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 June 30, 2005

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 Los Angeles, California	90067
(Address to principal executive offices)	(Zip Code)
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 Yeso   No

The number of shares of Common Stock, no par value, of the issuer outstanding as of August 12, 2005 was 4,322,674.

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

PART I – FINANCIAL INFORMATION

Item 1.  Financial Statements

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	June 30,			December 31,
	2005			2004
	(Dollars in thousands)
ASSETS
Cash and due from banks-demand	$	19,294		$	14,187
Due from banks-interest bearing	2,000			2,728
Federal funds sold and securities purchased under agreements to resell	9,000			—
Cash and cash equivalents	30,294			16,915
Securities available-for-sale, at fair value; aggregate amortized cost of $43,387 and $37,020 at June 30, 2005 and December 31, 2004, respectively	43,287			36,954
Securities held-to-maturity, at amortized cost	3,048			3,507
FRB and other stock, at cost	3,163			3,076
Loans receivable	307,528			313,847
Allowance for credit losses	(4,146		)	(3,928		)
Net loans receivable	303,382			309,919
Premises and equipment, net	5,852			5,804
Other real estate owned	1,056			1,056
Deferred tax asset	4,862			5,286
Goodwill	3,225			3,225
Core deposit intangible, net	1,519			1,630
Accrued interest receivable and other assets	3,996			3,750
Total assets	$	403,684		$	391,122
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	145,997		$	113,852
Interest-bearing demand	31,284			34,961
Money market	65,894			69,431
Savings	30,555			32,199
Time certificates of deposit:
$100,000 or more	56,079			41,111
Under $100,000	20,501			21,988
Total deposits	350,310			313,542
Other borrowings	—			25,900
Junior subordinated deferrable interest debentures	15,464			15,464
Accrued interest payable and other liabilities	1,478			1,734
Total liabilities	367,252			356,640
Shareholders’ equity:
Preferred stock, no par value - authorized 1,000,000 shares:
Series A non-cumulative convertible perpetual preferred stock;authorized 990,000 shares; no shares and 666,273 shares outstanding at June 30, 2005 and December 31, 2004, respectively	—			5,442
Series B non-cumulative convertible perpetual preferred stock; authorized 1,000 shares; 1,000 shares outstanding at June 30, 2005 and December 31, 2004	1,000			1,000
Common stock, no par value; authorized 10,000,000 shares; 4,320,874 shares and 2,954,128 shares outstanding at June 30, 2005 and December 31, 2004, respectively	45,155			39,491
Accumulated deficit	(9,747		)	(11,726		)
Accumulated other comprehensive income	24			275
Total shareholders’ equity	36,432			34,482
Total liabilities and shareholders’ equity	$	403,684		$	391,122

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				For the Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
	(Dollars in thousands,
	except per share data)
Interest income:
Loans, including fees	$	5,675	$	3,920	$	11,118	$	7,705
Securities	377		371		745		670
Due from banks - interest bearing	18		13		34		28
Federal funds sold and securities purchased under agreements to resell	19		12		29		54
Total interest income	6,089		4,316		11,926		8,457
Interest expense:
Deposits:
Interest-bearing demand	35		19		67		36
Money market and savings	234		183		454		346
Time certificates of deposit:
$100,000 or more	259		74		467		157
Under $100,000	152		105		294		218
Total interest expense on deposits	680		381		1,282		757
Federal funds purchased and securities sold under agreements to repurchase	—		2		—		2
Junior subordinated deferrable interest debentures	297		228		577		454
Other borrowings	39		83		133		171
Total interest expense	1,016		694		1,992		1,384
Net interest income before provision for credit losses	5,073		3,622		9,934		7,073
Provision for credit losses	—		—		89		—
Net interest income after provision for credit losses	5,073		3,622		9,845		7,073
Other operating income:
Net gain on sale of securities available-for-sale	—		—		—		19
International services	16		7		26		21
Investment division	14		13		29		25
Deposit-related and other customer services	269		382		566		802
Total other operating income	299		402		621		867
Other operating expenses:
Salaries and related benefits	1,848		1,887		3,686		3,755
Net occupancy	239		324		485		615
Furniture and equipment	124		162		251		298
Printing and communications	119		148		264		281
Insurance and regulatory assessments	105		103		213		220
Client services	147		148		319		280
Computer data processing	218		224		450		485
Legal services	308		78		456		181
Other professional services	285		191		539		373
Amortization of core deposit intangible	56		56		112		112
Retirement of fixed assets and leasehold improvements	—		43		—		43
Promotion and other expenses	150		75		310		219
Total other operating expenses	3,599		3,439		7,085		6,862
Income before income tax provision	1,773		585		3,381		1,078
Income tax provision	736		240		1,403		442
Net income	$	1,037	$	345	$	1,978	$	636
Earnings per share:
Basic	$	0.33	$	0.12	$	0.65	$	0.22
Diluted	$	0.22	$	0.08	$	0.42	$	0.14

See accompanying notes to consolidated financial statements.

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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Six Months Ended June 30,
	2005			2004
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	1,978		$	636
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	207			290
Provision for credit losses	89			—
Gain on sale of securities available for sale	—			(19		)
Net amortization of premium on securities available-for-sale	37			109
Net amortization of premium on securities held-to-maturity	16			26
Net amortization of core deposit intangible	112			112
Net amortization of premium on loans purchased	83			100
Decrease in accrued interest receivable and other assets	331			90
Decrease in accrued interest payable and other liabilities	(256		)	(317		)
Net cash provided by operating activities	2,597			1,027
Cash flows from investing activities:
Purchase of securities available-for-sale	(8,682		)	(22,532		)
Proceeds from sales of securities available-for-sale	—			2,019
Proceeds from repayments and maturities of securities available-for-sale	2,278			3,067
Proceeds from repayments and maturities of securities held-to-maturity	443			546
Loan payoffs (originations) and principal collections, net	5,995			(25,380		)
Net (purchase) of Federal Reserve Stock and other stocks	(87		)	(874		)
Purchases of premises and equipment	(255		)	(316		)
Net cash provided by (used in) investing activities	(308		)	(43,470		)
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts	23,287			28,540
Net increase (decrease) in time certificates of deposit	13,481			(5,242		)
Net decrease in securities sold under agreements to repurchase and federal funds purchased	—			(399		)
Net (decrease) increase in other borrowings	(25,900		)	8,900
Net proceeds from exercise of stock options	222			78
Net cash provided by financing activities	11,090			31,877
Net increase in cash and cash equivalents	13,379			(10,566		)
Cash and cash equivalents, January 1	16,915			39,284
Cash and cash equivalents, June 30	$	30,294		$	28,718
Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,857		$	1,152
Cash paid for income taxes	$	800		$	28

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 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 months and six months ended June 30, 2005 are not necessarily indicative of the results expected for any subsequent period or for the full year ending December 31, 2005.  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, 2004.

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 3,126,701 and 4,703,484, respectively, for the three months ended June 30, 2005 and 3,050,237 and 4,689,249, respectively, for the six months ended June 30, 2005.   The weighted average number of common shares outstanding used in computing basic earnings per share and diluted earnings per share was 2,906,241 and 4,551,564, respectively, for the three months ended June 30, 2004 and 2,858,382 and 4,607,981, respectively, for the six months ended June 30, 2004.

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

	Earnings		Weighted
	available to		Average	Per share
	shareholders		Shares	amount
	(in thousands)
For the three months ended June 30, 2005:
Basic EPS	$	1,037	3,126,701	$	0.33
Effect of dilutive securities:
Options			200,083
Convertible preferred stock			1,376,700
Diluted earnings per share	$	1,037	4,703,484	$	0.22
For the three months ended June 30, 2004:
Basic and diluted loss per share	$	345	2,906,241	$	0.12
Effect of diultive securities:
Options			140,001
Convertible preferred stock			1,505,322
Diluted earnings per share	345		4,551,564	$	0.08
For the six months ended June 30, 2005:
Basic EPS	$	1,978	3,050,237	$	0.65
Effect of dilutive securities:
Options			198,549
Convertible preferred stock			1,440,463
Diluted earnings per share	$	1,978	4,689,249	$	0.42
For the six months ended June 30, 2004:
Basic EPS	$	636	2,858,382	$	0.22
Effect of dilutive securities:
Options			245,782
Convertible preferred stock			1,503,817
Diluted earnings per share	$	636	4,607,981	$	0.14

NOTE 3—CASH AND CASH EQUIVALENTS

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

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NOTE 4—ALLOWANCE FOR CREDIT LOSSES

Provisions for credit losses charged to operations reflect management’s judgment of the adequacy of the allowance for credit losses and are determined through periodic analysis of the loan portfolio.  This analysis includes a detailed review of the classification and categorization of problem loans; 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 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						Six Months ended
	June 30,			June 30,			June 30,			June 30,
	2005			2004			2005			2004
	(Dollars in thousands)						(Dollars in thousands)
Balance, beginning of period	$	4,014		$	3,633		$	3,928		$	3,635
Loans charged off:
Commercial - secured and unsecured	—			—			6			31
Real estate loans:
Secured by commercial real properties	—			—			—			—
Secured by one to four family residential properties	—			—			—			—
Secured by multifamily residential properties	—			—			—			—
Total real estate loans	—			—			—			—
Construction and land development	—			—			—			—
Consumer installment, home equity and unsecured loans to individuals	—			—			—			4
Total loans charged-off	—			—			6			35
Recoveries of loans previously charged off:
Commercial - secured and unsecured	131			57			133			68
Real estate loans:
Secured by commercial real properties	—			—			—			—
Secured by one to four family residential properties	—			—			—			—
Secured by multifamily residential properties	—			—			—			—
Total real estate loans	—			—			—			—
Construction and land development	—			—			—			6
Consumer installment, home equity and unsecured loans to individuals	1			1			2			17
Total recoveries of loans previously charged off	132			58			135			91
Net charge-offs	(132		)	(58		)	(129		)	(56		)
Provision for credit losses	—			—			89			—
Balance, end of period	$	4,146		$	3,691		$	4,146		$	3,691

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

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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.

NOTE 5—GOODWILL AND CORE DEPOSIT INTANGIBLES

As of June 30, 2005 and December 31, 2004, the Company had goodwill of $3.2 million, and net core deposit intangibles of $1.5 million and $1.6 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 June 30, 2005 and December 31, 2004, and accumulated amortization was $782,000 and $670,000, respectively, at such dates.  The core deposit intangibles are estimated to have a life of 10 years and 4 months. Amortization for intangibles for 2005 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 or more frequently if conditions suggest impairment may exist.

NOTE 6—INCOME TAXES

Income tax provisions of $736,000 and $240,000 were recorded for the three months ended June 30, 2005 and 2004, respectively.  Income tax provisions of $1,403,000 and $442,000 were recorded for the six months ended June 30, 2005 and 2004, respectively.

At June 30, 2005, the Company had: (i) federal net operating loss carry forwards (“NOLS”) of approximately $9.7 million, which begin to expire in the year 2009; and (ii) federal alternative minimum tax “AMT” credits of $364,000.  The AMT credits carry forward indefinitely.

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

NOTE 7—BENEFIT PLANS

The estimated per share weighted average fair value of options granted in the three months ended June 30, 2005 and 2004 was $9.72 and $6.85, respectively.  The estimated per share weighted average fair value of options granted in the six months ended June 30, 2005 and 2004 was $9.59 and $6.95, 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

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Compensation, encourages, but does not require, companies to record compensation cost for stock-based employee compensation plans at fair value.  Accordingly and in accordance with the principle contained in APBO 25, 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 and six months ended June 30, 2005 and 2004 would have decreased to the pro forma amounts indicated below:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
	(Dollars in thousands,				(Dollars in thousands,
	except per share data)				except per share data)
Net Income:
As reported	$	1,037	$	345	$	1,978	$	636
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	41		35		78		57
Pro forma	$	996	$	310	$	1,900	$	579
Income Per Share as reported:
Basic	$	0.33	$	0.12	$	0.65	$	0.22
Diluted	0.22		0.08		0.42		0.14
Income Per Share Pro forma:
Basic	$	0.32	$	0.11	$	0.62	$	0.20
Diluted	0.21		0.07		0.41		0.13

The fair values of options granted during the three months ended June 30, 2005 and 2004 were estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used: 2005— no dividend yield, expected volatility of 43%, risk-free interest rate of 3.94%, and an expected life of 10 years; 2004— no dividend yield, expected volatility of 57%, risk-free interest rate of 4.60%, and an expected life of 10 years.

The Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), “Share-Based Payment” in December 2004, which requires entities that grant stock options and shares to employees to recognize the fair value of those options and shares as compensation cost over the service (vesting) period in their financial statements.  For public entities, such as National Mercantile, that file as small business issuers the effective date for SFAS No. 123(R) is the first interim or annual reporting period that begins after December 15, 2005.  Consequently, upon adoption of SFAS No. 123R the compensation cost for options granted will be treated as an expense.  The Company intends to adopt FAS No. 123R on January 1, 2006 and is currently evaluating the impact the adoption of the standard will have on the Company’s results of operations.

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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:

	Three Months ended June 30,						Six Months ended June 30,
	2005			2004			2005			2004
	(Dollars in thousands)						(Dollars in thousands)
Net income (loss)	$	1,037		$	345		$	1,978		$	636
Other comprehensive income (loss) before tax, and unrealized losses on securities:
Unrealized gain (loss) on interest rate swaps used in cash flow hedges	712			—			(370		)	—
Unrealized gain (loss) on interest rate floors used in cash flow hedges	(26		)	—			(26		)	—
Unrealized gain (loss) on securities available for sale	260			(377		)	(34		)	(346		)
Other comprehensive income (loss), before tax	946			(377		)	(430		)	(346		)
Income tax benefit (expense) related to items of other comprehensive income	(388		)	155			179			142
Other comprehensive income (loss)	558			(222		)	(251		)	(204		)
Total comprehensive income	$	1,595		$	123		$	1,727		$	432

NOTE 9—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 June 30, 2005, National Mercantile was paying an interest rate of 7.50% 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

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2006.  By use of this interest rate swap, the Company is hedging against a decline in rates in its portfolio of adjustable rate loans receivable.

The Company does not utilize derivatives for speculative purposes.  The interest rate swap reduces the cost of the 10.25% fixed-rate Junior Subordinated Debentures in a low interest rate environment.  This swap transaction is designated as hedging the exposure to variability in expected future cash flows that is attributable to a changes in interest rates on the Companies adjustable-rate loans (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 operations.  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.  A $507,000 increase in the fair value of the swap was recorded in income for the three-month period ended June 30, 2005 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 June 30, 2005, $1.0 million of the Company’s securities were pledged as collateral.

In July 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 interest rate swap has been recognized as an adjustment to interest income.  At June 30, 2005, the Banks were paying an interest rate of 7.50% 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.  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 operations.  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.

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On May 5, 2005, National Mercantile purchased several interest rate floors based upon the prime rate lending index as follows: (i) $150.0 million with a strike rate of 5.50% that expires May 6, 2006; (ii) $25.0 million with a strike rate of 5.75% that expires May 6, 2008; (iii) $25.0 million with a strike rate of 5.50% that expires May 6, 2010; and (iv) $25.0 million with a strike rate of 5.25% that expires May 6, 2012.   In the event, and for the number of days, that the actual prime rate is less than the strike rate, the counter party to the interest rate floors will pay the Company the difference between the actual prime rate and the strike rate calculated on the notional amounts.  The Company has passed the effect of the interest rate floors to the Banks by entering into reciprocal interest rate floors in the aggregate notional amount.

These interest rate floors 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.  The three $25.0 million floors have been designated as cash flow hedges.  Accordingly, the change in fair value of the floors is recorded each period as other comprehensive income and any ineffective portion of the change in the fair value is recorded in current operations.  The Company has a large portion of its loan portfolio that adjusts to changes in the prime rate lending index and, therefore, the floors are currently considered highly effective in offsetting changes in the cash flows of the loan portfolio.  At June 30, 2005 losses of $26,000 and $8,000 were recorded in other comprehensive income and current operations, respectively, for these interest rate floors.   The $150.0 million interest rate floor has not been designated as a hedge and accordingly, the change in fair value is recorded in current operations.   For the quarter ended June 30, 2005 an $8,000 loss was recorded in current operations for this floor.  The premiums paid for the interest rate floors are amortized over the life of the floors.

NOTE 10— CONVERSION OF PREFERRED STOCK

Pursuant to the election of the holders of a majority of the outstanding shares of Series A Noncumulative Perpetual Convertible Preferred Stock (the “Series A Preferred”) of National Mercantile Bancorp (the “Company”) on June 23, 2005, each outstanding share of the Company’s Series A Preferred was automatically converted into two shares of the Company’s Common Stock in accordance with the Company’s Amended and Restated Articles of Incorporation, as amended.  During the six months ended June 30, 2005, 666,273 shares of Series A Preferred were converted into 1,332,546 shares of common stock.

NOTE 11—RECLASSIFICATIONS

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

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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.

RESULTS OF OPERATIONS

The Company recorded net income of $1,037,000, or $0.33 basic earnings per share and $0.22 diluted earnings per share, for the three months ended June 30, 2005 compared to net income of $345,000, or $0.12 basic earnings per share and $0.08 diluted earnings per share, for the same period of 2004.   The increase in net income for the second quarter of 2005 was primarily due to a $1.5 million increase in net interest income before the provision for credit losses resulting from increases in the prime rate lending index, interest rate swaps, 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 $1,978,000, or $0.65 basic earnings per share and $0.42 diluted earnings per share, for the six months ended June 30, 2005 compared to net income of $636,000, or $0.22 basic earnings per share and $0.14 diluted earnings per share, for the same period of 2004.   The increase in net income for the 2005 period was primarily due to a $2.8 million increase in net interest income before provision for credit losses resulting from increases in the prime rate lending index, interest rate swaps, 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.

Return on average assets during the second quarter and first half of 2005 was 1.09% and 1.03%, respectively, compared to 0.37% and 0.35% during the second quarter and first half of 2004, respectively. Return on average equity during the second quarter and first half of 2005 was 11.64% and 11.23%, respectively, compared to 4.28% and 3.95% during the second quarter and first half of 2004, respectively.

NET INTEREST INCOME

Net interest income before the provision for credit losses increased $1.5 million for the three months ended June 30, 2005 compared to the same quarter of 2004 due to a $1.8 million increase in total interest income partially offset by a $322,000

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increase in interest expense.  Loan interest income increased $1.8 million due to a $29.3 million greater average volume of loans receivable and a 176 basis point increase in yield, resulting primarily from increases in the prime rate lending index and interest rate swaps.  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 9—Derivative Financial Instruments of the Notes to Consolidated Financial Statements for details of the swap terms).  The interest rate swaps contributed $128,000 to interest income or 17 basis points to the increase in loan yield.  During the second half of 2004 and first half of 2005, the Federal Reserve Bank increased the federal funds rate on nine occasions totaling 225 basis points, after a prolonged period of accommodative monetary policy, in response to signs of a stronger expansion of the economy.  Approximately 75% of our $307.5 million loans receivable have adjustable interest rates; accordingly, rising interest rates positively affects interest income partially offset by greater payments on our $50 million of interest rate swaps.

Interest income from securities available-for-sale remained the same during the second quarter 2005 compared to the second quarter 2004 due to a 46 basis point increase in yield even with a $6.3 million decrease in average volume.  The increase in the yield on securities available-for-sale was due to higher yields on recently purchased securities.  The decrease in securities was due to maturities and principal paydowns of existing securities.

Overall, interest-earning assets were $17.9 million greater during the second quarter 2005 than second quarter 2004 and the higher yields and favorable change in composition to higher-yielding assets resulted in a 175 basis point increase in weighted average yield on interest-earning assets.

Interest expense increased $322,000 for the three months ended June 30, 2005 compared to the same period in 2004, due primarily to a 59 basis point increase in cost of funds.  The average interest-bearing liabilities remained unchanged at $219.6 million for both quarters.   Average interest-bearing deposits were $5.2 million greater than the second quarter 2004.  Interest expense on deposits increased $299,000 due to a 58 basis point increase in weighted average cost and a $5.2 million increase in average interest-bearing deposits. Relatively low costing interest-bearing demand deposits and money market and savings deposits averaged $1.6 million and $15.5 million less, respectively, in the 2005 period compared to the 2004 period.  The decrease in transactional deposits is due to depositors redeploying their funds to the Company’s higher yielding certificates of deposit and alternative investments outside the Banks.  Time certificates of deposit averaged $22.3 million more during the second quarter 2005 than the same period in 2004.  The cost of time certificates of deposit increased 84 basis points due to higher rates on new certificates and repricing of matured certificates during the higher interest rate environment.  Rising market

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rates of interest during the latter half of 2004 and first half of 2005 resulted in the cost of interest-bearing demand deposits and money market and savings deposits to increase a moderate 21 basis points and 31 basis points, respectively, compared to the second quarter of 2004.  The Company elected to only moderately increase transaction deposit rates and to fund earning asset growth during 2005 with time certificates of deposit and relatively inexpensive overnight other borrowings.  Other borrowings during the second quarter 2005 averaged $5.4 million, or $5.1 million less than the same period in 2004.  The cost of other borrowings was 2.89% and 3.17% for the second quarters of 2005 and 2004, respectively, representing a decline of 28 basis points in 2005 due to a greater volume of short-term advances and the maturity of higher-costing longer term advances.  In a sustained rising interest rate environment, increases in deposit interest rates will be required to prevent net deposit withdrawals.  Noninterest-bearing demand deposits increased $5.7 million in average volume in the second quarter 2005 compared to the same period in 2004.

The Company altered its liquidity strategy during 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 customer and brokered time certificates of deposit.  This type of funding is typically higher costing and exhibits higher interest rate sensitivity.  The relatively high cost of new time certificates of deposit, however, impacts a relatively small portion of the Company’s funding sources.

The net yield on interest earning assets increased 1.43 basis points from 4.38% during the second quarter in 2004 to 5.81% in the second quarter in 2005, while the net interest spread increased 116 basis points from 3.95% during the second quarter in 2004 to 5.11% in the second quarter in 2005.

Net interest income before the provision for credit losses increased $2.8 million for the six months ended June 30, 2005 compared to the same period of 2004 due to a $3.5 million increase in total interest income.  Loan interest income increased $3.4 million due to $39.2 million greater average volume of loans receivable and a 152 basis point increase in yield, resulting primarily from increases in the prime rate lending index and interest rate swaps.  The interest rate swaps contributed 21 basis points to the increase in loan yield.

Interest income from securities available-for-sale increased $90,000 during the first half of 2005 compared to the first half of 2004 due to a 42 basis point increase in yield with average volume increasing only slightly.  The increase in the yield on securities available-for-sale was due to higher yields on the recently purchased securities.

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Overall, interest-earning assets were $27.5 million greater during the first half of 2005 than first half of 2004 and the higher yields and favorable change in composition to higher-yielding assets resulted in a 159 basis point increase in weighted average yield on interest-earning assets.

Interest expense increased $608,000 for the six months ended June 30, 2005 compared to the same period in 2004, due to a $14.9 million increase in average interest-bearing liabilities and a 46 basis point increase in cost of funds.   Average interest-bearing deposits were $13.8 million greater than the first half of 2004.  Interest expense on deposits increased $525,000 due to a 48 basis point increase in weighted average cost and a $13.8 million increase in average interest-bearing deposits. Relatively low costing money market and savings deposits averaged $6.5 million less in the 2005 period compared to the 2004 period.  The decrease in transactional deposits is due to depositors redeploying their funds to higher yielding certificates of deposit and alternative investments outside the Banks.  Time certificates of deposit averaged $20.0 million more during the first half of 2005 than the same period in 2004.  The cost of time certificates of deposit increased 68 basis points due to higher rates on new certificates and repricing of matured certificates during the higher interest rate environment.  Rising market rates of interest during the latter half of 2004 and first half of 2005 resulted in the cost of interest-bearing demand deposits and money market and savings deposits increasing a moderate 20 basis points and 26 basis points, respectively, compared to the first half of 2004.    Other borrowings during the first half of 2005 averaged $10.2 million, or $1.2 million greater than the same period in 2004.  The cost of other borrowings was 2.62% and 3.82% for the first half of 2005 and 2004, respectively, representing a decline of 120 basis points in 2005 due to a greater volume of short-term advances and the maturity of higher-costing longer term advances.  Noninterest-bearing demand deposits were relatively stable, with an increase of $2.0 million in average volume in the first half of 2005 compared to 2004.

The net yield on interest earning assets increased 131 basis points from 4.36% during the first half of 2004 to 5.67% in the first half of 2005, while the net interest spread increased 113 basis points from 3.91% during the first half of 2004 to 5.04% in the first half in 2005.

The following table presents the components of net interest income for the three months ended June 30, 2005 and 2004.

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Average Balance Sheet and

Analysis of Net Interest Income

	Three Months ended
	June 30, 2005							June 30, 2004
						Weighted							Weighted
				Interest		Average					Interest		Average
	Average			Income/		Yield/		Average			Income/		Yield/
	Amount			Expense		Rate		Amount			Expense		Rate
	(Dollars in thousands)
Assets:
Federal funds sold and securities purchased under agreements to resell	$	2,526		19		3.02	%	$	4,623		12		1.04	%
Due from banks-interest-bearing	2,032			18		3.55	%	4,091			13		1.28	%
Securities available-for-sale	40,235			346		3.44	%	46,495			346		2.98	%
Securities held-to-maturity	3,194			31		3.88	%	4,245			25		2.31	%
Loans receivable (1) (2)	302,382			5,675		7.53	%	273,042			3,920		5.77	%
Total interest earning assets	350,369			6,089		6.97	%	332,496			4,316		5.22	%
Noninterest earning assets:
Cash and due from banks - demand	16,352							23,194
Other assets	20,881							21,796
Allowance for credit losses and net unrealized gain on sales of securities available-for-sale	(4,358		)					(3,695		)
Total assets	$	383,244						$	373,791
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Demand	$	30,865		35		0.45	%	$	32,426		19		0.24	%
Money market and savings	97,512			234		0.96	%	113,038			183		0.65	%
Time certificates of deposit:
$100,000 or more	44,198			259		2.35	%	21,675			74		1.37	%
Under $100,000	26,175			152		2.33	%	26,381			105		1.60	%
Total time certificates of deposit	70,373			411		2.34	%	48,056			179		1.50	%
Total interest-bearing deposits	198,750			680		1.37	%	193,520			381		0.79	%
Other borrowings	5,404			39		2.89	%	10,524			83		3.17	%
Junior subordinated debentures	15,464			297		7.70	%	15,464			228		5.93	%
Federal funds purchased and securitiessold under agreements to repurchase	—			—		0.00	%	132			2		6.09	%
Total interest-bearing liabilities	219,618			1,016		1.86	%	219,640			694		1.27	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	126,399							120,734
Other liabilities	1,497							1,080
Shareholders’ equity	35,730							32,337
Total liabilities and shareholders’ equity	$	383,244						$	373,791
Net interest income (spread)				$	5,073	5.11	%				$	3,622	3.95	%
Net yield on earning assets (2)						5.81	%						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 $437,000 and $275,000 for the three months ended June 30, 2005 and 2004, respectively.

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The following table presents the components of net interest income for the six months ended June 30, 2005 and 2004.

Average Balance Sheet and

Analysis of Net Interest Income

	Six Months ended
	June 30, 2005							June 30, 2004
						Weighted							Weighted
				Interest		Average					Interest		Average
	Average			Income/		Yield/		Average			Income/		Yield/
	Amount			Expense		Rate		Amount			Expense		Rate
	(Dollars in thousands)
Assets:
Federal funds sold and securities purchased under agreements to resell	$	2,098		29		2.79	%	$	11,029		54		0.98	%
Due from banks-interest-bearing	2,378			34		2.88	%	4,394			28		1.28	%
Securities available-for-sale	40,073			680		3.39	%	39,707			590		2.97	%
Securities held-to-maturity	3,304			65		3.93	%	4,377			80		3.66	%
Loans receivable (1) (2)	305,556			11,118		7.34	%	266,353			7,705		5.82	%
Total interest earning assets	353,409			11,926		6.81	%	325,860			8,457		5.22	%
Noninterest earning assets:
Cash and due from banks - demand	17,736							23,078
Other assets	20,726							21,646
Allowance for credit losses and net unrealized gain on sales of securities available-for-sale	(4,213		)					(3,611		)
Total assets	$	387,658						$	366,973
Liabilities and shareholders’ equity:
Interest-bearing deposits:
Demand	$	31,448		67		0.43	%	$	31,176		36		0.23	%
Money market and savings	100,307			454		0.91	%	106,794			346		0.65	%
Time certificates of deposit:
$100,000 or more	42,352			467		2.22	%	22,908			157		1.38	%
Under $100,000	26,973			294		2.20	%	26,370			218		1.66	%
Total time certificates of deposit	69,325			761		2.21	%	49,278			375		1.53	%
Total interest-bearing deposits	201,080			1,282		1.29	%	187,248			757		0.81	%
Other borrowings	10,244			133		2.62	%	9,012			171		3.82	%
Junior subordinated debentures	15,464			577		7.52	%	15,464			454		5.90	%
Federal funds purchased and securities sold under agreements to repurchase	—			—		0.00	%	181			2		2.22	%
Total interest-bearing liabilities	226,788			1,992		1.77	%	211,905			1,384		1.31	%
Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	123,917							121,965
Other liabilities	1,423							848
Shareholders’ equity	35,530							32,255
Total liabilities and shareholders’ equity	$	387,658						$	366,973
Net interest income (spread)				$	9,934	5.04	%				$	7,073	3.91	%
Net yield on earning assets (2)						5.67	%						4.36	%

(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 $860,000 and $568,000 for the six months ended June 30, 2005 and 2004, 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)

	Six Months ended June 30,
	2005 vs 2004
							Net
	Increase (decrease) due to:						Increase
	Volume			Rate			(Decrease)
Interest Income:
Federal funds sold and securities purchased under agreement to resell	$	(44	)	$	19		$	(25	)
Interest-bearing deposits with other financial institutions	(13		)	19			6
Securities available-for-sale	6			84			90
Securities held-to-maturity	(20		)	5			(15		)
Loans receivable (2)	1,124			2,289			3,413
Total interest-earning assets	1,053			2,416			3,469
Interest Expense:
Interest-bearing deposits:
Demand	$	0		$	31		$	31
Money market and savings	(22		)	130			108
Time certificates of deposit:
$100,000 or more	133			177			310
Under $100,000	5			71			76
Total time certificates of deposit	138			248			386
Total interest-bearing deposits	116			409			525
Other borrowings	23			(61		)	(38		)
Junior subordinated debentures	—			123			123
Federal funds purchased and securities sold under agreements to repurchase	(2		)	—			(2		)
Total interest-bearing liabilities	137			471			608
Net interest income	$	916		$	1,945		$	2,861

(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 no provision for credit losses for the second quarter 2005 and $89,000 provision for the six months ended June 30, 2005 compared to no provision for the three months and six months ended June 30, 2004.  No provision for credit losses was made in the second quarter due to a decline in loans receivable and recoveries of loans previously charged off.  See Note 4 of Notes to Consolidated Financial Statements.

OTHER OPERATING INCOME

Other operating income decreased to $103,000 during the second quarter of 2005 from $402,000 during the second quarter of 2004 primarily due to an $113,000 decrease in deposit-related and other customer services income resulting from changes in deposit fee structures.

Other operating income decreased to $621,000 during the six months ended June 30, 2005 from $867,000 during the six months ended June 30, 2004 primarily due to a $236,000 decrease in deposit-related and other customer services income resulting from changes in deposit fee structures.

OTHER OPERATING EXPENSES

Other operating expenses increased to $3.6 million for the three months ended June 30, 2005 compared to $3.4 million for the same period of 2004. Variances within operating expenses were: (i) salaries and related benefits expense decreased $39,000 or 2.1% due to a reduction in staffing levels during the second half of 2004 related to the consolidation of client services partially offset by the addition of business development staff and increased commission expense; (ii) net occupancy expense decreased $85,000 or 26.2% due to a reduction in rent from the relocation of the Company’s headquarters office and banking office in Century City; (iii) legal services expense increased $230,000 or 294.9% primarily due to activity on the settlement of a dispute over collateral securing a borrower’s loan that has now been resolved; and, (iv) other professional services expense increased $94,000 or 49.2% due to a productivity consultant engagement and increased costs for audit services.

Other operating expenses increased to $7.1 million for the six months ended June 30, 2005 compared to $6.9 million for the same period of 2004. Variances within operating expenses were: (i) salaries and related benefits expense decreased $69,000 or 1.8% due to a reduction in staffing levels during 2004 related to the consolidation of client services partially offset by the addition of business development staff and increased commission expense; (ii) net occupancy expense decreased

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$130,000 or 21.1% due to a reduction in rent from the relocation of the Company’s headquarters office and banking office in Century City; (iii) legal services expense increased $275,000 or 151.9% primarily due to activity on the settlement of a dispute over collateral securing a borrower’s loan; and, (iv) other professional services expense increased $166,000 or 44.5% due to a productivity consultant engagement and increased costs for audit services.

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

	June 30, 2005
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Available-for-Sale:
U.S. Treasury securities	$	698	$	—	$	2	$	696
GNMA-issued/guaranteed mortgage pass through certificates	120		5		—		125
Other U.S. Government and federal agency securities	22,953		—		146		22,807
FHLMC/FNMA-issued mortgage pass through certificates	14,132		63		7		14,188
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	31		—		—		31
Privately issued corporate bonds, CMO and REMIC securities	5,453		—		13		5,440
	$	43,387	$	68	$	168	$	43,287
FRB and other equity stocks	$	3,163	—		—		$	3,163
	June 30, 2005
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Held-to-Maturity:
FHLMC/FNMA-issued mortgage pass through certificates	$	3,048	$	11	$	4	$	3,055
	$	3,048	$	11	$	4	$	3,055
	December 31, 2004
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Available-For-Sale:
U.S. Treasury securities	$	696	$	—	$	2	$	694
GNMA-issued/guaranteed mortgage pass through certificates	164		7		—		171
Other U.S. government and federal agency securities	23,958		—		128		23,830
FHLMC/FNMA-issued mortgage pass through certificates	9,288		76		1		9,363
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	38		—		—		38
Privately issued corporate bonds, CMO and REMIC securities	2,876		1		19		2,858
	$	37,020	$	84	$	150	$	36,954
FRB and other equity stocks	$	3,076	—		—		$	3,076
	December 31, 2004
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Held-to-Maturity:
FHLMC/FNMA-issued mortgage pass through certificates	$	3,507	$	40	$	—	$	3,547
	$	3,507	$	40	$	—	$	3,547

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As of June 30, 2005, the Company did not hold securities of any issuer, other than U.S. government-chartered agencies, the aggregate book value of which exceeded 10% of the Company’s shareholders’ equity.  At June 30, 2005 and December 31, 2004, there were no securities deemed by management to be other-than-temporarily impaired.

LOAN PORTFOLIO

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

Loan Portfolio Composition

	June 30,					December 31,
	2005					2004
	Amount			Percent		Amount			Percent
	(Dollars in thousands)
Commercial loans - secured and unsecured	$	94,117		31	%	$	98,429		31	%
Real estate loans:
Secured by commercial real properties	126,081			41	%	135,944			43	%
Secured by one to four family residential properties	9,953			3	%	9,405			3	%
Secured by multifamily residential properties	17,532			6	%	18,330			6	%
Total real estate loans	153,566			50	%	163,679			52	%
Construction and land development	56,843			18	%	50,289			16	%
Consumer installment, home equity and unsecured loans to individuals	4,203			1	%	2,516			1	%
Total loans outstanding	308,729			100	%	314,913			100	%
Deferred net loan origination fees	(1,201		)			(1,066		)
Loans receivable, net	$	307,528				$	313,847

Total loans outstanding decreased by $6.3 million to $307.5 million at June 30, 2005 compared to $313.8 million at December 31, 2004 due primarily to more rapid payoffs than funding of commercial real estate loans.  Real estate loans secured by commercial real properties decreased $9.9 million from $135.9 million at December 31, 2004 to $126.1 million at June 30, 2005.  The Company has experienced significant price competition, particularly for fixed rates on commercial real estate loans.

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NONPERFORMING ASSETS

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

Nonperforming Assets

	June 30,			December 31
	2005			2004
	(Dollars in thousands)
Nonaccrual loans	$	300		$	18
Troubled debt restructurings	—			—
Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest	—			1,804
Nonperforming loans	300			1,822
Other real estate owned	1,056			1,056
Other nonperforming assets	—			—
Total nonperforming assets	$	1,356		$	2,878
Allowance for credit losses as a percent of nonaccrual loans	1382.0		%	21822.2		%
Allowance for credit losses as a percent of nonperforming loans	1382.0		%	215.6		%
Total nonperforming assets as a percent of loans receivable	0.4		%	0.9		%
Total nonperforming assets as a percent of total shareholders’ equity	3.7		%	8.3		%

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 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.

There were no loans charged off during the second quarter of 2005.  Loans charged off during the six months ended June 30, 2005 were $6,000.   This compares to no loans being charged off during the second quarter of 2004 and $35,000 during the first half of 2004.   Recoveries of loans previously charged off were $132,000 and $135,000 during the second quarter and first half of 2005, respectively, compared to $58,000 and $91,000 during the second quarter and first half of 2004.  See Note 4 of Notes to Consolidated Financial Statements.

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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.

DEPOSITS

Total deposits were $350.3 million and $313.5 million at June 30, 2005 and December 31, 2004, respectively.  Noninterest-bearing demand deposits increased to $146.0 million at June 30, 2005 compared to $113.9 million at December 31, 2004.  Our noninterest-bearing demand deposits experience significant variability and seasonality due to the nature of our depositors’ businesses and the cash needs of our business customers for quarterly tax payments and owner distributions.  Noninterest-bearing demand deposits declined significantly at December 31, 2004 from the fourth quarter average of $129.0 million; thus the increase at June 30, 2005 reflected a normalization following this year-end variability as well as deposits that are expected to be transitory.  Money market deposits and savings deposits were $65.9 million and $30.6 million, respectively, at June 30, 2005 compared to $69.4 million and $32.2 million, respectively, at December 31, 2004.  Interest-bearing demand deposits, which for the most part are limited to individuals, decreased to $31.3 million at June 30, 2005 from $35.0 million at December 31, 2004.  Similar to noninterest-bearing demand deposits, interest-bearing demand deposits increased significantly at December 31, 2004 from the fourth quarter average of $31.7 million, thus the decline at June 30, 2005 reflected a normalization following the year-end variability.  Time certificates of deposit (“TCDs”) increased to $76.6 million at June 30, 2005 from $63.1 million at December 31, 2004 due to an increase in brokered deposits.  There were $11.5 million in brokered TCDs at June 30, 2005 compared to $6.9 million at December 31, 2004.

During the first half of 2005, the Company supplemented its liquidity with $7.5 million of brokered time certificates of deposit ranging in term from three months to one year.  Additionally, although the Company has priced its retail certificates of deposit to encourage runoff during the past several years, in the rising rate environment experienced during the first quarter of 2005, 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.

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OTHER BORROWINGS

There were no other borrowings, consisting of advances from the Federal Home Loan Bank, at June 30, 2005 compared to $25.9 million at December 31, 2004.   The decline in other borrowings reflected repayment at maturity due to the decline in loans receivable and increase in deposits.

SHAREHOLDERS’ EQUITY

Shareholders’ equity increased from $34.5 million at December 31, 2004 to $36.4 million at June 30, 2005 due to the retained earnings for the six months ended June 30, 2005 and the increase in market value of interest rate swaps and securities available-for-sale.

CAPITAL ADEQUACY REQUIREMENTS

At June 30, 2005, the Company and the Banks were in compliance with all applicable regulatory capital requirements and the Banks were “well capitalized” under the Prompt Corrective Action rules of the OCC.  The following table sets forth the regulatory capital standards for well-capitalized institutions, and the capital ratios for the Company and the Banks, as of June 30, 2005 and December 31, 2004.

26

Regulatory Capital Information

of the National MercantileBancorp and Banks

	Minimum
	For Capital		Well
	Adequacy		Capitalized		June 30,		December 31,
	Purposes		Standards		2005		2004
National Mercantile Bancorp:
Tier 1 leverage	4.00	%	N/A		11.18	%	9.87	%
Tier 1 risk-based capital	4.00	%	N/A		11.88	%	10.39	%
Total risk-based capital	8.00	%	N/A		13.85	%	12.42	%
Mercantile National Bank:
Tier 1 leverage	4.00	%	5.00	%	10.85	%	8.99	%
Tier 1 risk-based capital	4.00	%	6.00	%	12.53	%	10.44	%
Total risk-based capital	8.00	%	10.00	%	13.78	%	11.60	%
South Bay Bank, NA:
Tier 1 leverage	4.00	%	5.00	%	10.72	%	9.32	%
Tier 1 risk-based capital	4.00	%	6.00	%	10.21	%	9.32	%
Total risk-based capital	8.00	%	10.00	%	11.24	%	10.29	%

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 - demand was $19.3 million on June 30, 2005 compared to $14.2 million on December 31, 2004.  Due from banks-interest-bearing was $2.0 million at June 30, 2005 and $2.7 million at December 31, 2004, respectively.  There was $9.0 million in Federal funds sold at June 30, 2005 compared to no Federal funds sold at December 31, 2004.  Mercantile had $5.0 million and South Bay had $12.0 million in Federal funds lines with correspondent banks as of June 30, 2005.

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.   National Mercantile has not deferred any interest payments.

National Mercantile’s cash and due from banks was $56,000 on June 30, 2005 compared to $174,000 at December 31, 2004.   Due from banks-interest bearing was $510,000 at June 30, 2005 compared to $1.7 million at December 31, 2004.

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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 cumulative retained earnings for the foreseeable future.  South Bay had cumulative retained earnings of $2.8 million as of June 30, 2005.  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 likely that such consent could not be obtained unless the distributing bank remained “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 $21.4 million at June 30, 2005 compared to a liability sensitive position of $9.2 million at December 31, 2004.  This change resulted primarily from an increase in securities repricing after three months but within one year, an increase in federal funds sold and a decrease in other borrowings partially offset by a decrease in adjustable loans receivable and an increase in time certificates of deposit.

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Interest rate sensitivity is managed by matching the repricing opportunities on the Company’s earning assets to those on the funding liabilities.  Various strategies are used to manage the repricing characteristics of assets and liabilities to ensure that exposure to interest rate fluctuations is limited within guidelines of acceptable levels of risk-taking.  Hedging strategies, including the terms and pricing of loans and deposits, the use of derivative financial instruments (see Note 9 to the Consolidated Financial Statements) and managing the deployment of securities are used to reduce mismatches in interest rate repricing opportunities of portfolio assets and their funding sources.  Interest rate risk is measured using financial modeling techniques, including stress tests, to measure the impact of changes in interest rates on future earnings.  These static measurements do not reflect the results of any projected activity and are best used as early indicators of potential interest rate exposures.

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.  During the second quarter of 2005, the Company purchased $225 million of interest rate floors at various strike prices and terms to partially mitigate the negative effects of rapidly declining interest rates on its net interest margin.  Alternatively, a rising interest rate environment tends to positively effect net interest income due to the Company’s large base of noninterest-bearing deposits as well as interest rates paid on funding liabilities typically change in smaller magnitude compared to changes in the yield on earning assets.

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Rate-Sensitive Assets and Liabilities

	June 30, 2005
	Maturing or repricing in
	Less			After three			After one
	than			months			year
	three			but within			but within			After
	months			one year			5 years			5 years			Total
	(Dollars in thousands)
Rate-Sensitive Assets:
Federal funds sold and securities purchased under agreements to resell	$	9,000		$	—		$	—		$	—		$	9,000
Securities at amortized cost	521			14,589			12,280			19,045			46,435
Due from banks - interest bearing	2,000			—			—			—			2,000
FRB and other stock, at cost	—			—			—			3,163			3,163
Loans receivable (1)	237,188			18,270			40,962			10,808			307,228
Interest rate swaps	—			—			40,000			25,000			65,000
Total rate-sensitive assets	248,709			32,859			93,242			58,016			432,826
Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings	127,733			—			—			—			127,733
Time certificates of deposit	35,805			31,607			9,126			42			76,580
Other borrowings	—			—			—			—			—
Junior subordinated debentures	—			—			—			15,464			15,464
Interest rate swaps	65,000			—			—			—			65,000
Total rate-sensitive liabilities	228,538			31,607			9,126			15,506			284,777
Interest rate-sensitivity gap	20,171			1,252			84,116			42,510			148,049
Cumulative interest rate-sensitivity gap	$	20,171		$	21,423		$	105,539		$	148,049
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	109		%	108		%	139		%	152		%

(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, 2004
	Maturing or repricing in
	Less			After three			After one
	than			months			year
	three			but within			but within			After
	months			one year			5 years			5 years			Total
	(Dollars in thousands)
Rate-Sensitive Assets:
Federal funds sold and securities purchased under agreements to resell	$	—		$	—		$	—		$	—		$	—
Securities available-for-sale, at amortized cost	500			$	6,696		$	15,885		$	13,939		$	37,020
Securities held-to-maturity	—			—			—			3,507			3,507
Due from banks - interest bearing	2,728			—			—						2,728
FRB and other stock, at cost	—			—			—			3,076			3,076
Loans receivable (1)	251,134			10,468			40,991			11,236			313,829
Interest rate swaps	—			—			40,000			25,000			65,000
Total rate-sensitive assets	254,362			17,164			96,876			56,758			425,160
Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings	136,591			—			—			—			136,591
Time certificates of deposit	26,708			26,543			9,848			—			63,099
Other borrowings	25,900			—			—			—			25,900
Junior subornidated debentures	—			—			—			15,464			15,464
Interest rate swaps	65,000			—			—			—			65,000
Total rate-sensitive liabilities	254,199			26,543			9,848			15,464			306,054
Interest rate-sensitivity gap	163			(9,379		)	87,028			41,294			119,106
Cumulative interest rate-sensitivity gap	$	163		$	(9,216	)	$	77,812		$	119,106
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	100		%	97		%	127		%	139		%

(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.

FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS

The Company’s results of operations and financial condition are affected by many factors, including the following.

Risk from changes in interest rates.

The success of the Company’s business depends, to a large extent, on its net interest income.  Changes in market interest rates can affect net interest income by affecting the spread between interest-earning assets and interest-bearing liabilities.  This

31

may be due to the different maturities of 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:

•The Company’s ability to originate loans;

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

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

•The average life of interest-earning assets;

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

•The 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 the Company’s control.

Risk from possible declines in the quality of the Company’s assets.

The Company’s financial condition depends significantly on the quality of its assets.  While its has developed and implemented underwriting policies and procedures to guide management 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 non-performing assets rises, the 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.

Allowances for credit losses may be inadequate.

Allowances for credit losses are established against each segment of the loan portfolio.  At June 30, 2005, the allowance for credit losses equaled 1.35% of loans receivable and 1382.0% of nonperforming loans.  Although management believes that it has established adequate allowances for credit losses as of June 30, 2005, the credit quality of the Company’s assets is affected by many factors beyond its control, including local and national economic conditions, and the possible existence of facts which are not currently known which adversely affect the likelihood of repayment of various loans in the loan portfolio and realization of the collateral upon a default.  Accordingly, there is no assurance 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.  Material future additions to the allowance for credit losses may also be necessary due to increases

32

in the size and changes in the composition of the loan portfolio.  Increases in the provisions for credit losses would adversely affect the Company’s results of operations.

Economic conditions may worsen.

The Company’s business is strongly influenced by economic conditions in its market area (principally, the greater Los Angeles metropolitan area) as well as regional and national economic conditions and in its niche markets, including the entertainment industry in Southern California.  Should the economic condition in these areas worsen, the financial condition of its borrowers could weaken, which could lead to higher levels of loan defaults or a decline in the value of collateral for its loans.  In addition, an unfavorable economy could reduce the demand for its loans and other products and services.

Because a significant amount of the loans are made to borrowers in California, the Company’s operations could suffer as a result of local recession or natural disasters in California.

At June 30, 2005, a large majority of the loans outstanding were collateralized by real properties located in California.  Because of this concentration in California, the Company’s 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 the loans, together with any primary financing on the mortgaged properties, equal or exceed the value of the mortgaged properties, the Company 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 the ability to recover losses on properties affected by such disasters and adversely impact the Company’s results of operations.

The Company’s business is very competitive.

There is intense competition in Southern California and elsewhere in the United States for banking customers.  The Company experiences competition for deposits from many sources, including credit unions, insurance companies and money market and other mutual funds, as well as other commercial banks and savings institutions.  The Company competes 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 the competitors have greater financial strength, marketing capability and name recognition, 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 small business customers.  Such advantages may give the competitors

33

opportunities to realize greater efficiencies and economies of scale than the Company can.  There is no assurance that the Company will be able to compete effectively against its competition.

The Company’s 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 the Company may be changed at any time, and the interpretation of these statutes and regulations by examining authorities also may change.  There is no assurance that future changes in applicable statutes and regulations or in their interpretation will not adversely affect the Company’s business.

Goodwill is evaluated annually and any impairment must be recorded 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.

The Company has goodwill of $3.2 million in connection with the South Bay acquisition in December 2001.  During the fourth quarter of 2004, the required impairment tests of goodwill were completed.  The tests determined that goodwill was not considered impaired.  No assurance can be given that goodwill will not become impaired in the future.

The Company annually evaluates whether the deferred tax asset will be realized and must establish a valuation allowance if necessary to reduce it to its realizable value.

On a periodic basis, at least annually, an analysis is performed 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 likely;

•Expected future taxable income arising from the reversal of temporary differences adequate 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

34

to income tax expense.  A charge to earnings will be made in the event that a valuation allowance to the deferred tax asset is necessary.  No such valuation allowance existed at June 30, 2005.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements about the Company.  Forward-looking statements consist of description of plans or objectives for future operations, products or services, forecasts of revenues, earnings or other measures of economic performance and assumptions underlying or relating to any of the foregoing.  Because forward-looking statements discuss future events or conditions and not historical facts, they often include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” “target,” “can,” “could,” “may,” “should” or similar expressions.   Do not rely unduly on forward-looking statements.  They give the Company’s expectations about the future and are not guarantees or predictions of futures events, conditions or results.  Forward-looking statements speak only as of the date they are made, and the Company does not undertake to update them to reflect changes that occur after that date.

Many factors, most beyond the Company’s control, could cause actual results to differ significantly from the Company’s expectations These include, among other things, changes in interest rates which reduce interest margins, impact funding sources or diminish loan demand; increased competitive pressures; adverse changes in national and local economic conditions, and in real estate markets in California; changes in fiscal policy, monetary policy; legislative or regulatory environments, requirements or changes which adversely affect the Company; and declines in the credit quality of the Company’s loan portfolio.  See “Factors Which May Affect Future Operating Results.”

ITEM 3.  CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) that are designed to assure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide reasonable assurance only of achieving the desired control

35

objectives, and management necessarily is required to apply its judgment in weighting the costs and benefits of possible new or different controls and procedures.  Limitations are inherent in all control sysytems, so no evaluation of controls can provide absolute assurance that all control issues and any fraud within the company have been detected.

As required by Exchange Act Rule 13a-15(b), as of the end of the period covered by this report the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures.  Based on this evaluation, our Chief Executive Officer and Chief financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date.

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.

36

PART II—OTHER INFORMATION

Item 1.LEGAL PROCEEDINGS

None.

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3.DEFAULTS UPON SENIOR SECURITIES

None.

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

The Annual Meeting of Shareholders of the Company was held on May 19, 2005 to elect the members of the Company’s Board of Directors and vote on two additional proposals.  The number of votes for each nominee is set forth below:

Name	Votes For	Votes Withheld
Donald E. Benson	2,553,394	26,336
Joseph N. Cohen	2,514,198	65,532
Robert E. Gipson	2,553,394	26,336
W. Douglas Hile	2,553,394	26,336
Antoinette Hubenette, M.D.	2,553,394	26,336
Scott A. Montgomery	2,553,394	26,336
Dion G. Morrow	2,553,394	26,336
Carl R. Terzian	2,553,394	26,336
Robert E. Thomson	2,553,394	26,336

In addition, the following proposals were voted on at the annual meeting:

Proposal to approve the Company’s 2005 Stock Incentive Plan.

For	Against	Abstain	Broker Non-Vote
1,749,543	74,949	11,924	743,314

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Proposal to approve an amendment to the Company’s Amended and Restate Articles of Incorporation to amend the terms of the Series A Preferred Stock.

For	Against	Abstain	Broker Non-Vote
1,777,210	32,026	27,180	743,314

Item 5.OTHER INFORMATION

None.

Item 6.EXHIBITS

3.1 Certificate of Amendment of the Amended and Restated Articles of Incorporation of National Mercantile Bancorp

10.1 National Mercantile Bancorp 2005 Stock Incentive Plan (1)

10.2 Form of Incentive Stock Option Agreement (1)

10.3 Form of Non-Qualified Stock Option Agreement (1)

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

(1)Filed as an exhibit to National Mercantile Bancorp’s Registration Statement on Form S-8 Registration no. 333-125220

SIGNATURES

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

		NATIONAL MERCANTILE BANCORP
		(Registrant)
DATE:	August 12, 2005	/s/	Scott A. Montgomery
		Scott A. Montgomery
		Chief Executive Officer
DATE:	August 12, 2005	/s/	David R. Brown
		David R. Brown
		Principal Financial and Principal Accounting Officer

38

EX-3.1

Exhibit 3.1

CERTIFICATE OF AMENDMENT

OF THE

AMENDED AND RESTATED ARTICLES OF INCORPORATION

OF

NATIONAL MERCANTILE BANCORP

The undersigned certify that:

1.They are the President and the Assistant Secretary, respectively, of National Mercantile Bancorp, a California corporation.

2.Article XI, Section C of the Amended and Restated Articles of Incorporation of this corporation is amended to add a new paragraph (4) to the section that reads as follows:

“(4) Automatic Conversion.

(a) Each share of Series A Preferred Stock shall automatically be converted into shares (calculated as to each conversion to the nearest 1/100^th of a shares) of Common Stock (as used in Section C(3)(h)), based on the then-effective conversion price (as provided in Section C(3)), upon the approval (at a meeting or by written consent) of the holders of a majority of the outstanding shares of the Series A Preferred Stock (the “Automatic Conversion”).

(b) The effective date of the Automatic Conversion shall be: (i) if the approval shall be given at a meeting, the close of business on the date of the meeting; or (ii) if the approval shall be given by written consent, the close of business on the date the Corporation shall have first received sufficient written consents to cause the Automatic Conversion.  The record date for determining holders of the Series A Preferred Stock entitled to give consents shall be the date the Corporation receives the first written consent with such approval.  If the conversion is not approved within 60 days of receipt by the Corporation of the first written consent, all written consents received prior thereto shall be invalid and of no force or effect.

(c) Upon the effective date of the Automatic Conversion, the outstanding shares of Series A Preferred Stock shall be converted automatically into Common Stock whether or not the certificates representing such shares are surrendered to the Corporation or its transfer agent.(d) Following the effective date of the Automatic Conversion, the Corporation shall notify the holders of the Series A Preferred Stock of the Automatic Conversion.  The holders of the Series A Preferred Stock shall surrender the certificates representing such Series A Preferred Stock at the office of the Corporation or the transfer agent for the Corporation.  Thereupon,

there shall be issued and delivered to each such holder promptly at such office and in such holder’s name as shown on such surrendered certificate or certificates, a certificate or certificates for the number of shares of Common Stock into which the shares of Series A Preferred Stock surrendered were convertible on the effective date of the Automatic Conversion.  No fractional shares of Common Stock shall be issued upon Automatic Conversion, but, instead of any fraction of a share which would otherwise be issuable, the Corporation shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the market price per share of Common Stock as of the close of business on the day of the automatic conversion.  “Market price” has the meaning ascribed to it in Section C(3)(i).”

3.The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the board of directors.

4.The foregoing amendment of the Amended and Restated Articles of Incorporation has been duly approved by the required vote of shareholders in accordance with Section 902 and 903 of the California Corporations Code. The total number of outstanding voting shares of the corporation on April 1, 2005, the record date, was 3,656,399 of which 3,006,774 are shares of Common Stock and 649,625 are shares of Series A Preferred Stock. The number of shares voting in favor of the amendment equaled or exceeded the vote required. The percentage vote required was more than 50% of the number of outstanding shares of Common Stock and more than 50% of the number of outstanding shares of Series A Preferred Stock.

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

DATE:	May 20, 2005
		/s/ Scott A. Montgomery
		Scott A. Montgomery, President and CEO
		/s/ Giovanna Soprano
		Giovanna Soprano, Assistant Secretary

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 officer(s) 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:	August 12, 2005	/s/ SCOTT A. MONTGOMERY
		Scott A. Montgomery
		Chief Executive Officer

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 officer(s) 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:	August 12, 2005	/s/ DAVID R. BROWN
		David R. Brown
		Chief Financial Officer

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 June 30, 2005 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 as of and for the periods covered in the report.

/s/ SCOTT A. MONTGOMERY

Scott A. Montgomery

Chief Executive Officer

Date:  August 12, 2005

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to National Mercantile Bancorp and will be retained by National Mercantile Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-QSB and shall not be considered filed as part of the Form 10-QSB.

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 June 30, 2005 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, as of and for the periods covered in the report.

/s/ DAVID R. BROWN

David R. Brown

Chief Financial Officer

Date:  August 12, 2005

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to National Mercantile Bancorp and will be retained by National Mercantile Bancorp and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-QSB and shall not be considered filed as part of the Form 10-QSB.