U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2003 Commission File Number: 0-15982

NATIONAL MERCANTILE BANCORP

(Exact name of small business issuer as specified in its charter)

California		95-3819685
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

1840 Century Park East, Los Angeles, California		90067
(Address of principal executive offices)		(Zip Code)

Issuer’s telephone number, including area code (310) 277-2265

Indicate by check mark whether the issuer (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.

YES

APPLICABLE ONLY TO CORPORATE ISSUERS:

The number of shares outstanding of the issuer’s Common Stock, no par value, as of August 14, 2003 was 2,700,929.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30, 2003			December 31, 2002
	(Unaudited)
	(Dollars in thousands)
ASSETS
Cash and due from banks-demand	$	18,625		$	18,876
Federal funds sold and securities purchased under agreements to resell	39,900			18,700
Cash and cash equivalents	58,525			37,576
Securities available-for-sale, at fair value; aggregate amortized cost of $21,548 and $25,824 at June 30, 2003 and December 31, 2002, respectively	21,674			26,170
Due from banks-time	325			325
FRB and other stock, at cost	1,866			2,018
Loans receivable	266,150			272,323
Allowance for credit losses	(3,452		)	(4,846		)
Net loans receivable	262,698			267,477

Premises and equipment, net	5,639			5,836
Other real estate owned	1,000			1,000
Deferred tax asset	8,087			7,984
Goodwill	2,174			2,174
Core deposit intangibles, net	1,965			2,077
Accrued interest receivable and other assets	2,350			2,748
Total assets	$	366,303		$	355,385

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	123,569		$	107,580
Interest-bearing demand	27,644			30,465
Money market	51,272			43,134
Savings	46,783			42,182
Time certificates of deposit:
$100,000 or more	30,147			43,006
Under $100,000	32,536			32,358
Total deposits	311,951			298,725

Federal funds purchased and securities sold under agreements to repurchase	395			1,476
Other borrowings	7,500			7,500
Accrued interest payable and other liabilities	1,206			1,950
Total liabilities	321,052			309,651

Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures, net	14,538			14,530

Shareholders’ equity:
Preferred stock, no par value – authorized 1,000,000 shares:
Series A non-cumulative convertible perpetual preferred stock; authorized 990,000 shares; outstanding 732,785 shares and 734,985 shares at June 30, 2003 and December 31 2002, respectively	5,985			6,003
Series B non-cumulative convertible perpetual preferred stock; authorized 1,000 shares; outstanding 1,000 shares	1,000			1,000
Common stock, no par value; authorized 10,000,000 shares; outstanding 2,696,729 and 2,679,544 shares at June 30, 2003 and December 31, 2002, respectively	38,131			38,054
Accumulated deficit	(14,476		)	(14,055		)
Accumulated other comprehensive income	73			202
Total shareholders’ equity	30,713			31,204
Total liabilities and shareholders’ equity	$	366,303		$	355,385

See accompanying notes to consolidated financial statements.

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2003			2002			2003			2002
	(Dollars in thousands, except per share data)
Interest income:
Loans, including fees	$	4,090		$	4,361		$	8,207		$	8,752
Securities available-for-sale	159			447			409			930
Federal funds sold and securities purchased under agreements to resell	133			129			176			256
Total interest income	4,382			4,937			8,792			9,938
Interest expense:
Interest-bearing demand	28			85			89			157
Money market and savings	254			371			555			699
Time certificates of deposit:
$ 100,000 or more	119			194			266			501
Under $100,000	237			355			519			760
Total interest expense on deposits	638			1,005			1,429			2,117
Federal funds purchased and securities sold under agreements to repurchase	3			58			11			95
Other borrowings	89			146			178			296
Total interest expense	730			1,209			1,618			2,508
Net interest income before provision for credit losses	3,652			3,728			7,174			7,430
Provision for credit losses	1,145			150			1,255			300
Net interest income after provision for credit losses	2,507			3,578			5,919			7,130
Other operating income:
Net gain on sale of securities available-for-sale	—			—			100			—
International services	7			14			15			19
Investment division	22			20			44			42
Deposit-related and other customer services	316			252			621			621
Gain (loss) on sale of OREO/fixed assets	(61		)	—			(61		)	—
Total other operating income	284			286			719			682
Other operating expenses:
Salaries and related benefits	1,843			1,766			3,670			3,405
Net occupancy	344			349			673			722
Furniture and equipment	125			113			234			214
Printing and communications	133			139			262			311
Insurance and regulatory assessments	84			87			195			178
Client services	142			255			320			446
Computer data processing	249			284			465			512
Legal services	117			206			260			380
Other professional services	182			243			407			317
Amortization of core deposit intangible	56			—			112			—
Promotion and other expenses	135			(43		)	222			197
Total other operating expenses	3,410			3,399			6,820			6,682
Income before income tax provision and minority interest	(619		)	465			(182		)	1,130

Minority interest in the Company’s income of the:
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures, net	223			389			456			773
Series A Preferred Stock of South Bay Bank, N.A.	—			106			—			106

Income (loss) before income tax (benefit) provision	(842		)	(30		)	(638		)	251

Income tax (benefit) provision	(323		)	32			(216		)	138
Net income (loss)	$	(519	)	$	(62	)	$	(422	)	$	113
Income (loss) available to common shareholders (net income (loss) less accretion of discount of minority interest in subsidiary preferred stock of $72,000 and $151,000 for the three months and six months ended June 30, 2002)	$	(519	)	(134		)	$	(422	)	(38		)
Loss per share:
Basic	$	(0.19	)	$	(0.08	)	$	(0.16	)	$	(0.02	)
Diluted	$	(0.19	)	$	(0.08	)	$	(0.16	)	$	(0.02	)

See accompanying notes to consolidated financial statements.

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended June 30,
	2003			2002
	(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)	$	(422	)	$	113
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization	246			183
Provision for credit losses	1,255			300
Gain on sale of securities available for sale	(100		)	—
Loss on sales of OREO	61			—
Net amortization of premium on securities available-for-sale	113			87
Net amortization of core deposit intangible	112			—
Net amortization of premium (discount) on loans purchased	143			186
Decrease in accrued interest receivable and other assets	387			798
Decrease in accrued interest payable and other liabilities	(744		)	(876		)
Net cash provided by operating activities	1,051			791
Cash flows from investing activities:
Purchase of securities available-for-sale	(14,536		)	(2,539		)
Proceeds from sales of securities available-for-sale	2,757			—
Proceeds from repayments and maturities of securities available-for-sale	16,042			14,668
Proceeds from sales of OREO	474			—
Loan originations and principal collections, net	2,846			4,116
Redemption of Federal Reserve stock and other stocks	152			329
Purchases of premises and equipment	(41		)	(170		)
Net cash provided by investing activities	7,694			16,404
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts	25,907			8,924
Net decrease in time certificates of deposit	(12,681		)	(19,002		)
Net decrease in securities sold under agreements to repurchase and federal funds purchased	(1,081		)	(1,123		)
Net decrease in other borrowings	—			(2,000		)
Net proceeds from exercise of stock options	59			27
Net cash provided by (used in) financing activities	12,204			(13,174		)
Net increase in cash and cash equivalents	20,949			4,021
Cash and cash equivalents, January 1	37,576			52,093
Cash and cash equivalents, June 30	$	58,525		$	56,114

Supplemental disclosures of cash flow information:
Cash paid for Interest	$	2,207		$	2,454
Transfers to OREO from loans receivable, net	$	535		$	—

See accompanying notes to consolidated financial statements.

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS

The unaudited consolidated financial statements include the accounts of National Mercantile Bancorp (the ‘‘Company’’) and its wholly owned subsidiaries, Mercantile National Bank, South Bay Bank, N.A., and National Mercantile Capital Trust I. The unaudited consolidated financial statements reflect all interim adjustments, which are of a normal recurring nature and which, in management’s opinion, are necessary for the fair presentation of the Company’s consolidated financial position and results of operations and cash flows for such interim periods. The results for the three and six months ended June 30, 2003 are not necessarily indicative of the results expected for any subsequent period or for the full year ending December 31, 2003. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2002.

In December 2002 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, (“SFAS No. 148”), Accounting for Stock-Based Compensation-Transition and Disclosure. SFAS No. 148 amends Statement of Financial Accounting Standards No. 123, (“SFAS No. 123”), Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No.148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The transition guidance and annual disclosure provisions are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. The Company adopted the provisions of SFAS No. 148 effective in the first quarter of 2003.

The estimated per share weighted average fair value of options granted was $4.81 and $4.17 for the three months ended June 30, 2003 and 2002, respectively. The estimated per share weighted average fair value of options granted was $4.73 and $3.79 for the six months ended June 30, 2003 and 2002, respectively. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for the stock incentive plans. SFAS No. 123, Accounting for Stock-Based Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value. Accordingly, no compensation cost has been recognized for the plans. 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 the three months ended June 30, 2003 and 2002 and the six months ended June 30, 2003 and 2002 would have decreased by $28,000 and $23,000, and $66,000 and $46,000 respectively. Basic and diluted loss per share would have increased by $0.01 for the three months ended June 30, 2003 and by $0.02 for the six months ended June 30, 2003. Basic loss per share would have increased by $0.02 for the three months ended June 30, 2002 and by $0.03 for the six months ended June 30, 2002 and diluted loss per share would have remained unchanged.

The fair values of options granted during the three months ended June 30, 2003 and 2002 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: 2003— no dividend yield, expected volatility of 59%, risk-free interest rate of 3.50%, and an expected life of 10 years; 2002— no dividend yield, expected volatility of 64%, risk-free interest rate of 4.81%, and an expected life of 10 years.

NOTE 2—EARNINGS PER SHARE

Basic earnings or loss 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 and diluted loss per share for the three months ended June 30, 2003 and 2002 was 2,695,366 and 1,631,451, respectively and 2,691,485 and 1,629,320, respectively, for the six months ended June 30, 2003 and 2002. Common share equivalents have not been included in the loss per share computation as they are anti-dilutive.

The following table is a reconciliation of income and shares used in the computation of basic and diluted loss per share:

	Earnings available to shareholders			Weighted Average Shares	Per share amount
	(in thousands)
For the three months ended June 30, 2003:
Basic and diluted loss per share	$	(519	)	2,695,366	$	(0.19	)

For the three months ended June 30, 2002:
Basic and diluted loss per share	$	(134	)	1,631,451	$	(0.08	)

For the six months ended June 30, 2003:
Basic and diluted loss per share	$	(422	)	2,691,485	$	(0.16	)

For the six months ended June 30, 2002:
Basic and diluted loss per share	$	(38	)	1,629,320	$	(0.02	)

NOTE 3—CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks-demand and federal funds sold.

NOTE 4—ALLOWANCE 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 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 performs a periodic risk and credit analysis, the results of which are reported to the Board of Directors. Loans charged off during the three months ended June 30, 2003 were $2.4 million compared to $401,000 during the three months ended June 30, 2002. Recoveries of loans previously charged off were $54,000 during the three months ended June 30, 2003 compared to $176,000 for the same period in 2002. Loans charged off during the six months ended June 30, 2003 were $2.8 million compared to $1.8 million during the six months ended June 30, 2002. Recoveries of loans previously charged off were $194,000 during the six months ended June 30, 2003 compared to $336,000 for the same period in 2002.

The following sets forth information concerning the Company's allowance for credit losses for the periods indicated.

	Three months ended				Six months ended
	June 30, 2003		June 30, 2002		June 30, 2003		June 30, 2002
	(Dollars in thousands)				(Dollars in thousands)
Balance, beginning of period	$	4,694	$	5,449	$	4,846	$	6,542
Loans charged off:
Real estate construction and land development	—		—		—		31
Commercial loans:
Secured by one to four family residential properties	15		—		38		—
Secured by commercial real properties	75		—		75		—
Other – secured and unsecured	2,318		400		2,697		1,742
Consumer installment and unsecured loans to individuals	33		1		33		31

Total loans charged-off	2,441		401		2,843		1,804

Recoveries of loans previously charged off:
Real estate construction and land development	—		84		—		191
Commercial loans:
Secured by commercial real properties	—		—		—		—
Other – secured and unsecured	47		47		133		95
Consumer installment and unsecured loans to individuals	7		45		61		50
Total recoveries of loans previously charged off	54		176		194		336
Net charge-offs	2,387		225		2,649		1,468
Provision for credit losses	1,145		150		1,255		300
Balance, end of period	$	3,452	$	5,374	$	3,452	$	5,374

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 that 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 Office of the Comptroller of the Currency, as an integral part of its examination process, periodically reviews the allowance for credit losses and could require additional provisions for credit losses.

NOTE 5—GOODWILL AND OTHER INTANGIBLE ASSETS

As of June 30, 2003 and December 31, 2002, the Company had goodwill of $2.2 million, and net core deposit intangibles of $2.0 million and $2.1 million, respectively, from the South Bay Bank acquisition. The gross carrying amount of core deposit intangibles was $2.3 million at June 30, 2003 and December 31, 2002, and accumulated amortization was $339,000

and $223,000, respectively, at such dates. The core deposit intangibles are estimated to have a life of 10 years and 4 months. Amortization for intangibles for 2003 and each of the next four years is estimated to be $223,000 per year. In accordance with SFAS No. 142 goodwill is not amortized. The Company has no other indefinite-lived intangible assets.

NOTE 6—INCOME TAXES

Income tax benefit of $323,000 and provision of $32,000 were recorded for the three months ended June 30, 2003 and 2002, respectively. Income tax benefit of $216,000 and provision of $138,000 were recorded for the six months ended June 30, 2003 and 2002, respectively. The difference between the statutory tax rate and the effective tax rate for the three and six months ended June 30, 2003 is due to the amortization of the core deposit intangible not being deductible for tax purposes.

At June 30, 2003, the Company had: (i) federal net operating loss carry forwards (“NOLS”) of approximately $17.9 million, which begin to expire in the year 2009; (ii) California NOLS of $559,000 which will expire in 2005; (iii) a federal alternative minimum tax “AMT” credit of $298,000; and (iv) a California AMT of $16,000. The AMT credits carry forward indefinitely.

NOTE 7—BENEFICIAL CONVERSION RIGHTS OF SUBSIDIARY PREFERRED STOCK

In connection with its acquisition of South Bay Bank in December 2001, the Company recorded $1.8 million additional paid in capital, with a corresponding discount to the minority interest in the South Bay Series A Preferred stock, which remained outstanding following the acquisition, related to the beneficial conversion rights of such preferred stock. The discount was being amortized against retained earnings over the period from the acquisition date through the earliest possible conversion date of the preferred stock, June 30, 2005, using the effective yield method. For the three months and six months ended June 30, 2002 the amount of the discount amortized against retained earnings was $72,000 and $151,000, respectively. The amortization of the discount was netted against net income to determine income available to common shareholders for earnings per share in the 2002 period. The South Bay Series A Preferred stock was fully redeemed in December 2002.

NOTE 8—COMPREHENSIVE INCOME

Comprehensive income is comprised of net income and all changes to shareholders’ equity, except those changes resulting from investments by shareholders and distributions to shareholders. Total comprehensive income is as follows:

	For the three months ended June 30,						For the six months ended June 30,
	2003			2002			2003			2002
Net income (loss)	$	(519	)	$	(62	)	$	(422	)	$	113

Other comprehensive income, before tax, and
unrealized losses on securities:
Unrealized gain (loss) on securities available for sale	(32		)	496			(220		)	292
Other comprehensive income (loss), before tax	(32		)	496			(220		)	292

Income tax benefit (expense) related to items of other
comprehensive income	13			(203		)	91			(120		)
Other comprehensive loss	(19		)	293			(129		)	172
Total comprehensive income	$	(538	)	$	231		$	(551	)	$	285

NOTE 9—JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

In 2001, the Company, through National Mercantile Capital Trust I (the “Trust”), issued 15,000 of 10.25% fixed rate securities (the “Trust Preferred Securities”), with a liquidation amount of $1,000 per Trust Preferred Security and an aggregate liquidation amount of $15.0 million due July 25, 2031. The Trust Preferred Securities represent undivided beneficial interests in the assets of the Trust and are unconditionally guaranteed by the Company with respect to distributions and payments upon liquidation, redemption and otherwise pursuant to the terms of a guarantee agreement.

The primary assets of the Trust are $15.5 million aggregate principal amount of the Company’s 10.25% fixed rate junior subordinated deferrable interest debentures due July 25, 2031 that pay interest each January 25 and July 25. The interest is deferrable, at the Company’s option, for a period up to ten consecutive semi-annual payments, but in any event not beyond June 25, 2031. The debentures are redeemable, in whole or in part, at the Company’s option on or after five years from issuance at declining premiums to maturity.

The costs associated with the Trust Preferred Securities issuance have been netted against the proceeds and are being accreted using a method that approximates the interest method over a period of thirty years. The recorded balance of Trust Preferred Securities was $14.5 million at June 30, 2003 and December 31, 2002.

NOTE 10—DERIVATIVE FINANCIAL INSTRUMENTS

In January 2003, the Company entered into a interest rate swap agreement pursuant to which it exchanged a fixed rate payment obligation of 10.25% on a notional principal amount of $15.0 million for a floating rate interest based on the six-month London InterBank Offered Rate plus 458 basis points for a 29-year period ending July 25, 2031. The interest rate swap agreement results in the Company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amounts. The differential paid or received on the interest rate swap is recognized as an adjustment to interest expense. At July 25, 2003, the Company was paying an interest rate of 5.70% under the terms of the swap which will reduce its interest expense $642,000 for the twelve months ended December 31, 2003. The counter party to the swap has the option to call the swap under a declining premium schedule beginning July 2006.

The interest rate swap reduces the adverse impact of the Company’s 10.25% fixed rate Trust Preferred Securities in a declining interest rate environment. The Company does not utilize derivatives for speculative purposes. Under Statement of Financial Accounting Standards No. 133 this swap transaction is designated as a fair value hedge. Accordingly, the ineffective portion of the change in the fair value of the swap transaction is recorded each period in current income. The terms of the swap are symmetrical with the terms of the Trust Preferred Securities, including the payment deferral terms, and considered highly effective in offsetting changes in fair value of the Trust Preferred Securities. Accordingly, an $269,000 increase in the fair value of the swap was recorded in income for the three-month period ended June 30, 2003 and an $456,000 increase in the fair value of the swap was recorded in income for the six-month period ended June 30, 2003 with an offsetting charge to earnings to reflect a similar increase in the fair value of the Trust Preferred Securities. No ineffectiveness was recorded to current earnings related to the interest rate swap.

NOTE 11—PREFERRED STOCK

In the first quarter of 2003, 2,200 shares of Series A non-cumulative convertible perpetual preferred stock were converted to 4,400 shares of common stock as reflected in the Shareholders’ equity section of the Consolidated balance sheets.

NOTE 12—RECLASSIFICATIONS

Certain prior year data have been reclassified to conform to current year presentation.

NOTE 13—ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, also known as FIN No. 46. FIN No. 46 changes the consolidation requirements by requiring a variable interest entity to be consolidated by a company if that company is subject to the majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. In addition, FIN No. 46 requires disclosures about variable interest entities that the company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN No. 46 apply to variable interest entities created after January 31, 2003 and apply to existing variable interest entities in the first fiscal year or interim period beginning after June 15, 2003.

In order to comply with FIN No. 46 the Company will be required to restate consolidated balance sheets and consolidated statements of operations, to show the junior subordinated debentures as other liabilities and other interest expense, respectively, but it will not have a material effect on the company.

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, also known as SFAS No. 150. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires than an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. The Adoption of SFAS No. 150 will not have a material effect on our earnings or financial position.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

National Mercantile Bancorp (“National Mercantile” on a parent-only basis, and the ‘‘Company’’ on a consolidated basis) is the holding company for two subsidiary banks, Mercantile National Bank (“Mercantile”) and South Bay Bank, N.A. (“South Bay”) (and collectively, “the Banks”). National Mercantile’s principal assets are the capital stock of Mercantile and South Bay. National Mercantile Capital Trust I (the “Trust”) is a Delaware statutory business trust formed for the exclusive purpose of issuing and selling trust preferred securities and also is a consolidated subsidiary of the Company.

RESULTS OF OPERATIONS

The Company recorded a net loss of $519,000, or $0.19 basic and diluted loss per share, for the three months ended June 30, 2003 compared to a net loss of $62,000, or $0.08 basic and diluted loss per share, for the same period of 2002. The increase in net loss for the 2003 period was primarily due to a $1.0 million increase in provision for credit losses partially offset by a $106,000 decrease in the minority interest in the Company’s income of the preferred stock of South Bay and a decline in the provision for income taxes of $355,000.

Net loss for the six months ended June 30, 2003 was $422,000, or $0.16 basic and diluted loss per share, compared to a net income of $113,000 for the same period of 2002. On a per share basis, the results for the six months ended June 30, 2002 was $0.02 basic and diluted loss per share, due to a $151,000 charge against income available to shareholders relating to the amortization of the discount on the preferred stock of South Bay. The increase in net loss was primarily due to a $1.0 million increase in the provision for credit losses and a $138,000 increase in operating expenses partially offset by a $106,000 decrease in the minority interest in the Company’s income of the preferred stock of South Bay and a decline in the provision for income taxes of $354,000.

Return on average assets during the second quarter and first half of 2003 was a minus 0.56% and 0.24%, respectively, compared to minus 0.07% and a positive 0.06% during the second quarter and first half of 2002, respectively. Return on average equity during the second quarter and first half of 2003 was a minus 6.58% and 2.70%, respectively, compared to a minus 0.97% and a positive 0.89% during the second quarter and first half of 2002, respectively.

NET INTEREST INCOME

Net interest income before the provision for credit losses for the three months ended June 30, 2003 and 2002 was $3.7 million. While net interest income before the provision for credit losses was nearly unchanged for the periods, total interest income decreased $555,000 in the 2003 period, despite $9.3 million greater average interest earning assets, due to a lower weighted average yield on interest-earning assets. The weighted average yield on earning assets was 5.34% for the quarter ended June 30, 2003 compared to 6.19% for the same period in 2002 representing an 85 basis point decline. The decline in interest income was fully offset by (i) a $367,000 decrease in interest expense on deposits due to $4.8 million lower average balance and a 71 basis point lower weighted average cost of interest-bearing deposits and (ii) a $55,000 decrease in interest expense on federal funds purchased and securities sold under agreements to repurchase and (iii) a $57,000 decrease in interest expense on other borrowings. The weighted average cost of interest bearing liabilities was 1.47% for the quarter ended June

30, 2003 compared to 2.26% for the same period in 2002 representing a 79 basis point decline. The lower yields and costs were due to the Federal Reserve’s reduction in target federal funds rate during the past several years in response to the slow economy and the related impact upon market rates of interest.

Federal funds sold and securities available-for-sale averaged $41.4 million and $21.1 million, respectively, for the three months ended June 30, 2003 compared to $29.9 million and $31.3 million, respectively, for the second quarter in 2002. The decrease in average securities available-for-sale and a $22.6 million increase in average noninterest bearing deposits funded the increase in average federal funds sold and an $8.0 million increase in average loans receivable as well as a $14.9 million decrease in interest bearing liabilities. The relative increase in federal funds sold and decrease in securities available-for-sale was due to a strategic decision by management based upon its assessment of relative risks, particularly market value risk.

The net yield on earning assets was 4.45% for the three months ended June 30, 2003 compared to 4.68% for the same period in 2002 due to a change in mix of interest earning assets to lower yielding asset types and the overall decline in yields. Partially mitigating the decline in net yield on earning assets was an overall decline in deposit rates, a change in deposit mix to lower costing deposits, and an increase in noninterest-bearing demand deposits.

Net interest income was $7.2 million for the six months ended June 30, 2003 compared to $7.4 million for the same period in 2002. While net interest income decreased slightly for the periods, total interest income decreased $1.1 million due to lower weighted average yield in interest-earning assets and lower average interest earning assets. The weighted average yield on earning assets was 5.54% for the six months ended June 30, 2003 compared to 6.24% for the same period in 2002 representing a decline of 70 basis points. The decline in interest income was partially offset by (i) a $688,000 decrease in interest expense on deposits due to a 62 basis point lower weighted average cost of interest-bearing deposits and (ii) a $202,000 decrease in interest expense on federal funds purchased and securities sold under agreements to repurchase and other borrowings. The weighted average cost of interest bearing liabilities was 1.65% for the six months ended June 30, 2003 compared to 2.33% for the same period in 2002 representing a decline of 68 basis points. The lower yields and costs were due to the Federal Reserve’s reduction in target federal funds rate during the past several years in response to the slow economy and the related impact upon market rates of interest.

Federal funds sold and securities available-for-sale averaged $28.2 million and $23.7 million, respectively, for the six months ended June 30, 2003 compared to $30.7 million and $33.3 million, respectively, for the six months ended June 30, 2002. The decrease in average federal funds sold and securities available-for-sale, as well as a $12.3 million increase in money market and savings deposits, in the 2003 period compared to 2002 funded a $10.8 million increase in loans receivable and a

$22.6 million decrease in relatively high-costing time certificates of deposit and a $7.6 million decrease in other borrowings. The increase in loans receivable and decrease in securities available for sale reflects management’s emphasis on growth in higher yielding earning assets and its strategic decision to reduce risk exposure to securities available for sale, particularly market value risk. The change in the mix of interest bearing liabilities – an increase in noninterest bearing demand deposits and money market deposits and a decrease in time certificates of deposits – reflects management’s emphasis to grown business banking, principally at South Bay Bank, in order to generate lower costing transactional deposits.

The net yield on interest-earning assets decreased from 4.67% to 4.52% due to an overall decline in yields on interest earning assets, partially offset by overall declines in deposit rates, a change in deposit mix to lower costing deposits, and an increase in noninterest bearing demand deposits.

Average loans receivable increased $8.0 million or 3.1% for the three months ended June 30, 2003 compared to the same period in 2002. The weighted average yield on loans receivable declined 61 basis points to 6.16% for the second quarter 2003. The lower yields on loans receivable are due to the sustained decline in interest rates over the past two years affecting the yields on adjustable rate loans tied to rate indices as well as the yields on newly originated fixed rate loans and existing fixed rate loans upon renewal at maturity.

Securities available for sale decreased $10.2 million or 32.5% for the three months ended June 30, 2003 compared to the same period 2002, in order to fund higher yielding loans, reduce higher cost funding sources and to reduce the exposure to a decline in market value in the event that market rates begin to rise. The weighted average yield on securities available for sale was 3.01% and 5.71% for the three months ended June 30, 2003 and 2002, respectively, representing a 270 basis point decline. The decline in yield was due to purchases of securities in the declining rate environment during 2002 and to a lesser extent, adjustable rate securities in the portfolio. Federal funds sold averaged $41.4 million and yielded 1.29% during the second quarter of 2003 compared to an average of $29.9 million yielding 1.73% for the same period in 2002.

Average loans receivable increased $10.8 million or 4.2% for the six months ended June 30, 2003 compared to the same period in 2002. The weighted average yield on loans receivable declined 68 basis points to 6.18% for the six months ended June 30, 2003. The lower yields on loans receivable are due to the sustained decline in interest rates over the past two years affecting the yields on adjustable rate loans tied to rate indices as well as the yields on newly originated fixed rate loans and existing fixed rate loans upon renewal at maturity. Securities available for sale decreased $9.5 million or 28.6% for the six months ended June 30, 2003 compared to the same period in 2002, in order to fund higher yielding loans, reduce higher cost funding sources and to reduce the exposure to a decline in market value in the event that market rates begin to rise. The

weighted average yield on securities available for sale was 3.44% and 5.64% for the six months ended June 30, 2003 and 2002, respectively, representing a 220 basis point decline for the six months ended June 30, 2003. The decline in yield was due to purchases of securities in the declining rate environment during 2002 and to a lesser extent, adjustable rate securities in the portfolio. Federal funds sold averaged $28.2 million and yielded 1.26% during the six months ended June 30, 2003 compared to an average of $30.7 million yielding 1.68% for the same period in 2002.

Average total deposits increased $17.8 million or 6.0% to $313.7 million during the second quarter of 2003 compared to $295.9 million during the second quarter of 2002. Federal funds purchased and securities sold under agreements to repurchase averaged $538,000 and $2.8 million for the three months ended June 30, 2003 and 2002, respectively. Average total other borrowings decreased $7.8 million or 50.9% to $7.5 million during the quarter ended June 30, 2003 compared to $15.3 million during the quarter ended June 30, 2002 reflecting a planned reduction in these relatively high cost funds provided for by a reduction in securities available for sale. Other borrowings included advances from the Federal Home Loan Bank and they were not renewed upon maturity.

Average total deposits increased $5.1 million or 1.7% to $303.0 million during the six months ended June 30, 2003 compared to $297.9 million during the six months ended June 30, 2002. Federal funds purchased and securities sold under agreements to repurchase averaged $834,000 and $3.0 million for the six months ended June 30, 2003 and 2002, respectively. Average total other borrowings decreased $7.6 million or 50.2% to $7.5 million during the six months ended June 30, 2003 compared to $15.1 million during the six months ended June 30, 2002 reflecting a planned reduction in these relatively high cost funds provided for by a reduction in securities available for sale.

The weighted average cost of interest bearing liabilities declined 79 basis points to 1.47% during the second quarter of 2003 from 2.26% the during the second quarter of 2002. This change was a result of a decrease in the weighted average cost of interest bearing deposits to 1.34% during the first quarter of 2003 compared to 2.05% during the first quarter of 2002. The decline in the weighted average cost of deposits was due to a lower volume of higher-costing time certificates of deposit as well as lower rates on deposits. The change in the composition of deposits reflects growth in escrow and title company deposits due to the strong residential real estate market and mortgage refinancing activity and secondarily due to management’s emphasis on business banking at South Bay, which resulted in lower cost transaction deposit accounts.

The weighted average cost of interest bearing liabilities declined 68 basis points to 1.65% during the six months ended June 30, 2003 from 2.33% the during the six months ended June 30, 2002. This change was a result of a decrease in the weighted average cost of interest bearing deposits to 1.52% during the six months ended June 30, 2003 compared to 2.14%

during the six months ended June 30, 2002. The decline in the weighted average cost of deposits was due to a lower volume of higher-costing time certificates of deposit as well as lower rates on deposits. The change in the composition of deposits reflects management’s emphasis on business banking at South Bay, which resulted in lower cost transaction deposit accounts.

The weighted average cost of other borrowings was 4.76% during the second quarter of 2003 compared to 3.83% during the second quarter of 2002. The increase was due to the maturity of lower costing borrowings.

The weighted average cost of other borrowings was 4.79% during the six months ended June 30, 2003 compared to 3.96% during the six months ended June 30, 2002. The increase was due to the maturity of lower costing borrowings

Average noninterest-bearing demand deposits increased $22.6 million or 22.7% during the second quarter 2003 to $122.1 million from $99.5 million due to management’s emphasis on growth in business banking.

Average noninterest-bearing demand deposits increased $15.4 million or 15.7% during the six months ended June 30, 2003 to $113.9 million from $98.5 million primarily as a result of growth in escrow and title company deposits due to the strong residential real estate market and mortgage refinancing activity.

The following table presents the components of net interest income for the three months ended June 30, 2003 and 2002.

	Three months ended
	June 30, 2003							June 30, 2002
	Average Amount			Interest Income/Expense		Weighted Average Yield/Rate		Average Amount			Interest Income/Expense		Weighted Average Yield/Rate
	(Dollars in thousands)
Assets:
Federal funds sold and securities
purchased under agreements to resell	$	41,409		133		1.29	%	$	29,898		$	129	1.73	%
Securities available-for-sale	21,147			159		3.01	%	31,309			447		5.71	%
Loans receivable (1) (2)	266,520			4,090		6.16	%	258,545			4,361		6.77	%
Total interest earning assets	329,076			4,382		5.34	%	319,752			4,937		6.19	%

Noninterest earning assets:
Cash and due from banks - demand	22,045							19,477
Other assets	22,537							24,015
Allowance for credit losses and net unrealized gain on sales of securities available-for-sale	(4,518		)					(5,453		)
Total assets	$	369,140						$	357,791

Liabilities and shareholders' equity:
Interest-bearing deposits:
Demand	$	27,592		28		0.41	%	$	27,759		$	85	1.23	%
Money market and savings	99,262			254		1.03	%	85,104			371		1.75	%
Time certificates of deposit:
$100,000 or more	30,643			119		1.56	%	46,002			194		1.69	%
Under $100,000	34,117			237		2.79	%	37,598			355		3.79	%
Total time certificates of deposit	64,760			356		2.20	%	83,600			549		2.63	%
Total interest-bearing deposits	191,614			638		1.34	%	196,463			1,005		2.05	%
Other borrowings	7,500			89		4.76	%	15,282			146		3.83	%
Federal funds purchased and securities
sold under agreements to repurchase	538			3		2.24	%	2,758			58		8.44	%
Total interest-bearing liabilities	199,652			730		1.47	%	214,503			1,209		2.26	%

Noninterest-bearing liabilities:
Noninterest bearing demand deposits	122,110							99,486
Other liabilities	1,228							2,517
Guaranteed preferred beneficial interests in the Company's junior subordinated deferrable interest debentures, net	14,536							14,520
Minority interest of the preferred stock of subsidiary	—							788
Shareholders' equity	31,614							25,977
Total liabilities and shareholders' equity	$369,140							$	357,791

Net interest income (spread)				$	3,652	3.87	%				$	3,728	3.93	%

Net yield on earning assets (2)						4.45	%						4.68	%

(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 $227,000 and $112,000 for the three months ended June 30, 2003 and 2002, respectively.

The following table presents the components of net interest income for the six months ended June 30, 2003 and 2002.

Average Balance Sheet and

Analysis of Net Interest Income

	Six months ended
	June 30, 2003							June 30, 2002
	Average Amount			Interest Income/Expense		Weighted Average Yield/Rate		Average Amount			Interest Income/Expense		Weighted Average Yield/Rate
	(Dollars in thousands)
Assets:
Federal funds sold and securities
purchased under agreements to resell	$	28,196		176		1.26	%	$	30,655		$	256	1.68	%
Securities available-for-sale	23,749			409		3.44	%	33,264			930		5.64	%
Loans receivable (1) (2)	267,911			8,207		6.18	%	257,128			8,752		6.86	%
Total interest earning assets	319,856			8,792		5.54	%	321,047			9,938		6.24	%

Noninterest earning assets:
Cash and due from banks – demand	21,437							20,351
Other assets	21,348							24,139
Allowance for credit losses and net unrealized gain on sales of securities available-for-sale	(4,507		)					(5,924		)
Total assets	$	358,134						$	359,613

Liabilities and shareholders’ equity:
Interest-bearing deposits:
Demand	$	27,621		89		0.65	%	$	27,658		$	157	1.14	%
Money market and savings	94,147			555		1.19	%	81,834			699		1.72	%
Time certificates of deposit:
$100,000 or more	31,352			266		1.71	%	48,917			501		2.07	%
Under $100,000	35,915			519		2.91	%	40,975			760		3.74	%
Total time certificates of deposit	67,267			785		2.35	%	89,892			1,261		2.83	%
Total interest-bearing deposits	189,035			1,429		1.52	%	199,384			2,117		2.14	%
Other borrowings	7,500			178		4.79	%	15,069			296		3.96	%
Federal funds purchased and securities sold under agreements to repurchase	834			11		2.66	%	2,952			95		6.49	%
Total interest-bearing liabilities	197,369			1,618		1.65	%	217,405			2,508		2.33	%

Noninterest-bearing liabilities:
Noninterest bearing demand deposits	113,942							98,507
Other liabilities	803							2,868
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures, net	14,534							—
Minority interest of the preferred stock of subsidiary	—							752
Shareholders’ equity	31,486							25,563
Total liabilities and shareholders’ equity	$	358,134						$	345,095

Net interest income (spread)				$	7,174	3.89	%				$	7,430	3.92	%

Net yield on earning assets (2)						4.52	%						4.67	%

(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 $417,000 and $279,000 for the six months ended June 30, 2003 and 2002, respectively.

The following tables sets forth, for the periods indicated, the changes in interest earned and interest paid resulting from changes in volume and changes in rates. Average balances in all categories in each reported period were used in the volume computations. Average yields and rates in each reported period were used in rate computations.

Increase (Decrease) in Interest Income/Expense Due to Change

in Average Volume and Average Rate (1)

	Six months ended June 30, 2003 vs 2002
	Increase (decrease) due to:						Net Increase
	Volume			Rate			(Decrease)
Interest Income:
Federal funds sold and securities purchased under agreement to resell	$	(20	)	$	(60	)	$		(80	)
Securities available-for-sale	(268		)	(253		)	(521			)
Loans receivable (2)	367			(912		)	(545			)
Total interest-earning assets	79			(1,225		)	(1,146			)

Interest Expense:
Interest-bearing deposits:
Demand	$	—		$	(68	)	$		(68	)
Money market and savings	105			(249		)	(144			)
Time certificates of deposit:
$100,000 or more	(180		)	(55		)	(235			)
Under $100,000	(94		)	(147		)	(241			)
Total time certificates of deposit	(274		)	(202		)	(476			)
Total interest-bearing deposits	(169		)	(519		)	(688			)
Other borrowings	(149		)	31			(118			)
Federal funds purchased and securities sold under agreements to repurchase	(68		)	(16		)	(84			)
Total interest-bearing liabilities	(385		)	(504		)	(890			)

Net interest income	$	465		$	(721	)	$	(256		)

(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.

PROVISION FOR CREDIT LOSSES

Provision for credit losses for the three months and six months ended June 30, 2003 was $1.1 million and $1.3 million, respectively, compared to $150,000 and $300,000 for the three months and six months ended June 30, 2002, respectively. The increase in provisions for credit losses during the second quarter 2003 was required following the charge off and write down

of several nonperforming loans. Loan charge-offs during the second quarter of 2003 were $2.4 million compared to $401,000 during the second quarter of 2002. Loan charge-offs during the six months ended June 30, 2003 were $2.8 million compared to $1.8 million during the six months ended June 30, 2002. Recoveries were $54,000 during the second quarter of 2003, compared to $176,000 during the second quarter of 2002. Recoveries were $194,000 during the six months ended June 30, 2003 compared to $336,000 during the six months ended June 30, 2002.

OTHER OPERATING INCOME

Other operating income decreased slightly to $284,000 during the second quarter of 2003 from $286,000 during the second quarter of 2002 due to a loss on sale of Other Real Estate Owned, offset by an increase in deposit-related and other customer services.

Other operating income increased to $719,000 during the six months ended June 30, 2003 from $682,000 during the six months ended June 30, 2002 due to net gains on sales of securities of $100,000 for the 2003 period compared to no gains for the 2002 period, offset by a loss on sale of Other Real Estate Owned.

Net gains on sales of investment securities are generated primarily in declining interest rate environments. Accordingly, gains or losses from sales of investment securities may fluctuate significantly from period to period, and the results in any period are not necessarily indicative of the results, which may be obtained in future periods.

OTHER OPERATING EXPENSES

Other operating expense remained stable at $3.4 million for the three months ended June 30, 2003 and 2002. Variances within operating expenses were reflected as follows; (i) salaries and related benefits expense increased $77,000, or 4.4%; (ii) client services expense decreased $113,000 or 44.3%; (iii) legal services expense decreased $89,000 or 43.2%; (iv) other professional services expense decreased $61,000, or 25.1%; (v) amortization of core deposit intangble expense increased $56,000; and (vi) promotion and other expenses increased $178,000 or 414.0%.

Other operating expense increased by $138,000 to $6.8 million during the six months ended June 30, 2003 compared to $6.7 million during six months ended June 30, 2002. This increase was reflected as follows; (i) salaries and related benefits expense increased $265,000, or 7.8%; (ii) net occupancy expense decreased $49,000 or 6.8%; (iii) printing and communications expense decreased $49,000 or 15.8%; (iv) client services expense decreased $126,000, or 28.3%; (v) computer data processing expense decreased $47,000, or 9.2%; (vi) legal services expense decreased $120,000, or 31.6%; (vii)

other professional services expense increased $90,000 or 28.4%; and (viii) amortization of core deposits expenses increased $112,000.

The increase in salary and related expense in the second quarter of 2003 is due to greater temporary help expense and an increase in incentive bonus accrual. The temporary help expense is expected to decrease in later quarters, however, it will be largely offset by salary expense. The decline in client services is primarily related to the decrease in services by the escrow customers. The decline in legal expense for the 2003 period reflects lower expenses for credit collection. Other professional expense decreased for the three months ended June 30, 2003 to $182,000 from $243,000 during the second quarter of 2002. This decrease is due to the consulting expense and a nonrecurring expense related to the sale of nonperforming assets at South Bay in the second quarter of 2002.

MINORITY INTEREST IN THE COMPANY’S INCOME

The minority interest of the guaranteed beneficial interest in the Company’s junior subordinated deferrable interest debentures (“Trust Preferred Securities”) in the Company’s income was $223,000 and $389,000 for the three months ended June 30 , 2003 and 2002, respectively, representing the interest expense of the Trust Preferred Securities that are classified as mezzanine equity for accounting purposes.

The decline in interest expense of the Trust Preferred Securities is due to an interest rate swap agreement that the Company entered into in January 2003 in which it exchanged a fixed rate payment obligation of 10.25% on a notional principal amount of $15.0 million for a floating interest rate based on the six-month London InterBank Offered Rate plus 458 basis points for a 29-year period ending July 25, 2031. The weighted average cost of the Trust Preferred Securities was 6.18% and 10.25% for the three months ended March 31, 2003 and 2002, respectively. On July 25, 2003 the interest rate reset and the Company was paying an interest rate of 5.93% under the terms of the swap.

This swap transaction is designated as a fair value hedge. Accordingly, an $269,000 increase in the fair value of the swap was recorded in income for the three-month period ended June 30, 2003. The terms of the swap are symmetrical with the terms of the Trust Preferred Securities, including the payment deferral terms, and considered highly effective in offsetting changes in fair value of the Trust Preferred Securities. Accordingly, an offsetting charge to earnings was recorded for the three months ended June 30, 2003 to reflect the increase in the fair value of the Trust Preferred Securities.

BALANCE SHEET ANALYSIS

INVESTMENT SECURITIES

The following comparative period-end table sets forth certain information concerning the estimated fair values and unrealized gains and losses of available-for-sale securities.

Estimated Fair Values of and Unrealized

Gains and Losses on Investment Securities

	June 30, 2003
	Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)
U.S. Treasury securities	$	3,746	$	—	$	1	$	3,745
GNMA-issued/guaranteed mortgage pass through certificates	583		14		—		597
FHLMC/FNMA-issued mortgage pass through certificates	7,568		269		—		7,837
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	1,109		—		3		1,106
Mutual Funds	5,000		—		5		4,995
Privately issued corporate bonds, CMO and REMIC securities	3,542		9		157		3,394
	$	21,548	$	292	$	166	$	21,674

FRB and other equity stocks	$	1,867	—		—		$	1,867

	December 31, 2002
	Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)
U.S. Treasury securities	$	998	$	—	$	1	$	997
GNMA-issued/guaranteed mortgage pass through certificates	2,409		73		—		2,482
FHLMC/FNMA-issued mortgage pass through certificates	12,370		506		—		12,876
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	4,544		44		—		4,588
Privately issued corporate bonds, CMO and REMIC securities	5,503		12		288		5,227
	$	25,824	$	635	$	289	$	26,170

FRB and other equity stocks	$	2,018	—		—		$	2,018

The total amortized cost of investment securities decreased $4.3 million to $21.5 million at June 30, 2003 from $25.8 million at December 31, 2002 due to maturities, repayments or paydowns on principal amortizing securities and the sale of $2.6 million of securities. The Company had a net unrealized gain of $126,000 at June 30, 2003 on its investment securities portfolio compared to a net unrealized gain of $346,000 at December 31, 2002.

As of June 30, 2003 the Company did not hold securities of any issuer, other than U.S. government agencies and corporations, the aggregate book value of which exceeded 10% of the Company’s shareholders’ equity.

Gross realized gains on sale of securities available-for sale were $100,000 for the six months ended June 30, 2003 and there were no realized gains on the sale of securities for the six months ended June 30, 2002.

LOAN PORTFOLIO

The following comparative period-end table sets forth certain information concerning the composition of the loan portfolio.

Loan Portfolio Composition

	June 30, 2003					December 31, 2002
	Amount			Percent		Amount			Percent
	(Dollars in thousands)
Commercial loans:
Secured by one to four family residential properties	$	9,420		4	%	$	10,797		4	%
Secured by multifamily residential properties	13,493			5	%	12,596			5	%
Secured by commercial real properties	123,407			46	%	119,872			44	%
Other – secured and unsecured	82,252			31	%	86,015			32	%
Real estate construction and land development	35,902			14	%	37,934			14	%
Consumer installment, home equity and unsecured loans to individuals	2,204			1	%	5,566			1	%
Total loans outstanding	266,678			100	%	272,780			100	%

Deferred net loan origination fees and purchased loan discount	(528		)			(457		)
Loans receivable, net	$	266,150				$	272,323

Total loans outstanding decreased by $6.1 million to $266.7 million at June 30, 2003 compared to $272.8 million at December 31, 2002 as loan payoffs exceeded loan originations and loans charge offs. The Company experienced a higher volume of loan originations than payoffs and prior year’s origination volume in its commercial real estate loans and loans secured by multifamily residential properties during the first six months of 2003 resulting in an increase from December 31, 2002. These increases were more than offset by decreases in other secured and unsecured commercial loans, consumer installment loans and real estate construction and land development loans.

NONPERFORMING ASSETS

The following comparative period-end table sets forth certain information concerning nonperforming assets.

Nonperforming Assets

	June 30, 2003			December 31 2002
	(Dollars in thousands)
Nonaccrual loans	$	592		$	5,787
Troubled debt restructurings	—			—
Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest	9			209
Nonperforming loans	601			5,996
Other real estate owned	1,000			1,000
Other nonperforming assets	—			—
Total nonperforming assets	$	1,601		$	6,996

Allowance for credit losses as a percent of nonaccrual loans	583.1		%	83.7		%
Allowance for credit losses as a percent of nonperforming loans	574.4		%	80.8		%
Total nonperforming assets as a percent of loans receivable	0.6		%	2.6		%
Total nonperforming assets as a percent of total shareholders' equity	5.2		%	22.4		%

Nonaccrual loans decreased $5.2 million at June 30, 2003 to $592,000 million from $5.8 million at December 31, 2002 due primarily to collection of nonaccrual loans and loan charge offs. There were $9,000 of loans past due 90 days or more and still accruing interest at June 30, 2003 compared to $209,000 at December 31, 2002. As a result, the amount of nonperforming assets at June 30, 2003 decreased 77.1% from the level at December 31, 2002.

ALLOWANCE FOR CREDIT LOSSES

Loans charged off during the second quarter and first half of 2003 were $2.4 million and $2.8 million, respectively, compared to $401,000 and $1.8 million during the second quarter and first half of 2002, respectively. Recoveries of loans previously charged off were $54,000 and $194,000 during the second quarter and first half of 2003 compared to $176,000 and $336,000 during the second quarter and first half of 2002, respectively. See Note 4 of Notes to Consolidated Financial Statements.

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 that 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 Office of the Comptroller of the Currency (“OCC”), as an integral part of its examination process, periodically reviews the allowance for credit losses and could require additional provisions for credit losses.

TOTAL DEPOSITS

Total deposits were $312.0 million and $298.7 million at June 30, 2003 and December 31, 2002, respectively. Noninterest-bearing demand deposits and money market deposits were $123.6 million and $51.3 million, respectively, at June 30, 2003 compared to $107.6 million and $43.1 million, respectively, at December 31, 2002. The increase in these accounts is attributable to an emphasis on growing business banking, particularly at South Bay, which generates transaction deposit accounts and an increase in deposits from the Company’s escrow customers. Interest-bearing demand deposits, which are largely limited to individuals, decreased to $27.6 million at June 30, 2003 from $30.5 million at December 31, 2002. Savings deposits increased to $46.8 million at June 30, 2003 compared to $42.2 million at December 31, 2002 reflecting the relatively

higher yields being paid on this deposit type. Time certificates of deposit (“TCDs”) decreased significantly to $62.7 million at June 30, 2003 from $75.4 million at December 31, 2002. This decrease is due to an emphasis on growing lower cost deposit accounts. Additionally, TCDs $100,000 and over decreased due to the termination of a $15.0 million public funds deposit partially offset by $5.0 million of brokered TCDs in January, 2003. There were no brokered TCDs at December 31, 2002.

FEDERAL FUNDS SOLD AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

Federal funds sold and securities sold under agreements to repurchase at June 30, 2003 were $395,000 compared to $1.5 million at year-end 2002. The decline is due to the planned runoff of the higher costing liabilities at South Bay.

OTHER BORROWINGS

Other borrowings were $7.5 million at June 30, 2003 and December 31, 2002 representing advances from the Federal Home Loan Bank.

SHAREHOLDERS’ EQUITY

Shareholders’ equity declined from $31.2 at December 31, 2002 to $30.7 million at June 30, 2003 due to the net loss for the six months ended June 30, 2003 and the declines in market value of securities available-for-sale.

CAPITAL ADEQUACY REQUIREMENTS

At June 30, 2003 the Company and the Banks were in compliance with all applicable regulatory capital requirements and the Banks were “well capitalized” under the Prompt Corrective Action rules of the OCC. The following table sets forth the regulatory capital standards for well capitalized institutions, and the capital ratios for the Company and the Banks as of June 30, 2003 and December 31, 2002.

Regulatory Capital Information

of the National MercantileBancorp and Banks

	Minimum For Capital Adequacy Purposes		Well Capitalized Standards		June 30, 2003		December 31, 2002
National Mercantile Bancorp:
Tier 1 leverage	4.00	%	N/A		8.32	%	8.60	%
Tier 1 risk-based capital	4.00	%	N/A		10.33	%	10.57	%
Total risk-based capital	8.00	%	N/A		13.03	%	13.31	%

Mercantile National Bank:
Tier 1 leverage	4.00	%	5.00	%	7.51	%	7.20	%
Tier 1 risk-based capital	4.00	%	6.00	%	10.63	%	9.89	%
Total risk-based capital	8.00	%	10.00	%	11.88	%	11.15	%

South Bay Bank, NA:
Tier 1 leverage	4.00	%	5.00	%	9.06	%	9.38	%
Tier 1 risk-based capital	4.00	%	6.00	%	9.92	%	10.90	%
Total risk-based capital	8.00	%	10.00	%	10.88	%	12.15	%

LIQUIDITY

The Company manages its liquidity through a combination of core deposits, federal funds purchased, repurchase agreements, collateralized borrowing lines, and a portfolio of securities available for sale. Liquidity is also provided by maturing investment securities and loans.

National Mercantile is a legal entity separate and distinct from the Banks, and therefore it must provide for its own liquidity. National Mercantile’s principal sources of funds are proceeds from the sales of securities and dividends or capital distributions from the Banks. In addition to its own operating expenses, National Mercantile is responsible for the payment of the interest on the outstanding issues of Trust Preferred Securities. The semi-annual interest payments on the Trust Preferred Securities, under the terms of the indenture, are deferrable at the Company’s option, for a period up to ten consecutive semi-annual payments, but in any event not beyond June 25, 2031.

Cash and due from banks was $18.6 million on June 30, 2003 compared to $18.9 million on December 31, 2002. Federal funds sold were $39.9 million and $18.7 million for June 30, 2003 and December 31, 2002, respectively. Mercantile National Bank had $5.0 million and South Bay Bank had $12.0 million in Federal funds lines with correspondent banks as of June 30, 2003.

The payment of dividends by National Mercantile is limited by the terms of the Trust Preferred Securities indenture. National Mercantile may not declare or pay any dividends or other distributions on its common stock or preferred stock if it is in default under the terms of the indenture or if it has elected to defer payments of interest on the Trust Preferred Securities.

ASSET LIABILITY MANAGEMENT

The following table shows that the Company’s cumulative one-year interest rate sensitivity gap indicated an asset sensitive position of $80.3 million at June 30, 2003, a change from an asset sensitive position of $41.2 million at December 31, 2002. This change resulted primarily from an increase in assets repricing in less than three months, consisting of federal funds sold and adjustable rate loans receivable partially offset by a decrease in securities available for sale. Rate-sensitive liabilities increased only $866,000, consisting of an increase in demand, money market and savings and other borrowings, offset by a decrease in time certificates of deposit.

The Company’s asset sensitive position during a period of slowly declining interest rates is not expected to have a significant negative impact on net interest income since rates paid on the Company’s large base of interest bearing demand, savings and money market deposit accounts historically have not changed proportionately with changes in interest rates. However, since the Company is in an asset sensitive position, in a period of rapidly declining rates, such as the environment that was experienced during 2001 and 2002, the rapid decline will have a negative effect on the Company’s net interest income as changes in the rates of interest bearing deposits historically have not changed in similar magnitude to changes in market interest rates. Additionally, in relatively low and declining interest rate environments, the interest rates paid on funding liabilities may begin to reach floors preventing further downward adjustments while rates on earning assets continue to adjust downward.

Rate-Sensitive Assets and Liabilities

	June 30, 2003
	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	$	39,900		$	—		$	—		$	—		$	39,900
Securities available-for-sale, at amortized cost	12,134			1,064			2,293			6,183			21,674
Due from banks - time	—			325			—			—
FRB and other stock, at cost	—			—			—			1,866
Loans receivable (1)	206,323			7,449			16,976			35,402			266,150
Total rate-sensitive assets	258,357			8,838			19,269			43,451			329,915

Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings	125,699			—			—			—			125,699
Time certificates of deposit	26,999			29,277			5,749			658			62,683
Other borrowings	—			4,895			3,000			—			7,895
Total rate-sensitive liabilities	152,698			34,172			8,749			658			196,277
Interest rate-sensitivity gap	105,659			(25,334		)	10,520			42,793			133,638
Cumulative interest rate-sensitivity gap	$	105,659		$	80,325		$	90,845		$	133,638
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	169		%	143		%	146		%	168		%

(1) Loans receivable excludes nonaccrual loans.

(2) 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.

Rate-Sensitive Asets and Liabilities

	December 31, 2002
	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	$	18,700		$	—		$	—		$	—		$	18,700
Securities available-for-sale, at amortized cost	—			998			1,857			22,969			25,824
Due from banks - time	—			325			—			—			325
FRB and other stock, at cost	—			—			—			2,018			2,018
Loans receivable (1)	196,286			10,907			40,375			19,425			266,993
Total rate-sensitive assets	214,986			12,230			42,232			44,412			313,860

Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings	115,781			—			—			—			115,781
Time certificates of deposit	36,882			31,865			6,617			—			75,364
Other borrowings	—			1,476			7,500			—			8,976
Total rate-sensitive liabilities	152,663			33,341			14,117			—			200,121
Interest rate-sensitivity gap	62,323			(21,111		)	28,115			44,412			113,739
Cumulative interest rate-sensitivity gap	$	62,323		$	41,212		$	69,327		$	113,739
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	141		%	122		%	135		%	157		%

(1) Loans receivable excludes nonaccrual loans.

(2) 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.

In October 2002, Mercantile executed an informal non-binding memorandum of understanding (“MOU”), with the OCC relating to its interest rate risk management. The MOU provides for Mercantile to take certain actions that the OCC believes would strengthen Mercantile’s interest rate risk management process, including the review of its interest rate risk limits and interest rate risk modeling assumptions and the retention of an independent consultant to conduct a review of Mercantile’s interest rate risk measurement processes by February 28, 2003. Mercantile has completed the actions provided in the MOU and has been informed by the OCC that the MOU will be terminated.

FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS

Our results of operations and financial condition are affected by many factors, including the following.

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 June 30, 2003, our allowance for credit losses equaled 1.3% of loans receivable and 574.4% of nonperforming loans. Although we believed that we had established adequate allowances for credit losses as of June 30, 2003, the credit quality of 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 years economic conditions in these areas have been generally unfavorable. Should the economic condition in these areas continue to be unfavorable, 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 June 30, 2003, a large majority of our loans outstanding were collateralized by real 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 as a bank holding company, and Mercantile and South Bay, as national banks, 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.

We test goodwill annually and must record any impairment as a charge to earnings.

Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”), among other provisions, prescribes that goodwill and intangible assets that have indefinite useful lives will not be amortized but rather tested annually, or more frequently upon the occurrence of certain events, for impairment. SFAS No. 142 provides specific guidance for the testing of goodwill for impairment, which may require re-measurement of the fair value of the reporting unit. Impairment losses are to be reported as a charge to current period earnings.

We recorded goodwill of $2.2 million in connection with the South Bay acquisition in December 2001. During the fourth quarter of 2002, we completed the required impairment tests of goodwill. The tests determined that our goodwill was not considered impaired. No assurance can be given that our goodwill will not become impaired in the future.

We determine annually whether our deferred tax asset will be realized and must establish a valuation allowance if necessary to reduce it to its realizable value.

In conjunction with the acquisition of South Bay, we reversed our valuation allowance of $6.9 million on the deferred tax asset with the related benefit reducing goodwill. On a periodic basis, at least annually, we perform an analysis to determine if

it is more likely than not that some or all of the gross deferred tax asset will not be realized. Factors used in the analysis that are reflective of the future realization of a deferred tax asset are:

• A relatively consistent strong earnings history;

• Future earnings are assured;

• Expected adequate future taxable income arising from the reversal of temporary differences to realize the tax asset;

An evaluation allowance may be established to reduce the deferred tax asset to its realizable value. The determination of whether a valuation allowance is necessary involves considering the positive and negative factors related to whether the deferred tax asset is more likely than not to be realized. Any adjustment required to the valuation allowance is coupled with a related entry to income tax expense. A charge to earnings will be made in the event that we determine that a valuation allowance to the deferred tax asset is necessary.

ITEM 3. CONTROLS AND PROCEDURES

The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer believe that the Company’s disclosure controls and procedures reasonable ensure that information required to be disclosed by the Company in this quarterly report has been made known to them in a timely manner.

There was no change in the Company’s internal control over financial reporting during the Company’s most recently completed fiscal quarter that has materially affected, or is reasonabley likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

None.

Item 2. CHANGES IN SECURITIES

None.

Item 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

(a) On May 29, 2003, the Company held its annual meeting of shareholders.

(b) At the annual meting, the following directors were elected: Donald E. Benson, Joseph N. Cohen, Robert E. Gibson, Antoinette Hubenette, M.D., Scott A. Montgomery, Dion G. Morrow, Carl R. Terzian and Robert E. Thomson.

(c) The Following proposals were considered at the annual meeting and the number of shares voting for or against such proposals are listed below.

Election of Directors

Name	Votes For	Votes Withheld
Donald E. Benson	3,732,540	28,998

Joseph N. Cohen	3,732,540	28,998

Robert E. Gipson	3,732,540	28,998

Antoinette Hubenette, M.D.	3,732,540	28,998

Scott A. Montgomery	3,732,540	28,998

Dion G. Morrow	3,732,540	28,998

Carl R. Terzian	3,732,540	28,998

Robert E. Thomson	3,732,540	28,998

Amendments to the 1996 Stock Incentive Plan to increase the number of shares available for grant by 120,000 shares increasing the number of option shares from 548,510 to 668,510.

Votes For		Votes Against		Abstentions		Broker Non-votes
2,893,018		172,721		4,242		691,557

Amendments to Article XIII of the Articles of Incorporation to extend the termination date for Article XIII (which imposes a share transfer restriction) from July 1, 2003 to July 1, 2006.

Votes For		Votes Against		Abstentions		Broker Non-votes
3,001,097		64,316		4,568		691,557

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

31.1 Certification of Scott A. Montgomery on disclosure controls.

31.2 Certification of David R. Brown on disclosure controls.

32.1 Certification of Scott A. Montgomery pursuant to section 906 of the Sarbanes-Oxley Act of 2002

32.2 Certification of David R. Brown pursuant to section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K.

Form 8-K, reporting the Company’s press release regarding second quarter 2003 operating results was filed August 8, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NATIONAL MERCANTILE BANCORP
		(Registrant)

DATE: August 14, 2003		/s/Scott A. Montgomery
		Scott A. Montgomery
		Chief Executive Officer

DATE: August 14, 2003		/s/David R. Brown
		David R. Brown
		Principal Financial and Principal Accounting Officer