10QSB

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

ý Quarterly report under section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended  September 30, 2004

o  Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to .

Commission File Number 0-15982

NATIONAL MERCANTILE BANCORP

(Exact name of small business issuer in its charter)

California	95-3819685
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1880 Century Park East	90067
Los Angeles, California	(Zip Code)
(Address to principal executive offices)

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

                Check whether the issuer:  (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 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.    ý Yes    o No

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act  after the distribution of securities under a plan confirmed by a court.    o Yes       o No

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable dat:  The number of shares of Common Stock, no par value, of the issuer outstanding as of  November 10, 2004 was 2,950,678.

Transitional Small Business Disclosure Format (Check one):    o Yes       ý No

PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31, 2003
	2004
	(Unaudited)
	(Dollars in thousands)
ASSETS
Cash and due from banks-demand	$	25,855		$	24,556
Due from banks-interest bearing	2,728			4,728
Federal funds sold and securities purchased under agreements to resell	4,000			10,000
Cash and cash equivalents	32,583			39,284
Securities available-for-sale, at fair value; aggregate amortized cost of $40,985 and $30,756 at  September 30, 2004 and December 31, 2003, respectively	41,021			30,877
Securities held-to-maturity, at amortized cost	3,776			4,597
FRB and other stock, at cost	2,956			1,872
Loans receivable	303,812			260,249
Allowance for credit losses	(3,850		)	(3,635		)
Net loans receivable	299,962			256,614
Premises and equipment, net	5,695			5,444
Other real estate owned	1,043			925
Deferred tax asset	5,544			6,950
Goodwill	3,225			3,225
Intangible assets, net	1,686			1,854
Accrued interest receivable and other assets	7,967			3,564
Total assets	$	405,458		$	355,206
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	121,503		$	119,998
Interest-bearing demand	30,832			29,349
Money market	72,702			55,422
Savings	34,744			38,925
Time certificates of deposit:
$100,000 or more	40,833			27,308
Under $100,000	21,935			27,715
Total deposits	322,549			298,717
Federal funds purchased and securities sold under agreements to repurchase	—			399
Other borrowings	31,900			7,500
Junior subordinated deferrable interest debentures	15,464			15,464
Accrued interest payable and other liabilities	1,607			1,405
Total liabilities	371,520			323,485
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 666,273 shares and 729,585 shares at September 30, 2004 and December 31, 2003, respectively	5,442			5,959
Series B non-cumulative convertible perpetual preferred stock; authorized 1,000 shares; outstanding 1,000 shares at September 30, 2004 and December 31, 2003	1,000			1,000
Common stock, no par value; authorized 10,000,000 shares; outstanding 2,924,078 shares and 2,772,279 shares at September 30, 2004 and December 31, 2003, respectively	39,284			38,602
Accumulated deficit	(12,404		)	(13,911		)
Accumulated other comprehensive income	616			71
Total shareholders’ equity	33,938			31,721
Total liabilities and shareholders’ equity	$	405,458		$	355,206

See accompanying notes to consolidated financial statements.

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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended September 30,							For the Nine Months Ended September 30,
	2004				2003			2004				2003
	(Dollars in thousands, except per share data)							(Dollars in thousands, except per share data)
Interest income:
Loans, including fees	$	5,067			$	3,914		$	12,772			$	12,121
Securities	403				251			1,073				660
Due from banks - interest bearing	12				5			40				5
Federal funds sold and securities purchased under agreements to resell	5				92			59				268
Total interest income	5,487				4,262			13,944				13,054
Interest expense:
Interest-bearing demand	19				21			55				110
Money market and savings	195				181			541				736
Time certificates of deposit:
$100,000 or more	93				163			250				429
Under $100,000	121				138			339				657
Total interest expense on deposits	428				503			1,185				1,932
Federal funds purchased and securities sold under agreements to repurchase	—				3			1				14
Junior subordinated deferrable interest debentures	259				228			713				228
Other borrowings	105				89			277				267
Total interest expense	792				823			2,176				2,441
Net interest income before provision for credit losses	4,695				3,439			11,768				10,613
Provision for credit losses	120				10			120				1,265
Net interest income after provision for credit losses	4,575				3,429			11,648				9,348
Other operating income:
Net gain (loss) on sale of securities available-for-sale	(95			)	—			(76			)	100
International services	25				19			46				34
Investment division	13				22			38				66
Deposit-related and other customer services	374				356			1,176				977
Loss on sale of other real estate owned	—				—			—				(61			)
Total other operating income	317				397			1,184				1,116
Other operating expenses:
Salaries and related benefits	1,884				1,792			5,639				5,462
Net occupancy	270				333			885				1,006
Premises and equipment	91				112			389				346
Printing and communications	144				143			425				405
Insurance and regulatory assessments	107				97			327				292
Client services	156				129			436				449
Computer data processing	236				261			721				726
Legal services	53				122			234				382
Other professional services	226				206			599				613
Amortization of core deposit intangible	55				56			167				168
Retirement of premises and equipment	—				—			43				—
Promotion and other expenses	156				41			375				263
Total other operating expenses	3,378				3,292			10,240				10,112
Income before income tax provision and minority interest	1,514				534			2,592				352
Minority interest in the Company’s income of the:
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures, net	—				—			—				456
Income (loss) before income tax provision	1,514				534			2,592				(104			)
Income tax provision	642				242			1,084				26
Net income (loss)	$		872		$		292	$		1,508		$		(130	)
Earnings (loss) per share:
Basic	$		0.30		$		0.11	$		0.52		$		(0.05	)
Diluted	$		0.19		$		0.07	$		0.33		$		(0.05	)
Weighted average shares outstanding, basic	2,918,583				2,700,935			2,878,595				2,694,670
Weighted average shares outstanding, diluted	4,565,380				4,402,571			4,593,927				2,694,670

See accompanying notes to consolidated financial statements.

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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended September 30,
	2004			2003
	(Dollars in thousands)
Cash flows from operating activities:
Net income (loss)	$	1,508		$	(130	)
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	338			362
Provision for credit losses	120			1,265
Gain on sale of securities available for sale	76			(100		)
Loss on sales of OREO	—			61
Net amortization of premium on securities available-for-sale	171			161
Net amortization of premium on securities held-to-maturity	37			—
Net amortization of core deposit intangible	167			168
Net amortization of premium on loans purchased	145			204
Decrease (increase) in accrued interest receivable and other assets	(3,429		)	632
Increase (decrease) in accrued interest payable and other liabilities	202			(1,212		)
Net cash (used in) provided by operating activities	(665		)	1,411
Cash flows from investing activities:
Purchase of securities available-for-sale	(22,532		)	(36,334		)
Proceeds from sales of securities available-for-sale	6,397			2,757
Proceeds from repayments and maturities of securities available-for-sale	5,586			21,321
Proceeds from sales of OREO	—			474
Proceeds from repayments and maturities of securities held-to-maturity	784
Loan originations and principal collections, net	(42,596		)	21,597
Redemption (purchase) of Federal Reserve stock and other stocks	(1,084		)	149
Purchases of premises and equipment	(589		)	(78		)
Net cash (used in) provided by investing activities	(54,034		)	9,886
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts	16,087			35,377
Net increase (decrease) in time certificates of deposit	7,745			(18,677		)
Net decrease in securities sold under agreements to repurchase and federal funds purchased	(399		)	(1,079		)
Net increase in other borrowings	24,400			—
Net proceeds from exercise of stock options	165			96
Net cash provided by financing activities	47,998			15,717
Net (decrease) increase in cash and cash equivalents	(6,701		)	27,014
Cash and cash equivalents, January 1	39,284			37,576
Cash and cash equivalents, September 30	$	32,583		$	64,590
Supplemental disclosures of cash flow information:
Cash paid for interest	$	2,358		$	2,825
Transfers to OREO from loans receivable, net	—			535
Cash paid for income taxes	$	51		$	—

See accompanying notes to consolidated financial statements.

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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 (“National Mercantile” on a parent-only basis, and the ‘‘Company’’ on a consolidated basis) and its wholly owned subsidiaries, Mercantile National Bank and South Bay Bank, N.A., (collectively, the “Banks”). The Company adopted FASB Interpretation No. 46 Consolidation of Variable Interest Entities effective July 1, 2003 and accordingly the accounts of National Mercantile Capital Trust I are not included in the consolidated balance sheets at September 30, 2004 and December 31, 2003 or the consolidated statement of operations for the three and nine months ended September 30, 2004.  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 nine months ended September 30, 2004 are not necessarily indicative of the results expected for any subsequent period or for the full year ending December 31, 2004. 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, 2003.

NOTE 2—EARNINGS PER SHARE

         Basic earnings per share are 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 and diluted earnings per share was 2,918,583 and 4,565,380, respectively, for the three months ended September 30, 2004 and 2,878,595 and 4,593,927, respectively, for the nine months ended September 30, 2004.   The weighted average number of common shares outstanding used in computing basic earnings per share and diluted earnings per share was 2,700,935 and 4,402,571, respectively, for the three months ended September 30, 2003.  The weighted average number of common shares outstanding used in computing basic and diluted loss per share was 2,694,670 for the nine months ended September 30, 2003.

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

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	Net Income (Loss)				Weighted Average Shares	Per share amount
	(in thousands)
For the three months ended September 30, 2004:
Basic EPS	$		872		2,918,583	$	0.30
Effect of dilutive securities:
Options					138,431
Convertible preferred stock					1,508,365
Diluted earnings per share	$		872		4,565,380	$	0.19
For the three months ended September 30, 2003:
Basic and diluted loss per share	$		292		2,700,935	$	0.11
Effect of diultive securities:
Options					72,354
Convertible preferred stock					1,629,282
Diluted earnings per share	292				4,402,571	$	0.07
For the nine months ended September 30, 2004:
Basic EPS	$	1,508			2,878,595	$	0.52
Effect of dilutive securities:
Options					209,998
Convertible preferred stock					1,505,333
Diluted earnings per share	$	1,508			4,593,927	$	0.33
For the nine months ended September 30, 2003:
Basic and diluted loss per share	$	(130		)	2,694,670	$	(0.05	)

NOTE 3—CASH AND CASH EQUIVALENTS

For purposes of reporting cash flows, cash and cash equivalents include cash, due from banks-demand, due from banks-interest-bearing 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

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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 loans, 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.

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

Analysis of Changes in Allowance for Credit Losses

	Three months ended									Nine months ended
	September 30,					September 30,				September 30,				September 30,
	2004					2003				2004				2003
	(Dollars in thousands)									(Dollars in thousands)
Balance, beginning of period	$		3,691		$		3,452			$		3,635		$		4,846
Loans charged off:
Real estate loans:
Secured by one to four family residential properties	—				(7				)	—				31
Secured by multifamily residential properties	—				—					—				75
Secured by commercial real properties	—				—					—				—
Real estate construction and land development	—				—					—				—
Commercial - secured and unsecured	—				1					31				2,698
Consumer installment, home equity lines of credit and unsecured loans to individuals	—				13					4				46
Total loans charged-off	—				7					35				2,850
Recoveries of loans previously charged off:
Real estate loans:
Secured by one to four family residential properties	—				—					—				—
Secured by multifamily residential properties	—				—					—				—
Secured by commercial real properties	—				13					—				13
Real estate construction and land development	—				—					6				—
Commercial - secured and unsecured	26				114					94				247
Consumer installment, home equity lines of credit and unsecured loans to individuals	13				6					30				67
Total recoveries of loans previously charged off	39				133					130				327
Net charge-offs (recoveries)	(39			)	(126				)	(95			)	2,523
Provision for credit losses	120				10					120				1,265
Balance, end of period	$	3,850			$			3,588		$	3,850			$	3,588

         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

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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 September 30, 2004 and December 31, 2003, the Company had goodwill of $3.2 million, and net core deposit intangibles of $1.7 million and $1.9 million, respectively, from its acquisition of South Bay Bank in December 2001.  The gross carrying amount of core deposit intangibles was $2.3 million at September 30, 2004 and December 31, 2003, and accumulated amortization was $614,000 and $447,000, respectively, at such dates.  The core deposit intangibles are estimated to have a life of 10 years and 4 months. Amortization for intangibles for 2004 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 recorded indefinite-lived intangible assets.  Goodwill and other intangible assets are reviewed and assessed annually for impairment.

NOTE 6—INCOME TAXES

An income tax provision of $642,000 and $242,000 were recorded for the three months ended September 30, 2004 and 2003, respectively.  Income tax provision of $1,084,000 and $26,000 were recorded for the nine months ended September 30, 2004 and 2003, respectively.

At September 30, 2004, the Company had: (i) federal net operating loss carry forwards (“NOLS”) of approximately $16.2 million, which begin to expire in the year 2009; (ii) California NOLS of $273,000 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 California NOLS were scheduled to expire in 2002; the state legislature suspended NOLS utilization and extended the related carry forwards expiration.  The AMT credits carry forward indefinitely.

Management believes that it is more likely than not that the deferred tax asset will be realized.  Accordingly, no valuation allowance has been established against the deferred tax asset.

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NOTE 7—BENEFIT PLANS

         There were no stock options granted in the three months ended September 30, 2004.  The estimated per share weighted average fair value of options granted in the three months ended September 30, 2003 was $4.92.  The estimated per share weighted average fair value of options granted for the nine months ended September 30, 2004 and 2003 was $6.95 and $4.78, respectively. The Company applies Accounting Principles Board Opinion No. 25 and related Interpretations in accounting for its 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 options.  Had compensation cost for the options granted been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company’s net income for the three months ended September 30, 2004 and 2003 would have decreased by $35,000 and $28,000, respectively.  Basic and diluted earnings per share would have decreased by $0.01 for the three months ended September 30, 2004.   Basic and diluted loss per share would have increased by $0.01 for the three months ended September 30, 2003.  Had compensation cost for the options granted been determined based on the fair value at the grant dates for awards consistent with the method of SFAS No. 123, the Company’s net income for the nine months ended September 30, 2004 and 2003 would have decreased by $102,000 and $93,000 respectively.  Basic earnings per share would have decreased by $0.03 for the nine months ended September 30, 2004 and diluted earnings per share would have decreased by $0.02 for the nine months ended September 30, 2004.  Basic and diluted loss per share would have increased by $0.03 for the nine months ended September 30, 2003.

         The fair values of options granted during the three months ended September 30, 2004 and 2003 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: 2004—no dividend yield, expected volatility of 57%, risk-free interest rate of 4.21%, and an expected life of 10 years; 2003—no dividend yield, expected volatility of 59%, risk-free interest rate of 4.05%, and an expected life of 10 years.

NOTE 8—COMPREHENSIVE INCOME (LOSS)

       Comprehensive income (loss) is the change in equity during a period from transactions and other events and circumstances from nonowner sources.  The accumulated balance of other comprehensive income (loss) is required to be displayed separately from retained earnings in the consolidated balance sheet.  Total comprehensive income (loss) was as follows:

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	Three months ended							Nine months ended
	September 30,							September 30,
	2004			2003				2004			2003
	(in thousands)
Net income (loss)	$	872		$		292		$	1,508		$	(130	)
Other comprehensive income (loss) before tax, and unrealized losses on securities:
Unrealized gain (loss) on interst rate swaps used in cash flow hedges	1,017			—				1,017			—
Unrealized gain (loss) on securities available for sale	261			(62			)	(85		)	(282		)
Other comprehensive income (loss), before tax	1,278			(62			)	932			(282		)
Income tax benefit (expense) related to items of other comprehensive income	(529		)	26				(387		)	117
Other comprehensive income (loss)	749			(36			)	545			(165		)
Total comprehensive income (loss)	$	1,621		$	256			$	2,053		$	(295	)

NOTE 9—JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

         In 2001, National Mercantile, through National Mercantile Capital Trust I (the “Trust”), issued 15,000 of 10.25% fixed-rate preferred securities due July 25, 2031 (the “Trust Preferred Securities”), with a liquidation amount of $1,000 per Trust Preferred Security and an aggregate liquidation amount of $15.0 million.  The Trust Preferred Securities represent undivided beneficial interests in the assets of the Trust and are guaranteed by National Mercantile only 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 National Mercantile’s 10.25% fixed-rate junior subordinated deferrable interest debentures due July 25, 2031, (the “Junior Subordinated Debentures”) that pay interest each January 25 and July 25.  The interest is deferrable, at National Mercantile’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 National Mercantile’s option on or after five years from issuance at declining premiums to maturity.

                The Company adopted FASB Interpretation No. 46, Consolidation of Variable Interest Entities (FIN 46) as of July 1, 2003 resulting in the deconsolidation of the Trust. Accordingly, the Junior Subordinated Debentures have been classified in liabilities at September 30, 2004 and the related interest was classified as interest expense for the three and nine months then

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ended.  For dates and periods prior to the adoption of FIN 46, the Trust Preferred Securities, net of the cost of issuance, were recorded as a minority interest and the related interest was recorded as a minority interest in the Company’s income.

NOTE 10—DERIVATIVE FINANCIAL INSTRUMENTS

         In January 2003, National Mercantile entered into an 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 National Mercantile paying or receiving the difference between the fixed and floating rates at specified intervals calculated on the notional amounts.  The differential paid or received on the interest rate swap is recognized as an adjustment to interest expense.  At September 30, 2004, National Mercantile was paying an interest rate of 5.75% under the terms of the swap.  The counter party to the swap has the option to call the swap under a declining premium schedule beginning July 2006.  The Company is hedging against a decline in rates in its portfolio of adjustable rate loans receivable.

         The interest rate swap reduces the cost of the 10.25% fixed-rate Junior Subordinated Debentures in a low 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 Junior Subordinated Debentures, including the payment deferral terms, and considered highly effective in offsetting changes in fair value of the Junior Subordinated Debentures.  An $671,000 increase in the fair value of the swap was recorded in income for the three-month period ended September 30, 2004 with an offsetting charge to earnings to reflect a similar decrease in the fair value of the Junior Subordinated Debentures.   No ineffectiveness was recorded to current earnings related to the interest rate swap.

         The terms of the swap require National Mercantile to provide collateral to support its contract obligations and varies based upon the swap contract value.  At September 30, 2004, $1.3 million in securities were pledged as collateral.

         On July 1, 2004, the Banks entered into interest rate swap agreements in which they exchanged an adjustable rate interest based on the prime rate lending index for a fixed rate payment of 6.925% on an aggregate notional principal amount beginning at $50.0 million for a 4-year period, declining to $30.0 million for the fifth year and $10.0 million for the sixth year with a final maturity of June 30, 2010.  The interest rate swap agreement results in the Banks paying or receiving the difference between the fixed and floating rates at monthly intervals calculated on the notional amounts.  The differential paid or received on the

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interest rate swap has been recognized as an adjustment to interest income.  At September 30, 2004, the Banks were paying an interest rate of 4.75% under the terms of the swap.

         These interest rate swaps reduce the current asset sensitivity of the Company’s balance sheet moderating the potential negative impact on earnings in the event of declining interest rates.  The Company does not utilize derivatives for speculative purposes.  Under Statement of Financial Accounting Standards No. 133 these swap transactions have been designated as cash flow hedges.  Accordingly, the change in fair value of the swaps is recorded each period as other comprehensive income and any ineffective portion of the change in the fair value is recorded in current income.  The Company has a large portion of its loan portfolio that adjusts to changes in the prime rate lending index and therefore the swaps are currently considered highly effective in offsetting changes in the cash flows of the loan portfolio.

NOTE 11—CONVERSION OF PREFERRED STOCK

         During the nine months ended September 30, 2004, 63,312 shares of Series A non-cumulative convertible perpetual preferred stock were converted into 126,624 shares of common stock.

NOTE 12—RECLASSIFICATIONS

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

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”) (collectively, “the Banks”).  National Mercantile’s principal assets are the capital stock of Mercantile and South Bay.

In July 2001, National Mercantile formed National Mercantile Capital Trust (the “Trust”) as a Delaware statutory business trust formed for the exclusive purpose of issuing and selling trust preferred securities (the “Trust Preferred Securities”).  The Trust issued those securities and utilized the proceeds to purchase from National Mercantile, its junior subordinated deferrable interest debentures (the “Junior Subordinated Debentures”).  Through June 30, 2003, the Company’s financial statements reflected the Trust as a consolidated subsidiary, with the effect that the Trust Preferred Securities of the Trust reflected on the

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balance sheet as mezzanine equity and payments on the Trust Preferred Securities were set forth as minority interest in the Company’s income of the guaranteed preferred beneficial interest in the Junior Subordinated Debentures.

       The Company implemented FIN 46 effective July 1, 2003 with the effect that since that date the Trust has not been a consolidated subsidiary of the Company for financial reporting purposes.  As a result: (i) the Company’s balance sheets as of dates on or after July 1, 2003 no longer reflect the Trust Preferred Securities as mezzanine equity but instead reflect the Junior Subordinated Debentures as liabilities, and (ii) the Company’s statements of operations incorporating periods on or after July 1, 2003, reflect from July 1, 2003 forward interest payments on the Junior Subordinated Debentures as interest expense and do not reflect payments on the Trust Preferred Securities as a minority interest in the Company’s income of the guaranteed preferred beneficial interest in the Company’s Junior Subordinated Debentures.  As discussed below, this has a significant effect on comparisons of net interest income between periods on and after July 1, 2003.

RESULTS OF OPERATIONS

The Company recorded net income of $872,000, or $0.30 basic earnings per share and $0.19 diluted earnings per share, for the three months ended September 30, 2004 compared to net income of $292,000, or $0.11 basic earnings per share and $0.07 diluted earnings per share, for the same period of 2003.   The increase in net income for the 2004 period was primarily due to a $1.3 million increase in net interest income resulting from interest rate swaps, increases in the prime rate lending index, a greater volume of interest earning assets, particularly higher yielding loans receivable and securities available-for-sale, and a favorable change in earning asset and funding liability composition.

The Company recorded net income of $1.5 million, or $0.52 basic earnings per share and $0.33 diluted earnings per share, for the nine months ended September 30, 2004 compared to a net loss of $130,000, or $0.05 basic and diluted loss per share, for the same period of 2003.   The increase in net income for the 2004 period was due to a $1.2 million increase in net interest income resulting from the Banks’ interest rate swaps, increases in the prime rate lending index and a greater volume of higher yielding earning assets, as well as a $265,000 decrease in interest expense resulting from lower deposit interest rates and a favorable change in deposit mix.  Additionally, 2004 net income benefited significantly from a $1.1 million decrease in provision for credit losses.  These positive changes were partially offset by a $128,000 increase in other operating expenses.

Return on average assets during the third quarter and first nine months of 2004 was 0.88% and 0.39%, respectively, compared to 0.31% and a negative 0.05% during the third quarter and first nine months of 2003, respectively. Return on

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average equity during the third quarter and first nine months of 2004 was 10.47% and 4.53%, respectively, compared to 3.72% and a negative 0.55% during the third quarter and first nine months of 2003, respectively.

NET INTEREST INCOME

         Net interest income before the provision for credit losses increased $1.3 million for the three months ended September 30, 2004 compared to the same quarter of 2003 due to a $1.2 million increase in total interest income.  Loan interest income increased $1.2 million due to $40.3 million greater average volume of loans receivable and a 74 basis point increase in yield, resulting primarily from interest rate swaps and increases in the prime rate lending index.  The increase in loans receivable is due to the added business development staff, the funding of previously approved construction loans and stronger new construction and commercial real estate loan demand.   On July 1, 2004, the Banks entered into interest rate swap agreements in which they exchanged an adjustable rate interest based on the prime rate lending index for a fixed rate payment of 6.925% on an aggregate notional principal amount of $50.0 million (see Note 10 Derivative Financial Instruments of the Consolidated Financial Statements for details of the swap terms).  The interest rate swaps contributed 42 basis points to the increase in loan yield.  During the third quarter of 2004, the Federal Reserve Bank increased interest rates 25 basis points on three occasions after a prolonged period of accommodative monetary policy in response to signs of stronger expansion of the economy.  Approximately 70% of the $303.8 million loans receivable have adjustable interest rates; accordingly, rising interest rates positively affects interest income partially offset by greater payments for the $50 million interest rate swaps.

         Interest income from securities available-for-sale increased $134,000 during the third quarter 2004 compared to third quarter 2003 despite a 29 basis point decline in yield due to $20.8 million greater average volume.  The decline in the yield from securities available-for-sale was due to lower yields on the newly purchased securities and the maturity or pay down of higher-yielding securities in the portfolio.  The growth in securities was a result of the redeployment of lower yielding federal funds sold, which averaged $41.7 million less than the 2003 period.  The decline in average federal funds sold more than offset a 43 basis point increase in yield resulting in an $87,000 decline in interest income on federal funds sold in the 2004 period.

         Overall, interest-earning assets were $23.3 million greater during the third quarter 2004 than third quarter 2003 and the higher yields and favorable change in composition to higher-yielding assets resulted in a 105 basis point increase in weighted average yield on interest-earning assets.

         Interest expense decreased $31,000 for the three months ended September 30, 2004, despite a $19.4 million increase in average interest-bearing liabilities, due to a lower cost of funds and a favorable change in deposit composition.  Average

15

interest-bearing deposits were $4.5 million greater than the third quarter 2003; however, interest expense on deposits decreased $75,000 due to a 17 basis point decline in weighted average cost.  Relatively low costing interest-bearing demand deposits and money market and savings deposits averaged $2.0 million and $9.3 million greater, respectively, in the 2004 period compared to the 2003 period.  Relatively high costing time certificates of deposit averaged $6.8 million less during the third quarter 2004 than the same period in 2003.  This favorable change in deposit composition is due to a combination of emphasis on developing business banking, which results in greater volumes of transactional deposits, with limited increases in pricing, particularly at South Bay, on typically retail time certificates of deposit resulting in some runoff at maturity.  The cost of time certificates of deposit declined 39 basis points due to the maturity of higher yielding deposits and repricing during the sustained low interest rate environment.  While market rates of interest increased during the third quarter of 2004, the cost of interest-bearing demand deposits and money market and savings deposits declined 4 basis points and 1 basis point, respectively, compared to the third quarter of 2003.  The Company elected to generally hold deposit rates stable and fund earning asset growth mostly with relatively inexpensive overnight other borrowings.  Other borrowings during the third quarter 2004 averaged $23.0 million, or $15.5 million greater than the same period in 2003.  The cost of other borrowings was 1.82% and 4.71% for the third quarters 2004 and 2003, respectively, representing a decline of 289 basis points in 2004.  In a sustained rising interest rate environment, increases in deposit interest rates will be required to prevent net deposit withdrawals.  Noninterest-bearing demand deposits were relatively stable, with a $494,000 increase in average volume in the third quarter 2004 compared to 2003.

         The Company altered its liquidity strategy during the third quarter of 2004, maintaining a significantly lower level of short-term assets, primarily federal funds sold, and relying on overnight other borrowings, against pledged loans and securities, to fund loan growth and deposit outflows.  Liquidity was supplemented with brokered time certificates of deposit.

         The net yield on interest earning assets increased 122 basis points from 4.11% during the third quarter in 2003 to the third quarter in 2004.

         Net interest income before the provision for credit losses increased $1.2 million for the nine months ended September 30, 2004 compared to the same period of 2003 due to the inclusion of $713,000 interest on the Junior Subordinated Debentures in the 2004 compared to  $228,000 in 2003, due to an accounting change in the third quarter of 2003.

         Interest income increased due to a 0.16% increase in the weighted average yield on interest earning assets along with a $11.9 million increase in average interest earning assets.  The increase in the weighted average yield on interest earning assets was due to an increase in market interest rates, resulting in a repricing of adjustable rate assets (primarily loans) and lower

16

yields on renewed loans and newly originated or purchased assets.   The yield on loans receivable increased 3 basis points for the 2004 period compared to 2003 and loans receivable averaged $12.5 million more in the first nine months of 2004 compared to the same period in 2003, due to a higher volume of loans in the third quarter of 2004.  The increase in interest income was moderated by a change in the composition of earning assets.  The average volume of lower-yielding federal funds sold and securities purchased under agreements to resell declined $25.2 million for the nine months ended September 30, 2004 while the average volumes of higher- yielding securities available-for-sale and securities held-to-maturity increased $17.6 million and $3.4 million, respectively.

         Interest expense decreased due to a 0.28% decline in the weighted average rates on interest-bearing liabilities, which more than offset a $16.2 million increase in average interest-bearing liabilities. The reduction in the weighted average rate was due to: (i) a decline in market interest rates and (ii) an increase in lower-cost demand, savings and money market deposits and reduction in higher-cost certificates of deposit.  This was offset in part by the inclusion of interest on the higher cost Junior Subordinated Debentures as interest expense.  Interest-bearing demand, and money market and savings deposits increased $3.0 million and $11.5 million, respectively, as a result of the additional resources expended to develop business banking.  Time certificates of deposit decreased $14.2 million due to more aggressive pricing practices.

         The following table presents the components of net interest income for the three months ended September 30, 2004 and 2003.

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Average Balance Sheet and

Analysis of Net Interest Income

	Three months ended
	September 30, 2004							September 30, 2003
	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	$	1,558		5		1.28	%	$	43,228		$	92	0.84	%
Due from banks-interest bearing	2,728			12		1.75	%	363			5		5.39	%
Securities available-for-sale	49,183			365		2.97	%	28,341			231		3.26	%
Securities held-to-maturity	3,927			38		3.87	%	2,395			20		3.34	%
Loans receivable (1) (2)	297,602			5,067		6.77	%	257,328			3,914		6.03	%
Total interest earning assets	354,998			5,487		6.15	%	331,655			4,262		5.10	%
Noninterest earning assets:
Cash and due from banks - demand	22,314							22,764
Other assets	21,694							22,032
Allowance for credit losses and net unrealized gain on sales of securities available-for-sale	(3,891		)					(3,480		)
Total assets	$	395,115						$	372,971
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Demand	$	31,827		19		0.24	%	$	29,781		21		0.28	%
Money market and savings	112,114			195		0.69	%	102,838			181		0.70	%
Time certificates of deposit:
$100,000 or more	25,371			93		1.46	%	27,504			163		2.35	%
Under $100,000	27,479			121		1.75	%	32,158			138		1.70	%
Total time certificates of deposit	52,850			214		1.61	%	59,662			301		2.00	%
Total interest-bearing deposits	196,791			428		0.87	%	192,281			503		1.04	%
Other borrowings	22,982			105		1.82	%	7,500			89		4.71	%
Junior subordinated debentures	15,464			259		6.66	%	15,464			228		5.85	%
Federal funds purchased and securities sold under agreements to repurchase	—			—		0.00	%	606			3		1.96	%
Total interest-bearing liabilities	235,237			792		1.34	%	215,851			823		1.51	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	125,857							125,363
Other liabilities	969							620
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures, net	—							—
Shareholders’ equity	33,052							31,137
Total liabilities and shareholders’ equity	$	395,115						$	372,971
Net interest income (spread)				$	4,695	4.81	%				$	3,439	3.59	%
Net yield on interest earning assets (2)						5.26	%						4.11	%

(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 $484,000 and $239,000 for the three months ended September 30, 2004 and 2003, respectively.

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The following table presents the components of net interest income for the nine months ended September 30, 2004 and 2003.

Average Balance Sheet and

Analysis of Net Interest Income

	Nine months ended
	September 30, 2004							September 30, 2003
	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	$	7,823		59		1.01	%	$	32,974		268		1.09	%
Due from banks-interest bearing	3,835			40		1.39	%	338			5		1.95	%
Securities available-for-sale	42,889			955		2.97	%	25,296			640		3.37	%
Securities held-to-maturity	4,226			118		3.72	%	807			20		3.30	%
Loans receivable (1) (2)	276,845			12,772		6.16	%	264,345			12,121		6.13	%
Total interest earning assets	335,618			13,944		5.55	%	323,760			13,054		5.39	%
Noninterest earning assets:
Cash and due from banks - demand	22,822							21,884
Other assets	21,661							21,574
Allowance for credit losses and net unrealized gain on sales of securities available-for-sale	(3,705		)					(4,161		)
Total assets	$	376,396						$	363,057
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Demand	$	31,395		55		0.23	%	$	28,349		110		0.52	%
Money market and savings	108,580			541		0.67	%	97,077			736		1.01	%
Time certificates of deposit:
$100,000 or more	23,867			250		1.40	%	30,172			429		1.90	%
Under $100,000	26,611			339		1.70	%	34,526			657		2.54	%
Total time certificates of deposit	50,478			589		1.56	%	64,698			1,086		2.24	%
Total interest-bearing deposits	190,453			1,185		0.83	%	190,124			1,932		1.36	%
Other borrowings	13,703			277		2.70	%	7,500			267		4.76	%
Junior subordinated debentures	15,464			713		6.16	%	5,155			228		5.91	%
Federal funds purchased and securities sold under agreements to repurchase	94			1		1.42	%	686			14		2.73	%
Total interest-bearing liabilities	219,714			2,176		1.32	%	203,465			2,441		1.60	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	123,272							117,791
Other liabilities	888							743
Guaranteed preferred beneficial interests in the Company’s junior subordinated deferrable interest debentures, net	—							9,689
Shareholders’ equity	32,522							31,369
Total liabilities and shareholders’ equity	$	376,396						$	363,057
Net interest income (spread)				$	11,768	4.23	%				$	10,613	3.79	%
Net yield on interest earning assets (2)						4.68	%						4.38	%

(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 $1,052,000 and $656,000 for the three months ended September 30, 2004 and 2003, respectively.

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The following table 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)

	Nine months ended September 30, 2004 vs 2003
	Increase (decrease) due to:						Net Increase
	Volume			Rate			(Decrease)
Interest Income:
Federal funds sold and securities purchased under agreement to resell.	$	(204	)	$	(5	)	$	(209	)
Interest-bearing deposits with other financial institutions	51			(16		)	35
Securities available-for-sale	445			(130		)	315
Securities held-to-maturity	85			13			98
Loans receivable (2)	585			66			651
Total interest-earning assets	962			(72		)	890
Interest Expense:
Interest-bearing deposits:
Demand	$	12		$	(67	)	$	(55	)
Money market and savings	88			(283		)	(195		)
Time certificates of deposit:
$100,000 or more	(90		)	(89		)	(179		)
Under $100,000	(150		)	(168		)	(318		)
Total time certificates of deposit	(240		)	(257		)	(497		)
Total interest-bearing deposits	(140		)	(607		)	(747		)
Other borrowings	221			(211		)	10
Junior subordinated debentures	457			28			485
Federal funds purchased and securities sold under agreements to repurchase	(12		)	(1		)	(13		)
Total interest-bearing liabilities	526			(791		)	(265		)
Net interest income	$	436		$	719		$	1,155

(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.

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PROVISION FOR CREDIT LOSSES

The Company recorded a $120,000 provision for credit losses for the three months and nine months ended September 30, 2004 compared to provisions of $10,000 and $1.3 million for the three months and nine months ended September 30, 2003, respectively.  The provision in the third quarter of 2004 was primarily due to the growth in loans receivable.  The decrease in provisions for credit losses for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 was due to recoveries of loans previously charged off and the current adequacy of the allowance for credit losses based upon our analysis.  See Note 4 of Notes to Consolidated Financial Statements.

OTHER OPERATING INCOME

Other operating income decreased to $317,000 during the third quarter of 2004 from $397,000 during the third quarter of 2003 primarily due to a $95,000 net loss on sale of securities-available-for sale partially offset by an $18,000 increase in deposit-related and other customer service income due to increased fees and new product introduction.

Other operating income increased to $1.2 million during the nine months ended September 30, 2004 from $1.1 million during the nine months ended September 30, 2003 due to an increase in deposit-related and other customer service income.  The increase was partially offset by a $176,000 decrease in net gain on sale of securities available-for-sale and decline in investment services income.

Net gains on sales of securities are generated primarily in declining interest rate environments.   Accordingly, gains or losses from sales of 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 expenses increased to $3.4 million for the three months ended September 30, 2004 compared to $3.3 million for the same period of 2003. Variances within operating expenses were reflected as follows: (i) salaries and related benefits expense increased $92,000 or 5.1%; (ii) net occupancy expense decreased $63,000 or 18.9%; (iii) premise and equipment expense decreased $21,000 or 18.8%; (iv) client services expense increased $27,000 or 20.9%; (v) computer data processing expense decreased $25,000 or 9.6%;  (vi) legal services expense decreased $69,000 or 56.6%;  (vii) other

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professional services expense increased $20,000 or 9.7%; and (viii) promotional and other expenses increased $115,000 or 280.5%.

Other operating expenses increased to $10.2 million for the nine months ended September 30, 2004 compared to $10.1 million for the same period in 2003. Variances within operating expenses were reflected as follows; (i) salaries and related benefits expense increased $177,000 or 3.2%; (ii) net occupancy expense decreased $121,000 or 12.0%; (iii) premise and equipment expense increased $43,000 or 12.4%; (iv) insurance and regulatory assessments increased $35,000, or 12.0%; (v) legal services expense decreased $148,000 or 38.7%; (vii) retirement of premises and equipment increased $43,000 and (viii) promotional and other expenses increased $112,000 or 42.6%.

The increase in salary and related expense is primarily due to the addition of business development staff and increased commission expense. The decrease in occupancy expense was due to a decrease in rent expense from the move of the corporate headquarters in January 2004. The decrease in premise and equipment expense is due to less depreciation of furniture and equipment.  Client services expenses increased due to increased data processing and messenger services for clients.  Legal expenses decreased for the collection of loans due to fewer past due loans and fewer other real estate owned properties.    Promotion and other expenses increased due to operating losses increases.

MINORITY INTEREST IN THE COMPANY’S INCOME

The minority interest in the Company’s income of the guaranteed beneficial interest in the Company’s Junior Subordinated Debentures was $713,000 for the nine months ended September 30, 2003.  As a result of the reclassification pursuant to FIN 46 effective July 1, 2003, no such minority interest expense was recorded for the nine months ended September 30, 2004.

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 securities available-for-sale and securities held-to-maturity.

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Estimated Fair Values of and Unrealized

Gains and Losses on Securities

	September 30, 2004
	Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)
Available-for-Sale:
U.S. Treasury securities	$	701	$	—	$	1	$	700
GNMA-issued/guaranteed mortgage pass through certificates.	194		8		—		202
Other U.S. Government and federal agency securities	30,072		30		9		30,093
FHLMC/FNMA-issued mortgage pass through certificates	3,704		114		—		3,818
CMO’s and REMIC’s issued by U.S. government-sponsored agencies.	41		—		—		41
Mutual funds	5,405		—		108		5,297
Privately issued corporate bonds, CMO and REMIC securities	868		2		—		870
	$	40,985	$	154	$	118	$	41,021
FRB and other equity stocks	$	2,956	—		—		$	2,956

	September 30, 2004
	Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)
Held-to-Maturity:
FHLMC/FNMA-issued mortgage pass through certificates	$	3,776	$	58	$	—	$	3,834
	$	3,776	$	58	$	—	$	3,834

	December 31, 2003
	Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)
Available-For-Sale:
U.S. Treasury securities	$	600	$	—	$	1	$	599
GNMA-issued/guaranteed mortgage pass through certificates	351		12		—		363
Other U.S. government and federal agency securities	12,758		45		4		12,799
FHLMC/FNMA-issued mortgage pass through certificates	3,828		161		—		3,989
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	56		1		—		57
Mortgage mutual funds	10,000		—		98		9,902
Privately issued corporate bonds, CMO and REMIC securities	3,163		5		—		3,168
	$	30,756	$	224	$	103	$	30,877
FRB and other equity stocks	$	1,872	—		—		$	1,872

	December 31, 2003
	Total amortized cost		Gross unrealized gains		Gross unrealized loss		Estimated fair value
	(Dollars in thousands)
Held-to-Maturity:
FHLMC/FNMA-issued mortgage pass through certificates	$	4,597	$	43	$	—	$	4,640
	$	4,597	$	43	$	—	$	4,640

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As of September 30, 2004, 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, except $5.3 million of an adjustable rate mortgage mutual fund in which the fund’s holdings are primarily comprised of U.S. agency securities, agency mortgage pools and U.S. Treasury securities.

LOAN PORTFOLIO

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

Loan Portfolio Composition

	September 30,						December 31,
	2004						2003
	Amount				Percent		Amount				Percent
	(Dollars in thousands)
Real estate loans:
Secured by one to four family residential properties	$		11,134		4	%	$		8,167		3	%
Secured by multifamily residential properties	12,771				4	%	13,071				5	%
Secured by commercial real properties	142,218				46	%	132,320				52	%
Real estate construction and land development	47,784				16	%	27,210				10	%
Commercial loans - secured and unsecured	88,802				29	%	76,699				29	%
Consumer installment, home equity and unsecured loans to individuals	2,033				1	%	3,510				1	%
Total loans outstanding	304,742				100	%	260,977				100	%
Deferred net loan origination fees and purchased loan discount	(930			)			(728			)
Loans receivable, net	$	303,812					$	260,249

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Total loans outstanding increased by $43.6 million to $303.8 million at September 30, 2004 compared to $260.2 million at December 31, 2003 due to the funding of previously originated real estate construction and land development loans as well as new originations in real estate construction loans, real estate loans secured by commercial real properties and commercial loans.  Due to the nature of construction loans, the outstanding balance of newly originated loans increases gradually during the life of the loan and repays in a lump sum.  During the latter half of 2003 and early part of 2004, the Company hired several seasoned lending officers resulting in increased new business development.

Real estate construction and land development loans increased $20.6 million from $27.2 million at December 31, 2003 to $47.8 million at September 30, 2004.  During this same time period, commercial loans increased $12.1 million from $76.7 million to $88.8 million, real estate loans secured by commercial real properties increased $9.9 million from $132.3 million to $142.2 million and real estate loans secured by one to four family residential properties increased $2.9 million from $8.2 million to $11.1 million.  Relatively small declines were recorded in real estate loans secured by multifamily residential properties and consumer installment, home equity and unsecured loans to individuals.

NONPERFORMING ASSETS

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

Nonperforming Assets

	September 30, 2004			December 31 2003
	(Dollars in thousands)
Nonaccrual loans	$	238		$	438
Troubled debt restructurings	—			—
Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest	5			—
Nonperforming loans	243			438
Other real estate owned	1,043			925
Other nonperforming assets	—			—
Total nonperforming assets	$	1,286		$	1,363
Allowance for credit losses as a percent of nonaccrual loans	1617.6		%	829.9		%
Allowance for credit losses as a percent of nonperforming loans	1584.4		%	829.9		%
Total nonperforming assets as a percent of loans receivable	0.4		%	0.5		%
Total nonperforming assets as a percent of total shareholders’ equity	3.8		%	4.3		%

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Nonaccrual loans decreased $200,000 from December 31, 2003 to September 30, 2004 due primarily to collection of nonaccrual loans and loan charge offs.  Other real estate owned (OREO) increased $118,000 from December 31, 2003 to September 30, 2004 due to capitalization of expenditures for improvements on existing OREO.  Nonaccrual and impaired loans are accounted for under the Company’s policy, which is in accordance with Financial Accounting Standards No. 114 Accounting by Creditors for Impairment of a Loan.

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, in conjunctionwith an outside advisory firm, performs a periodic risk and credit analysis, the results of which are reported to the Board of Directors.

No loans were charged off during the third quarter of 2004.  Loans charged off during the nine months ended September 30, 2004 were $35,000.  This compares to loans charged off of $7,000 and $2.9 million during the third quarter and first nine months of 2003, respectively.  Recoveries of loans previously charged off were $39,000 and $130,000 during the third quarter and first nine months of 2004, respectively, compared to $133,000 and $327,000 during the third quarter and first nine months of 2003, 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.

26

DEPOSITS

Total deposits were $322.5 million and $298.7 million at September 30, 2004 and December 31, 2003, respectively.  Noninterest-bearing demand deposits and money market deposits were $121.5 million and $72.7 million, respectively, at September 30, 2004 compared to $120.0 million and $55.4 million, respectively, at December 31, 2003. Interest-bearing demand deposits, which are largely limited to individuals, increased to $30.8 million at September 30, 2004 from $29.3 million at December 31, 2003.  The increase in these accounts is attributable to an emphasis on growing business banking through the hiring of commercial lending officers, which generates transaction deposit accounts.  Time certificates of deposit (“TCDs”) increased to $62.8 million at September 30, 2004 from $55.0 million at December 31, 2003 due to an increase in brokered deposit for funding purposes. There were $7.4 million in brokered TCDs at September 30, 2004 and $5.0 million brokered TCDs at December 31, 2003.

During the third quarter of 2004, the Company supplemented its liquidity with brokered time certificates of deposit ranging in term from three months to one year.  Additionally, although management has priced its retail certificates of deposit to encourage runoff during the past several years, in the rising rate environment experienced during the third quarter of 2004, it has elected to generally maintain stable rates on its immediately repriceable base of deposits — interest-bearing demand deposits, and savings and money market deposits — and price new time certificates of deposit to generate growth.

FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

There were no federal funds purchased and securities sold under agreements to repurchase at September 30, 2004 compared to $399,000 at December 31, 2003.

OTHER BORROWINGS

Other borrowings, consisting of advances from the Federal Home Loan Bank were $31.9 million at September 30, 2004 compared to $7.5 million at December 31, 2003.   As part of its current funding strategy the Company utilized a greater amount of overnight borrowing from the FHLB to fund its securities available-for-sale and loans receivable.

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JUNIOR SUBORDINATED DEFERRABLE INTEREST DEBENTURES

Junior Subordinated Debentures were $15.5 million at September 30, 2004 and December 31, 2003. See Note 9 of Notes to Consolidated Financial Statements.

SHAREHOLDERS’ EQUITY

Shareholders’ equity increased from $31.7 million at December 31, 2003 to $33.9 million at September 30, 2004 due to the retained earnings for the nine months ended September 30, 2004 and the increase in market value of interest rate swaps.

CAPITAL ADEQUACY REQUIREMENTS

At September 30, 2004 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 September 30, 2004 and December 31, 2003.

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Regulatory Capital Information

of the National Mercantile Bancorp and Banks

	Minimum For Capital Adequacy Purposes		Well Capitalized Standards		September 30, 2004		December 31, 2003
National Mercantile Bancorp:
Tier 1 leverage	4.00	%	N/A		9.33	%	8.69	%
Tier 1 risk-based capital	4.00	%	N/A		10.73	%	11.02	%
Total risk-based capital	8.00	%	N/A		12.97	%	13.84	%
Mercantile National Bank:
Tier 1 leverage	4.00	%	5.00	%	8.37	%	8.13	%
Tier 1 risk-based capital	4.00	%	6.00	%	10.92	%	10.88	%
Total risk-based capital	8.00	%	10.00	%	12.17	%	12.13	%
South Bay Bank, NA:
Tier 1 leverage	4.00	%	5.00	%	9.11	%	9.44	%
Tier 1 risk-based capital	4.00	%	6.00	%	9.68	%	11.18	%
Total risk-based capital	8.00	%	10.00	%	10.70	%	12.37	%

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.

The Company’s cash and due from banks was $25.9 million on September 30, 2004 compared to $24.6 million on December 31, 2003.  Due from banks-interest-bearing was $2.7 million and $4.7 million at September 30, 2004 and December 31, 2003, respectively.  Federal funds sold were $4.0 million and $10.0 million for September 30, 2004 and December 31, 2003, respectively.  Mercantile had $5.0 million and South Bay had $12.0 million in Federal funds lines with correspondent banks as of September 30, 2004.

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 Junior Subordinated Debentures.  The semiannual interest payments on the Junior Subordinated Debentures, under the terms of the indenture, are deferrable at National Mercantile’s option, for a period up to ten consecutive semiannual payments, but in any event not beyond June 25, 2031.  The National Mercantile has not deferred any interest payments.

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National Mercantile’s cash and due from banks was $0.6 million on September 30, 2004 compared to $1.2 million at December 31, 2003.

Dividends and capital distributions from the Banks constitute the principal ongoing source of cash to National Mercantile.  The Banks are subject to various statutory and regulatory restrictions on their ability to pay dividends and capital distributions to National Mercantile.

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 earnings, as defined by the OCC.  The OCC and the Federal Reserve 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.  A bank’s ability to pay dividends in the future is, and could be, further influenced by regulatory policies or agreements and by capital guidelines.

Mercantile has a substantial accumulated deficit and does not anticipate having positive retained earnings for the foreseeable future.  South Bay has an accumulated surplus of $1,017,000 as of September 30, 2004.  Mercantile and South Bay may from time to time be permitted to make capital distributions to National Mercantile with the consent of the OCC.  It is not anticipated that such consent could be obtained unless the distributing bank were to remain “well capitalized” following such distribution.

ASSET LIABILITY MANAGEMENT

The following table shows that the Company’s cumulative one-year interest rate sensitivity gap indicated an asset sensitive position of $55.1 million at September 30, 2004, a $30.7 million decrease from an asset sensitive position of $85.9

30

million at December 31, 2003.  This change resulted primarily from an increase in demand, money market and savings deposits repricing in less than three months, partially offset by an increase in adjustable loans receivable and federal funds sold.

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 deposits 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.

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Rate-Sensitive Assets and Liabilities

	September 30, 2004
	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	$	4,000		$	—			$	—			$	—		$	4,000
Securities at amortized cost	7,667			510				25,538				11,082			44,797
Due from banks - interest bearing	—			2,728				—				—			2,728
FRB and other stock, at cost	—			—				—				2,956			2,956
Loans receivable (1)	250,291			15,897				33,204				4,182			303,574
Total rate-sensitive assets	261,958			19,135				58,742				18,220			358,055
Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings	138,278			—				—				—			138,278
Time certificates of deposit	23,580			32,205				6,791				192			62,768
Other borrowings	25,000			6,900								—			31,900
Total rate-sensitive liabilities	186,858			39,105				6,791				192			232,946
Interest rate-sensitivity gap	75,100			(19,970		)		51,951				18,028			125,109
Cumulative interest rate-sensitivity gap	$	75,100		$	55,130			$	107,081			$	125,109
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	140		%	124		%		146		%		154		%

(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.

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Rate-Sensitive Assets and Liabilities

	December 31, 2003
	Maturing or repricing in
	Less than three months			After three months but within oneyear			After one year but within 5years			After 5years			Total
	(Dollars in thousands)
Rate-Sensitive Assets:
Federal funds sold and securities purchased under agreements to resell	$	10,000		$	—		$	—		$	—		$	10,000
Securities available-for-sale, at amortized cost	10,507			4,186			4,875			11,309			30,877
Securities held-to-maturity	—			—			—			4,597			4,597
Due from banks - interest bearing	—			4,728			—			—			4,728
FRB and other stock, at cost	—			—			—			1,872			1,872
Loans receivable (1)	221,578			6,647			27,973			4,341			260,539
Total rate-sensitive assets	242,085			15,561			32,848			22,119			312,613
Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings	123,696			—			—			—			123,696
Time certificates of deposit	28,427			19,263			7,333			—			55,023
Other borrowings	—			399			—			—			399
Total rate-sensitive liabilities	152,123			19,662			7,333			—			179,118
Interest rate-sensitivity gap	89,962			(4,101		)	25,515			22,119			133,495
Cumulative interest rate-sensitivity gap	$	89,962		$	85,861		$	111,376		$	133,495
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	159		%	150		%	162		%	175		%

(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.

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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 September 30, 2004, our allowance for credit losses equaled 1.27% of loans receivable and 1584.40% of nonperforming loans.  Although we believed that we had established adequate allowances for credit losses as of September 30, 2004, 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

34

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 September 30, 2004, 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

35

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 $3.2 million in connection with the South Bay acquisition in December 2001.  During the fourth quarter of 2003, 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.

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         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:

•Future earnings are assured;

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

A valuation 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. No such valuation allowance exists at September 30, 2004.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements in the Quarterly Report on Form 10-QSB under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report are forward-looking and are based upon information currently available to the Company.  The Company, through its officers, directors or employees, may also from time to time make oral forward-looking statements.   Any such statement is qualified by reference to these cautionary statements.   In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the Company is hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statement made by or on behalf of the Company.

Undue reliance should not be placed on the Company’s forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond the Company’s control.  The Company’s forward-looking statements speak only as of the date on which this report was filed with United Stated Securities and Exchange Commission.  Over time, actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by the Company’s forward-looking statements, and such difference might be significant and materially adverse to the Company’s stockholders.

All subsequent written or oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified by the factors described above.   The Company assumes no obligation, and disclaims any obligation, to update information contained in the Quarterly Report on Form 10-QSB, including forward-looking

37

statements, as a result of facts, events or circumstances after the date of this report, except as required by law in the normal course of its public disclosure practices.

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 reasonably 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 reasonably likely to materially affect, the Company’s internal control over financial reporting.

38

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

None.

Item 5.       OTHER INFORMATION

None.

Item 6.       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

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:	November 15 , 2004	/s/  SCOTT A. MONTGOMERY
		Scott A. Montgomery
		Chief Executive Officer
DATE:	November 15 , 2004	/s/  DAVID R. BROWN
		David R. Brown
		Principal Financial and Principal Accounting Officer

39

EX-31.1

Exhibit 31.1

I, Scott A. Montgomery, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of National Mercantile Bancorp;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 (b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.  The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date:	November 15, 2004	/s/ SCOTT A. MONTGOMERY
		Scott A. Montgomery
		Chief Executive Officer

1

EX-31.2

Exhibit 31.2

I, David R. Brown, certify that:

1. I have reviewed this quarterly report on Form 10-QSB of National Mercantile Bancorp;

 
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;

4. The small business issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.  The small business issuer’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

Date:	November 15, 2004	/s/  DAVID R. BROWN
		David R. Brown Chief Financial Officer

1

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

                In connection with the Quarterly Report of National Mercantile Bancorp (the “Company”) on Form 10-QSB for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Scott A. Montgomery, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

                (1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

                (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ SCOTT A. MONTGOMERY

Scott A. Montgomery
Chief Executive Officer

Date:  November 15, 2004

1

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

                In connection with the Quarterly Report of National Mercantile Bancorp (the “Company”) on Form 10-QSB for the period ending September 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David R. Brown, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

                (1)  The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

                (2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ DAVID R. BROWN

David R. Brown

Chief Financial Officer

Date:  November 15, 2004

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