economy could reduce the demand for our loans and other products and services.

Because a significant amount of the loans we make are to borrowers in California, our operations could suffer as a result of local recession or natural disasters in California.

    At December 31, 2000, approximately 47% of our loans outstanding were collateralized by properties located in California. Because of this concentration in California, our financial position and results of operations have been and are expected to continue to be influenced by general trends in the California economy and its real estate market. Real estate market declines may adversely affect the values of the properties collateralizing loans. If the principal balances of our loans, together with any primary financing on the mortgaged properties, equal or exceed the value of the mortgaged properties, we could incur higher losses on sales of properties collateralizing foreclosed loans. In addition, California historically has been vulnerable to certain natural disaster risks, such as earthquakes and erosion-caused mudslides, which are not typically covered by the standard hazard insurance policies maintained by borrowers. Uninsured disasters may adversely impact our ability to recover losses on properties affected by such disasters and adversely impact our results of operations.

Our business is very competitive.

    There is intense competition in Southern California and elsewhere in the United States for banking customers. We experience competition for deposits from many sources, including credit unions, insurance companies and money market and other mutual funds, as well as other commercial banks and savings institutions. We compete for loans and deposits primarily with other commercial banks, mortgage companies, commercial finance companies and savings institutions. In recent years out-of-state financial institutions have entered the California market, which has also increased competition. Many of our competitors have greater financial strength, marketing capability and name recognition than we do, and operate on a statewide or nationwide basis. In addition, recent developments in technology and mass marketing have permitted larger companies to market loans more aggressively to our small business customers. Such advantages may give our competitors opportunities to realize greater efficiencies and economies of scale than we can. We can provide no assurance that we will be able to compete effectively against our competition.

Our business is heavily regulated.

    Both National Mercantile Bancorp, as a bank holding company, and Mercantile National Bank, as a national bank, are subject to significant governmental supervision and regulation, which is intended primarily for the protection of depositors. Statutes and regulations affecting us may be changed at any time, and the interpretation of these statutes and regulations by examining authorities also may change. We cannot assure you that future changes in applicable statutes and regulations or in their interpretation will not adversely affect our business.

Our ability to use our net operating losses may be limited.

    During the past three years, although we have had taxable income, we have not paid any income taxes other than alternative minimum taxes because of our net operating loss carryforwards. As of December 31, 2000, we had net operating loss carryforwards of $18.4 million and $1.5 million for federal and state tax purposes, respectively. Our federal net operating loss carryforward begins to expire in 2009. Our state net operating loss carryforwards continue to expire but remain available in reducing amounts through 2002. Our ability to use these carryforwards in the future would be significantly limited if we experience an "ownership change" within the meaning of Section 382 of the

35

Internal Revenue Code. If our use of these carryforwards is limited, we would be required to pay taxes on our taxable income to the extent our taxable income exceeded the limited amounts which could be offset, and our net income would be lower.

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The consolidated financial statements required by this Item are included herewith as a separate section of this Report, commencing on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    Not applicable.

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    The information required by this item will appear under the captions "Election of Directors," "Executive Officers," and "Compliance with Section 16(a) Beneficial Ownership Reporting" in the Company's proxy statement for the 2001 Annual Meeting of Shareholders (the "2001 Proxy Statement"), and such information shall be deemed to be incorporated herein by reference to that portion of the 2001 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's most recently completed fiscal year.

ITEM 10. EXECUTIVE COMPENSATION

    The information required by this item will appear under the captions "Compensation of Executive Officers," "Compensation of Directors," "Summary Compensation Table," "Report on Executive Compensation for 2000", "2000 Option Exercises and Year-End Option Values," and "Compensation Committee Interlocks and Insider Participation" in the 2001 Proxy Statement, and such information shall be deemed to be incorporated herein by reference to those portions of the 2001 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's most recently completed fiscal year.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    The information required by this item will appear under the caption "Security Ownership of Principal Shareholders and Management" in the 2001 Proxy Statement, and such information shall be deemed to be incorporated herein by reference to that portion of the 2001 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's most recently completed fiscal year.

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    The information required by this item will appear under the caption "Certain Relationships and Related Transactions" in the 2001 Proxy Statement, and such information shall be deemed to be incorporated herein by reference to that portion of the 2001 Proxy Statement, if filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the Company's most recently completed fiscal year.

36

PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a) The following documents have been filed as part of this report:

1.  Financial Statements

	Page
Report of Independent Public Accountants	39
Consolidated Balance Sheet at December 31, 2000	40
Consolidated Statements of Operations for the years ended December 31, 2000 and 1999	41
Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000 and 1999	42
Consolidated Statements of Cash Flows for the years ended December 31, 2000 and 1999	43
Notes to Consolidated Financial Statements for the two years ended December 31, 2000	44

2.  Financial Statement Schedules

    None.

    (b) Reports on Form 8-K

    (c) Exhibits

    See Index to Exhibits on page E-1 of this Report on Form 10-KSB

    (d) See Item 14(a) above.

37

SIGNATURES

    Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NATIONAL MERCANTILE BANCORP (Registrant)
By	/s/ SCOTT A. MONTGOMERY Scott A. Montgomery Chief Executive Officer

Date: March 23, 2001

    Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/ ROBERT E. GIPSON Robert E. Gipson	Chairman of the Board	March 23, 2001
/s/ ROBERT E. THOMSON Robert E. Thomson	Vice Chair	March 23, 2001
/s/ DONALD E. BENSON Donald E. Benson	Director	March 23, 2001
/s/ JOSEPH N. COHEN Joseph N. Cohen	Director	March 23, 2001
/s/ ALAN GRAHM Alan Grahm	Director	March 23, 2001
/s/ ANTOINETTE HUBENETTE, M.D. Antoinette Hubenette, M.D.	Director	March 23, 2001
/s/ SCOTT A. MONTGOMERY Scott A. Montgomery	Director, Chief Executive Officer, and Interim Principal Financial and Principal Accounting Officer	March 23, 2001
/s/ DION G. MORROW Dion G. Morrow	Director	March 23, 2001
/s/ CARL R. TERZIAN Carl R. Terzian	Director	March 23, 2001

38

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders and the Board of Directors
of National Mercantile Bancorp and Subsidiary:

    We have audited the accompanying consolidated balance sheet of National Mercantile Bancorp (a California corporation) and Subsidiary (collectively the "Company") as of December 31, 2000, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years ended December 31, 2000 and 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

    We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

    In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Mercantile Bancorp and Subsidiary as of December 31, 2000, and the results of their operations and their cash flows for the years ended December 31, 2000 and 1999 in conformity with accounting principles generally accepted in the United States.

Arthur Andersen LLP

Los Angeles, California
January 15, 2001

39

NATIONAL MERCANTILE BANCORP AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

			December 31, 2000
			(Dollars in thousands)
ASSETS
Cash and due from banks-demand			$	7,897
Federal funds sold and securities purchased under agreements to resell				19,700
		Cash and cash equivalents		27,597
Securities available-for-sale, at fair value; aggregate amortized cost of $64,953				64,417
FRB and other stock, at cost				2,733
Loans receivable				110,248
	Allowance for credit losses			(2,597	)
		Net loans receivable		107,651
Premises and equipment, net				526
Accrued interest receivable and other assets				1,919
		Total assets	$	204,843
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
	Noninterest-bearing demand		$	59,935
	Interest-bearing demand			9,004
	Money market			32,351
	Savings			1,144
	Time certificates of deposit:
		$100,000 or more		25,865
		Under $100,000		6,248
		Total deposits		134,547
Federal funds purchased and securities sold under agreements to repurchase				7,500
Other borrowings				40,000
Accrued interest payable and other liabilities				2,093
		Total liabilities		184,140
Commitments and contingencies (Note 9)
Shareholders' equity:
Preferred stock, no par value: (10,000 shares undesignated)
	Series A non-cumulative convertible perpetual preferred stock:
	authorized 990,000 shares; outstanding 770,423 shares			6,292
Common stock, no par value: authorized 10,000,000 shares; outstanding 1,547,429 shares				29,905
Accumulated deficit				(14,958	)
Accumulated other comprehensive loss				(536	)
		Total shareholders' equity		20,703
		Total liabilities and shareholders' equity	$	204,843

See accompanying notes to consolidated financial statements.

40

NATIONAL MERCANTILE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

				For The Year Ended December 31,
				2000			1999
				(Dollars in thousands, except per share data)
Interest income:
	Loans, including fees			$	9,049		$	5,781
	Securities available-for-sale				4,799			4,379
	Federal funds sold and securities purchased under agreements to resell				612			385
		Total interest income			14,460			10,545
Interest expense:
	Interest-bearing demand				113			91
	Money market and savings				1,258			836
	Time certificates of deposit:
		$100,000 or more			1,103			996
		Under $100,000			399			580
			Total interest expense on deposits		2,873			2,503
	Federal funds purchased and securities sold under agreements to repurchase				68			50
	Other borrowings				2,082			1,005
			Total interest expense		5,023			3,558
			Net interest income before provision for credit losses		9,437			6,987
Provision for credit losses					(576	)		—
			Net interest income after provision for credit losses		10,013			6,987
Other operating income:
	Net gain (loss) on sale of securities available-for-sale				18			(1	)
	International services				110			87
	Investment division				88			60
	Deposit-related and other customer services				583			552
	Gain on sale of other real estate owned				69			—
			Total other operating income		868			698
Other operating expenses:
	Salaries and related benefits				3,906			3,229
	Net occupancy				966			1,002
	Furniture and equipment				323			217
	Printing and communications				280			265
	Insurance and regulatory assessments				296			297
	Client services				835			673
	Computer data processing				416			311
	Legal services				170			70
	Other professional services				396			301
	Other real estate owned expenses				3			45
	Promotion and other expenses				279			214
			Total other operating expenses		7,870			6,624
			Net income before income tax provision		3,011			1,061
Income tax provision					67			47
			Net income	$	2,944		$	1,014
Earnings per share:
	Basic			$	2.77		$	1.50
	Diluted			$	1.08		$	0.41

See accompanying notes to consolidated financial statements.

41

NATIONAL MERCANTILE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

			Preferred Stock					Common Stock
											Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)
			Shares		Amount			Shares	Amount								Total
			(Dollars in thousands except share data)
Balance at January 1, 1999			900,000		$	7,350		677,048	$	24,613	$	(18,916	)	$	211		$	13,258
	Stock options exercised							147		1								1
	Comprehensive loss:
		Other comprehensive income:
		Unrealized holding loss during the period													(2,687	)		(2,687	)
		Add: Reclassification adjustment for losses included in net income													1			1
	Net income											1,014						1,014
		Comprehensive loss																(1,672	)
Balance at December 31, 1999			900,000			7,350		677,195		24,614		(17,902	)		(2,475	)		11,587
	Preferred stock converted into common stock on a 2:1 basis		(129,577	)		(1,058	)	259,154		1,058								—
	Issuance of common stock							602,081		4,190								4,190
	Stock options exercised							8,999		43								43
	Comprehensive income:
		Other comprehensive income:
		Unrealized holding gain during the period													1,957			1,957
		Less: Reclassification adjustment for gain included in net income													(18	)		(18	)
	Net income											2,944						2,944
		Comprehensive income																4,883
Balance at December 31, 2000			770,423		$	6,292		1,547,429	$	29,905	$	(14,958	)	$	(536	)	$	20,703

See accompanying notes to consolidated financial statements.

42

NATIONAL MERCANTILE BANCORP AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

			For The Year Ended December 31,
			2000			1999
			(Dollars in thousands)
Cash flow from operating activities:
	Net income		$	2,944		$	1,014
	Adjustments to reconcile net income to net cash provided by operating activities:
	Depreciation and amortization			197			191
	Provision for credit losses			(576	)		—
	Gain on sale of other real estate owned			(69	)		—
	Provision for other real estate owned			—			35
	Net (gain) loss on sale of securities available-for-sale			(18	)		1
	Net (accretion) amortization of (discount) premiums on securities			(28	)		61
	Net accretion of discounts on loans purchased			(36	)		(34	)
	Increase in accrued interest receivable and other assets			(204	)		(126	)
	Increase in accrued interest payable and other liabilities			711			289
		Net cash provided by operating activities		2,921			1,431
Cash flows from investing activities:
	Purchase of securities available-for-sale			(2,899	)		(15,967	)
	Proceeds from sales of securities available-for-sale			1,891			1,016
	Proceeds from repayments and maturities of securities available-for-sale			7,078			12,817
	Loan originations and principal collections, net			(35,327	)		(17,085	)
	Proceeds from sale of other real estate owned			486			—
	Proceeds from sale of other assets — SBA guaranteed loans			209			—
	Purchases of premises and equipment			(97	)		(91	)
		Net cash used in investing activities		(28,659	)		(19,310	)
Cash flows from financing activities:
	Net increase in demand deposits, money market and savings accounts			11,483			13,026
	Net increase (decrease) in time certificates of deposit			6,080			(3,014	)
	Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased			7,500			(1,000	)
	Net increase in other borrowings			13,800			6,900
	Net proceeds from issuance of common stock			4,190			—
	Net proceeds from exercise of stock options			43			1
		Net cash provided by financing activities		43,096			15,913
Net increase (decrease) in cash and cash equivalents				17,358			(1,966	)
Cash and cash equivalents, January 1				10,239			12,205
Cash and cash equivalents, December 31			$	27,597		$	10,239

See accompanying notes to consolidated financial statements.

43

NATIONAL MERCANTILE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Summary of Significant Accounting Policies

    The accounting and reporting policies of National Mercantile Bancorp (the "Company") and of its wholly owned subsidiary Mercantile National Bank (the "Bank") conform to accounting principles generally accepted in the United States and to prevailing practices within the banking industry. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities at the date of consolidated financial statements and the reported amounts of revenues and expenses during reported periods. Actual results could differ from those estimates.

    The Company, through the Bank, engages in commercial banking in the Los Angeles area serving niche markets represented by professional service providers, entertainment, healthcare and community based nonprofit borrowers, and associated individuals with commercial banking and personal banking needs.

Basis of Presentation

    The consolidated financial statements include the accounts of the Company and the Bank. All intercompany transactions and balances have been eliminated. The Bank is the Company's only subsidiary.

Cash and Cash Equivalents

    For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks-demand, federal funds sold and securities purchased under agreements to resell.

Securities

    Securities available-for-sale are carried at estimated fair value. Unrealized gains or losses on available-for-sale securities are excluded from earnings and reported as accumulated other comprehensive income in a separate component of shareholders' equity until realized. Because the Company has net operating loss carryforwards, no tax expense (benefit) has been recorded from unrealized gains (losses). Premiums or discounts on available-for-sale securities are amortized or accreted into income using the effective interest method. Realized gains or losses on sales of available-for-sale securities are recorded using the specific identification method.

Loans

    Loans are generally carried at principal amounts outstanding less unearned income. Unearned income includes deferred unamortized fees net of direct incremental loan origination costs.

    Interest income is accrued as earned. Net deferred fees are accreted into interest income using the effective interest method. Loans are placed on nonaccrual status when a loan becomes 90 days past due as to interest or principal unless the loan is both well secured and in process of collection. Loans are also placed on nonaccrual status when the full collection of interest or principal becomes uncertain. When a loan is placed on nonaccrual status, the accrued and unpaid interest receivable is reversed and the accretion of deferred loan fees is ceased. Thereafter, interest collected on the loan is accounted for on the cash collection or cost recovery method until qualifying for return to accrual status. Generally, a loan may be returned to accrual status when all delinquent principal and interest are brought current in accordance with the terms of the loan agreement and certain performance criteria have been met.

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    The Company considers a loan to be impaired when it is probable that it will be unable to collect all amounts due according to the contractual terms of the loan agreement. Once a loan is determined to be impaired, the impairment is measured based on the present value of the expected future cash flows discounted at the loan's effective interest rate, except that as a practical expedient, the impairment is measured by using the loan's observable market price or the fair value of the collateral if the loan is collateral dependent.

    When the measurement of the impaired loan is less than the recorded amount of the loan, an impairment is recognized by creating a valuation allowance with a corresponding charge to the provision for credit losses or by adjusting an existing valuation allowance for the impaired loan with a corresponding charge or credit to the provision for credit losses.

    The Company's policy is to record cash receipts received on impaired loans first as reductions to principal and then to interest income.

Allowance for Credit Losses

    The provisions for credit losses charged to operations reflects management's judgment of the adequacy of the allowance for credit losses and are determined through periodic analysis of the loan portfolio, problem loans and consideration of such other factors as the Company's loan loss experience, trends in problem loans, concentrations of credit risk, and economic conditions (particularly Southern California), as well as the results of the Company's ongoing examination process and its regulatory examinations.

    The calculation of the adequacy of the allowance for credit losses is based on a variety of factors, including loan classifications, migration trends and underlying cash flow and collateral values. On a periodic basis, management engages an outside loan review firm to review the Company's loan portfolio, risk grade accuracy and the reasonableness of loan evaluations. Annually, this outside loan review team analyzes the Company's methodology for calculating the allowance for credit losses based on the Company's loss histories and policies. The Company uses a migration analysis as part of its allowance for credit losses evaluation which is a method by which specific charge-offs are related to the prior life of the same loan compared to the total loan pools in which the loan was graded. This method allows for management to use historical trends that are relative to the Company's portfolio rather than use outside factors that may not take into consideration trends relative to the specific loan portfolio. In addition, this analysis takes into consideration other trends that are qualitative relative to the Company's marketplace, demographic trends, amount and trends in nonperforming assets and concentration factors.

Premises and Equipment, Net

    Premises and equipment are presented at cost less accumulated amortization and depreciation. Depreciation of furniture, fixtures and equipment is determined using the straight-line method over the estimated useful lives (3 years to 5 years) of each type of asset. Leasehold improvements are amortized using the straight-line method over the term of the related leases or the service lives (10 years to 20 years) of the improvements, whichever is shorter. Gains and losses on dispositions are reflected in current operations. Maintenance and repairs are charged to other operating expenses as incurred.

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Other Real Estate Owned

    Other Real Estate Owned ("OREO") is comprised of real estate acquired in satisfaction of loans. Properties acquired by foreclosure or deed in lieu of foreclosure are transferred to OREO and are initially recorded at the lower of the loan balance or fair value at the date of transfer of the property, establishing a new cost basis. Subsequently, OREO is carried at the lower of cost or fair value less costs to sell. The fair value of the OREO property is based upon a current appraisal. Losses that result from the ongoing periodic valuation of these properties are charged against other operating expenses in the period in which they are identified. Expenses for holding costs are charged to other operating expenses as incurred.

Income Taxes

    The Company and the Bank file consolidated federal income tax returns and combined state income tax returns.

    Deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between financial reporting and tax reporting basis of assets and liabilities, as well as for operating losses and tax credit carryforwards, using enacted tax laws and rates. Deferred tax assets will be reduced through a valuation allowance whenever it becomes more likely than not that all, or some portion will not be realized. Deferred income taxes (benefit) represents the net change in deferred tax asset or liability balance during the year. This amount, together with income taxes currently payable or refundable in the current year, represents the total tax expense (benefit) for the year.

Comprehensive Income

    Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources. The accumulated balance of other comprehensive income is required to be displayed separately from retained earnings and additional paid in capital in the consolidated balance sheet.

    The components of other comprehensive income together with total comprehensive income are reported in the consolidated statements of changes in shareholders' equity. The accumulated balance of other comprehensive income is not reported as a net amount after taxes due to the size and availability of the Company's net operating loss carry forwards.

Earnings per Share

    Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. The weighted average number of common shares outstanding used in computing basic earnings per share for the years ended December 31, 2000 and 1999 was 1,061,133 and 677,137, respectively. The weighted average number of common shares and common share equivalents outstanding used in computing diluted earnings per share for the years ended December 31, 2000 and

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1999 was 2,719,949, and 2,477,614, respectively. The following table is a reconciliation of net income and shares used in the computation of basic and diluted earnings per share:

			Net Income		Weighted Average Shares	Per Share Amount
			(in thousands)
For the year ended 2000:
	Basic EPS		$	2,944	1,061,133	$	2.77
	Effect of dilutive securities:
		Options and warrants			117,970
		Convertible preferred stock			1,540,846
	Diluted EPS		$	2,944	2,719,949	$	1.08
For the year ended 1999:
	Basic EPS		$	1,014	677,137	$	1.50
	Effect of dilutive securities:
		Options and warrants			477
		Convertible preferred stock			1,800,000
	Diluted EPS		$	1,014	2,477,614	$	0.41

Fair Value of Financial Instruments

    Estimated fair value amounts have been determined using available market information and appropriate valuation methodologies. Considerable judgment is required to interpret market data and to develop the estimates of fair value. Accordingly, the estimates of fair value in the financial statements are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and estimation methodologies may have a material effect on the estimated fair value amounts.

Stock Options

    Compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. Pro forma net income and pro forma earnings per share disclosures for employee stock option grants are based on recognition as expense, over the vesting period, the fair value on the date of grant of all stock-based awards made during 2000 and 1999.

Recent Accounting Pronouncements

    The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities — an Amendment of SFAS No. 133". SFAS Nos. 133 and 138 establish accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or as a liability measured at its fair value

47

and that changes in the fair value be recognized currently in the statements of operations. The Company adopted SFAS Nos. 133 and 138 on January 1, 2001. The impact of the adoption did not have a material effect on the Company's financial position or result of operations.

    In September of 2000, the FASB issued SFAS No. 140, "Accounting for Transfer and Servicing of Financial Assets and Extinguishments of Liabilities — a replacement of FASB Statement No. 125". As of December 31, 2000, the Company has adopted accounting and disclosure requirements of SFAS No. 140 as set forth in paragraphs 15 and 17 of the Statement, respectively. The adoption of SFAS No. 140 did not have an impact on the financial condition or the results of operations of the Company.

Note 2—Investment Securities

    The following is a summary of amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair values of the Company's investment securities available-for-sale at December 31, 2000:

	Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value
U.S. Treasury securities	$	2,008	$	9	$	—	$	2,017
GNMA-issued/guaranteed mortgage pass through certificates		5,288		118		—		5,406
Other U.S. government and federal agency securities		1,952		42		—		1,994
FHLMC/FNMA-issued mortgage pass through certificates		15,172		86		36		15,222
CMO's and REMIC's issued by U.S. government-sponsored agencies		36,532		1		669		35,864
Privately issued Corporate bonds, CMO's and REMIC's securities		4,001		—		87		3,914
FRB and other equity stocks		2,733		—		—		2,733
	$	67,686	$	256	$	792	$	67,150

    The Company had realized gains related to the sale of investment securities of $18,000 for the year ended December 31, 2000.

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    The estimated fair value and amortized cost of investment securities at December 31, 2000 by contractual maturity, are shown below:

					After one but within five years			After five but within ten years
		Within one year									After ten years
																Weighted Average Yield
		Amount		Yield	Amount		Yield	Amount		Yield	Amount		Yield	Total
		(Dollars in thousands)
Securities available-for-sale:
	U.S Treasury securities	$	—	—	$	2,017	5.90%	$	—	—	$	—	—	$	2,017	5.90%
	GNMA-issued/guaranteed mortgage pass-through certificates		—	—		—	—		—	—		5,406	7.41%		5,406	7.41%
	Other U.S. government and federal agencies		—	—		1,994	7.14%		—	—		—	—		1,994	7.14%
	FHLMC/FNMA-issued mortgage pass-through certificates		35	6.86%		1,290	6.67%		—	—		13,897	6.69%		15,222	6.69%
	CMO's and REMIC's issued by U.S. government-sponsored agencies		—	—		—	—		—	—		35,864	6.72%		35,864	6.72%
	Privately issued Corporate bonds, CMO's and REMIC's securities		—	—		—	—		—	—		3,914	6.78%		3,914	6.78%
	FRB and other equity stocks		—	—		—	—		—	—		2,733	6.50%		2,733	6.50%
		$	35	6.86%	$	5,301	6.55%	$	—	—	$	61,814	6.77%	$	67,150	6.75%
Amortized Cost		$	35		$	5,246		$	—		$	62,405		$	67,686

    Actual maturities may differ from contractual maturities to the extent that borrowers have the right to call or prepay obligations with or without call or repayment penalties.

    Investment securities totaling $4.7 million were pledged to secure government tax deposits, bankruptcy deposits, or for other purposes required or permitted by law at December 31, 2000.

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Note 3—Loans Receivable and Allowance for Credit Losses

    The following is a summary of the major categories of loans receivable outstanding at December 31, 2000:

(Dollars in thousands)
Commercial loans:
	Secured by one-to-four family residential properties	$	6,578
	Secured by multifamily residential properties		3,765
	Secured by commercial real properties		40,540
	Other, secured and unsecured		53,433
Real estate construction and land development			1,890
Home equity lines of credit			644
Consumer installment and unsecured loans to individuals			3,729
			110,579
Unearned income			(331	)
		$	110,248
Weighted average yield for loans at December 31			10.14%

    At December 31, 2000, the Company had identified impaired loans with recorded investments of $683,000. At December 31, 2000, no related specific allowance for credit losses were necessary for these loans. During 2000, the average recorded investment of impaired loans was $665,000. During the years ended December 31, 2000 and 1999 interest income recognized on impaired loans was $2,000 and $81,000, respectively.

    In the normal course of business, the Bank may make loans to officers and directors as well as loans to companies and individuals affiliated with or guaranteed by officers and directors of the Company and the Bank. Such loans are made in the ordinary course of business at rates and terms no more favorable than those offered to other customers with a similar credit standing. The outstanding principal balance of these loans was $29,000 at December 31, 2000 and $9,000 at December 31, 1999. The balance at December 31, 1999 included a loan to one individual who is no longer affiliated with the Bank. During 2000 there were $31,000 of advances and $2,000 of repayments. Interest income recognized on these loans amounted to $1,000 and $3,000 during 2000 and 1999, respectively. At December 31, 2000, none of these loans were on nonaccrual status. Based on analysis of information presently known to management about the loans to officers and directors and their affiliates, management believes all have the ability to comply with the present loan repayment terms.

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    The following is a summary of activity in the allowance for credit losses for the year ended December 31, 2000:

	2000
	(Dollars in thousands)
Balance, beginning of year	$	1,896
Provision for credit losses		(576	)
Loans charged-off		(118	)
Recoveries of loans previously charged-off		1,395
Balance, end of year	$	2,597

    The following is a summary of nonperforming loans at December 31, 2000:

	(Dollars in thousands)
Nonaccrual loans	$	683
Troubled debt restructurings		—
Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest		—
	$	683

    Interest foregone on nonperforming loans outstanding at December 31, 2000 and 1999 was $83,000 and $131,000, respectively. Foregone interest on nonperforming loans does not include interest forgone on loans on nonperforming status that were restored to performing status prior to year end, or subsequent to either being charged off prior to year end or transferred to OREO prior to year end.

    The ability of the Company's borrowers to honor their contracts is substantially dependent upon economic conditions and real estate market values throughout the Company's market area. At December 31, 2000, loans aggregating $51.5 million were collateralized by liens on residential and commercial real properties. While the Company's loan portfolio is generally diversified with regard to the industries represented, at December 31, 2000, the Company's loans to businesses and individuals engaged in entertainment industry related activities amounted to $29.9 million, $2.6 million of which are collateralized by real property.

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Note 4—Premises and Equipment and Lease Commitments

    The following is a summary of the major components of premises and equipment at December 31, 2000:

	(Dollars in thousands)
Leasehold improvements	$	1,695
Furniture, fixtures and equipment		3,435
		5,130
Less accumulated amortization and depreciation		(4,604	)
	$	526

    Depreciation and amortization expense was $197,000 in 2000 and $191,000 in 1999. Net rental expense on operating leases included in net occupancy expense in the Consolidated Statements of Operations was $791,000 in 2000 and $827,000 in 1999.

    In connection with the lease, the Company issued the landlord a warrant to purchase up to 9.9% of the outstanding shares of capital stock of the Company at December 31, 1997. The exercise price of the warrant is currently $5.00 per share of Common Stock and $10.00 per share of Series A Preferred. The warrant expires on December 31, 2002. The Company also granted the landlord registration rights with respect to capital stock purchased by the landlord (or its assignee) pursuant to the Warrant.

    In addition, the Bank leases approximately 1,650 square feet in an office building in Encino, California at approximately $1.85 per square feet or $3,053 per month through May 31, 2004.

    The future net minimum annual rental commitments at December 31, 2000 are summarized below.

	(Dollars in thousands)
For the year ended December 31,
2001	$	881
2002		879
2003		878
2004		742
2005		44
	$	3,424

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NATIONAL MERCANTILE BANCORP AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 5—Income Taxes

    A current federal and state income tax provision of $67,000 and $47,000 was recognized during 2000 and 1999, respectively, primarily due to alternative minimum tax ("AMT") that could not be offset by net operating loss carryforwards ("NOL").

    A reconciliation of the amounts computed by applying the federal statutory rate of 34% for 2000 and 1999 to the income and the effective tax rate are as follows:

		2000					1999
		(Dollars in thousands)
Tax provision at statutory rate		$	1,024		34.0%		$	360		34.0%
Increase (reduction) in taxes resulting from:
	Valuation allowance on deferred tax asset		(977	)	(32.4	)		(327	)	(30.8	)
	Other, net		20		0.6			13		1.2
		$	67		2.2%		$	47		4.4%

    The major components of the net deferred tax asset at December 31, 2000 are as follows:

		(Dollars in thousands)
Deferred tax assets:
	Net operating losses	$	6,361
	Accrued expenses		449
	Alternative minimum tax credits		289
	Nonaccrual interest		84
	State taxes		3
	Loan Fees		117
	Other		19
	Total deferred tax assets		7,322
Deferred tax liabilities:
	Bad debt expense		283
	Depreciation		20
	Total deferred tax liabilities		303
Net deferred tax asset			7,019
Valuation allowance			(7,019	)
Deferred tax asset, net of valuation allowance		$	—

    A valuation allowance has been placed against 100% of the net deferred tax asset due to the uncertainty as to its ultimate realization.

    For tax purposes at December 31, 2000, the Company had (i) federal NOL's of $18.4 million, which begin to expire in 2009; (ii) California NOL's of $1.5 million, of which $1.2 million will expire in 2001 and $300,000 will expire in 2002; and (iii) an AMT credit at December 31, 2000 of $295,000 which may be carried forward indefinitely.

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Note 6—Benefit Plans

    Stock Incentive Plans.  At December 31, 2000, the Company had in effect one stock incentive plan pursuant to which up to a total of 348,510 shares of common stock may be issued. Under this plan, the Company could grant to directors, officers, employees and consultants stock-based incentive compensation in a variety of forms, including without limitation nonqualified options, incentive options, sales and bonuses of common stock and stock appreciation rights. Generally, awards under these plans may be granted by the Board of Directors or a committee of the Board of Directors on such terms and conditions as the Board of Directors or committee determines. However, the exercise price of options granted to nonemployee directors may not be less than the fair market value of the common stock on the date of grant. At December 31, 2000, the only outstanding awards under this plan were stock options, and at that date 40,220 shares were available for future awards. At December 31, 2000, there were also outstanding options and tandem stock appreciation rights granted under three prior stock incentive plans.

    The following summarizes option grants, cancellations and exercises under the stock incentive plans for the periods indicated.

				Option price range per share
Outstanding, January 1, 1999		277,148		$	4.63	—	$	8.52
	Granted	91,350			4.44	—		4.88
	Cancelled	(19,600	)		4.50	—		7.07
	Exercised	(147	)		6.00	—		6.00
Outstanding, December 31, 1999		348,751			4.44	—		8.52
	Granted	55,550			3.94	—		7.97
	Cancelled	(16,560	)		4.44	—		7.66
	Exercised	(8,999	)		4.59	—		6.06
Outstanding, December 31, 2000		378,742		$	3.94	—	$	8.52

    Of the outstanding options at December 31, 2000: (i) options to purchase 270,032 shares were vested and exercisable; and (ii) the remaining options become exercisable as follows: 2001 — 77,592 and 2002 — 31,118.

    The estimated per share weighted average fair value of options granted was $4.36 and $2.48 during 2000 and 1999. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for the stock incentive plans. Accordingly, no compensation cost has been recognized for the plans. SFAS No. 123, "Accounting for Stock-Based Compensation," which encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. Had compensation cost for the options granted been determined based on the fair value at the grant dates for awards under the plans consistent with the method of SFAS No. 123, the Company's net income for 2000 and 1999 would have been decreased by $119,000 and $105,000, respectively. Basic and diluted earnings per share would have decreased by $.10 and $.04 for 2000, respectively, and $.15 and $.04 for 1999, respectively.

    The fair values of options granted during 2000 and 1999 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: 2000- no dividend yield, expected volatility of 88%, risk-free interest rate of 5.11%, and an expected life of 10

53

years; 1999 — no dividend yield, expected volatility of 74%, risk-free interest rate of 6.44%, and an expected life of 10 years.

    Defined Contribution Retirement Plan.  The Company maintains a defined contribution retirement plan under section 401(k) of the Internal Revenue Code. Employees are eligible to participate following six months of continuous employment. Under the plan, employee contributions were partially matched by the Company through August 31, 1995 and subsequently reinstated May 1, 2000. Such matching contributions becomes fully vested when the employee reaches three years of service. The Company's matching contributions for 2000 was $46,000.

Note 7—Borrowed Funds

    The following summarizes borrowed funds and weighted average rates.

	2000
	Year-end			Average
	Balance		Rate	Balance		Rate
	(Dollars in thousands)
Federal funds purchased and securities sold under repurchase agreements	$	7,500	6.71%	$	998	6.81%
Other borrowings		40,000	6.59%		32,424	6.42%

    The maximum amount of federal funds purchased and securities sold under agreements to repurchase at any month-end was $7.5 million during 2000. The average amount of federal funds purchased and securities sold under agreement to repurchase was $998,000 during 2000.

    Other borrowings are primarily comprised of Federal Home Loan Bank ("FHLB") advances. At December 31, 2000 FHLB advances included: (i) $24.0 million overnight variable rate borrowings, with a weighted average rate of 6.57% based on the federal funds rate; (ii) variable rate borrowings of $5.5 million maturing October 2001 and $8.0 million maturing July 2001 with a weighted average rate of 6.74% based on the London Inter Bank Offering Rate ("LIBOR") index; and (iii) a $2.5 million putable borrowing with a fixed rate of 5.93%, with puts commencing July 2002 and continues every three months thereafter, through July 2004. The maximum amount of other borrowings outstanding at any month-end was $40.0 million during 2000.

    The Bank had $7.2 million of unused borrowing capacity from the FHLB at December 31, 2000.

Note 8—Availability of Funds from Bank; Restrictions on Cash Balances; Capital

    The Company is a legal entity separate and distinct from the Bank. At present, substantially all of the Company's revenues come from interest earned on deposits, investments and loans. Management believes the Company's cash balance plus interest revenues, on a separate-entity basis, are adequate to cover its modest level of operating expenses.

    The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year exceeds the Bank's net income for that year combined with its retained net income for the preceding two years, less any required transfers to surplus.

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    The OCC also has authority to prohibit the Bank from engaging in activities that the OCC regards as unsafe or unsound in conducting its business. It is possible that, depending upon the financial condition of the Bank and other factors, the OCC could assert that the payment of dividends or other payments is, under some circumstances, considered to be an unsafe or unsound practice. Further, future cash dividends by the Bank to the Company will depend upon management's assessment of the Bank's future capital requirements.

    In addition, federal law restricts the Bank's extension of credit to, the issuance of a guarantee or letter of credit on behalf of investments in or taking as collateral stock or other securities of the Company. Restrictions prevent the Company from borrowing from the Bank unless the loans are secured by designated amounts of marketable obligations. Further, secured loans to and investments in the Company or its affiliates by the Bank are limited to 10% of the Bank's capital stock and surplus (as defined by federal regulations) and are limited, in the aggregate, to 20% of the Bank's contributed capital (as defined by federal regulations).

    Federal Reserve Board regulations require the Bank to maintain certain minimum reserve balances. Cash balances maintained to meet reserve requirements are not available for use by the Bank or the Company. During 2000 and 1999 the average reserve balances for the Bank were approximately $2.4 million and $1.3 million, respectively. Neither the Company nor the Bank is required to maintain compensating balances to assure credit availability under existing borrowing arrangements.

    The Company and the Bank are subject to various capital requirements administered by the federal banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory — and possibly additional discretionary — actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company's and the Bank's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification are also subject to qualitative judgment by the regulators about components, risk weightings and other factors.

    Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 2000, the Company and Bank meet all capital adequacy requirements to which they are subject.

    At December 31, 2000, the most recent notification from the OCC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized under the prompt corrective action rules, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the most recent notification which management believes have changed the Bank's category.

    The following table presents, at the dates indicated, certain information regarding the regulatory capital of the Company and the Bank and the required amounts of regulatory capital for the Company

55

and the Bank to meet applicable regulatory capital requirements and, in the case of the Bank, to be well capitalized under the prompt corrective action rules.

		Actual			For Capital Adequacy Purposes			To be Categorized as Well Capitalized under Prompt Corrective Action Rules
		Amount		Ratio	Amount		Ratio	Amount		Ratio
		(Dollars in thousands)
As of December 31, 2000:
Total Capital to Risk Weighted Assets
	Company	$	22,814	18.26%	$	9,997	>=8.0%		n/a
	Bank		19,703	16.00%		9,854	>=8.0%	$	12,318	>=10.0%
Tier 1 Capital to Risk Weighted Assets
	Company		21,239	17.00%		4,998	>=4.0%		n/a
	Bank		18,150	14.74%		4,927	>=4.0%		7,391	>=6.0%
Tier 1 Capital to Average Assets
	Company		21,239	10.73%		7,919	>=4.0%		n/a
	Bank		18,150	9.31%		7,802	>=4.0%		9,752	>=5.0%

Note 9—Commitments and Contingencies

    In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk. These financial instruments include commitments to extend credit, letters of credit and financial guarantees. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount reflected in the consolidated balance sheet.

    Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit, letters of credit and financial guarantees written, is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as is does for on-balance sheet instruments.

    The Company had outstanding loan commitments aggregating $26.1 million at December 31, 2000, substantially all of which were commercial loans with variable rates. In addition, the Company had $731,000 outstanding letters of credit at December 31, 2000.

    Loan commitments are agreements to lend to a customer subject to certain conditions. Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since a portion of the commitments are expected to expire without being drawn upon, the total amount of commitments do not necessarily represent future cash requirements.

    The Company is from time to time is party to lawsuits, which arise in the normal course of business. The Company does not believe that any pending lawsuit at December 31, 2000 will have a material adverse effect on the financial position or results of operations of the Company.

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Note 10—Supplemental Cash Flow Information

    The following information supplements the statements of cash flows for the years ended December 31, 2000 and 1999:

		2000		1999
		(Dollars in thousands)
Interest paid		$	5,004	$	3,491
Income tax paid			22		34
Non-Cash Investing and Financing Transactions:
	Unrealized gain (loss) on securities available-for-sale		1,939		(2,686	)
	Transfers to OREO from loans receivable, net		35		—

Note 11—Disclosures about the Fair Value of Financial Instruments

    The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate that value.

    Cash, cash equivalents and interest bearing deposits:  For these short-term investments, the carrying amount is a reasonable estimation of fair value.

    Securities:  For securities classified as available-for-sale, fair value equals quoted market prices, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

    Loans:  Variable rate loans have carrying amounts that approximate fair value. The fair value of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In establishing the credit risk component of the fair value calculations for loans, the Company concluded the allowance for credit losses represented a reasonable estimate of credit risk component of the fair value at December 31, 2000.

    Deposits:  The fair value of demand and interest checking deposits, money market accounts and savings deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar maturities.

    Borrowed funds:  The carrying value for this relatively short-term debt is a reasonable approximation of its fair value. Borrowings with maturities greater than one year bear interest at variable rates and approximate fair value.

57

    The estimated fair values of financial instruments are presented below.

		December 31, 2000
		Carrying Amount		Fair Value
		(Dollars in thousands)
Financial Assets:
	Cash, cash equivalents and deposits with other financial institutions	$	27,597	$	27,597
	Securities available-for-sale		67,150		67,150
	Loans, net of allowance for credit losses		107,651		107,080
Financial Liabilities:
	Demand deposits, money market and savings		102,434		102,434
	Time certificates of deposit		32,113		32,162
	Federal funds purchased and securities sold under agreements to repurchase		7,500		7,500
	Other borrowings		40,000		39,997

58

Note 12—Parent Company Information

    The following financial information presents the condensed balance sheet of the Company on a parent-only basis as of December 31, 2000, and the related condensed statements of operations and cash flows for each of the years in the two-year period ended December 31, 2000.

Balance Sheet			December 31, 2000
			(Dollars in thousands)
Cash with Bank			$	76
Federal Funds				1,700
Loan receivable				1,300
Investment in the Bank				17,614
Other assets				13
		Total assets	$	20,703
Liabilities			$	—
Shareholders' equity:
	Preferred stock			6,292
	Common stock			29,905
	Accumulated deficit			(14,958	)
	Accumulated other comprehensive loss			(536	)
	Total shareholders' equity			20,703
		Total liabilities and shareholder's equity	$	20,703

		Year ended December 31,
Statements of Operations		2000		1999
		(Dollars in thousands)
Interest income		$	142	$	195
Other income			—		—
Total operating income			142		195
Other operating expense			—		1
	Income before equity in undistributed net income of the Bank		142		194
Equity in undistributed net income of the Bank			2,802		820
Net income		$	2,944	$	1,014

59

			Year ended December 31,
Statements of Cash Flows			2000			1999
			(Dollars in thousands)
Cash flows from operating activities:
	Net income		$	2,944		$	1,014
		Adjustment to reconcile net income to net cash provided by operating activities.:
		Equity in undistributed net income of the Bank, net		(2,802	)		(820	)
		Other, net		(10	)		12
		Net cash provided by operating activities		132			206
Cash flows from investing activities:
	Investment in Bank			(2,400	)		(2,400	)
	Purchase of loans participated and principal collections, net			(804	)		2,410
		Net cash (used in) provided by investing activities		(3,204	)		10
Cash flows from financing activities:
	Proceeds from issuance of common stock			4,190			—
	Proceeds from stock options exercised			43			1
		Net cash provided by financing activities		4,233			1
Net increase in cash and cash equivalents				1,161			217
Cash and cash equivalents, beginning of the year				615			398
Cash and cash equivalents, end of the year			$	1,776		$	615

60

INDEX TO EXHIBITS

Exhibit No.
3.1	Amended and Restated Articles of Incorporation, dated June 20, 1997 (1); Certificate of Amendment of the Articles of Incorporation, filed May 4, 2000 *
3.2	Bylaws of the Company, as amended, restated as of December 18, 1992 (2)
10.1	Employment Agreement dated January 1, 2000 between Mercantile National Bank and Scott A. Montgomery (3)
10.2	Form of Indemnity Agreement between the Company and its directors (4)
10.3	First Floor Lease at 1840 Century Park East, Los Angeles, California, dated as of December 21, 1982 between Northrop Corporation and Mercantile National Bank (2)
10.4	Second Floor Lease at 1840 Century Park East, Los Angeles, California, dated as of December 21, 1982 between Northrop Corporation and Mercantile National Bank for space at 1840 Century Park East, Los Angeles, California, as amended by Amendment to Second Floor Lease dated as of June 7, 1986, and as amended by Second Amendment to Second Floor Lease dated as of December 18, 1992 between California State Teachers' Retirement System and Mercantile National Bank (2)
10.5	Lease Restructure Agreement dated December 31, 1995 by and between California State Teachers' Retirement System and Mercantile National Bank (5)
10.6	Warrant Agreement dated December 31, 1995 by and between the Company and California State Teachers' Retirement System (5)
10.7	Registration Rights Agreement dated December 31, 1995 by and between the Company and California State Teachers' Retirement System (5)
10.8	National Mercantile Bancorp Amended 1996 Stock Incentive Plan (6)
10.9	Registration Rights Agreement between the Company and Conrad Company (7)
10.10	Registration Rights Agreement between the Company and Wildwood Enterprises Inc. Profit Sharing Plan and Trust (7)
11.	Statement regarding computation of per share earnings (see "Note 1 — Summary of Significant Accounting Policies — Earnings (Loss) Per Share" — of the "Notes to the Consolidated Financial Statements" in "Item 8. Financial Statements" in this Annual Report on Form 10-KSB)
21.	Subsidiaries of the Registrant*

*

Included in this Report

(1)

Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1997.

(2)

Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference.

(3)

Filed as an exhibit to the Company's Report on Form 10-Q for the quarter ended March 31, 1999 and incorporated herein by reference.

(4)

Filed as an exhibit to Company's Annual Report on Form 10-K for the year ended December 31, 1990 and incorporated herein by reference.

(5)

Filed as an exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 and incorporated herein by reference.

(6)

Filed as an exhibit to the Company's Report on Form 10-Q for the quarter ended March 31, 1998 and incorporated herein by reference.

(7)

Filed as an exhibit to the Company's Registration Statement on Form S-2 dated February 10, 1997 and amendments thereto and incorporated herein by reference.

61

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Form 10-KSB
NATIONAL MERCANTILE BANCORP Table of Contents Form 10-KSB For the Fiscal Year Ended December 31, 2000
PART I

ITEM 1. BUSINESS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Operating Expenses

ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

PART III

ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

PART IV

ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

SIGNATURES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
NATIONAL MERCANTILE BANCORP AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO EXHIBITS

EX-3.1

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EXHIBIT 3.1

CERTIFICATE OF AMENDMENT
OF THE
ARTICLES OF INCORPORATION
OF
NATIONAL MERCANTILE BANCORP

    The undersigned do hereby certify that:

1.

They are the president and chief executive officer, and executive vice president - operations and chief financial officer, respectively, of National Mercantile Bancorp (hereinafter called the "Corporation"), a corporation organized and existing under and by virtue of the provisions of the laws of the State of California.

2.

The Corporation filed Amended and Restated Articles of Incorporation on June 20, 1997.

3.

Paragraph (D) of Article XIII of the Amended and Restated Articles of Incorporation is amended to read in its entirety as follows:

(D) Termination. This Article XIII shall have no applicability and shall be of no force and effect, notwithstanding notations to the contrary on any certificates evidencing ownership of any securities of the Corporation, (i) on or after July 1, 2003 or (ii) upon the occurrence of any transaction in which holders of all outstanding shares of capital stock receive, or are offered the opportunity to receive, cash, stock or other property for all such shares and upon the consummation of which the acquirer will own at least a majority of the outstanding shares of capital stock.

4.

The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the Board of Directors of the Corporation.

5.

The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 of the General Corporation Law of the State of California. The total number of outstanding shares of Common Stock is 892,437; the total number of outstanding shares of Preferred Stock is 792,379, all such shares consisting of Series A Noncumulative Convertible Preferred Stock. The votes entitled to be cast by the outstanding shares of Common Stock and Preferred Stock in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the outstanding shares.

    We further declare under penalty of perjury under the laws of the State of California that the matters set forth in this Certificate are true and correct of our own knowledge.

Date: May 2, 2000
/s/ Scott A. Montgomery	/s/ Joseph W. Kiley III	[SEAL]
Scott A. Montgomery President and Chief Executive Officer	Joseph W. Kiley III Executive Vice President - Operations and Chief Financial Officer

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CERTIFICATE OF AMENDMENT OF THE ARTICLES OF INCORPORATION OF NATIONAL MERCANTILE BANCORP

EX-21

EXHIBIT 21

Subsidiaries of the Registrant

Mercantile National Bank
1840 Century Park East
Los Angeles, California 90067