10QSB 1 a05-20180_110qsb.htm QUARTERLY AND TRANSITION REPORTS OF SMALL BUSINESS ISSUERS

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB

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

for the quarterly period ended September 30, 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 Yes o No

Indicated by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes ý No

The number of shares of Common Stock, no par value, of the issuer outstanding as of November 8, 2005 was 4,338,274.

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

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Presented are the unaudited consolidated financial statements 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 (“Mercantile”) and South Bay Bank, N.A. (“South Bay”), (collectively, the “Banks”).

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,			December 31,
	2005			2004
	(Dollars in thousands)
ASSETS
Cash and due from banks-demand	$	15,113		$	14,187
Due from banks-interest bearing	2,000			2,728
Federal funds sold	3,110			—
Cash and cash equivalents	20,223			16,915
Securities available-for-sale, at fair value; aggregate amortized cost of $56,763 and $37,020 at September 30, 2005 and December 31, 2004, respectively	56,382			36,954
Securities held-to-maturity, at amortized cost	2,795			3,507
FRB and other stock, at cost	3,301			3,076
Loans receivable	330,179			313,847
Allowance for loan and lease losses	(4,526		)	(3,511		)
Net loans receivable	325,653			310,336

Premises and equipment, net	5,840			5,804
Other real estate owned	1,056			1,056
Deferred tax asset	4,652			5,286
Goodwill	3,225			3,225
Core deposit intangible, net	1,463			1,630
Accrued interest receivable and other assets	3,893			3,750
Total assets	$	428,483		$	391,539

LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits:
Noninterest-bearing demand	$	124,053		$	113,852
Interest-bearing demand	31,583			34,961
Money market	75,377			69,431
Savings	30,180			32,199
Time certificates of deposit:
$100,000 or more	72,845			41,111
Under $100,000	20,518			21,988
Total deposits	354,556			313,542

Other borrowings	19,000			25,900
Junior subordinated deferrable interest debentures	15,464			15,464
Accrued interest payable and other liabilities	2,376			2,151
Total liabilities	391,396			357,057

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 September 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 September 30, 2005 and December 31, 2004	1,000			1,000
Common stock, no par value; authorized 10,000,000 shares; 4,337,874 shares and 2,954,128 shares outstanding at September 30, 2005 and December 31, 2004, respectively	45,290			39,491
Accumulated deficit	(8,450		)	(11,726		)
Accumulated other comprehensive income (loss)	(753		)	275
Total shareholders’ equity	37,087			34,482
Total liabilities and shareholders’ equity	$	428,483		$	391,539

See accompanying notes to consolidated financial statements.

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2005			2004			2005			2004
	(Dollars in thousands, except per share data)

Interest income:
Loans, including fees	$	6,194		$	5,067		$	17,312		$	12,772
Securities	523			403			1,268			1,073
Due from banks - interest bearing	23			12			57			40
Federal funds sold	14			5			43			59
Total interest income	6,754			5,487			18,680			13,944

Interest expense:
Deposits:
Interest-bearing demand	46			19			113			55
Money market and savings	350			195			804			541
Time certificates of deposit:
$100,000 or more	323			93			790			250
Under $100,000	161			121			455			339
Total interest expense on deposits	880			428			2,162			1,185
Junior subordinated deferrable interest debentures	326			259			903			713
Other borrowings	92			105			225			278
Total interest expense	1,298			792			3,290			2,176
Net interest income before provision (benefit) for credit losses	5,456			4,695			15,390			11,768
Provision (benefit) for credit losses	(213		)	120			(124		)	120
Net interest income after provision (benefit) for credit losses	5,669			4,575			15,514			11,648

Other operating income:
Net loss on sale of securities available-for-sale	—			(95		)	—			(76		)
International services	11			25			37			46
Investment division	15			13			44			38
Deposit-related and other customer services	252			374			818			1,176
Total other operating income	278			317			899			1,184

Other operating expenses:
Salaries and related benefits	1,998			1,884			5,684			5,639
Net occupancy	257			270			742			885
Furniture and equipment	127			91			378			389
Printing and communications	128			144			392			425
Insurance and regulatory assessments	105			107			318			327
Client services	152			156			471			436
Computer data processing	216			236			666			721
Legal services	133			53			589			234
Other professional services	287			226			826			599
Amortization of core deposit intangible	55			55			167			167
Retirement of fixed assets and leasehold improvements	—			—			—			43
Promotion and other expenses	272			156			582			375
Total other operating expenses	3,730			3,378			10,815			10,240
Income before income tax provision	2,217			1,514			5,598			2,592
Income tax provision	920			642			2,323			1,084
Net income	$	1,297		$	872		$	3,275		$	1,508

Earnings per share:
Basic	$	0.30		$	0.30		$	0.94		$	0.52
Diluted	$	0.27		$	0.19		$	0.70		$	0.33

See accompanying notes to consolidated financial statements.

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended September 30,
	2005			2004
	(Dollars in thousands)
Cash flows from operating activities:
Net income	$	3,275		$	1,508
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	315			338
Provision (benefit) for credit losses	(124		)	120
Loss on sale of securities available for sale	—			76
Net amortization of premium on securities available-for-sale	42			171
Net amortization of premium on securities held-to-maturity	24			37
Net amortization of core deposit intangible	167			167
Net amortization of premium on loans purchased	121			145
(Increase) decrease in accrued interest receivable and other assets	212			(3,429		)
Increase in accrued interest payable and other liabilities	1,058			202
Net cash provided by (used in) operating activities	5,090			(665		)

Cash flows from investing activities:
Purchase of securities available-for-sale	(23,531		)	(22,532		)
Proceeds from sales of securities available-for-sale	—			6,397
Proceeds from repayments and maturities of securities available-for-sale	3,746			5,586
Proceeds from repayments and maturities of securities held-to-maturity	688			784
Loan originations and principal collections, net	(17,796		)	(42,726		)
Recoveries of loans previously charged off	1,216			130
Net purchase of Federal Reserve Stock and other stocks	(225		)	(1,084		)
Purchases of premises and equipment	(351		)	(589		)
Net cash used in investing activities	(36,253		)	(54,034		)

Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts	10,750			16,087
Net increase in time certificates of deposit	30,264			7,745
Net decrease in securities sold under agreements to repurchase and federal funds purchased	—			(399		)
Net increase (decrease) in other borrowings	(6,900		)	24,400
Net proceeds from exercise of stock options	357			165
Net cash provided by financing activities	34,471			47,998
Net increase (decrease) in cash and cash equivalents	3,308			(6,701		)
Cash and cash equivalents, January 1	16,915			39,284
Cash and cash equivalents, September 30	$	20,223		$	32,583

Supplemental disclosures of cash flow information:
Cash paid for interest	$	3,537		$	2,358
Cash paid for income taxes	$	960		$	51

See accompanying notes to consolidated financial statements.

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS

The unaudited consolidated financial statements include the accounts of National Mercantile Bancorp (“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 of the Company 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 nine months ended September 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 4,327,175 and 4,740,664, respectively, for the three months ended September 30, 2005 and 3,480,560 and 4,699,097, respectively, for the nine months ended September 30, 2005. The weighted average number of common shares outstanding used in computing basic earnings per share and diluted earnings per share was 2,918,583 and 4,565,379, respectively, for the three months ended September 30, 2004 and 2,878,595 and 4,593,926, respectively, for the nine months ended September 30, 2004.

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

	Earnings available to shareholders		Weighted Average Shares	Per share amount
	(in thousands)

For the three months ended September 30, 2005:
Basic EPS	$	1,297	4,327,175	$	0.30

Effect of dilutive securities:
Options			227,117
Convertible preferred stock			186,372
Diluted earnings per share	$	1,297	4,740,664	$	0.27

For the three months ended September 30, 2004:
Basic EPS	$	872	2,918,583	$	0.30

Effect of dilutive securities:
Options			138,431
Convertible preferred stock			1,508,365
Diluted earnings per share	872		4,565,379	$	0.19

For the nine months ended September 30, 2005:
Basic EPS	$	3,275	3,480,560	$	0.94

Effect of dilutive securities:
Options			208,072
Convertible preferred stock			1,010,465
Diluted earnings per share	$	3,275	4,699,097	$	0.70

For the nine months ended September 30, 2004:
Basic EPS	$	1,508	2,878,595	$	0.52

Effect of dilutive securities:
Options			209,998
Convertible preferred stock			1,505,333
Diluted earnings per share	$	1,508	4,593,926	$	0.33

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.

NOTE 4—ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is the sum of the allowance for loan and lease losses and the reserve for contingent losses on unfunded commitments. The allowance for loan and lease losses is a valuation adjustment used to recognize impairment of the recorded investment in the Company’s loans receivable on its balance sheet before losses have been confirmed resulting in a subsequent charge-off or write-down. The reserve for contingent losses on unfunded commitments is a liability accrual for unidentified but probable losses on the Company’s commitments to fund loans. As of September 30, 2005, the reserve for contingent losses on unfunded commitments has been reclassified from the allowance for loan and lease losses to other liabilities. The 2004 year end reserve for contingent losses on unfunded commitments has been reclassified to conform to the current presentation.

Provisions for credit losses charged (or credited) 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 systematic and 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). During the third quarter 2005, Management modified the methodology for evaluating the adequacy of the allowance for credit losses to (i) conform the analyses between its subsidiaries, (ii) recognize a factor for probable losses in the Company’s adjustable rate loans resulting from increasing borrower difficulty to service debt in a rising interest rate environment, and (iii) recognize a factor for greater probable losses in certain higher risk loan segments including film production finance and consumer overdrafts. These additional factors resulted in $571,000 additional allowance for credit losses. Management performs a periodic risk and credit analysis, the results of which are reported to the Board of Directors.

During the third quarter 2005, the Company recovered $1.1 million from a loan previously charged off and the recovery was added to the allowance for loan and lease losses. Pursuant to Management’s evaluation of the allowance for credit losses at September 30, 2005, a benefit for credit losses of $213,000 was recorded for the third quarter 2005.

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

	Allowance for Loan and Lease Losses			Reserve for Contingent Losses on Unfunded Commitments			Allowance for Credit Losses
				(Dollars in thousands)
For the three months ended September 30, 2005
Balance, beginning of period	$	3,669		$	477		$	4,146
Total loans charged-off	—			—			—
Total recoveries of loans previously charged off	1,081			—			1,081
Net charge-offs	(1,081		)	—			(1,081		)
Provision for credit losses	(224		)	11			(213		)
Balance, end of period	$	4,526		$	488		$	5,014

For the three months ended September 30, 2004
Balance, beginning of period	$	3,312		$	379		$	3,691
Total loans charged-off	—			—			—
Total recoveries of loans previously charged off	39			—			39
Net charge-offs	(39		)	—			(39		)
Provision for credit losses	132			(12		)	120
Balance, end of period	$	3,483		$	367		$	3,850

For the nine months ended September 30, 2005
Balance, beginning of period	$	3,511		$	417		$	3,928
Total loans charged-off	6			—			6
Total recoveries of loans previously charged off	1,216			—			1,216
Net charge-offs	(1,210		)	—			(1,210		)
Provision for credit losses	(195		)	71			(124		)
Balance, end of period	$	4,526		$	488		$	5,014

For the nine months ended September 30, 2004
Balance, beginning of period	$	3,268		$	367		$	3,635
Total loans charged-off	35			—			35
Total recoveries of loans previously charged off	130			—			130
Net charge-offs	(95		)	—			(95		)
Provision for credit losses	120			—			120
Balance, end of period	$	3,483		$	367		$	3,850

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.

NOTE 5—GOODWILL AND CORE DEPOSIT INTANGIBLES

As of September 30, 2005 and December 31, 2004, the Company had recognized 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 September 30, 2005 and December 31, 2004, and accumulated amortization was $837,000 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 $920,000 and $642,000 were recorded for the three months ended September 30, 2005 and 2004, respectively. Income tax provisions of $2,323,000 and $1,084,000 were recorded for the nine months ended September 30, 2005 and 2004, respectively.

At September 30, 2005, the Company had: (i) federal net operating loss carry forwards (“NOLS”) of approximately $8.3 million, which begin to expire in the year 2009; and (ii) federal alternative minimum tax “AMT” credits of $495,000. 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 September 30, 2005 was $9.57. There were no stock options granted in the three months ended September 30, 2004. The estimated per share weighted average fair value of options granted in the nine months ended September 30, 2005 and 2004 was $9.58 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 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 nine months ended September 30, 2005 and 2004 would have decreased to the pro forma amounts indicated below:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
	(Dollars in thousands, except per share data)				(Dollars in thousands, except per share data)
Net income:
As reported	$	1,297	$	872	$	3,275	$	1,508

Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects	90		52		190		140
Pro forma	$	1,207	$	820	$	3,085	$	1,368

Income per share as reported:
Basic	$	0.30	$	0.30	$	0.94	$	0.52
Diluted	0.27		0.19		0.70		0.33
Income per share pro forma:
Basic	$	0.28	$	0.28	$	0.89	$	0.48
Diluted	0.25		0.18		0.66		0.30

The fair values of options granted during the three months ended September 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 4.38%, and an expected life of 10 years; 2004— no dividend yield, expected volatility of 57%, risk-free interest rate of 4.21%, 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.

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 September 30,						Nine Months ended September 30,
	2005			2004			2005			2004
	(Dollars in thousands)						(Dollars in thousands)

Net income	$	1,297		$	872		$	3,275		$	1,508

Other comprehensive income (loss) before tax, and unrealized losses on securities:
Unrealized gain (loss) on interest rate swaps used in cash flow hedges	(896		)	1,017			(1,266		)	1,017
Unrealized gain (loss) on interest rate floors used in cash flow hedges	(151		)	—			(176		)	—
Unrealized gain (loss) on securities available for sale	(281		)	261			(315		)	(85		)
Other comprehensive income (loss), before tax	(1,328		)	1,278			(1,757		)	932

Income tax benefit (expense) related to items of other comprehensive income	551			(529		)	730			(387		)
Other comprehensive income (loss)	(777		)	749			(1,027		)	545
Total comprehensive income	$	520		$	1,621		$	2,248		$	2,053

NOTE 9—DERIVATIVE FINANCIAL INSTRUMENTS

The Company holds fixed rate and variable rate financial assets that are funded by fixed rate and variable rate liabilities. Consequently, they are subject to the effects of changes in interest rates. In response to this, the Company has developed an interest rate risk management policy with the objective of mitigating financial exposure to changing interest rates. These exposures are managed, in part, with the use of derivatives but only to the extent necessary to meet the overall goal of minimizing interest rate risk.

Derivatives are accounted for according to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This standard requires that all derivative instruments be recognized in the financial statements and measured at fair value regardless of the purpose or intent for holding them. To qualify for hedge accounting, the details of the hedging relationship must be formally documented at inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks that are being hedged, the derivative instrument and how effectiveness is being assessed.

The derivative must be highly effective in offsetting either changes in fair value or cash flows, as appropriate, for the risk being hedged. Effectiveness is evaluated on a retrospective and prospective basis. If a hedge relationship becomes ineffective, it no longer qualifies as a hedge. Any excess gains or losses attributable to such ineffectiveness, as well as subsequent changes in the fair value of the derivative, are recognized in earnings.

The following is a summary of our risk management strategies and the effect of these strategies on the consolidated financial statements.

	September 30, 2005					December 31, 2004
	Notional Amount		Fair Value			Notional Amount		Fair Value
	(Dollars in thousands)
Fair value hedges:
Interest rate swaps	$	15,000	$	(296	)	$	15,000	$	(311	)

Cash flow hedges:
Interest rate swaps	$	50,000	$	(743	)	$	50,000	$	406
Interest rate floors	$	75,000	$	196		$	—	$	—

Other derivatives:
Interest rate floors	$	150,000	$	—		$	—	$	—

Fair value hedges are hedges that minimize the risk of changes in the fair values of assets, liabilities and certain types of firm commitments. The Company uses interest rate swaps to hedge the change in fair value of its junior subordinated deferrable interest debentures. The interest rate swaps result in the Company 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 such interest rate swaps are recognized as an adjustment to interest expense. The net change in fair value of the derivatives and the hedged items is reported in earnings. The fair value hedges are highly effective and therefore no ineffectiveness was recognized in current earnings related to this swap.

Cash flow hedges are hedges that use simple derivatives to offset the variability of expected future cash flows. The Company’s cash flow hedges include certain interest rate swaps and interest rate floors used to manage the interest rate risk associated with its significant volume of adjustable rate loans. At September 30, 2005 a loss of $435,000 was recorded in accumulated other comprehensive income and no ineffectiveness was recorded to earnings for the three months and nine months ended September 30, 2005 related to these interest rate swaps. At September 30, 2005 a loss of $107,000 was recorded in accumulated other comprehensive income related to the interest rate floors. Ineffectiveness related to the interest rate floors

designated as cash flow hedges of $18,000 and $24,000 was charged to earnings for the three and nine months ended September 30, 2005, respectively.

Other derivatives not designated as hedges are interest rate floors that do not meet the strict criteria for hedge accounting treatment. We use derivatives to hedge exposures when it makes economic sense to do so, including circumstances in which the hedging relationship does not qualify for hedge accounting. Derivatives not designated as hedges are marked to market through earnings. There was an $8,000 charge to earnings during the second quarter 2005 writing the value of this floor to zero and there was no change in market value for these derivatives recorded to earnings for the three months ended September 30, 2005.

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. As a result of this conversion, 643,893 shares of Series A Preferred were converted into 1,287,786 shares of Common Stock. During the nine months ended September 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.

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 OVERVIEW

The Company recorded net income of $1,297,000, or $0.30 basic earnings per share and $0.27 diluted earnings per share, for the three months ended September 30, 2005 compared to net income of $872,000, or $0.30 basic earnings per share and $0.19 diluted earnings per share, for the same period of 2004. The increase in net income for the third quarter of 2005 was primarily due to a $761,000 increase in net interest income before the provision for credit losses resulting from increases in the prime rate lending index, a greater volume of interest earning assets, particularly higher-yielding loans receivable and securities available-for-sale, and a favorable change in earning asset and funding liability composition. Third quarter 2005 net income was further enhanced by a $333,000 decrease in the provision for loan losses compared to the 2004 period offset by a $352,000 increase in noninterest expense.

Pursuant to the election of the holders of a majority of the outstanding shares of the Company’s Series A Noncumulative Perpetual Convertible Preferred Stock (the “Series A Preferred”) 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. As a result of this conversion, 643,893 shares of Series A Preferred were converted into 1,287,786 shares of Common Stock. The Series A Preferred were previously included in the dilutive shares outstanding but not basic shares outstanding for earnings per share computation.

The Company recorded net income of $3.3 million, or $0.94 basic earnings per share and $0.70 diluted earnings per share, for the nine months ended September 30, 2005 compared to net income of $1.5 million, or $0.52 basic earnings per share and $0.33 diluted earnings per share, for the same period of 2004. The increase in net income for the 2005 period was primarily due to a $3.6 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. The provision for loan

losses during the 2005 period decreased $244,000 compared to the 2004 period, while other operating income decreased $285,000 and noninterest expense increased $575,000.

Return on average assets during the third quarter and first nine months of 2005 was 1.27% and 1.11%, respectively, compared to 0.88% and 0.53% during the third quarter and first nine months of 2004, respectively. Return on average equity during the third quarter and first nine months of 2005 was 13.77% and 12.11%, respectively, compared to 10.47% and 6.18% during the third quarter and first nine months of 2004, respectively.

NET INTEREST INCOME

Net interest income before the provision for credit losses increased $761,000 for the three months ended September 30, 2005 compared to the same quarter of 2004 due to a $1.3 million increase in total interest income partially offset by a $506,000 increase in interest expense. Loan interest income increased $1.1 million due to an $18.1 million greater average volume of loans receivable and a 101 basis point increase in yield, resulting primarily from increases in the prime rate lending index. During the second half of 2004 and first nine months of 2005, the Federal Reserve Bank increased the federal funds rate on eleven occasions totaling 275 basis points, after a prolonged period of accommodative monetary policy, in response to signs of increasing inflation risks. Approximately 75% of the $330.2 million loans receivable have adjustable interest rates; accordingly, rising interest rates positively affect interest income partially offset by greater payments on our $50 million of prime rate-indexed interest rate swaps. The greater loan volume was primarily due to the more rapid funding of construction loans originated in earlier periods and fewer payoffs of commercial real estate loans.

Interest income from securities available-for-sale increased during the third quarter 2005 compared to the third quarter 2004 due to a $3.9 million increase in average volume and a 75 basis point increase in yield. At September 30, 2005 securities available-for-sale were $56.4 million, an increase of $19.4 million from December 31, 2004. The purchase of securities was accelerated during the third quarter 2005 to extend the duration of portfolio assets in order to reduce the Company’s asset sensitivity. The increase in the yield on securities available-for-sale was due to higher yields on the more recently purchased securities due to rising market interest rates.

Overall, interest-earning assets were $20.3 million greater during the third quarter 2005 than third quarter 2004 and the higher yields and favorable change in composition to higher-yielding assets resulted in a 99 basis point increase in weighted average yield on interest-earning assets.

Interest expense increased $506,000 for the three months ended September 30, 2005 compared to the same period in 2004, due primarily to an 82 basis point increase in cost of funds. Average interest-bearing liabilities increased $3.1 million for the third quarter 2005 compared to the same period in 2004; the composition of interest-bearing liabilities, however, changed significantly. During the rising interest rate environment experienced during the past five quarters, the Company elected to only moderately increase transaction deposit rates and to fund runoff of these deposits with brokered certificates of deposit. This type of funding is typically higher costing and exhibits higher interest rate sensitivity. While rates are higher on certificates of deposit, the greater interest expense on the incremental certificates of deposit needed to fund the decrease in transaction deposits is less than the impact of increasing rates on the significantly greater volume of transaction accounts. Consequently, money market and savings deposits averaged $10.3 million less in the 2005 period compared to the 2004 period due to depositors redeploying their funds to the Company’s higher yielding certificates of deposit and alternative investments outside the Banks. The cost of interest-bearing demand deposits and money market and savings deposits increased 29 basis points and 67 basis points, respectively, compared to the third quarter of 2004. Time certificates of deposit averaged $23.8 million more during the third quarter 2005 than the same period in 2004 while the cost increased 89 basis points due to higher rates on new certificates and repricing of matured certificates during the higher interest rate environment. In a sustained rising interest rate environment, increases in deposit interest rates will be required to prevent net deposit withdrawals.

Additionally, other borrowings were repaid with lower cost brokered deposits. Other borrowings during the third quarter 2005 averaged $9.9 million, or $13.1 million less than the same period in 2004. The cost of other borrowings was 3.68% and 1.82% for the third quarters of 2005 and 2004, respectively, representing an increase of 186 basis points for the 2005 period. Noninterest-bearing demand deposits increased $2.7 million in average volume in the third quarter 2005 compared to the same period in 2004.

The net yield on interest earning assets increased 51 basis points from 5.26% during the third quarter in 2004 to 5.77% in the third quarter in 2005, while the net interest spread increased 17 basis points from 4.81% during the third quarter in 2004 to 4.98% in the third quarter in 2005.

Net interest income before the provision for credit losses increased $3.6 million for the nine months ended September 30, 2005 compared to the same period of 2004 due to a $4.7 million increase in total interest income partially offset by a $1.1 million increase in interest expense. Loan interest income increased $4.5 million due to $32.1 million greater average volume of loans receivable and a 133 basis point increase in yield, resulting primarily from increases in the prime rate lending index as well as interest income recorded from the 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). Thus, the interest rate swaps contributed interest income for the full nine months of 2005 but only the third quarter of 2004. The interest rate swaps contributed 16 basis points to the increase in loan yield during 2005.

Interest income from securities available-for-sale increased $219,000 during the first nine months of 2005 compared to the first nine months of 2004 due to a 55 basis point increase in yield with average volume increasing $1.6 million. The increase in the yield on securities available-for-sale was due to higher yields on the more recently purchased securities.

Overall, interest-earning assets were $25.2 million greater during the first nine months of 2005 than first nine months of 2004 and the higher yields and favorable change in composition to higher-yielding assets resulted in a 137 basis point increase in weighted average yield on interest-earning assets.

Interest expense increased $1.1 million for the nine months ended September 30, 2005 compared to the same period in 2004, due to an $11.0 million increase in average interest-bearing liabilities and a 59 basis point increase in cost of funds. Interest expense on deposits increased $1.0 million for the nine months ended September 30, 2005 compared to the same period in 2004 due to a 58 basis point increase in weighted average cost and a $14.6 million increase in average interest-bearing deposits. Relatively low costing money market and savings deposits averaged $7.8 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 $21.3 million more during the first nine months of 2005 than the same period in 2004. The cost of time certificates of deposit increased 76 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 nine months of 2005 resulted in the cost of interest-bearing demand deposits and money market and savings deposits increasing 24 basis points and 40 basis points, respectively, compared to the first nine months of 2004. Other borrowings during the first nine months of 2005 averaged $10.1 million, or $3.6 million less than the same period in 2004. The cost of other borrowings was 2.97% and 2.70% for the first nine months of 2005 and 2004, respectively, representing an increase of 27 basis points in 2005 due to an increase in market rates of interest. Noninterest-bearing demand deposits were relatively stable, with an increase of $2.2 million in average volume in the first nine months of 2005 compared to 2004.

The net yield on interest earning assets increased 102 basis points from 4.68% during the first nine months of 2004 to 5.70% in the first nine months of 2005, while the net interest spread increased 78 basis points from 4.23% during the first nine months of 2004 to 5.01% in the first nine months in 2005.

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

Average Balance Sheet and

Analysis of Net Interest Income

	Three Months ended
	September 30, 2005							September 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	$	1,604		14		3.46	%	$	1,558		5		1.28	%
Due from banks-interest bearing	2,000			23		4.56	%	2,728			12		1.75	%
Securities available-for-sale	53,050			494		3.72	%	49,183			365		2.97	%
Securities held-to-maturity	2,954			29		3.93	%	3,927			38		3.87	%
Loans receivable (1) (2)	315,735			6,194		7.78	%	297,602			5,067		6.77	%
Total interest earning assets	375,343			6,754		7.14	%	354,998			5,487		6.15	%

Noninterest earning assets:
Cash and due from banks - demand	15,196							22,314
Other assets	20,428							21,694
Allowance for credit losses and net unrealized gain on sales of securities available-for-sale	(5,395		)					(3,891		)
Total assets	$	405,572						$	395,115

Liabilities and shareholders’ equity:
Interest-bearing deposits:
Demand	$	34,483		46		0.53	%	$	31,827		19		0.24	%
Money market and savings	101,809			350		1.36	%	112,114			195		0.69	%
Time certificates of deposit:
$100,000 or more	51,794			323		2.47	%	25,371			93		1.46	%
Under $100,000	24,873			161		2.57	%	27,479			121		1.75	%
Total time certificates of deposit	76,667			484		2.50	%	52,850			214		1.61	%
Total interest-bearing deposits	212,959			880		1.64	%	196,791			428		0.87	%
Other borrowings	9,912			92		3.68	%	22,982			105		1.82	%
Junior subordinated debentures	15,464			326		8.36	%	15,464			259		6.66	%
Federal funds purchased and securities sold under agreements to repurchase	—			—		—		—			—		—
Total interest-bearing liabilities	238,335			1,298		2.16	%	235,237			792		1.34	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	128,523							125,857
Other liabilities	1,363							969
Shareholders’ equity	37,351							33,052
Total liabilities and shareholders’ equity	$	405,572						$	395,115

Net interest income (spread)				$	5,456	4.98	%				$	4,695	4.81	%

Net yield on earning assets (2)						5.77	%						5.26	%

(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 $421,000 and $484,000 for the three months ended September 30, 2005 and 2004, respectively.

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

Average Balance Sheet and

Analysis of Net Interest Income

	Nine Months ended
	September 30, 2005							September 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	$	1,932		43		2.98	%	$	7,823		59		1.01	%
Due from banks-interest bearing	2,250			57		3.39	%	3,835			40		1.39	%
Securities available-for-sale	44,446			1,174		3.52	%	42,889			955		2.97	%
Securities held-to-maturity	3,186			94		3.93	%	4,226			118		3.72	%
Loans receivable (1) (2)	308,986			17,312		7.49	%	276,845			12,772		6.16	%
Total interest earning assets	360,800			18,680		6.92	%	335,618			13,944		5.55	%

Noninterest earning assets:
Cash and due from banks - demand	16,880							22,822
Other assets	20,628							21,661
Allowance for credit losses and net unrealized gain on sales of securities available-for-sale	(4,611		)					(3,705		)
Total assets	$	393,697						$	376,396

Liabilities and shareholders’ equity:
Interest-bearing deposits:
Demand	$	32,471		113		0.47	%	$	31,395		55		0.23	%
Money market and savings	100,814			804		1.07	%	108,580			541		0.67	%
Time certificates of deposit:
$100,000 or more	45,885			790		2.30	%	23,867			250		1.40	%
Under $100,000	25,914			455		2.35	%	26,611			339		1.70	%
Total time certificates of deposit	71,799			1,245		2.32	%	50,478			589		1.56	%
Total interest-bearing deposits	205,084			2,162		1.41	%	190,453			1,185		0.83	%
Other borrowings	10,132			225		2.97	%	13,703			277		2.70	%
Junior subordinated debentures	15,464			903		7.81	%	15,464			713		6.16	%
Federal funds purchased and securities sold under agreements to repurchase	—			—		—		94			1		1.42	%
Total interest-bearing liabilities	230,680			3,290		1.91	%	219,714			2,176		1.32	%

Noninterest-bearing liabilities:
Noninterest-bearing demand deposits	125,469							123,272
Other liabilities	1,404							888
Shareholders’ equity	36,144							32,522
Total liabilities and shareholders’ equity	$	393,697						$	376,396

Net interest income (spread)				$	15,390	5.01	%				$	11,768	4.23	%

Net yield on earning assets (2)						5.70	%						4.68	%

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

(2) Yields and amounts earned on loans receivable include loan fees of $1,281,000 and $1,052,000 for the six months ended September 30, 2005 and 2004, respectively.

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

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

Average Volume and Average Rate (1)

	Nine Months ended September 30, 2005 vs 2004
	Increase (decrease) due to:					Net Increase
	Volume			Rate		(Decrease)

Interest Income:
Federal funds sold and securities purchased under agreement to resell	$	(44	)	$	28	$	(16	)
Interest-bearing deposits with other financial institutions	(17		)	34		17
Securities available-for-sale	34			185		219
Securities held-to-maturity	(29		)	5		(24		)
Loans receivable (2)	1,482			3,058		4,540
Total interest-earning assets	1,426			3,310		4,736

Interest Expense:
Interest-bearing deposits:
Demand	$	2		$	56	$	58
Money market and savings	(39		)	302		263
Time certificates of deposit:
$100,000 or more	230			310		540
Under $100,000	(9		)	125		116
Total time certificates of deposit	221			435		656
Total interest-bearing deposits	184			793		977
Other borrowings	(72		)	20		(52		)
Junior subordinated debentures	—			190		190
Federal funds purchased and securities sold under agreements to repurchase	(1		)	—		(1		)
Total interest-bearing liabilities	111			1,003		1,114

Net interest income	$	1,315		$	2,307	$	3,622

(1)	The change in interest income or interest expense that is attributable to both changes in average balance and average rate has been allocated to the changes due to (i) average balance and (ii) average rate in proportion to the relationship of the absolute amounts of changes in each.
(2)	Table does not include interest income that would have been earned on nonaccrual loans.

PROVISION FOR CREDIT LOSSES

The Company recorded a benefit for credit losses of $213,000 for the third quarter 2005. During the third quarter 2005, the Company recovered $1.1 million of a loan charged off in a previous period. Management’s assessment of the adequacy of the allowance for credit losses at September 30, 2005 determined that recognition of a benefit was required. Consequently, a benefit of $124,000 was reported for the nine months ended September 30, 2005 compared to $120,000 provision for the three months and nine months ended September 30, 2004. See Note 4 of Notes to Consolidated Financial Statements.

OTHER OPERATING INCOME

Other operating income decreased to $278,000 during the third quarter of 2005 from $317,000 during the third quarter of 2004 primarily due to a $122,000 decrease in deposit-related and other customer services income resulting from changes in deposit fee structures to bundle services.

Other operating income decreased to $899,000 during the nine months ended September 30, 2005 from $1.2 million during the nine months ended September 30, 2004 primarily due to a $358,000 decrease in deposit-related and other customer services income resulting from changes in deposit fee structures.

OTHER OPERATING EXPENSES

Other operating expenses increased to $3.7 million for the three months ended September 30, 2005 compared to $3.4 million for the same period of 2004. Variances within operating expenses were: (i) salaries and related benefits expense increased $114,000 or 6.1% due to the addition of business development staff and increased commission expense; (ii) furniture and equipment expense increased $36,000 or 39.6% due to an increase in rental equipment and an increase in depreciation expense of fixed assets purchased; (iii) legal services expense increased $80,000 or 150.9% primarily due to activity on the settlement of a dispute over collateral securing a loan that has now been resolved; (iv) other professional services expense increased $61,000 or 27.0% due to increased costs for audit services; and, (v) other expenses increased $116,000 or 74.4% due to operating loss accruals.

Other operating expenses increased to $10.8 million for the nine months ended September 30, 2005 compared to $10.2 million for the same period of 2004. Significant variances within operating expenses were: (i) net occupancy expense decreased $143,000 or 16.2% due to a reduction in rent from the relocation of the Company’s headquarters office and banking office in Century City; (ii) legal services expense increased $355,000 or 151.7% primarily due to activity on the settlement of a

dispute over collateral securing a loan; (iii) other professional services expense increased $227,000 or 37.9% due to a productivity consultant engagement and increased costs for audit services; and (v) other expenses increased $207,000 or 55.2% due to operating loss accruals.

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.

Estimated Fair Values of and Unrealized

Gains and Losses on Securities

	September 30, 2005
	Total		Gross		Gross		Estimated
	amortized		unrealized		unrealized		fair
	cost		gains		loss		value
	(Dollars in thousands)
Available-for-Sale:
U.S. Treasury securities	$	699	$	—	$	1	$	698
GNMA-issued/guaranteed mortgage pass through certificates	109		3		—		112
Other U.S. Government and federal agency securities	22,944		—		152		22,792
FHLMC/FNMA-issued mortgage pass through certificates	17,743		24		148		17,619
CMO’s and REMIC’s issued by U.S. government-sponsored agencies	29		—		—		29
Privately issued corporate bonds, CMO and REMIC securities	15,239		—		107		15,132
	$	56,763	$	27	$	408	$	56,382

FRB and other equity stocks	$	3,301	—		—		$	3,301

	September 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	$	2,795	$	—	$	32	$	2,763

	$	2,795	$	—	$	32	$	2,763

	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

As of September 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 September 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

	September 30, 2005					December 31, 2004
	Amount			Percent		Amount			Percent
	(Dollars in thousands)
Commercial loans - secured and unsecured	$	88,281		27	%	$	98,429		31	%
Real estate loans:
Secured by commercial real properties	128,555			39	%	135,944			43	%
Secured by one to four family residential properties	11,697			3	%	9,405			3	%
Secured by multifamily residential properties	18,891			6	%	18,330			6	%
Total real estate loans	159,143			48	%	163,679			52	%
Construction and land development	79,097			24	%	50,289			16	%
Consumer installment, home equity and unsecured loans to individuals	4,786			1	%	2,516			1	%
Total loans outstanding	331,307			100	%	314,913			100	%

Deferred net loan origination fees	(1,128		)			(1,066		)
Loans receivable, net	$	330,179				$	313,847

Total loans outstanding increased by $16.3 million to $330.2 million at September 30, 2005 compared to $313.8 million at December 31, 2004 due primarily to increased funding of construction loans. The growth in construction loans was offset by a $10.1 million decline in commercial loans and a $7.4 million decline in real estate loans secured by commercial real properties. The first half of 2005 experienced a decline in loan volume largely due to the payoff of construction loans for completed real estate projects and the lack of construction loan funding for new projects delayed by an unusually rainy winter and spring in

Southern California. Construction loan funding increased in the third quarter 2005 as the projects moved forward. The decrease in commercial loans and commercial real estate loans occurred primarily in the first half of 2005, when borrowers concerned about rising rates increasingly refinanced their adjustable rate loans into fixed rate loans. The Company suffered a net outflow of these loans as competitors were willing to price the fixed rate loans at lower interest rates than the Company was willing to offer. The refinancing activity moderated during the third quarter. Throughout 2005, the Company’s borrowers have been repaying commercial loans and reducing the utilization of credit commitments.

NONPERFORMING ASSETS

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

Nonperforming Assets

	September 30,			December 31
	2005			2004
	(Dollars in thousands)

Nonaccrual loans	$	313		$	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	313			1,822
Other real estate owned	1,056			1,056
Other nonperforming assets	—			—
Total nonperforming assets	$	1,369		$	2,878

Allowance for credit losses as a percent of nonaccrual loans	1446.0		%	21822.2		%
Allowance for credit losses as a percent of nonperforming loans	1446.0		%	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

The adequacy of the allowance for credit losses is determined through periodic analysis of the loan portfolio. This analysis includes a systematic and 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). During the third quarter 2005, Management modified the methodology for evaluating the adequacy of the allowance for credit losses to (i)

conform the analyses between the Banks, (ii) recognize a factor for probable losses in the Company’s adjustable rate loans resulting from increasing borrower difficulty to service debt in a rising interest rate environment, and (iii) recognize a factor for greater probable losses in certain higher risk loan segments including film production finance and consumer overdrafts. The supplemental factors resulted in $571,000 additional allowance for credit losses. Management 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 third quarter of 2005. Loans charged off during the nine months ended September 30, 2005 were $6,000. This compares to no loans being charged off during the third quarter of 2004 and $35,000 during the first nine months of 2004. Recoveries of loans previously charged off were $1.1 million and $1.2 million during the third quarter and first nine months of 2005, respectively, compared to $39,000 and $130,000 during the third quarter and first nine months of 2004. Pursuant to Management’s evaluation of the allowance for credit losses at September 30, 2005, a benefit for credit losses of $213,000 was recorded for the third quarter 2005. See Note 4 of Notes to Consolidated Financial Statements.

DEPOSITS

Total deposits were $354.6 million and $313.5 million at September 30, 2005 and December 31, 2004, respectively. Noninterest-bearing demand deposits increased to $124.1 million at September 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 September 30, 2005 reflected a normalization following this year-end variability. Money market deposits and savings deposits were $75.4 million and $30.2 million, respectively, at September 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 $31.6 million at September 30, 2005 from $35.0 million at December 31, 2004. Interest-bearing demand deposits increased significantly at December 31, 2004 from the fourth quarter average of $31.7 million, thus the decline at September 30, 2005 reflected a normalization following the year-end variability. Time certificates of deposit (“TCDs”) increased to $93.4 million at September 30, 2005 from $63.1 million at December 31, 2004 due to an increase in brokered deposits. There were $27.5 million in brokered TCDs at September 30, 2005 compared to $6.9 million at December 31, 2004.

During the first nine months of 2005, the Company supplemented its liquidity by increasing its use of brokers to issue three-month to one-year TCDs. These efforts resulted in a net increase of brokered TCDs of $20.6 million from $6.9 million at December 31, 2004 to $27.5 million at September 30, 2005.

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 three quarters of 2005, it has elected to only moderately increase 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.

In a sustained rising interest rate environment, increases in deposit interest rates will be required to prevent net deposit withdrawals. Additionally, in order to generate new deposit growth, the Company has paid significantly higher rates than that paid on existing deposits.

OTHER BORROWINGS

There were $19.0 million of other borrowings, consisting of advances from the Federal Home Loan Bank, at September 30, 2005 compared to $25.9 million at December 31, 2004. The decline in other borrowings reflected repayment at maturity due to the increase in deposits, partially offset by the increase in loan fundings and security purchases.

SHAREHOLDERS’ EQUITY

Shareholders’ equity increased from $34.5 million at December 31, 2004 to $37.1 million at September 30, 2005 due to the retained earnings for the nine months ended September 30, 2005 partially offset by a decrease in market value of interest rate swaps and securities available-for-sale.

CAPITAL ADEQUACY REQUIREMENTS

At September 30, 2005, National Mercantile 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 National Mercantile and the Banks, as of September 30, 2005 and December 31, 2004.

Regulatory Capital Information

of the National Mercantile Bancorp and Banks

	Minimum
	For Capital		Well
	Adequacy		Capitalized		September 30,		December 31,
	Purposes		Standards		2005		2004
National Mercantile Bancorp:
Tier 1 leverage	4.00	%	N/A		11.04	%	9.87	%
Tier 1 risk-based capital	4.00	%	N/A		11.72	%	10.39	%
Total risk-based capital	8.00	%	N/A		13.67	%	12.42	%

Mercantile National Bank:
Tier 1 leverage	4.00	%	5.00	%	11.01	%	8.99	%
Tier 1 risk-based capital	4.00	%	6.00	%	13.40	%	10.44	%
Total risk-based capital	8.00	%	10.00	%	14.66	%	11.60	%

South Bay Bank, NA:
Tier 1 leverage	4.00	%	5.00	%	9.69	%	9.32	%
Tier 1 risk-based capital	4.00	%	6.00	%	8.93	%	9.32	%
Total risk-based capital	8.00	%	10.00	%	10.18	%	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 $15.1 million on September 30, 2005 compared to $14.2 million on December 31, 2004. Due from banks-interest-bearing was $2.0 million at September 30, 2005 and $2.7 million at December 31, 2004, respectively. There was $3.1 million in Federal funds sold at September 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 September 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 funding 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 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 $32,000 on September 30, 2005 compared to $174,000 at December 31, 2004. Due from banks-interest bearing was $1.0 million at September 30, 2005 compared to $1.7 million at December 31, 2004.

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 $2.1 million as of September 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 a liability sensitive position of $13.9 million at September 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.

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 interest rate sensitivity position during a period of moderate rising interest rates is expected to have a positive impact on 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 of its substantial adjustable earning assets. Since interest rates began increasing in June 2004, the Company’s net interest income has in fact significantly increased with funding costs lagging the increase in earning asset yields. This lag in funding costs could narrow future net interest margins in the event that rates paid on deposits begin rising more rapidly due to increased funding needs or competitive pressures.

In a period of declining rates, such as the environment that was experienced during 2001 and 2002, the decline is expected to 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. To partially mitigate the negative effects of declining

interest rates on its net interest margin, during the third quarter 2005 the Company accelerated its purchases of intermediate term investment securities which were partly funded by short-term liabilities. Additionally, the Company has entered into interest rate swap agreements and has purchased interest rate floors at various strike prices and terms that have the effect of further reducing its exposure to declining interest rates.

Rate-Sensitive Assets and Liabilities

	September 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	$	3,110		$	—		$	—		$	—		$	3,110
Securities at amortized cost	422			14,643			11,744			32,749			59,558
Due from banks - interest bearing	2,000			—			—			—			2,000
FRB and other stock, at cost	—			—			—			3,301			3,301
Loans receivable (1)	257,739			13,416			41,291			17,420			329,866
Interest rate swaps	—			—			50,000			15,000			65,000
Total rate-sensitive assets	263,271			28,059			103,035			68,470			462,835

Rate-Sensitive Liabilities: (2)
Interest bearing deposits:
Demand, money market and savings	137,140			—			—			—			137,140
Time certificates of deposit	32,674			51,457			9,232			—			93,363
Other borrowings	19,000												19,000
Interest rate swaps	65,000			—			—			—			65,000
Total rate-sensitive liabilities	253,814			51,457			9,232			—			314,503
Interest rate-sensitivity gap	9,457			(23,398		)	93,803			68,470			148,332
Cumulative interest rate-sensitivity gap	$	9,457		$	(13,941	)	$	79,862		$	148,332
Cumulative ratio of rate sensitive assets to rate-sensitive liabilities	104		%	95		%	125		%	147		%

(1) Loans receivable excludes nonaccrual loans.

(2) Deposits which are subject to immediate withdrawal are presented as repricing within three months or less.

The distribution of other time deposits is based on scheduled maturities.

Rate-Sensitive 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

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 September 30, 2005, the allowance for credit losses equaled 1.37% of loans receivable and 1382.0% of nonperforming loans. Although management believes that it has established adequate allowances for credit losses as of September 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 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 September 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 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 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 September 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 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.

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

None.

Item 5. OTHER INFORMATION

None.

Item 6. EXHIBITS

31.1 Certification of Scott A. Montgomery on disclosure controls

31.2 Certification of David R. Brown on disclosure controls

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

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

SIGNATURES

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

		NATIONAL MERCANTILE BANCORP
		(Registrant)

DATE:	November 10, 2005	/s/ Scott A. Montgomery
		Scott A. Montgomery
		Chief Executive Officer

DATE:	November 10, 2005	/s/ David R. Brown
		David R. Brown
		Principal Financial and Principal Accounting Officer