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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-KSB



| | x | ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ------------------------------------------------------------------------------

for the fiscal year ended December 31, 2006



| |  ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------

for the transition period from
                             to
                            .

Commission File Number 000-15982

NATIONAL MERCANTILE BANCORP

(Exact name of small business issuer in its charter)



|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|California                                                    |  | 95-3819685                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|1880 Century Park East, Suite 800Los Angeles, California      |  | 90067                              
|(Address to principal executive offices)                      |  | (Zip Code)                         

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Check whether the issuer is
not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ̈

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

Check if there is no disclosure of delinquent filers to
Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment
to this Form 10-KSB. x

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). ̈Yes x No

The issuers revenues for its most recent fiscal year: $37.3 million.

The aggregate market value of the voting common equity held by nonaffiliates of the registrant, based upon the closing sale price of its Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System on December 29, 2006, was approximately $34.4 million.

As of March 13, 2007, there were no outstanding
shares of Common Stock, no par value, of the issuer.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of the Proxy Statement of First California Financial Group, Inc., the successor to the registrant in its reincorporation merger, to be
distributed in connection with its 2007 Annual Meeting of Stockholders are incorporated by reference in Part III

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



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NATIONAL MERCANTILE BANCORP

Table of Contents

Form 10-KSB

For the Fiscal Year Ended December 31, 2006



|                     |  |                                                                                                                                       |  |   
|-------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | --
|PART I               |  | 4                                                                                                                                    
|Item 1.              |  | Description of Business                                                                                                               |  | 4 
|Item 2.              |  | Description of Property                                                                                                               |  | 12
|Item 3.              |  | Legal Proceedings                                                                                                                     |  | 12
|Item 4.              |  | Submission of Matters to a Vote of Security Holders                                                                                   |  | 12
|                     | 
|PART II              |  | 13                                                                                                                                   
|                     |  |                                                                                                                                      
|Item 5.              |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities                        |  | 13
|Item 6.              |  | Managements Discussion and Analysis or Plan of Operation                                                                             |  | 15
|Item 7.              |  | Financial Statements                                                                                                                  |  | 47
|Item 8.              |  | Changes In and Disagreements With Accountants on Accounting and Financial Disclosure                                                  |  | 47
|Item 8A.             |  | Controls and Procedures                                                                                                               |  | 47
|Item 8B.             |  | Other Information                                                                                                                     |  | 47
|                     | 
|PART III             |  | 48                                                                                                                                   
|                     |  |                                                                                                                                      
|Item 9.              |  | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance With Section 16(a) of the Exchange Act |  | 48
|Item 10.             |  | Executive Compensation                                                                                                                |  | 48
|Item 11.             |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                        |  | 48
|Item 12.             |  | Certain Relationships and Related Transactions, and Director Independence                                                             |  | 48
|Item 13.             |  | Exhibits                                                                                                                              |  | 48
|Item 14.             |  | Principal Accountant Fees and Services                                                                                                |  | 48
|                     | 
|Signatures           |  | 49                                                                                                                                   
|Financial Statements |  | 47                                                                                                                                   
|Index to Exhibits    |  | 85                                                                                                                                   



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Explanatory Note

On March 12, 2007, National Mercantile Bancorp, or National Mercantile, and First California Financial Group, Inc., a Delaware corporation, or First California, completed the previously announced reincorporation
merger of National Mercantile with and into First California, National Mercantiles wholly-owned subsidiary. We refer to that merger in this document as the Reincorporation Merger. As a result of the Reincorporation Merger, the separate
corporate existence of National Mercantile ceased, and First California succeeded, and assumed all the rights and obligations of, its former parent, National Mercantile. The Reincorporation Merger was followed immediately by the completion of the
previously announced merger of FCB Bancorp, a California corporation, or FCB, with and into First California. We refer to that merger in this document as the FCB Merger and, together with the Reincorporation Merger, the Mergers. As a result of the
FCB Merger, the separate corporate existence of FCB ceased, and First California succeeded, and assumed all the rights and obligations of, FCB.

In connection with the completion of the Reincorporation Merger and because National Mercantiles common stock was prior thereto registered under Section 12(b) of the Securities Exchange Act of 1934, as amended, or the Exchange
Act, First Californias common stock was deemed registered under Section 12(b) of the Exchange Act by operation of paragraph (a) of Rule 12g-3 under the Exchange Act. Pursuant to Sections 12 and 13 of the Exchange Act and related
regulations of the Securities and Exchange Commission, or SEC, including Rule 12g-3, First California is filing (1) this Annual Report on Form 10-KSB on behalf of National Mercantile for the fiscal year ended December 31, 2006 and
(2) an Annual Report on Form 10-K with respect to First California (as the then wholly-owned subsidiary of National Mercantile) for its partial fiscal year ended December 31, 2006. Because the FCB Merger was not completed prior to
December 31, 2006 and pursuant to Section 15(d) of the Exchange Act and related regulations of the SEC, First California is also filing an Annual Report on Form 10-K on behalf of FCB Bancorp for the fiscal year ended December 31,
2006. Future periodic and other reports with respect to First California, including as successor to the businesses of each of FCB Bancorp and National Mercantile, will be filed by First California (Commission File No. 000-52498).

ANNUAL REPORT ON FORM 10-KSB

Certain
matters discussed in this Form 10-KSB may constitute forward-looking statements within the meaning of the Exchange Act and as such may involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of
the business environment in which National Mercantile Bancorp (referred to as we, our or the Company when such reference includes National Mercantile Bancorp and its subsidiaries, collectively, National
Mercantile when referring only to the parent company and the Banks when referring only to National Mercantiles banking subsidiaries, Mercantile National Bank and South Bay Bank, N.A.) operates, projections of future
performance, perceived opportunities in the market and statements regarding our mission and vision. Our actual results, performance, or achievements may differ significantly from the results, performance, or achievements expressed or implied in such
forward-looking statements. Statements regarding policies and procedures are not intended to imply, and should not be interpreted to mean, that we will conduct our business in accordance with such policies for any particular period of time, as we
may at any time and from time to time amend or repeal such policies and adopt new policies. For discussion of the factors that might cause such a difference, see Item 6. Managements Discussion and Analysis of Financial Condition or Plan
of Operation  Factors Which May Affect Future Operating Results.



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PART I

|Item 1. | Description of Business
|------- | -----------------------

Historically, National Mercantile has been a bank holding company whose principal assets were the capital stock of its two bank subsidiaries: Mercantile National Bank, or Mercantile, and South Bay Bank, N.A., or South Bay, the subsidiaries
are also referred to herein as the Banks. National Mercantiles business strategy has been to attract individual and small- to mid-sized business borrowers in specific market niches located in our primary service areas by offering a variety of
loan products and a full range of banking services coupled with highly personalized service. Its lending products include revolving lines of credit, term loans, commercial real estate loans, construction loans and consumer and home equity loans,
which often contain terms and conditions tailored to meet the specific demands of the market niche in which the borrower operates. Additionally, National Mercantile has provided a wide array of deposit and investment products that are also designed
to meet specific customer needs.

The Banks operate throughout the west side of Los Angeles County including the South Bay, Century City
and San Fernando Valley with banking offices in Century City, Torrance, Encino and El Segundo and a loan production office in Beverly Hills. Additionally, South Bay targets Orange County businesses through a loan production office in Costa Mesa,
California.

The Banks targeted market niches for businesses include the entertainment industry, the healthcare industry,
professional services providers, the real estate escrow industry, property managers, public works contractors and community-based nonprofit organizations. Entertainment industry clients include television, music and film production companies, talent
agencies, individual performers, directors and producers (whom the Banks attract by establishing relationships with business management firms) and others affiliated with the entertainment industry. Healthcare organizations include primarily
outpatient healthcare providers such as physician medical groups, independent practice associations and surgery centers. Professional service customers include legal, accounting, insurance, advertising firms and their individual directors, officers,
partners and shareholders.

The Banks also engage in real estate and construction lending. Their real estate loans are for the purchase or
finance of principally smaller commercial properties, including owner-occupied business facilities and retail properties, and to a lesser extent multi-family and single family residential properties. The Banks make construction loans for small
commercial, multi-family and single residential properties, including tract developments and luxury homes for resale.

In order to grow and
expand their array of products and services, the Banks have from time to time opened de novo branch banking offices or acquired other financial service-related companies including in-market acquisitions with banks of similar size and
market presence.

The Banks believe that banking clients value doing business with locally managed institutions that can provide a full
service commercial banking relationship through an understanding of the clients financial needs and the flexibility to deliver customized solutions through our menu of products and services. They also believe that they better able to build
successful client relationships as the holding company provides cost effective administrative support services while promoting bank autonomy and flexibility in serving client needs.

To implement this philosophy, National Mercantile historically operated each of the Banks by retaining their independent names. Each bank subsidiary has
established strong client followings in its market areas through attention to client service and an understanding of client needs. Having completed the Mergers, we expect to combine the operations of Mercantile, South Bay and First California Bank,
the bank subsidiaries of First California, although certain branches may continue to be operated under the South Bay name.

The primary
focus for each Banks relationship managers is to cultivate and nurture their client relationships. Relationship managers are assigned to each borrowing client to provide continuity in the



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relationship. This emphasis on personalized relationships requires that all of the relationship managers maintain close ties to the communities or industry
niche in which they serve, so they are able to capitalize on their efforts through expanded business opportunities for the Banks. Client service decisions and day-to-day operations are maintained at the Banks.

At December 31, 2006, we had total assets of $501.6 million, total loans, net, of $361.0 million and total deposits of $380.6 million.

Corporate History

Mercantile was organized in
1981 as a national banking association and commenced operations through an office in Century City in 1982. In 1983 National Mercantile was organized under the laws of the State of California and registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended (the BHCA), to serve as a holding company for Mercantile.

In March 2001,
Mercantile opened a regional office in Encino, California which expanded our client-focused niche banking services to the San Fernando Valley area of Los Angeles. In January 2004, Mercantile opened a loan production office in Beverly Hills,
California to focus on providing banking services to those affiliated with the entertainment industry.

In December 2001, National
Mercantile acquired South Bay, which had offices in Torrance and El Segundo. In January 2004, South Bay opened a loan production office in Costa Mesa to expand its lending services to the Orange County area of Southern California.

In March 2007, National Mercantile merged with and into First California, a Delaware corporation and a wholly-owned subsidiary of National Mercantile.
Immediately thereafter, FCB merged with and into First California. As a result of these Mergers, the separate corporate existence of National Mercantile and FCB ceased, and First California succeeded, and assumed all the rights and obligations of,
National Mercantile and FCB.

Competition

The banking and financial services industry in California generally, and in the Banks market areas specifically, is highly competitive. The increasingly competitive environment is primarily a result of changes in regulation, changes
in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. Our primary service area is dominated by a relatively small number of major banks that have many offices operating over a wide
geographical area. We compete for loans, deposits, and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit
unions, and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than us. Nondepository
institutions can be expected to increase the extent to which they act as financial intermediaries. Large institutional users and sources of credit may also increase the extent to which they interact directly, meeting business credit needs outside
the banking system. Furthermore, the geographic constraints on portions of the financial services industry can be expected to erode. In addition, many of the major commercial banks operating in our primary service area offer services, such as trust
services, which are not offered directly by us and, by virtue of their greater total capitalization, such banks have substantially higher lending limits.

To compete with other financial institutions in our primary service area, we rely principally upon personal contact by our officers, directors and employees and providing, through third parties, specialized services
such as messenger, accounting and other related services. For clients whose loan demands exceed our legal lending limit, we arrange for such loans on a participation basis with other banks. We also assist clients requiring other services not offered
by us in obtaining such services from other providers.



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Economic Conditions and Government Policies

Our profitability, like most financial institutions, is primarily dependent on interest rate differentials. In general, the difference between the
interest rates paid by us on our interest-bearing liabilities, such as deposits and other borrowings, and the interest rates received by us on our interest-earning assets, such as loans and investment securities, comprise the major portion of our
earnings. These rates are highly sensitive to many factors that are beyond our control, such as inflation, recession and unemployment, and the impact which future changes in domestic and foreign economic conditions might have on us cannot be
predicted.

The monetary and fiscal policies of the federal government and the policies of regulatory agencies, particularly the Board of
Governors of the Federal Reserve System (the Federal Reserve), influence our business. The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market
operations in U.S. Government securities by adjusting the required level of reserves for depository institutions subject to its reserve requirements, and by varying the target federal funds and discount rates applicable to borrowings by depository
institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments, and deposits and also affect interest rates earned on interest-earning assets and paid on interest-bearing liabilities. We cannot fully
predict the nature and impact on us of any future changes in monetary and fiscal policies.

Financial and Statistical Disclosure

Certain statistical information with respect to National Mercantile is presented within Item 6. Selected Financial Data, Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk. This information should be read in conjunction with the
consolidated financial statements contained in Item 8. Financial Statements and Supplementary Data.

Supervision and Regulation

General

Banking is
a highly regulated industry. Congress and the states have enacted numerous laws that govern banks, bank holding companies and the financial services industry, and have created several largely autonomous regulatory agencies which have authority to
examine and supervise banks and bank holding companies, and to adopt regulations furthering the purpose of the statutes. The primary goals of the regulatory scheme are to maintain a safe and sound banking system, to protect depositors and the
Federal Deposit Insurance Corporation (FDIC) insurance fund, and to facilitate the conduct of sound monetary policy; they were not adopted for the benefit of shareholders of the Company. As a result, the Companys financial
condition, results of operations, ability to grow and engage in various business activities can be affected not only by management decisions and general economic conditions, but the requirements of applicable federal and state laws, regulations and
the policies of the various regulatory authorities.

Further, these laws, regulations and policies are reviewed often by Congress, state
legislatures and federal and state regulatory agencies. Changes in laws, regulations and policies can materially increase the cost of doing business, limit certain business activities, require additional capital, or materially adversely affect
competition between banks and other financial intermediaries. While it can be predicted that significant changes will occur, what changes, when they will occur, and how they will impact the Company cannot be predicted.

Set forth below is a summary description of certain of the material laws and regulations that relate to the operations of the Banks. Since National
Mercantile has ceased to exist, the following summary does not describe the laws and regulations that were applicable to it as a holding company. The description does not purport to be a complete description of these laws and regulations and is
qualified in its entirety by reference to the applicable laws and regulations.



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Both Banks are national banks and members of the Federal Reserve System. The Banks are subject to primary
supervision, examination, and regulation by the Office of the Comptroller of the Currency (the OCC) and are also subject to regulations of the FDIC and the Federal Reserve. The Banks are subject to requirements and restrictions under
federal law, including requirements to maintain reserves against deposits, restrictions on the types and amounts of loans that may be granted and limitations on the types of investments that may be made and services that may be offered. Various
consumer laws and regulations also affect the Banks operations. These laws primarily protect depositors and other customers of the Banks, rather than National Mercantile and its shareholders.

The OCC and the Federal Reserve have various remedies if they should determine that the financial condition, capital resources, asset quality, earnings
prospects, management, liquidity, or other aspects of a banks operations are unsatisfactory or that a bank or its management is violating or has violated any law or regulation. These remedies include the power to enjoin unsafe or
unsound practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in capital, to restrict the growth of
the bank, to assess civil monetary penalties, to remove officers and directors, and ultimately to terminate the banks deposit insurance.

FDIC

The Banks are subject to examination and regulation by the FDIC under the Federal Deposit Insurance Act because their
deposit accounts are insured by the FDIC.

Under FDIC regulations, each insured depository institution is assigned to one of three capital
groups for insurance premium purposes  well capitalized, adequately capitalized and undercapitalized  which are defined in the same manner as under prompt corrective action rules, as discussed under
Capital Adequacy Requirements below. These three groups are then divided into subgroups, which are based on supervisory evaluations by the institutions primary federal regulator, resulting in nine assessment classifications.
Currently, assessment rates for insured banks range from 0% of insured deposits for well-capitalized banks with minor supervisory concerns to 0.027% of insured deposits for undercapitalized banks with substantial supervisory concerns. The FDIC may
increase or decrease the assessment rate schedule semiannually.

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

All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of
interest on bonds issued by the Financing Corporation ( FICO), a federal corporation chartered under the authority of the Federal Housing Finance Board. The bonds, commonly referred to as FICO bonds, were issued to capitalize the Federal
Savings and Loan Insurance Corporation. The FICO has established assessment rates effective for the first quarter of 2006 at approximately $.0144 per $100 annually for assessable deposits. The FICO assessments are adjusted quarterly to reflect
changes in the assessment bases of the FDICs insurance funds and do not vary depending on a depository institutions capitalization or supervisory evaluations.



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Dividends and Capital Distributions

Dividends and capital distributions from the Banks constituted the principal source of cash to National Mercantile and will continue, together with
dividends and capital distributions from First California Bank, constitute the principal source of cash to First California. The Banks are subject to various statutory and regulatory restrictions on their ability to pay dividends and capital
distributions to their shareholder.

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. The Banks ability to pay dividends in the future is, and could be, further influenced by regulatory policies or agreements and by
capital guidelines.

Mercantile has an accumulated deficit of $4.7 million at December 31, 2006. South Bay had retained earnings of
$4.9 million as of December 31, 2006. Mercantile and South Bay may from time to time be permitted to make capital distributions to National Mercantile with the consent of the OCC. It is not anticipated that such consent could be obtained unless
the distributing bank were to remain well capitalized following such distribution.

Transactions with Affiliates

The Banks are subject to certain restrictions imposed by federal law on any extensions of credit to, or the issuance of a guarantee or
letter of credit on behalf of their holding company or other affiliates, the purchase of, or investments in, stock or other securities thereof, the taking of such securities as collateral for loans, and the purchase of assets of their holding
company or other affiliates. Such restrictions prevent their holding company and such other affiliates from borrowing from the Banks unless the loans are secured by marketable obligations of designated amounts. Further, such secured loans and
investments by the Banks to or in their holding company or to or in any other affiliate are limited, individually, to 10% of the respective Banks capital and surplus (as defined by federal regulations), and such secured loans and investments
are limited, in the aggregate, to 20% of the respective Banks capital and surplus (as defined by federal regulations).

Capital
Adequacy Requirements

Both the Federal Reserve and the OCC have adopted similar, but not identical, risk-based and
leverage capital adequacy guidelines for bank holding companies and national banks, respectively. Under the risk-based capital guidelines, different categories of assets are assigned different risk weights, ranging from zero percent for
assets considered risk-free (e.g., cash) to 100% for assets considered relatively high-risk (e.g., commercial loans). These risk weights are multiplied by corresponding asset balances to determine a risk-adjusted asset base. Certain off-balance
sheet items (e.g., standby letters of credit) are added to the risk-adjusted asset base. The minimum required ratio of total capital to risk-weighted assets for both bank holding companies and national banks is presently 8%. At least half of the
total capital is required to be Tier 1 capital, consisting principally of common shareholders equity, a limited amount of perpetual preferred stock and minority interests in the equity, less goodwill, intangible assets and certain
other items. The remainder (Tier 2 capital) may consist of a limited



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amount of subordinated debt, certain hybrid capital instruments and other debt securities, preferred stock and a limited amount of the general loan-loss
allowance.

The minimum Tier 1 leverage ratio (Tier 1 capital to average adjusted total assets) is 3% for bank holding companies and
national banks that have the highest regulatory examination rating and are not contemplating significant growth or expansion. All other bank holding companies and national banks are expected to maintain a ratio of at least 1% to 2% or more above the
stated minimum.

Prompt Corrective Action Rules

The OCC has adopted regulations establishing capital categories for national banks and prompt corrective actions for undercapitalized institutions. The regulations create five capital categories: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A bank may be reclassified by the OCC to the next level below that determined by its regulatory capital if the OCC finds that it is in an
unsafe or unsound condition or if it has received a less-than-satisfactory rating for any of the categories of asset quality, management, earnings or liquidity in its most recent examination and the deficiency has not been corrected, except that a
bank cannot be reclassified as critically undercapitalized for such reasons.

The OCC may subject national banks which are not at least
adequately capitalized to a broad range of restrictions and regulatory requirements. An undercapitalized bank may not pay management fees to any person having control of the institution, nor, except under certain circumstances and with
prior regulatory approval, make any capital distribution. Undercapitalized banks are subject to increased monitoring by the OCC, are restricted in their asset growth, must obtain regulatory approval for certain corporate activities, such as
acquisitions, new branches and new lines of business, and, in most cases, must submit to the OCC a plan to bring their capital levels to the minimum required in order to be classified as adequately capitalized. The OCC may not approve a capital
restoration plan unless each company that controls the bank guarantees that the bank will comply with it. Under Federal Reserve policy, a bank holding company is expected to act as a source of financial strength to its subsidiary banks and to commit
resources to support each such bank. In addition, a bank holding company is required to guarantee that its subsidiary bank will comply with any capital restoration plan. The amount of such a guarantee is limited to the lesser of (i) 5% of the
banks total assets at the time it became undercapitalized, or (ii) the amount which is necessary (or would have been necessary) to bring the bank into compliance with all applicable capital standards as of the time the bank fails to
comply with the capital restoration plan. A holding company guarantee of a capital restoration plan results in a priority claim to the holding companys assets ahead of its other unsecured creditors and shareholders that is enforceable even in
the event of the holding companys bankruptcy or the subsidiary banks insolvency.

If any one or more of a banks ratios
are below the minimum ratios required to be classified as undercapitalized, it will be classified as significantly undercapitalized provided that if its ratio of tangible equity to total assets is 2% or less, it will be classified as critically
undercapitalized. Significantly and critically undercapitalized banks are subject to additional mandatory and discretionary restrictions and, in the case of critically undercapitalized institutions, must be placed into conservatorship or
receivership unless the OCC and the FDIC agree otherwise.

Safety and Soundness Standards

The federal banking agencies have adopted guidelines designed to assist the federal banking agencies in identifying and addressing potential safety and
soundness concerns before capital becomes impaired. The guidelines set forth operational and managerial standards relating to (i) internal controls, information systems and internal audit systems; (ii) loan documentation; (iii) credit
underwriting; (iv) asset growth; (v) earnings; and (vi) compensation, fees and benefits.

In addition, the federal banking
agencies have also adopted safety and soundness guidelines with respect to asset quality and earnings standards. These guidelines provide six standards for establishing and maintaining a



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system to identify problem assets and prevent those assets from deteriorating. Under these standards, an insured depository institution should
(i) conduct periodic asset quality reviews to identify problem assets; (ii) estimate the inherent losses in problem assets and establish reserves that are sufficient to absorb estimated losses; (iii) compare problem asset totals to
capital; (iv) take appropriate corrective action to resolve problem assets; (v) consider the size and potential risks of material asset concentrations; and (vi) provide periodic asset quality reports with adequate information for
management and the board of directors to assess the level of asset risk.

These new guidelines also set forth standards for evaluating and
monitoring earnings and for ensuring that earnings are sufficient for the maintenance of adequate capital and reserves.

Cross
Guarantees

The Banks are also subject to cross-guaranty liability under federal law. This means that if one FDIC-insured depository
institution subsidiary of a multi-institution bank holding company fails or requires FDIC assistance, the FDIC may assess commonly controlled depository institutions for the estimated losses suffered by the FDIC. Such a liability could have a
material adverse effect on the financial condition of any assessed subsidiary institution and on National Mercantile as the common parent. While the FDICs cross-guaranty claim is generally junior to the claim of depositors, holders of secured
liabilities, general creditors and subordinated creditors, it is generally superior to the claims of shareholders and affiliates.

Community Reinvestment Act and Fair Lending

The Banks are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community Reinvestment Act (CRA) activities. A bank may be subject to substantial penalties and corrective measures for a violation of certain fair lending laws. The CRA requires
the Banks to ascertain and meet the credit needs of the communities it serves, including low- and moderate-income neighborhoods. The Banks compliance with the CRA is reviewed and evaluated by the OCC, which assigns the Banks a publicly
available CRA rating at the conclusion of the examination.

The CRA regulations emphasize measurements of performance in the area of
lending (specifically, a banks home mortgage, small business, small farm and community development loans), investment (a banks community development investments) and service (a banks community development services and the
availability of its retail banking services), although examiners are still given a degree of flexibility in taking into account unique characteristics and needs of a banks community and its capacity and constraints in meeting such needs. The
regulations also require certain levels of collection and reporting of data regarding certain kinds of loans.

Further, the federal banking
agencies may take compliance with such laws and CRA obligations into account when regulating and supervising other activities. An assessment of CRA compliance is required in connection with applications for OCC approval of certain activities,
including establishing or relocating a branch office that accepts deposits or merging or consolidating with, or acquiring the assets or assuming the liabilities of, a federally regulated financial institution. An unfavorable rating may be the basis
for OCC denial of such an application, or approval may be conditioned upon improvement of the applicants CRA record. In the case of a bank holding company applying for approval to acquire a bank or other bank holding company, the Federal
Reserve will assess the CRA record of each subsidiary bank of the applicant, and such records may be the basis for denying the application. The federal banking agencies have established annual reporting and public disclosure requirements for certain
written agreements that are entered into between insured depository institutions or their affiliates and nongovernmental entities or persons that are made pursuant to, or in connection with, the fulfillment of the CRA.

In connection with its assessment of CRA performance, the appropriate bank regulatory agency assigns a rating of outstanding,
satisfactory, needs to improve or substantial noncompliance. Each of the Banks received a satisfactory rating in its most recent exam.



10



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USA Patriot Act of 2001

The USA Patriot Act of 2001 (Patriot Act) is intended to strengthen the U.S. law enforcement and the intelligence communities abilities
to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial
transparency laws and requires various regulations, including: (i) due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-US persons;
(ii) standards for verifying customer identification at account opening; (iii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or
money laundering; and (iv) reports by non-financial trades and businesses filed with the Treasury Departments Financial Crimes Enforcement Network for transactions exceeding $10,000, and filing of suspicious activities reports by
securities brokers and dealers if they believe a customer may be violating U.S. laws and regulations.

Privacy

Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated
third parties. Pursuant to these rules, financial institutions must provide: (i) initial notices to customers about their privacy policies, describing the conditions under which they may disclose nonpublic personal information to nonaffiliated
third parties and affiliates; (ii) annual notices of their privacy policies to current customers; and (iii) a reasonable method for customers to opt out of disclosures to nonaffiliated third parties.

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We have
implemented our privacy policies in accordance with the law.

In recent years, a number of states have implemented their own versions of
privacy laws. For example, in 2003, California adopted standards that are more restrictive than federal law, allowing bank customers the opportunity to bar financial companies from sharing information with their affiliates.

Employees

At December 31, 2006, we had 86
full-time equivalent employees. None of the employees is covered by a collective bargaining agreement. We consider our employee relations to be satisfactory.

Available Information

National Mercantile historically maintained an Internet website at www.nationalmercbancorp.com, and
websites for Mercantile and South Bay at www.mnbla.com and www.southbaybank.com, respectively. First California intends to operate an Internet website at www.fcalgroup.com. At www.nationalmercbancorp.com and via the Investor Relations
link at the Banks websites, National Mercantiles annual reports on Form 10-KSB, quarterly reports on Form 10-QSB, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to
Section 13 or 15(d) of the Exchange Act are available, free of charge, as soon as reasonably practicable after such forms are electronically filed with, or furnished to, the SEC. The public may read and copy any materials we file with
the SEC at the SECs Public Reference Room, located at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains
an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. You may obtain copies of the Companys filings on the SEC site. These
documents may also be obtained in print upon request by our shareholders to our Investor Relations Department.

You may contact our
Investor Relations Department at First California Financial Group, Inc., 1100 Paseo Camarillo, Camarillo, CA 93010, Attention: Investor Relations, telephone 805-484-0534.



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(All website addresses given in this document are for information only and are not intended to be an
active link or to incorporate any website information into this document).



|Item 2. | Description of Property
|------- | -----------------------

As a
result of the Reincorporation Merger, First California succeeded to a National Mercantile lease of approximately 13,880 square feet in an office building at 1880 Century Park East, Los Angeles, California, which serves as its administrative
headquarters. The lease term is for the period January 2004 to April 2014. The rental rate, subject to an annual CPI adjustment and for changes in property taxes and operating costs, was $2.43 per square foot per month, or $33,785, at
December 31, 2006.

Mercantiles principal banking office is located in 1,800 square feet in an office building at 1880 Century
Park East, Los Angeles, California. The effective rent is $3.28 per square foot or $5,895 per month. The lease expires in June 2014.

Mercantile leases approximately 1,650 square feet in an office building in Encino, California for the primary purpose of providing branch banking operations in the San Fernando Valley. The effective rent is $2.83 per square foot or $4,687
per month. The lease expires in June 2009. Additionally, Mercantile leases 2,559 square feet in an office building in Beverly Hills as a loan production office, primarily for the entertainment industry. The effective rent is $3.21 per square foot,
or $8,226 per month and the lease expires June 2009.

South Bay owns a two-story stand-alone office building at 2200 Sepulveda Boulevard,
Torrance, California, which serves as its principal banking office. South Bay also leases approximately 3,100 square foot in an office building in El Segundo, California for the primary purpose of providing branch banking operations in the Los
Angeles airport area. The effective rent is $1.85 per month and the lease expires in January 2011. Additionally, South Bay leases 1,555 square feet in an office building in Costa Mesa, California as a loan production office in Orange County. The
office has been designed to serve as a full service branch banking office in the future. The effective rent is $1.94 per square foot, or $3,032 per month. The lease expires February 2009.

We believe our present facilities are adequate for our present needs but anticipate the need for additional facilities as we continue to grow. We believe
that, if necessary, we could secure suitable alternative facilities on similar terms without adversely affecting operations.



|Item 3. | Legal Proceedings.
|------- | ------------------

As a
result of the Mergers, National Mercantile has ceased to exist. With respect to First California, its successor, the nature of its business as successor to National Mercantile and FCB causes it to be involved in routine legal proceedings from time
to time. First California is not aware of any pending or threatened legal proceedings expected to have a material adverse effect on its business, financial condition, results of operations or cash flow.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------

There was no submission of matters to a vote of shareholders during the quarter ended December 31, 2006.



12



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PART II



|Item 5. | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities
|------- | --------------------------------------------------------------------------------------------------------------

As a result of the Mergers, National Mercantile has ceased to exist. Accordingly, there are no longer any outstanding securities of National Mercantile.
Information required by Item 201 of Regulation S-B regarding the market for National Mercantiles common equity prior to the Mergers is included below.

The common stock of National Mercantiles successor, First California, began trading on the Nasdaq Global Market under the symbol FCAL on March 13, 2007.

Prior to the Mergers, the common stock of National Mercantile was traded on the Nasdaq Capital Market under the symbol MBLA. The following
table shows the high and low trade prices of the common stock for each quarter of 2005 and 2006 as reported by the Nasdaq. Additionally, there may have been transactions at prices other than those shown during that time.



|                   |  |              |  |      
|------------------ |  | ------------ |  | -----
|                   |  | Common Stock
|Quarter Ended:     |  | High         |  | Low  
|March 31, 2005     |  | 12.56        |  | 10.16
|June 30, 2005      |  | 12.70        |  | 9.81 
|September 30, 2005 |  | 12.73        |  | 12.04
|December 31, 2005  |  | 15.68        |  | 12.40
|March 31, 2006     |  | 15.64        |  | 13.74
|June 30, 2006      |  | 16.34        |  | 13.04
|September 30, 2006 |  | 13.30        |  | 11.40
|December 31, 2006  |  | 14.00        |  | 12.18

At March 13, 2007, National Mercantile had no shareholders of record for its common stock.

Dividends

National Mercantile has not
paid a cash dividend on its common stock for more than 10 years. As a California corporation, under the California General Corporation Law, generally National Mercantile could not pay dividends in cash or property except (i) out of positive
retained earnings or (ii) if, after giving effect to the distribution, National Mercantiles assets would be at least 1.25 times its liabilities and its current assets would exceed its current liabilities (determined on a consolidated
basis under generally accepted accounting principles). At December 31, 2006, National Mercantile had an accumulated deficit of $1.7 million. Further, as a result of the Mergers, the separate corporate existence of National Mercantile ceased,
and First California succeeded, and assumed all the rights and obligations of National Mercantile, including any future payments of dividends to First California stockholders.



13



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Securities Authorized for Issuance Under Equity Compensation Plans.

The following table sets forth as of December 31, 2006 information regarding outstanding options under all of our equity compensation plans and the
number of shares available for future option grants under equity compensation plans currently in effect. All equity plans of National Mercantile, in addition to those of FCB, and all outstanding option awards were assumed by First California in the
Mergers.



|                                                           |  |                                                                                          |  |                                                                           |      |                                                                                                                                |        
|---------------------------------------------------------- |  | ---------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------- | ---- | ------------------------------------------------------------------------------------------------------------------------------ | -------
|                                                           |  | (a)                                                                                      |  | (b)                                                                       |      | (c)                                                                                                                           
|Plan category                                              |  | Number of securities to beissued upon exercise ofoutstanding options,warrants and
rights |  | Weighted-average exerciseprice of outstanding options,warrants and rights |      | Number of securitiesremaining available forissuance under equitycompensation plans(excluding
securitiesreflected in column (a)
|Equity compensation plans approved by security holders (1) |  | 492,355                                                                                  |  | $                                                                         | 8.28 |                                                                                                                                | 195,088
|Equity compensation plans not approved by security holders |  | None                                                                                     |  |                                                                           | N/A  |                                                                                                                                | N/A    
|Total                                                      |  |                                                                                          |  |                                                                           |      |                                                                                                                                |        

---

|(1) | Includes the 2005 Stock Incentive Plan, 1996 Stock Incentive Plan and the 1994 Stock Option Plan which has been terminated but under which there remained, as of December 31,
2006, outstanding options to purchase 1,375 shares of National Mercantile common stock.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 6. | Managements Discussion And Analysis Or Plan Of Operation
|------- | ---------------------------------------------------------

EXECUTIVE LEVEL OVERVIEW

Table 1

Operations Summary



|                                      |  |                            |        |                    |   |       |                            |        |        |                    |   |        |                            |  |   |        |   |  |        |    |  |   |       
|------------------------------------- |  | -------------------------- | ------ | ------------------ | - | ----- | -------------------------- | ------ | ------ | ------------------ | - | ------ | -------------------------- |  | - | ------ | - |  | ------ | -- |  | - | ------
|                                      |  | Year
EndedDecember 31,2006 |        | Increase(Decrease) |   |       | Year EndedDecember 31,2005 |        |        | Increase(Decrease) |   |        | Year EndedDecember 31,2004
|                                      |  |                            | Amount |                    | % |       |                            |        | Amount |                    |   | %      |                            | 
|                                      |  | (Dollars in thousands)    
|Interest income                       |  | $                          | 35,500 |                    | $ | 9,235 |                            | 35.2   | %      |                    | $ | 26,265 |                            |  | $ | 6,811  |   |  | 35.0   | %  |  | $ | 19,454
|Interest expense                      |  |                            | 12,152 |                    |   | 6,670 |                            | 121.7  | %      |                    |   | 5,482  |                            |  |   | 1,859  |   |  | 51.3   | %  |  |   | 3,623 
|                                      |  |                            |        |                    |   |       |                            |        |        |                    |   |        |                            |  |   |        |   |  |        |    |  |   |       
|Net interest income                   |  |                            | 23,348 |                    |   | 2,565 |                            | 12.3   | %      |                    |   | 20,783 |                            |  |   | 4,952  |   |  | 31.3   | %  |  |   | 15,831
|Provision (benefit) for credit losses |  |                            | 248    |                    |   | 332   |                            | (395.2 | )%     |                    |   | (84    | )                          |  |   | (304   | ) |  | (138.2 | )% |  |   | 220   
|Other operating income                |  |                            | 1,792  |                    |   | 674   |                            | 60.3   | %      |                    |   | 1,118  |                            |  |   | (1,297 | ) |  | (53.7  | )% |  |   | 2,415 
|Other operating expense               |  |                            | 15,028 |                    |   | 652   |                            | 4.5    | %      |                    |   | 14,376 |                            |  |   | 348    |   |  | 2.5    | %  |  |   | 14,028
|                                      |  |                            |        |                    |   |       |                            |        |        |                    |   |        |                            |  |   |        |   |  |        |    |  |   |       
|Income before income taxes            |  |                            | 9,864  |                    |   | 2,255 |                            | 29.6   | %      |                    |   | 7,609  |                            |  |   | 3,611  |   |  | 90.3   | %  |  |   | 3,998 
|Income taxes                          |  |                            | 4,222  |                    |   | 1,063 |                            | 33.6   | %      |                    |   | 3,159  |                            |  |   | 1,481  |   |  | 88.3   | %  |  |   | 1,678 
|                                      |  |                            |        |                    |   |       |                            |        |        |                    |   |        |                            |  |   |        |   |  |        |    |  |   |       
|Net income                            |  | $                          | 5,642  |                    | $ | 1,192 |                            | 26.8   | %      |                    | $ | 4,450  |                            |  | $ | 2,130  |   |  | 91.8   | %  |  | $ | 2,320 
|                                      |  |                            |        |                    |   |       |                            |        |        |                    |   |        |                            |  |   |        |   |  |        |    |  |   |       

We recorded net income of $5.6 million for 2006 compared to net income of $4.5 million for 2005
and $2.3 million for 2004. This represents fully-diluted earnings per share of $0.94 for 2006 compared to $0.75 for 2005 and $0.41 for 2004. The increase in net income for 2006 was due to a $2.6 million increase in net interest income resulting from
(i) increases in the prime rate lending index through the first half of the year, and (ii) a greater volume of interest earning assets, particularly higher yielding loans receivable and securities available-for-sale. During the later half
of 2006, we experienced a narrowing of net interest margins due to rising core deposit and wholesale funding costs. Net interest income for 2005 increased $5.0 million compared to 2004 similarly due to increases in the prime rate lending index and a
greater volume of earning assets, but also benefited from a more rapid rise in yield on earning assets than cost of interest-bearing liabilities. The provision for credit losses was $248,000 for 2006 reflecting the growth in loans receivable
compared to an $84,000 net benefit for credit losses in 2005 due to a significant recovery of a loan previously charged off. Noninterest income increased $674,000 for 2006 compared to 2005 due to the settlement of an insurance claim related to
collateral for a loan and a lower trading loss on nonhedge derivatives. Other operating expenses increased $652,000 in 2006 largely due to $1.3 million greater salaries and related expense reflecting (i) a $395,000 charge for stock option costs
upon implementation of Statement of Financial Accounting Standards No. 123R, Accounting for Stock-Based Compensation, (ii) increases expense for management bonuses and employee incentive compensation, and (iii) accruals for
liabilities associated with employee retention and severance plans installed to stabilize our workforce following our merger agreement with FCB Bancorp. Legal fees declined $414,000 reflecting fewer problem credits.

Return on average assets for 2006 was 1.16% compared to 1.10% and 0.61% for 2005 and 2004, respectively. Return on average equity for 2006 was 13.84%
compared to 12.15% for 2005 and 7.02% for 2004.

Total assets at December 31, 2006 were $501.6 million compared to $448.5 million and
$391.3 million at year-end 2005 and 2004, respectively. Loans receivable and securities available-for-sale increased $26.9 million and $30.7 million, respectively. The increase in loans receivable was due to $20.1 million growth in commercial real
estate loans and $16.4 million commercial loans  secured and unsecured partially offset by a $8.9 million decline in construction and land development loans.

The allowance for loan and lease losses at December 31, 2006 was $4.7 million compared to $4.5 million at December 31, 2005 reflecting added provisions for credit losses for the growth of loans during the
2006 year.



15



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Total deposits at December 31, 2006 were $380.6 million compared to $363.2 million at year-end 2005.
The composition of deposits at December 31, 2006 reflects a $42.4 million increase in money market accounts from the prior year end offset by a $9.6 million decline in interest-bearing demand deposits, a $9.4 million decline in time
certificates of deposit, and a $5.7 million decline in savings deposits. Noninterest-bearing demand deposits were nearly flat at December 31, 2006 compared to the prior year end. Federal funds purchased and securities sold under agreements to
repurchase were $45.0 million at year end 2006 while there was none at December 31, 2005 reflecting the execution of a securities leverage strategy designed to reduce our exposure to interest rate movements. Other borrowed funds were $10.3
million at December 31, 2006 compared to $28.3 million at year-end 2005.

Table 2

Ratios to Average Assets



|                                      |  |      |   |  |       |    |  |      |  
|------------------------------------- |  | ---- | - |  | ----- | -- |  | ---- | -
|                                      |  | 2006 |   |  | 2005  |    |  | 2004 |  
|Net interest income                   |  | 4.81 | % |  | 5.13  | %  |  | 4.16 | %
|Other operating income                |  | 0.37 | % |  | 0.28  | %  |  | 0.63 | %
|Provision (benefit) for credit losses |  | 0.05 | % |  | (0.02 | )% |  | 0.06 | %
|Other operating expense               |  | 3.10 | % |  | 3.55  | %  |  | 3.68 | %
|                                      |  |      |   |  |       |    |  |      |  
|Income before income taxes            |  | 2.03 | % |  | 1.88  | %  |  | 1.05 | %
|                                      |  |      |   |  |       |    |  |      |  
|Net income                            |  | 1.16 | % |  | 1.10  | %  |  | 0.61 | %
|                                      |  |      |   |  |       |    |  |      |  

CRITICAL ACCOUNTING POLICIES

Our accounting policies are integral to understanding the results reported. These policies are described in detail in Note 1 of the Notes to Consolidated Financial Statements. Our most complex accounting policies
require managements judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. We have established detailed policies and control procedures that are intended to ensure valuation methods are well controlled and
applied consistently from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The following is a brief description of our current accounting
policies involving significant management valuation judgments.

Allowance for Loan and Lease Losses

The allowance for loan and lease 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 was reclassified from the allowance for loan and lease losses to other liabilities. The 2004 year end reserve for contingent losses on unfunded commitments was reclassified to conform to the
current presentation.

The allowance for loan and lease losses represents managements best estimate of probable loan losses in our
loans receivable and commitments to fund loans. The allowance for loan and lease losses is determined based on managements assessment of several factors: (i) reviews and evaluation of individual loans including underlying cash flow and
collateral values, (ii) the level of and changes in classified and nonperforming loans, (iii) historical loan loss experiences, (iv) changes in the nature and volume of the loan portfolio, and (v) current economic conditions and
the related impact on specific borrowers and industry groups.

We review and manage the credit quality of the loan portfolio through a
process that includes a risk grading system, uniform underwriting criteria, early identification of problem credits, regular monitoring of any



16



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classified assets graded as criticized by our internal grading system, and an independent loan review process. The calculation of the adequacy of
the allowance for loan and lease losses is based on this internal risk grading system as well as other factors including loan grade migration trends and collateral values.

The internal risk grading utilizes a 10-level grading system  six pass grades for unclassified loans based upon our assessment of the
borrowers ability to service the loan and the quality of the collateral and four classification grades for criticized loans depending on the severity of the underwriting weakness and likelihood of loss. We use a statistical grading
migration analysis as part of our allowance for loan and lease losses evaluation for unclassified loans, which is a method by which the types and grades of historical loans charged-off are related to the current loan portfolio. This analysis
attempts to use historical trends in loan risk grading, nonperforming assets and concentrations that are characteristic to our portfolio and consider other factors affecting loan losses that are specific to our marketplace and customer demographic.

An allowance based upon the migration analysis is determined for various loan types and unclassified grades based upon loan risk grades
and historical charge off experience. Adjustments to these allowance factors are made for consideration of, among others matters, (i) changes in underwriting standards and internal risk grading between the current loan portfolio and the
historical sample, (ii) changes in the factors that resulted in historical loans charged-off, such as industry economic condition, and (iii) differences between the current economic environment and the economic environment during the
period of historical loans charged-off.

Generally, the allowance for loan and lease losses established for classified loans that are
collateral-dependent is based on the net realizable value of the collateral. In measuring the net realizable value of the collateral, management uses current appraisals that, among other techniques, observe market transactions of similar property
and adjust for differences. Changes in the financial condition of individual borrowers, in economic conditions, in historical loss experience and in the condition of the various markets in which collateral may be sold may all affect the required
level of the allowance for loan and lease losses and the associated provision for credit losses.

On a periodic basis we engage an outside
loan review firm to review our loan portfolio, risk grade accuracy and the reasonableness of loan evaluations. Annually, this outside loan review team analyzes our methodology for calculating the allowance for loan and lease losses based on our loss
histories and policies.

We utilize our judgment to determine the provision for credit losses and establish the allowance for loan and
lease losses. Each Banks board of directors reviews the adequacy of that Banks allowance for loan and lease losses on a quarterly basis. We believe, based on information known to management, that the allowance for loan and lease losses
at December 31, 2006 represents the probable loan losses in loans receivable. However, credit quality is affected by many factors beyond our control, including local and national economies, and facts may exist which are not known to us 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 we will not sustain loan losses materially in excess of the allowance for
loan and lease losses. In addition, the OCC, as an integral part of its examination process, periodically reviews the allowance for loan and lease losses and could develop an estimate that requires additional provisions for credit losses.

Goodwill and Other Intangible Assets

As discussed in Note 2 of the Notes to Consolidated Financial Statements, we must assess goodwill and other intangible assets each year, or more frequently upon the occurrence of certain events, for impairment.
Impairment is the condition that exists when the carrying amount of the asset exceeds its implied fair value.

The goodwill impairment test
involves comparing the fair value of South Bay with its carrying amount, including goodwill. We retained an independent valuation consultant to evaluate the goodwill as of October 1, 2006. The valuation consultant conducted the analysis
utilizing two valuation methods  the income approach and the market approach.



17



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The income approach measures the present worth of anticipated future net cash flows generated by South
Bay. The cash flows were based upon expected financial results derived from a probability-weighted average of three scenarios that we considered. Net cash flow forecasts require analysis of the significant variables influencing revenues, expenses,
working capital and capital investment as well as residual value and cost of capital. Our forecasts were for a three-year period reflecting average annual asset growth of 8.0%, an average loan to deposit ratio of 105% and varying interest rate
scenarios. A 10.1% cost of capital and a $56.7 million residual value was utilized in the analysis to discount the projected cash flows.

The market approach derives a valuation by analyzing the prices at which shares of capital stock of reasonably similar companies are trading in the public market, or the transaction price at which similar companies have been acquired. The
analysis identified eighteen transactions during the period from October 2004 through August 2006 involving acquired companies located in the state of California with similarities to South Bay in size and operating characteristics.
Transaction multiples were considered for purchase price to (i) earnings, and (ii) tangible book value. The purchase price to earnings multiple for the South Bay acquisition was 11.38 compared to a range from 10.32 to 36.92 with an average
of 23.59 for the transactions studied. The South Bay transaction purchase price to tangible book value multiple was 1.55 compared to a range of 1.35 to 3.93 with an average of 2.60 for the comparable transactions.

The consultant also analyzed our stock price as part of its market approach analysis. This analysis involved applying price multiples based on our stock
price at or near the valuation date to the performance measures of South Bay. Additionally, the consultant considered guideline companies operating in the same market segment as South Bay. The stock trading values of similar companies were not
considered reliable due to the small volume of trading activity, however, the results were not inconsistent with those of the transaction method.

The fair value indications derived from the income approach was $54.4 million and from the two market approaches, transaction and stock price analysis, $66.1 million and $53.0 million, respectively. The fair value of South Bay under both
approaches exceeds the carrying value at October 1, 2006 of $27.5 million, therefore, goodwill is not considered impaired. The testing of goodwill and other intangible assets for impairment requires re-measurement of fair values. If the future
fair values were materially less than the recorded value, we would be required to take a charge against earnings to write down the goodwill and other intangible assets to the lower value.

Deferred Tax Assets

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

Derivative Instruments and Hedging

We utilize derivative instruments to manage our risk to changes in interest rates. Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133) requires that an
entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge and earnings are affected only
to the extent to which the hedge is not effective in achieving offsetting changes in fair value or cash flows of the hedged item. We have designated certain of our derivative instruments as hedges and consider them highly effective. Circumstances
may change increasing the extent that the hedge is not effective resulting in a greater portion of the change in value of the derivative instruments being reported in earnings.



18



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We have other derivatives that hedge exposures when it makes economic sense to do so, including
circumstances in which the hedging relationship does not qualify for hedge accounting. The changes in the fair value of these derivatives are recorded as trading gains or losses on economic derivatives in the statement of operations.

OPERATIONS SUMMARY ANALYSIS

Net Interest Income

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

2006 Compared to 2005

Net interest income increased $2.6 million to $23.3 million during 2006 compared to 2005 due to a $9.2 million increase in interest income offset by a
$6.7 million increase in interest expense.

Loan interest income increased $6.1 million during 2006 due to $37.7 million greater average
volume of loans receivable and a 90 basis point increase in yield, resulting primarily from increases in the prime rate lending index during the first half of the year. Approximately 56% of our $365.7 million loans receivable at December 31,
2006, have adjustable interest rates; consequently, rising interest rates positively affect interest income. In order to lessen the impact on interest income in the event of a decline in the prime rate lending index, we have entered into interest
rate swaps, in which we exchanged an adjustable rate interest based on the prime rate lending index for a fixed rate payment on an aggregate notional amount of $50.0 million. The higher yields earned on our loans receivable during 2006 were
partially offset by the rising cost of interest rate swaps hedging certain adjustable rate loans. For 2006, the net settlement payment under these interest rate swaps was $524,000 reducing the loan yield 15 basis points for 2006.

Interest income from securities available-for-sale increased $3.1 million during 2006 compared to 2005 due to $44.5 million greater average volume and a
150 basis point increase in yield. Beginning the third quarter 2005 and continuing through the first half of 2006, we accelerated our investment activity as part of a strategy to further reduce the exposure of net interest income to a declining
interest rate environment. The additions to securities available-for-sale were mostly low-coupon, intermediate-term, 15- and 20-year mortgage-backed security pools, purchased at a discount, that we expect to have limited prepayments of principal in
the event of declining interest rates (and muted term extension in rising interest rates). These investments, as well as loans receivable, have been largely financed with adjustable rate wholesale funds that will decline in cost in a falling
interest rate environment. The securities available-for-sale purchased during 2005 and 2006, in a period of rising interest rates, and the maturity of lower yielding securities in the portfolio, resulted in an increase in the portfolio yield.

We continued to operate with minimal federal funds sold during 2006 in order to reduce our asset sensitivity. Federal funds sold averaged
$1.7 million and $1.6 million for 2006 and 2005, respectively. Overall, interest-earning assets were $81.8 million greater during 2006 than 2005 while the higher interest rates and favorable change in composition to higher-yielding assets resulted
in a 76 basis point increase in weighted average yield on interest-earning assets.

Interest expense increased $6.7 million for 2006 due to
a $83.5 million increase in average interest-bearing liabilities and a 147 basis point increase in the weighted average cost of interest-bearing liabilities. Interest



19



---

expense on deposits increased $4.6 million due to $48.6 million greater average volume of interest-bearing deposits than 2005 and due to a 145 basis point
rise in weighted average cost. Time certificates of deposit $100,000 and over averaged $32.0 million greater during 2006 than 2005 due to an increased volume of brokered certificates of deposit (Brokered CDs). The volume of money market
and savings deposits increased $20.7 million in 2006 and time certificates of deposit under $100,000 declined $2.3 million. Relatively low costing interest-bearing demand deposits averaged $1.8 million less in 2006 than in 2005.

During the rising interest rate environment experienced during the past ten quarters, we strategically elected to only moderately increase transaction
deposit rates and to fund asset growth, and runoff of deposits, with Brokered CDs. Although this type of funding is typically higher costing and exhibits higher interest rate sensitivity, the Brokered CDs facilitate the liquidity and interest rate
risk management techniques that we utilize to reduce our net interest income exposure to possible interest rates movements. The greater interest expense on the incremental Brokered CDs needed to fund asset growth, and any decrease in transaction
deposits, is less than the impact of increasing rates on the significantly greater volume of transaction accounts. In a sustained rising interest rate environment, like we experienced during 2006, higher deposit rates become increasingly necessary
to prevent accelerated deposit outflow resulting in deposit costs increasing more rapidly than yields on earning assets.

The cost of time
certificates of deposit $100,000 and over increased 166 basis points during 2006 compared to 2005. The cost of money market and savings deposits increased 148 basis points while the cost of interest-bearing demand deposits and time certificates of
deposit under $100,000 increased 23 basis points and 115 basis points, respectively.

The volume of other borrowings averaged $14.0 million
and $12.2 million in 2006 and 2005, respectively. We continue to employ a liquidity strategy of maintaining relatively low levels of short-term assets and utilize Federal Home Loan Bank overnight advances, against pledged loans and securities, to
fund asset and deposit fluctuations. Minimizing short-term assets and increasing short-term liabilities furthers the management of our asset sensitive balance sheet. The cost of other borrowings was 5.00% and 3.38% for 2006 and 2005, respectively,
representing an increase of 162 basis points in 2006.

Noninterest-bearing demand deposits averaged $114.7 million and $124.8 million in
2006 and 2005, respectively. While we continue to devote resources to growing our business accounts, in a rising interest rate environment depositors generally deploy their funds into higher yielding deposits and alternative investments outside the
Banks.

2005 Compared to 2004

Net interest income increased $5.0 million to $20.8 million during 2005 compared to 2004 due to a $6.8 million increase in interest income offset by a $1.9 million increase in interest expense.

Loan interest income increased $6.1 million due to $30.7 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 and interest rate swaps. During the second half of 2004, the Federal Reserve Bank increased interest rates 125 basis points on five occasions after a prolonged period of
accommodative monetary policy in response to signs of stronger economic activity and perceived higher inflation risk. Continuing in 2005, the Federal Reserve Bank increased interest rates 200 basis points on eight occasions. Approximately 75% of our
$338.6 million loans receivable at December 31, 2005, adjustable interest rates; consequently, rising interest rates positively affect interest income. The higher yields earned on our loans receivable during 2005 were partially offset by the
rising cost of interest rate swaps; however, these interest rate swaps still contributed 12 basis points to the increase in loan yield compared to 2004.

Interest income from securities available-for-sale increased $719,000 during 2005 compared to 2004 due to $10.0 million greater average volume and an 82 basis point increase in yield. During the third and fourth
quarter



20



---

of 2005, we accelerated our investment activity as part of a strategy to further reduce the exposure of net interest income to a declining interest rate
environment. The additions to securities available-for-sale have largely been low-coupon, intermediate-term, 15- and 20-year mortgage-backed security pools, purchased at a discount that we expect to have limited prepayment of principal in the event
of declining interest rates (and muted term extension in rising interest rates). These investments, as well as loans receivable, have been largely financed with adjustable rate wholesale funds that will decline in cost in a falling interest rate
environment. The securities available-for-sale purchased during 2005, in a period of higher interest rates, and the maturity of lower yielding securities in the portfolio, resulted in an increase in the portfolio yield.

Additionally, during 2005 we reallocated short-term lower-yielding federal funds sold, which averaged $6.0 million less than 2004, into higher yielding
earning assets. Furthermore, through deposit reclassification utilizing non-transaction sub accounts, we reduced our required reserves at the Federal Reserve Bank resulting in the redeployment of $6.5 million in noninterest-bearing cash and due from
banks  demand. Overall, interest-earning assets were $32.3 million greater during 2005 than 2004 while the higher interest rates and favorable change in composition to higher-yielding assets resulted in a 133 basis point increase in weighted
average yield on interest-earning assets.

Interest expense increased $1.9 million for 2005 due to a $19.7 million increase in average
interest-bearing liabilities and a 64 basis point increase in the weighted average cost of interest-bearing liabilities. Interest expense on deposits increased $1.8 million due to a 75 basis point rise in weighted average cost of interest-bearing
deposits in addition to $20.2 million greater average volume than 2004. Time certificates of deposit $100,000 and over averaged $24.8 million greater during 2005 than 2004 due to an increased volume of brokered certificates of deposit
(Brokered CDs). The volume of money market and savings deposits declined $4.3 million in 2005 and time certificates of deposit under $100,000 declined $1.3 million. Relatively low costing interest-bearing demand deposits averaged $1.0
million greater in 2005 than in 2004.

The cost of time certificates of deposit $100,000 and over increased 115 basis points during 2005
compared to 2004. The cost of money market and savings deposits increased 60 basis points while the cost of interest-bearing demand deposits and time certificates of deposit under $100,000 increased 24 basis points and 65 basis points, respectively.

The volume of other borrowings averaged $12.2 million and $12.6 million in 2005 and 2004, respectively. The cost of other borrowings was
3.38% and 2.65% for 2005 and 2004, respectively, representing an increase of 73 basis points in 2005.

Noninterest-bearing demand deposits
increased only slightly averaging $124.8 million and $124.7 million in 2005 and 2004, respectively.

Interest Rate Spread and Net Interest Margin

We analyze earnings performance using, among other measures, the interest rate spread and net interest margin. The interest rate spread
represents the difference between the weighted average yield received on interest earning assets and the weighted average rate paid on interest bearing liabilities. Net interest margin (also called the net yield on interest earning assets) is net
interest income expressed as a percentage of average total interest earning assets. Our net interest margin is affected by changes in the yields earned on assets and rates paid on liabilities, referred to as rate changes, and changes to the relative
amount of interest earning assets and interest bearing liabilities. Interest rates charged on our loans are affected principally by the demand for such loans, the supply of money available for lending purposes, and other competitive factors. These
factors are in turn affected by general economic conditions and other factors beyond our control, such as federal economic policies, the general supply of money in the economy, legislative tax policies, governmental budgetary matters, and actions of
the Federal Reserve Board. Table 3 presents information concerning the change in interest income and interest expense attributable to changes in average volume and average rate. Table 4 presents the weighted average yield



21



---

on each category of interest earning assets, the weighted average rate paid on each category of interest bearing liabilities, and the resulting interest rate
spread and net yield on interest earning assets for 2006, 2005 and 2004. We had no tax exempt interest income for 2006, 2005 or 2004.

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



|                                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|-------------------------------------------------------------------------- |  | -------------------------- | ----- | - | --------------------- | - | ----- | -------------------------- | ------ | --------------------- | ----- | ---- |  | - | ----- | - |  | - | ----- |  | - | ----- | -
|                                                                           |  | 2006 vs 2005               |       |   | 2005 vs 2004          |  
|                                                                           |  | Increase(decrease) due to: |       |   | NetIncrease(Decrease) |   |       | Increase(decrease) due to: |        | NetIncrease(Decrease) |      
|                                                                           |  | Volume                     |       |   | Rate                  |   |       |                            | Volume |                       |       | Rate | 
|                                                                           |  | (Dollars in thousands)     |      
|Interest Income:                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Federal funds sold                                                         |  | $                          |      |   |                       | $ | 36    |                            |        | $                     | 36    |      |  |   | (75   | ) |  | $ | 30    |  | $ | (45   | )
|Interest-bearing deposits with other financial institutions                |  |                            | 16    |   |                       |   | 14    |                            |        |                       | 30    |      |  |   | (22   | ) |  |   | 67    |  |   | 45    |  
|Securities available-for-sale                                              |  |                            | 1,686 |   |                       |   | 1,447 |                            |        |                       | 3,133 |      |  |   | 297   |   |  |   | 422   |  |   | 719   |  
|Securities held-to-maturity                                                |  |                            | (30   | ) |                       |   | 5     |                            |        |                       | (25   | )    |  |   | (38   | ) |  |   | 6     |  |   | (32   | )
|Loans receivable (2)                                                       |  |                            | 2,886 |   |                       |   | 3,175 |                            |        |                       | 6,061 |      |  |   | 1,944 |   |  |   | 4,180 |  |   | 6,124 |  
|                                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Total interest-earning assets                                              |  |                            | 4,558 |   |                       |   | 4,677 |                            |        |                       | 9,235 |      |  |   | 2,106 |   |  |   | 4,705 |  |   | 6,811 |  
|                                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Interest Expense:                                                          |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Interest-bearing deposits:                                                 |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Demand                                                                     |  |                            | (9    | ) |                       |   | 72    |                            |        |                       | 63    |      |  |   | 3     |   |  |   | 75    |  |   | 78    |  
|Money market and savings                                                   |  |                            | 268   |   |                       |   | 1,829 |                            |        |                       | 2,097 |      |  |   | (30   | ) |  |   | 623   |  |   | 593   |  
|Time certificates of deposit:                                              |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|$100,000 or more                                                           |  |                            | 840   |   |                       |   | 1,395 |                            |        |                       | 2,235 |      |  |   | 368   |   |  |   | 594   |  |   | 962   |  
|Under $100,000                                                             |  |                            | (55   | ) |                       |   | 273   |                            |        |                       | 218   |      |  |   | (23   | ) |  |   | 170   |  |   | 147   |  
|                                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Total time certificates of deposit                                         |  |                            | 785   |   |                       |   | 1,668 |                            |        |                       | 2,453 |      |  |   | 345   |   |  |   | 764   |  |   | 1,109 |  
|                                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Total interest-bearing deposits                                            |  |                            | 1,044 |   |                       |   | 3,569 |                            |        |                       | 4,613 |      |  |   | 318   |   |  |   | 1,462 |  |   | 1,780 |  
|Other borrowings                                                           |  |                            | 61    |   |                       |   | 227   |                            |        |                       | 288   |      |  |   | (10   | ) |  |   | 90    |  |   | 80    |  
|Junior subordinated debentures                                             |  |                            |      |   |                       |   | (39   | )                          |        |                       | (39   | )    |  |   |      |   |  |   |      |  |   |      |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                            | 1,808 |   |                       |   |      |                            |        |                       | 1,808 |      |  |   | (1    | ) |  |   |      |  |   | (1    | )
|                                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Total interest-bearing liabilities                                         |  |                            | 2,913 |   |                       |   | 3,757 |                            |        |                       | 6,670 |      |  |   | 307   |   |  |   | 1,552 |  |   | 1,859 |  
|                                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  
|Net interest income                                                        |  | $                          | 1,645 |   |                       | $ | 920   |                            |        | $                     | 2,565 |      |  | $ | 1,799 |   |  | $ | 3,153 |  | $ | 4,952 |  
|                                                                           |  |                            |       |   |                       |   |       |                            |        |                       |       |      |  |   |       |   |  |   |       |  |   |       |  

---

|(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 abso
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Table does not include interest income that would have been earned on nonaccrual loans.
|--- | ---------------------------------------------------------------------------------------



22



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Average Balance Sheet and Analysis of Net Interest Income



|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|--------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---------------------- | - | ------------------------- | ----------------- | ----- | ------------- |  | - | ---------------------- | - | ------------------------- | - | ------ | ------------- | ----- | - | ---------------------- | - | ------------------------- | - |  | - | ------ |  | ----- | -
|                                                                                              |  | Year Ended             |        
|                                                                                              |  | December 31, 2006      |         |   | December 31, 2005      |   |                           | December 31, 2004 |      
|                                                                                              |  | AverageAmount          |         |   | InterestIncome/Expense |   | WeightedAverageYield/Rate |                   |       | AverageAmount |  |   | InterestIncome/Expense |   | WeightedAverageYield/Rate |   |        | AverageAmount |       |   | InterestIncome/Expense |   | WeightedAverageYield/Rate |  
|                                                                                              |  | (Dollars in thousands) |        
|Assets:                                                                                       |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Federal funds sold and securities purchased under agreements to resell                        |  | $                      | 1,661   |   |                        |   | 86                        |                   | 5.18  | %             |  | $ | 1,647                  |   |                           | $ | 50     |               | 3.04  | % |                        | $ | 7,651                     |   |  | $ | 95     |  | 1.24  | %
|Due from banks-interest-bearing                                                               |  |                        | 2,538   |   |                        |   | 131                       |                   | 5.16  | %             |  |   | 2,187                  |   |                           |   | 101    |               | 4.62  | % |                        |   | 3,566                     |   |  |   | 56     |  | 1.57  | %
|Securities available-for-sale                                                                 |  |                        | 96,104  |   |                        |   | 5,087                     |                   | 5.29  | %             |  |   | 51,595                 |   |                           |   | 1,954  |               | 3.79  | % |                        |   | 41,603                    |   |  |   | 1,235  |  | 2.97  | %
|Securities held-to-maturity                                                                   |  |                        | 2,307   |   |                        |   | 96                        |                   | 4.16  | %             |  |   | 3,070                  |   |                           |   | 121    |               | 3.94  | % |                        |   | 4,085                     |   |  |   | 153    |  | 3.75  | %
|Loans receivable (1) (2)                                                                      |  |                        | 351,882 |   |                        |   | 30,100                    |                   | 8.55  | %             |  |   | 314,164                |   |                           |   | 24,039 |               | 7.65  | % |                        |   | 283,415                   |   |  |   | 17,915 |  | 6.32  | %
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Total interest earning assets                                                                 |  |                        | 454,492 |   |                        |   | 35,500                    |                   | 7.81  | %             |  |   | 372,663                |   |                           |   | 26,265 |               | 7.05  | % |                        |   | 340,320                   |   |  |   | 19,454 |  | 5.72  | %
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Noninterest earning assets:                                                                   |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Cash and due from banks  demand                                                              |  |                        | 14,066  |   |                        |   |                           |                   |       |               |  |   | 16,374                 |   |                           |   |        |               |       |   |                        |   | 22,874                    |   |  |   |        |  |       |  
|Other assets                                                                                  |  |                        | 22,879  |   |                        |   |                           |                   |       |               |  |   | 20,775                 |   |                           |   |        |               |       |   |                        |   | 21,529                    |   |  |   |        |  |       |  
|Allowance for credit losses and net unrealized gain on sales of securities available-for-sale |  |                        | (5,933  | ) |                        |   |                           |                   |       |               |  |   | (4,769                 | ) |                           |   |        |               |       |   |                        |   | (3,753                    | ) |  |   |        |  |       |  
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Total assets                                                                                  |  | $                      | 485,504 |   |                        |   |                           |                   |       |               |  | $ | 405,043                |   |                           |   |        |               |       |   |                        | $ | 380,970                   |   |  |   |        |  |       |  
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Liabilities and shareholders equity:                                                         |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Interest-bearing deposits:                                                                    |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Demand                                                                                        |  | $                      | 30,737  |   |                        |   | 221                       |                   | 0.72  | %             |  | $ | 32,497                 |   |                           | $ | 158    |               | 0.49  | % |                        | $ | 31,484                    |   |  | $ | 80     |  | 0.25  | %
|Money market and savings                                                                      |  |                        | 124,319 |   |                        |   | 3,439                     |                   | 2.77  | %             |  |   | 103,648                |   |                           |   | 1,342  |               | 1.29  | % |                        |   | 107,981                   |   |  |   | 749    |  | 0.69  | %
|Time certificates of deposit:                                                                 |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|$100,000 or more                                                                              |  |                        | 83,993  |   |                        |   | 3,600                     |                   | 4.29  | %             |  |   | 51,995                 |   |                           |   | 1,365  |               | 2.63  | % |                        |   | 27,179                    |   |  |   | 403    |  | 1.48  | %
|Under $100,000                                                                                |  |                        | 23,708  |   |                        |   | 838                       |                   | 3.53  | %             |  |   | 26,031                 |   |                           |   | 620    |               | 2.38  | % |                        |   | 27,345                    |   |  |   | 473    |  | 1.73  | %
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Total time certificates of deposit                                                            |  |                        | 107,701 |   |                        |   | 4,438                     |                   | 4.12  | %             |  |   | 78,026                 |   |                           |   | 1,985  |               | 2.54  | % |                        |   | 54,524                    |   |  |   | 876    |  | 1.61  | %
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Total interest-bearing deposits                                                               |  |                        | 262,757 |   |                        |   | 8,098                     |                   | 3.08  | %             |  |   | 214,171                |   |                           |   | 3,485  |               | 1.63  | % |                        |   | 193,989                   |   |  |   | 1,705  |  | 0.88  | %
|Other borrowings                                                                              |  |                        | 13,991  |   |                        |   | 700                       |                   | 5.00  | %             |  |   | 12,186                 |   |                           |   | 412    |               | 3.38  | % |                        |   | 12,550                    |   |  |   | 332    |  | 2.65  | %
|Junior subordinated debentures                                                                |  |                        | 15,464  |   |                        |   | 1,546                     |                   | 10.00 | %             |  |   | 15,464                 |   |                           |   | 1,585  |               | 10.25 | % |                        |   | 15,464                    |   |  |   | 1,585  |  | 10.25 | %
|Federal funds purchased and securities sold under agreements to repurchase                    |  |                        | 33,108  |   |                        |   | 1,808                     |                   | 5.46  | %             |  |   |                       |   |                           |   |       |               |      |   |                        |   | 113                       |   |  |   | 1      |  | 0.88  | %
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Total interest-bearing liabilities                                                            |  |                        | 325,320 |   |                        |   | 12,152                    |                   | 3.74  | %             |  |   | 241,821                |   |                           |   | 5,482  |               | 2.27  | % |                        |   | 222,116                   |   |  |   | 3,623  |  | 1.63  | %
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Noninterest-bearing liabilities:                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Noninterest-bearing demand deposits                                                           |  |                        | 114,701 |   |                        |   |                           |                   |       |               |  |   | 124,789                |   |                           |   |        |               |       |   |                        |   | 124,699                   |   |  |   |        |  |       |  
|Other liabilities                                                                             |  |                        | 4,728   |   |                        |   |                           |                   |       |               |  |   | 1,811                  |   |                           |   |        |               |       |   |                        |   | 1,086                     |   |  |   |        |  |       |  
|Shareholders equity                                                                          |  |                        | 40,755  |   |                        |   |                           |                   |       |               |  |   | 36,622                 |   |                           |   |        |               |       |   |                        |   | 33,069                    |   |  |   |        |  |       |  
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Total liabilities and shareholders equity                                                    |  | $                      | 485,504 |   |                        |   |                           |                   |       |               |  | $ | 405,043                |   |                           |   |        |               |       |   |                        | $ | 380,970                   |   |  |   |        |  |       |  
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Net interest income (spread)                                                                  |  |                        |         |   |                        | $ | 23,348                    |                   | 4.07  | %             |  |   |                        |   |                           | $ | 20,783 |               | 4.78  | % |                        |   |                           |   |  | $ | 15,831 |  | 4.09  | %
|                                                                                              |  |                        |         |   |                        |   |                           |                   |       |               |  |   |                        |   |                           |   |        |               |       |   |                        |   |                           |   |  |   |        |  |       |  
|Net yield on earning assets (2)                                                               |  |                        |         |   |                        |   |                           |                   | 5.14  | %             |  |   |                        |   |                           |   |        |               | 5.58  | % |                        |   |                           |   |  |   |        |  | 4.65  | %

---

|(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 $1.8 million, $1.7 million and $1.4 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



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Our net interest margin was 5.14%, 5.58% and 4.65% during 2006, 2005 and 2004, respectively, representing
a 44 basis point decline in 2006 after increasing 93 basis points in 2005. The narrowing net interest margin in 2006 reflects funding costs rising more rapidly than earning asset yields. This is due to effect of lagged deposit rate increases
discussed above in which deposit costs rise to market interest rates following an earlier delay in rate increases, as well as the effects of an inverted yield curve  an uncommon term structure in which short-term interest rates are higher than
longer-term rates  experienced during most of 2006 and continuing into 2007. Our earning assets are funded primarily with short-term liabilities, consequently, an inverted yield curve results in relatively high funding costs in relation to
term earning assets. Additionally, the higher short-term rates result in greater borrower demand for longer-term fixed rate loans which are lower costing than adjustable rate loans in this environment. Consequently, fixed rate loans were an
increasing percentage of our loan portfolio in 2006. The negative impact of a declining net interest margin on net interest income was mitigated in 2006 by increasing volumes of earning assets.

An inverted yield curve has recurrently signaled a slowing economy and declining future interest rates, particularly short-term rates resulting in the
more typical positively sloped yield curve. The greater volume of fixed rate loans recorded during 2006 would improve net interest margins in this type of interest rate development. Most of these loans carry prepayment penalties which will inhibit
prepayment in the event of declining interest rates. Additionally, the cost of the large volume of our short-term liabilities would likely decline. On the other hand, a sustained period of inverted yield curve term structures will place continued
downward pressure on our net interest margin.

Our net interest margin remains high in comparison with the interest rate spread due to the
continued significance of noninterest-bearing demand deposits relative to total funding sources. Average noninterest bearing demand deposits were $114.7 million, representing 30.4% of average deposits, during 2006, compared to $124.8 million,
representing 36.8% of average deposits, during 2005. Of these noninterest bearing demand deposits during 2006, $14.0 million or 12.2% of average noninterest bearing deposits were represented by real estate title and escrow company deposits, compared
to $14.7 million or 11.8% of average noninterest bearing deposits during 2005. While these deposits are noninterest bearing, they are not cost free funds. Customer service expenses, primarily costs related to external accounting and data processing
services provided to title and escrow company depositors are incurred by us to the extent that such depositors maintain certain average noninterest bearing deposits. Customer service expense is classified as other operating expense. If customer
service expenses related to escrow customers had been classified as interest expense, our reported net interest income for 2006 and 2005 would have been reduced by $326,000 and $370,000, respectively, and the net interest margin for 2006 and 2005
would have decreased 7 basis points and 10 basis points, respectively. Similarly, this would create identical reductions in other operating expense. The expense associated with these deposits increased in 2006 from 2005 due to a greater allowance
for customer services provided for these depositors.

Provision/Benefit for Credit Losses

During 2006, we recorded a provision for credit losses of $248,000 following our valuation assessment of the allowance for loan and lease losses and the
reserve for contingent losses on unfunded commitments. The provision was largely due to the growth in the loan portfolio during the year. In 2005, a benefit for credit losses of $84,000 was recorded. Impacting the allowance in 2005, among other
items, was a significant recovery of a loan previously charged off partially offset by relatively strong growth in loans receivable and unfunded loan commitments. A provision for credit losses of $220,000 was recorded in 2004. In 2006, net charge
offs of loans were $38,000. In 2005 and 2004, net recoveries were $1.2 million and $73,000, respectively.

Assuming continued loan growth,
and based on the relative uncertainty regarding the state of the economy, and the level of nonperforming loans, it is anticipated that regular provisions for credit losses will be made during 2006. Credit quality will be influenced by underlying
trends in the economic cycle, particularly in Southern California, and other factors, which are beyond managements control. Accordingly, no assurance can be given that we will not sustain loan losses that in any particular period are sizable
in relation to the allowance



24



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for loan and lease losses. Subsequent evaluation of the loan portfolio, in light of factors then prevailing, by us and our regulators may indicate a
requirement for increases in the allowance for loan and lease losses through additions to the provision for credit losses.

Other Operating Income

Other operating income was $1.8 million, $1.1 million and $2.4 million in 2006, 2005 and 2004, respectively. The increase in 2006 was
primarily due to (i) a nonrecurring $705,000 litigation settlement related to an insurance claim on collateral securing a loan, and (ii) a $128,000 decline in trading losses on non-hedge derivatives. The decline in 2005 was due to
(i) a $395,000 trading loss on economic derivatives compared to a $229,000 trading gain for 2004, (ii) a $250,000 decline in net settlement payments from an interest rate swap not designated as a hedge, and (iii) $592,000 lower
deposit account fees resulting from greater allowances for compensating balances and changes in deposit fee structures. In 2004, there was a net loss of $197,000 on sales of securities available-for-sale.

Other Operating Expenses

Other operating expense
increased $652,000, or 4.5%, in 2006 compared to 2005. Salaries and related benefits increased $1.3 million to $9.0 million primarily due to (i) a $395,000 charge for stock options following our implementation of SFAS 123R, (ii) larger
management bonuses, and (iii) increased commissions paid to business development officer for loan and deposit production. Legal fees declined $414,000 reflecting a lower level of problem credits. Computer data processing declined $135,000
during 2006 due to lower fees negotiated in the renewal of the contract with the service provider.

During 2005, other operating expenses
increased $348,000 to $14.4 million in 2005, compared to $14.0 million during 2004. Salaries and related benefits increased $280,000 to $7.8 million, primarily due to the addition of business development staff during the year, as well as larger
management bonuses and increased business development commissions. Net occupancy expense decreased $130,000 to $1.0 million primarily due to the relocation of our administrative offices and the Century City banking office. Other professional
services increased $273,000, or 32.0%, largely due to increased audit and tax expense as well as professional services for credit workouts. Other expenses decreased $150,000 largely due to a $250,000 reserve established during 2004 in a dispute over
our lien on the collateral for a loan as well as several unrelated and nonrecurring operating losses. The collateral dispute was resolved during 2005 and we recovered these expenses, and other damages, in a litigation settlement with the insurance
company in 2006. The recovery was recorded as other income.

Income Taxes

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

At December 31, 2006, our deferred tax asset totaled $1.7 million, respectively, with
no recorded valuation allowance. Our federal net operating loss carryforwards (Federal NOLs) and alternative minimum tax (AMT) credits were fully utilized during 2006. At December 31, 2005, we had Federal NOLs of $5.0 million and AMT credit
carryforward of $544,000.

An income tax provision of $4.2 million was recorded in 2006 compared to $3.2 million for 2005 and $1.7 million
for 2004.



25



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Accumulated Other Comprehensive Income or Loss

Accumulated other comprehensive income or loss is comprised of the unrealized gain or loss on available-for-sale securities and the unrealized gain or
loss on our derivative financial instruments designated as cash flow hedges, net of taxes. At December 31, 2006, 2005 and 2004, the accumulated other comprehensive loss related to the net unrealized loss on available-for-sale securities was
$376,000 $392,000 and $39,000, respectively. The derivatives designated as cash flow hedges had an accumulated other comprehensive loss of $784,000 and $762,000 at December 31, 2006 and 2005, respectively, compared to accumulated other
comprehensive income of $314,000 at December 31, 2004.

FINANCIAL CONDITION

Regulatory Capital

The following table sets forth (i) the minimum regulatory capital
requirements for National Mercantile and the Banks; (ii) the capital requirements for the Banks to be well capitalized under the prompt corrective action rules; and (iii) the regulatory capital ratios of National Mercantile and
the Banks as of the dates indicated in 2006 and 2005.

Table 5

Regulatory Capital Information of the National Mercantile and Banks



|                                       |  |                                    |      |  |                          |      |  |              |   |  |       |  
|-------------------------------------- |  | ---------------------------------- | ---- |  | ------------------------ | ---- |  | ------------ | - |  | ----- | -
|                                       |  | MinimumFor CapitalAdequacyPurposes |      |  | WellCapitalizedStandards |      |  | December 31, |  
|                                       |  |                                    | 2006 |  |                          | 2005 | 
|National Mercantile Bancorp:           |  |                                    |      |  |                          |      |  |              |   |  |       |  
|Tier 1 capital to average assets       |  | 4.00                               | %    |  | N/A                      |      |  | 12.24        | % |  | 10.74 | %
|Tier 1 capital to risk weighted assets |  | 4.00                               | %    |  | N/A                      |      |  | 13.63        | % |  | 11.98 | %
|Total capital to risk weighted assets  |  | 8.00                               | %    |  | N/A                      |      |  | 14.88        | % |  | 13.72 | %
|                                       |  |                                    |      | 
|Mercantile National Bank:              |  |                                    |      |  |                          |      |  |              |   |  |       |  
|Tier 1 capital to average assets       |  | 4.00                               | %    |  | 5.00                     | %    |  | 9.34         | % |  | 10.49 | %
|Tier 1 capital to risk weighted assets |  | 4.00                               | %    |  | 6.00                     | %    |  | 12.12        | % |  | 13.59 | %
|Total capital to risk weighted assets  |  | 8.00                               | %    |  | 10.00                    | %    |  | 13.34        | % |  | 14.84 | %
|                                       |  |                                    |      | 
|South Bay Bank, NA:                    |  |                                    |      |  |                          |      |  |              |   |  |       |  
|Tier 1 capital to average assets       |  | 4.00                               | %    |  | 5.00                     | %    |  | 9.83         | % |  | 9.04  | %
|Tier 1 capital to risk weighted assets |  | 4.00                               | %    |  | 6.00                     | %    |  | 10.37        | % |  | 9.00  | %
|Total capital to risk weighted assets  |  | 8.00                               | %    |  | 10.00                    | %    |  | 11.58        | % |  | 10.22 | %

National Mercantiles Tier I capital, which is comprised of shareholders equity as
modified by certain regulatory adjustments, was $56.8 million and $46.5 million at December 31, 2006 and 2005, respectively. National Mercantiles Tier 1 capital increased in 2006 as a result of net income, exercised stock options and a
reduction of the portion of deferred tax asset disallowed for regulatory capital purposes. Federal Reserve capital rules allow trust preferred securities to represent up to 25% of Tier 1 capital with the balance treated as Tier 2 capital for the
Total risk-based Capital ratio. At December 31, 2006 and 2005, Trust Preferred Securities represented $15.0 million and $13.1 million, respectively, of National Mercantiles Tier 1 capital. Disallowed against National Mercantiles
Tier 1 capital is $3.2 million of goodwill recorded in the acquisition of South Bay, $1.2 million of other intangible assets.

Mercantiles Tier 1 capital was $25.7 million and $24.8 million at December 31, 2006 and 2005, respectively. The increase in Tier 1 capital during 2006 was due to net income and the decrease of the portion of deferred tax asset
disallowed for regulatory capital purposes offset by a $3.5 million surplus capital distribution to National Mercantile.



26



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South Bays Tier 1 capital at December 31, 2006 was $22.8 million compared to $18.7 million at
December 31, 2005. The increase is due to net income in 2006 and a $2.0 million capital contribution from National Mercantile.

Liquidity
Management

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

Our deposit base provides the majority of our funding requirements.
Deposits, a relatively stable and low-cost source of funds has, along with shareholders equity, provided 86.1% and 92.7 % of funding for average total assets during 2006 and 2005, respectively. The other borrowings, specifically Federal
Home Loan Bank (FHLB) advances, which averaged $14.0 million during 2006 compared to $12.2 million during 2005, and federal funds purchased and securities sold under agreements to repurchase, which averaged $33.1 million in 2006 and zero
in 2005, comprise the balance of the liability funding. The other borrowings during 2006 and 2005 were used to fund higher yielding loans and securities.

Also, federal funds sold and securities purchased under resale agreements that may be immediately converted to cash at minimal cost. The aggregate of these assets averaged $1.6 million during 2006 and 2005.

The portfolio of available-for-sale securities is an additional source of liquidity, which averaged $96.1 million during 2006 compared to
$51.6 million in 2005. Except for a relatively small amount of securities pledged to collateralize public funds, deposits of bankruptcy estates and our swaps, our securities are pledged to collateralize securities sold under agreements to repurchase
and to the FHLB to secure immediately available borrowings. At December 31, 2006, $46.7 million of securities were pledged to the FHLB and an additional $34.5 million borrowing capacity remained. There were no unpledged investment securities at
December 31, 2006. Maturing loans also provide liquidity, of which $169.8 million of the Banks loans are scheduled to mature in 2007.

Net cash provided by operating activities totaled $9.2 million in 2006 compared to $7.9 million and $5.5 million in 2005 and 2004, respectively. The primary source of funds is net income from operations adjusted for utilization of deferred
tax assets, the provision for credit losses, depreciation and amortization, stock-based compensation cost and other non-cash items. Net cash used in investing activities totaled $57.2 million in 2006 compared to $61.4 million and $61.0 million in
2005 and 2004, respectively. The cash used in investing activities was primarily purchases of securities available-for-sale and loan originations, net of loan paydowns and payoffs. Net cash provided by financing activities was $45.2 million in 2006
compared to $52.9 million in 2005 and $33.2 million in 2004. The net cash provided in 2006 resulted primarily from an increase in Repurchase Agreements and increases in demand deposits, money market and savings accounts partially offset be a
decrease in other borrowings and time certificates of deposit.

Interest Rate Risk Management

Interest rate risk management seeks to maintain a stable growth of income and manage the risk associated with changes in interest rates. Net interest
income, the primary source of earnings, is affected by interest rate movements. Changes in interest rates have a lesser impact the more that assets and liabilities reprice in approximately equivalent amounts at basically the same time intervals.
Imbalances in these repricing opportunities at any point in time constitute interest sensitivity gaps, which is the difference between interest sensitive assets and interest sensitive liabilities.

Interest rate risk, including interest rate sensitivity and the repricing characteristics of assets and liabilities, is managed by our Balance Sheet
Management Committee (BSMC). The principal objective of BSMC is to maximize net interest income within acceptable levels of risk established by policy.



27



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We manage interest rate sensitivity by matching the repricing opportunities on our earning assets to
those on our funding liabilities. We use various strategies to manage the repricing characteristics of our 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 and managing the deployment of our securities are used to reduce mismatches in interest rate repricing opportunities of portfolio
assets and their funding sources.

Interest rate sensitivities are monitored through the use of simulation modeling techniques that apply
alternative interest rate scenarios to periodic forecasts of future business activity and estimate the related impact on net interest income. The use of simulation modeling assists management in its continuing efforts to achieve earnings growth in
varying interest environments. Table 6 shows the change in net interest income for two years given a 200 basis point decrease and increase in interest rates based upon our interest rate simulation model developed in the fourth quarter 2006:

Table 6

Net Interest Income at Risk Modeling



|                                    |  |                          |        |                        |      |      |                          |  |       |        |  |        |        |                        |   |        |         |   |      |   |  |       |  
|----------------------------------- |  | ------------------------ | ------ | ---------------------- | ---- | ---- | ------------------------ |  | ----- | ------ |  | ------ | ------ | ---------------------- | - | ------ | ------- | - | ---- | - |  | ----- | -
|                                    |  | Interest rate scenario   |       
|                                    |  | 200 Basis Point Decrease |        |                        | Base |      | 200 Basis Point Increase | 
|                                    |  | Amount                   |        | Change fromBase Amount |      |      | Percent                  |  |       | Amount |  | Amount |        | Change fromBase Amount |   |        | Percent |  
|Change in net interest income:      |  |                          |        |                        |      |      |                          |  |       |        |  |        |        |                        |   |        |         |   |      |   |  |       |  
|Months one through twelve           |  | $                        | 23,174 |                        | $    | 156  |                          |  | 0.68  | %      |  | $      | 23,018 |                        | $ | 22,758 |         | $ | (260 | ) |  | -1.13 | %
|Months thirteen through twenty-four |  |                          | 22,877 |                        |      | (348 | )                        |  | -1.50 | %      |  |        | 23,225 |                        |   | 23,019 |         |   | (206 | ) |  | -0.89 | %
|                                    |  |                          |        |                        |      |      |                          |  |       |        |  |        |        |                        |   |        |         |   |      |   |  |       |  
|Total for twenty-four months        |  | $                        | 46,051 |                        | $    | (192 | )                        |  | -0.42 | %      |  | $      | 46,243 |                        | $ | 45,777 |         | $ | (466 | ) |  | -1.01 | %
|                                    |  |                          |        |                        |      |      |                          |  |       |        |  |        |        |                        |   |        |         |   |      |   |  |       |  

The model results reflect a net interest income relatively neutral to movements in interest rates
within a 24-month time horizon. Beyond this horizon, our model reflects significant asset sensitivity due to the expiration of certain derivative instruments and the aging of other strategies that we have implemented to hedge our exposures to rate
movement. Key assumptions in the model include anticipated prepayments on mortgage-related instruments, contractual cash flow and maturities of all financial instruments, anticipated future business activity, deposit rate sensitivity and changes in
market conditions. These assumptions are inherently uncertain and, as a result, these models cannot precisely estimate the impact that higher or lower rate environments will have on net interest income. Actual results will differ from simulated
results due to the timing, magnitude and frequency of interest rate changes, changes in cash flow patterns and market conditions, as well as changes in managements strategies.

Investment Securities

We invest in investment securities consisting primarily of U.S. agency
securities and mortgage-related securities to: (i) generate interest income pending the ability to deploy those funds in loans meeting our lending strategies; (ii) increase net interest income where the rates earned on such investments
exceed the related cost of funds, consistent with the management of interest rate risk; and (iii) provide sufficient liquidity in order to maintain cash flow adequate to fund our operations and meet obligations and other commitments on a timely
and cost efficient basis. During 2006 and 2005, we held no tax-exempt securities.

We generally classify our investment securities as
available-for-sale except for investment securities we have the ability and the positive intent to hold to maturity which are classified as held-to-maturity securities.

Table 7 provides certain information regarding our investment securities.



28



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Table 7

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



|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|-------------------------------------------------------------- |  | ---------------------- | ------- | -------------------- | - | ------------------- |  | ------------------- | --- |  | - | -------
|                                                               |  | December 31, 2006     
|                                                               |  | Totalamortizedcost     |         | Grossunrealizedgains |   | Grossunrealizedloss |  | Estimatedfair value
|                                                               |  | (Dollars in thousands)
|Available-For-Sale:                                            |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|U.S. Treasury securities                                       |  | $                      | 599     |                      | $ |                    |  | $                   | 4   |  | $ | 595    
|GNMA-issued/guaranteed mortgage pass through certificates      |  |                        | 74      |                      |   |                    |  |                     |    |  |   | 74     
|Other U.S. government and federal agency securities            |  |                        | 8,985   |                      |   | 2                   |  |                     | 65  |  |   | 8,922  
|FHLMC/FNMA-issued mortgage pass through certificates           |  |                        | 57,993  |                      |   | 108                 |  |                     | 607 |  |   | 57,494 
|CMOs and REMICs issued by U.S. government-sponsored agencies |  |                        | 6,417   |                      |   | 41                  |  |                     | 8   |  |   | 6,450  
|Privately issued corporate bonds, CMO and REMIC securities     |  |                        | 28,991  |                      |   | 153                 |  |                     | 252 |  |   | 28,892 
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               |  | $                      | 103,059 |                      | $ | 304                 |  | $                   | 936 |  | $ | 102,427
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|FRB and other stocks                                           |  | $                      | 3,962   |                      | $ |                    |  | $                   |    |  | $ | 3,962  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               | 
|                                                               |  | December 31, 2006     
|                                                               |  | Totalamortizedcost     |         | Grossunrealizedgains |   | Grossunrealizedloss |  | Estimatedfair value
|                                                               |  | (Dollars in thousands)
|Held-to-Maturity:                                              |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|FHLMC/FNMA-issued mortgage pass through certificates           |  | $                      | 1,987   |                      | $ |                    |  | $                   | 40  |  | $ | 1,947  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               |  | $                      | 1,987   |                      | $ |                    |  | $                   | 40  |  | $ | 1,947  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               | 
|                                                               |  | December 31, 2005     
|                                                               |  | Totalamortizedcost     |         | Grossunrealizedgains |   | Grossunrealizedloss |  | Estimatedfair value
|                                                               |  | (Dollars in thousands)
|Available-For-Sale:                                            |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|U.S. Treasury securities                                       |  | $                      | 599     |                      | $ |                    |  | $                   |    |  | $ | 599    
|GNMA-issued/guaranteed mortgage pass through certificates      |  |                        | 98      |                      |   | 2                   |  |                     |    |  |   | 100    
|Other U.S. government and federal agency securities            |  |                        | 17,931  |                      |   |                    |  |                     | 152 |  |   | 17,779 
|FHLMC/FNMA-issued mortgage pass through certificates           |  |                        | 33,982  |                      |   | 47                  |  |                     | 366 |  |   | 33,663 
|CMOs and REMICs issued by U.S. government-sponsored agencies |  |                        | 2,528   |                      |   | 13                  |  |                     |    |  |   | 2,541  
|Mortgage mutual funds                                          |  |                        |        |                      |   |                    |  |                     |    |  |   |       
|Privately issued corporate bonds, CMO and REMIC securities     |  |                        | 17,290  |                      |   | 3                   |  |                     | 217 |  |   | 17,076 
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               |  | $                      | 72,428  |                      | $ | 65                  |  | $                   | 735 |  | $ | 71,758 
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|FRB and other stocks                                           |  | $                      | 3,809   |                      | $ |                    |  | $                   |    |  | $ | 3,809  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               | 
|                                                               |  | December 31, 2005     
|                                                               |  | Totalamortizedcost     |         | Grossunrealizedgains |   | Grossunrealizedloss |  | Estimatedfair value
|                                                               |  | (Dollars in thousands)
|Held-to-Maturity:                                              |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|FHLMC/FNMA-issued mortgage pass through certificates           |  | $                      | 2,612   |                      | $ |                    |  | $                   | 40  |  | $ | 2,572  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               |  | $                      | 2,612   |                      | $ |                    |  | $                   | 40  |  | $ | 2,572  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        



29



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|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|-------------------------------------------------------------- |  | ---------------------- | ------ | -------------------- | - | ------------------- |  | ------------------- | --- |  | - | ------
|                                                               |  | December 31, 2004     
|                                                               |  | Totalamortizedcost     |        | Grossunrealizedgains |   | Grossunrealizedloss |  | Estimatedfair 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 stocks                                           |  | $                      | 3,076  |                      | $ |                    |  | $                   |    |  | $ | 3,076 
|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|                                                               | 
|                                                               |  | December 31, 2004     
|                                                               |  | Totalamortizedcost     |        | Grossunrealizedgains |   | Grossunrealizedloss |  | Estimatedfair value
|                                                               |  | (Dollars in thousands)
|Held-to-Maturity:                                              |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|FHLMC/FNMA-issued mortgage pass through certificates           |  | $                      | 3,507  |                      | $ | 40                  |  | $                   |    |  | $ | 3,547 
|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|                                                               |  | $                      | 3,507  |                      | $ | 40                  |  | $                   |    |  | $ | 3,547 
|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       

At December 31, 2006, we held no securities from any issuer other than by U.S. government
agencies and corporations in which the aggregate book value exceeded 10% of our shareholders equity.

Table 8 sets forth information
concerning the contractual maturity of and weighted average yield of our investment securities at December 31, 2006.

Table 8

Maturities of and Weighted Average Yields on Investment Securities



|                                                          |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|--------------------------------------------------------- |  | ---------------------- | ----- | ----- | ----------------------------- | - | ------ | ----------------------------- | ----- |  | --------------- | ------ |  | ----- | ----- | -------------------- | ------ | - | ----- | - | ------ |  | ---- | - |  | - | ------- |  | ---- | -
|                                                          |  | Within oneyear         |       |       | After one butwithin fiveyears |   |        | After five butwithin tenyears |       |  | After ten years |        |  | Total |       | WeightedAverageYield |       
|                                                          |  | Amount                 |       | Yield |                               |   | Amount |                               | Yield |  |                 | Amount |  | Yield |       |                      | Amount |   | Yield |   |        | 
|                                                          |  | (Dollars in thousands) |      
|Securities available-for-sale:                            |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|U.S Treasury securities                                   |  | $                      | 595   |       | 4.32                          | % |        | $                             |      |  |                |        |  | $     |      |                      |       |   |       | $ |       |  |     |   |  | $ | 595     |  | 4.32 | %
|GNMA-issued/guaranteed mortgage pass-through certificates |  |                        |      |       |                              |   |        |                               |      |  |                |        |  |       |      |                      |       |   |       |   | 74     |  | 5.70 | % |  |   | 74      |  | 5.70 | %
|Other U.S. government and federal agencies                |  |                        | 3,499 |       | 4.54                          | % |        |                               | 5,423 |  | 4.44            | %      |  |       |      |                      |       |   |       |   |       |  |     |   |  |   | 8,922   |  | 4.48 | %
|FHLMC/FNMA-issued mortgage pass-through certificates      |  |                        | 78    |       | 5.36                          | % |        |                               | 59    |  | 5.97            | %      |  |       | 5,503 |                      | 5.11   | % |       |   | 51,854 |  | 5.38 | % |  |   | 57,494  |  | 5.35 | %
|CMOs and REMICs issued by                               |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|U.S. government-sponsored agencies                        |  |                        |      |       |                              |   |        |                               | 1     |  | 6.56            | %      |  |       |      |                      |       |   |       |   | 6,449  |  | 5.57 | % |  |   | 6,450   |  | 5.57 | %
|Mortgage mutual funds                                     |  |                        |      |       |                              |   |        |                               |      |  |                |        |  |       |      |                      |       |   |       |   |       |  |     |   |  |   |        |  |     |  
|Privately issued corporate bonds,                         |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|CMOs and REMICs securities                              |  |                        |      |       |                              |   |        |                               |      |  |                |        |  |       |      |                      |       |   |       |   | 28,892 |  | 5.55 | % |  |   | 28,892  |  | 5.55 | %
|                                                          |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|                                                          |  | $                      | 4,172 |       | 4.52                          | % |        | $                             | 5,483 |  | 4.46            | %      |  | $     | 5,503 |                      |       |   |       | $ | 87,269 |  | 5.45 | % |  | $ | 102,427 |  | 5.34 | %
|                                                          |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|Amortized cost                                            |  | $                      | 4,189 |       |                               |   |        | $                             | 5,534 |  |                 |        |  | $     | 5,542 |                      |        |   |       | $ | 87,794 |  |      |   |  | $ | 103,059 |  |      |  
|                                                          |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|Securities held-to-maturity:                              |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|FHLMC/FNMA-issued mortgage pass-through certificates      |  | $                      |      |       |                              |   |        | $                             |      |  |                |        |  | $     | 1,987 |                      | 4.37   | % |       | $ |       |  |     |   |  | $ | 1,987   |  | 4.37 | %
|                                                          |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  
|                                                          |  | $                      |      |       |                              |   |        | $                             |      |  |                |        |  | $     | 1,987 |                      | 4.37   | % |       | $ |       |  |     |   |  | $ | 1,987   |  | 4.37 | %
|                                                          |  |                        |       |       |                               |   |        |                               |       |  |                 |        |  |       |       |                      |        |   |       |   |        |  |      |   |  |   |         |  |      |  



30



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

Lending Activities

We engage in commercial banking, serving small to medium-sized businesses in the niche markets of entertainment, healthcare, business banking, real estate
development, operations of multi-family and commercial properties, as well as community-based nonprofit organizations, business executives, professionals and other individuals. Our primary geographic focus is the Los Angeles basin of Los Angeles
County, with four branch banking offices consisting of Mercantile Banks offices located in Century City and Encino, and South Bay Banks offices located in Torrance and El Segundo. We offer a full range of loan, deposit and investment
products, which are designed to meet specific customer needs and are offered with highly personalized service.

Loan products include
commercial real estate loans, construction financing, revolving lines of credit, term loans and consumer and home equity loans, along with an array of deposits and investment accounts that often contain terms and conditions tailored to meet the
specific demands of the market niche in which the borrower operates, including the ability to evaluate the revenue streams and other sources of repayment supporting the loan. In order to provide the personalized service required by these customers,
we use a team approach to customer service combining an experienced relationship management officer with operations support personnel.

Entertainment industry customers include television, music and film production companies, talent agencies, individual performers, directors and producers (whom we attract by establishing relationships with business management firms), and
others affiliated with the entertainment industry. Professional service customers include legal, accounting, insurance and advertising firms and their individual directors, officers, partners and shareholders. Healthcare organizations include
primarily outpatient healthcare providers such as physician medical groups, independent practice associations and surgery centers.

Loan
Portfolio

The following table sets forth the composition of our loan portfolio at the dates indicated:



|                                                                     |  |                        |         |   |         |     |   |        |   |         |         |  |     |  
|-------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------- | --- | - | ------ | - | ------- | ------- |  | --- | -
|                                                                     |  | December 31,           |        
|                                                                     |  | 2006                   |         |   | 2005    |    
|                                                                     |  | Amount                 |         |   | Percent |     |   | Amount |   |         | Percent | 
|                                                                     |  | (Dollars in thousands) |        
|Commercial loans  secured and unsecured                             |  | $                      | 105,862 |   |         | 29  | % |        | $ | 89,474  |         |  | 26  | %
|Real estate loans:                                                   |  |                        |         |   |         |     |   |        |   |         |         |  |     |  
|Secured by commercial real properties                                |  |                        | 141,741 |   |         | 39  | % |        |   | 121,641 |         |  | 36  | %
|Secured by one to four family residential properties                 |  |                        | 8,790   |   |         | 2   | % |        |   | 10,498  |         |  | 3   | %
|Secured by multifamily residential properties                        |  |                        | 17,602  |   |         | 5   | % |        |   | 18,663  |         |  | 6   | %
|                                                                     |  |                        |         |   |         |     |   |        |   |         |         |  |     |  
|Total real estate loans                                              |  |                        | 168,133 |   |         | 46  | % |        |   | 150,802 |         |  | 44  | %
|Construction and land development                                    |  |                        | 83,188  |   |         | 23  | % |        |   | 92,077  |         |  | 27  | %
|Consumer installment, home equity and unsecured loans to individuals |  |                        | 9,640   |   |         | 3   | % |        |   | 7,239   |         |  | 2   | %
|                                                                     |  |                        |         |   |         |     |   |        |   |         |         |  |     |  
|Total loans outstanding                                              |  |                        | 366,823 |   |         | 100 | % |        |   | 339,592 |         |  | 100 | %
|                                                                     |  |                        |         |   |         |     |   |        |   |         |         |  |     |  
|Deferred net loan origination fees and purchased loan discount       |  |                        | (1,105  | ) |         |     |   |        |   | (1,034  | )       |  |     |  
|                                                                     |  |                        |         |   |         |     |   |        |   |         |         |  |     |  
|Loans receivable, net                                                |  | $                      | 365,718 |   |         |     |   |        | $ | 338,558 |         |  |     |  
|                                                                     |  |                        |         |   |         |     |   |        |   |         |         |  |     |  

Our lending officers have limited authority to originate loans and require approvals from our more
senior credit officers or our loan approval committee for loans over $150,000. The Banks may not make any loan, with certain limited exceptions, in excess of their loan to one borrower limit under applicable regulations ($4.1 million



31



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for Mercantile and $3.9 million for South Bay at December 31, 2006). If a Banks borrower requests a loan in excess of these amounts we may
originate the loan with the participation of the other Bank or other lenders. At December 31, 2006 we had $12.4 million in loans originated and serviced by other banks in which we purchased a non-recourse participation. These participation
loans had $14.2 million of unfunded commitments as of December 31, 2006. We generally purchase participations in loans from other banks in which we have a reciprocal alliance to purchase loan participations from us. We have not taken a
subordinate credit position on any loan participations purchased or sold. The bank originating the loan services the loan, typically without compensation.

Commercial Loans. We offer adjustable and fixed rate secured and unsecured commercial loans for working capital, the purchase of assets and other business purposes. Loan amounts typically range from $100,000 to
$3.0 million. We underwrite these loans primarily on the basis of the borrowers ability to service the debt from cash flow without reliance on the liquidation of the underlying collateral, where applicable. These loans generally have maturity
terms of 12 months and are typically renewed.

Collateral for commercial loans may include commercial or residential real property,
accounts receivable, inventory, equipment, marketable securities or other assets. Unsecured commercial loans include short-term term loans and lines of credit. Our underwriting guidelines for these loans generally require that the borrower have low
levels of existing debt, working capital sufficient to cover the loan and a history of earnings, appropriate liquidity, and positive cash flow from operations. Typically, unsecured lines of credit must be unused for a continuous 30-day period within
each year to demonstrate the borrowers ability to have sufficient funds to operate without the credit line.

Real Estate Loans.We offer adjustable and fixed rate secured loans to finance the purchase or holding of commercial real estate, single family (one to four) residences and multi-family residences. These loans generally have maturities ranging from three to
fifteen years and payments based on a 15 to 25 years amortization schedule. The original principal amount of a real estate loan generally does not exceed 65% to 75% of the appraised value of the property (or the lesser of the appraised value or the
purchase price for the property if the loan is made to finance the purchase of the property). We require a current appraisal in connection with the origination of each real estate loan.

Construction and Land Development Loans. Real estate construction and land development loans are short-term secured loans made to finance the
construction of commercial, one to four-family and multifamily residential properties or for improvements to raw land. These loans include financing for developers for the construction of residential tract homes and custom homes. Our real estate
construction and loan development loans are primarily for properties located in Southern California. These loans typically have adjustable rates with terms of twelve to fifteen months. We monitor the progress of the construction and disburse the
loan proceeds directly to the various contractors during stages of improvement. Generally, the amount of a construction loan does not exceed 65% of the appraised completion value and the borrowers funds are disbursed prior to disbursement of
the construction loan.

Consumer Installment Loans and Home Equity Lines of Credit. We offer consumer loans and home equity lines of
credit in amounts generally less than $100,000. Home equity lines of credit provide the borrower with a line of credit in an amount that generally does not exceed 80% of the appraised value of the borrowers residence net of senior mortgages.
Consumer loans are primarily adjustable rate open ended unsecured loans (such as credit card loans) but also include fixed rate term loans (generally under five years) to purchase personal property, which are secured by that personal property. These
loans (other than purchase money loans) generally provide for monthly payments of interest and a portion of the outstanding principal balance.

Industry Concentrations

Our board of directors has limited our exposure to industry concentration by policy and we
regularly monitor such concentration based upon our borrowers North American Industry Classification System codes.



32



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The limits range from 5% to 50% of total loans depending on industry type. Loans to the entertainment industry, healthcare industry and community-based
nonprofit organizations, individually, were less than 10% of total loans outstanding at December 31, 2005 and 2004.

Loan Rate
Composition and Maturities

Of our total loans outstanding, excluding loans on nonaccrual, 55.6% and 73.7% had adjustable rates at
December 31, 2006 and 2005, respectively. Adjustable rate loans generally have interest rates tied to the prime rate and adjust with changes in the rate on a daily, monthly or quarterly basis.

Of our total loans outstanding, excluding nonaccrual loans, at December 31, 2006, 46.2% were due in one year or less, 37.0% were due in 1-5 years
and 16.8% were due after 5 years. As is customary in the banking industry, loans can be renewed by mutual agreement between the borrower and us. Because we are unable to estimate the extent to which its borrowers will renew their loans, Table 11 is
based on contractual maturities.

Table 11

Loan
Maturities



|                                                                                       |  |                                         |         |                                         |   |         |  |   |        
|-------------------------------------------------------------------------------------- |  | --------------------------------------- | ------- | --------------------------------------- | - | ------- |  | - | -------
|                                                                                       |  | December 31, 2006                      
|                                                                                       |  | Interest ratesare floatingor adjustable |         | Interest ratesare fixed orpredetermined |   | Total  
|                                                                                       |  | (Dollars in thousands)                 
|Aggregate maturities of total loans outstanding:                                       |  |                                         |         |                                         |   |         |  |   |        
|Commercial loans                                                                      |  |                                         |         |                                         |   |         |  |   |        
|In one year or less                                                                    |  | $                                       | 45,538  |                                         | $ | 16,195  |  | $ | 61,733 
|After one year but within five years                                                   |  |                                         | 15,149  |                                         |   | 23,153  |  |   | 38,302 
|After five years                                                                       |  |                                         | 2,727   |                                         |   | 3,100   |  |   | 5,827  
|Real estate loans                                                                     |  |                                         |         |                                         |   |         |  |   |        
|In one year or less                                                                    |  |                                         | 22,948  |                                         |   | 4,595   |  |   | 27,543 
|After one year but within five years                                                   |  |                                         | 33,582  |                                         |   | 54,602  |  |   | 88,184 
|After five years                                                                       |  |                                         | 6,410   |                                         |   | 45,996  |  |   | 52,406 
|Construction and land development loans                                               |  |                                         |         |                                         |   |         |  |   |        
|In one year or less                                                                    |  |                                         | 73,449  |                                         |   | 1,020   |  |   | 74,469 
|After one year but within five years                                                   |  |                                         | 487     |                                         |   | 4,943   |  |   | 5,430  
|After five years                                                                       |  |                                         |        |                                         |   | 3,289   |  |   | 3,289  
|Consumer installment, home equity lines of credit and unsecured loans to individuals  |  |                                         |         |                                         |   |         |  |   |        
|In one year or less                                                                    |  |                                         | 210     |                                         |   | 5,378   |  |   | 5,588  
|After one year but within five years                                                   |  |                                         | 2,387   |                                         |   | 1,665   |  |   | 4,052  
|After five years                                                                       |  |                                         |        |                                         |   |        |  |   |       
|                                                                                       |  |                                         |         |                                         |   |         |  |   |        
|Total loans outstanding (1)                                                            |  | $                                       | 202,887 |                                         | $ | 163,936 |  | $ | 366,823
|                                                                                       |  |                                         |         |                                         |   |         |  |   |        

---

|(1) | Excluding nonaccrual loans
|--- | --------------------------

Off-Balance Sheet Loan
Commitments and Contingent Obligations

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



33



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Loan commitments are agreements to lend to a customer a specified amount subject to certain conditions.
Loan commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. We had outstanding loan commitments aggregating $129.8 million at December 31, 2006, substantially all of which were for
construction loans and commercial lines of credit.

Standby letters of credit are conditional commitments issued by us to secure the
financial performance of a customer to a third party and are primarily issued to support private borrowing arrangements. The credit risk involved in issuing a letter of credit for a customer is essentially the same as that involved in extending a
loan to that customer. We use the same credit underwriting policies in accepting such contingent obligations as we do for loans. When deemed necessary, we hold appropriate collateral supporting those commitments. The nature of collateral obtained
varies and may include deposits held in financial institutions and real properties. At December 31, 2006 letters of credit amounted to $1.2 million. Many of these commitments are expected to expire without being drawn upon and, as such, the
total commitment amounts do not necessarily represent future cash requirements.

Asset Quality and Credit Risk Management

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

Nonperforming Assets

Nonperforming assets consist of nonperforming loans, other real estate owned and other property owned. Nonperforming loans are (i) loans which have
been placed on nonaccrual status, (ii) troubled debt restructurings (TDRs), or (iii) loans which are contractually past due ninety days or more with respect to principal or interest, and have not been restructured or
placed on nonaccrual status, and are accruing interest as described below. Other real estate owned consists of real properties securing loans of which we have taken title in partial or complete satisfaction of the loan. Other property owned consists
of assets, other than real property, that we have foreclosed in satisfaction of a loan. We had no loans that cause management to have serious doubts about the ability of the borrower to comply with the present loan repayment terms and we had no
other interest earning assets that were considered other-than-temporarily impaired at December 31, 2006. Information about nonperforming assets is presented in Table 12.

Table 12

Nonperforming Assets



|                                                                                                                          |  |                        |     |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | --- | - | ---- | - | ------ | -
|                                                                                                                          |  | December 31,           |    
|                                                                                                                          |  | 2006                   |     |   | 2005 |  
|                                                                                                                          |  | (Dollars in thousands) |    
|Nonaccrual loans                                                                                                          |  | $                      |    |   |      | $ | 319    |  
|Troubled debt restructurings                                                                                              |  |                        |    |   |      |   |       |  
|Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest |  |                        |    |   |      |   |       |  
|Nonperforming loans                                                                                                       |  |                        |    |   |      |   | 319    |  
|                                                                                                                          |  |                        |     |   |      |   |        |  
|Other real estate and property owned                                                                                      |  |                        | 303 |   |      |   | 1,056  |  
|Total nonperforming assets                                                                                                |  | $                      | 303 |   |      | $ | 1,375  |  
|                                                                                                                          |  |                        |     |   |      |   |        |  
|Allowance for loan and lease losses as a percent of nonaccrual loans                                                      |  |                        | N/A |   |      |   | 1400.6 | %
|Allowance for loan and lease losses as a percent of nonperforming loans                                                   |  |                        | N/A |   |      |   | 1400.6 | %
|Total nonperforming assets as a percent of loans receivable                                                               |  |                        | 0.1 | % |      |   | 0.4    | %
|Total nonperforming assets as a percent of total shareholders equity                                                     |  |                        | 0.7 | % |      |   | 3.6    | %



34



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

When a loan is placed on nonaccrual status, all interest previously accrued but uncollected is reversed against current period operating results. Income
on such loans is then recognized only to the extent that cash is received, and, where the ultimate collection of the carrying amount of the loan is probable, after giving consideration to the borrowers current financial condition, historical
repayment performance and other factors. Accrual of interest is resumed only when (i) principal and interest are brought fully current, and (ii) such loans are either considered, in managements judgment, to be fully collectible or
otherwise become well secured and in the process of collection. (See Net Interest Income for a discussion of the effects on operating results of nonperforming loans.)

There were no nonaccrual loans at December 31, 2006 compared to $319,000 at December 31, 2005. The additional interest income that would have
been recorded from nonaccrual loans, if the loans had not been on nonaccrual status, was $28,000, $11,000 and $12,000 for 2006, 2005 and 2004, respectively. Interest payments received on nonaccrual loans are applied to principal unless there is no
doubt as to ultimate full repayment of principal, in which case, the interest payment is recognized as interest income. Interest income not recognized on nonaccrual loans reduced the net yield on earning assets by 1 basis point for 2006, and zero
basis points in 2005 and 2004.

Troubled Debt Restructurings. A TDR is a loan for which we have, for economic or legal reasons
related to a borrowers financial difficulties, granted a concession to the borrower we would not otherwise consider, including modifications of loan terms to alleviate the burden of the borrowers near-term cash flow requirements in order
to help the borrower to improve its financial condition and eventual ability to repay the loan. At December 31, 2006 and 2005 and for the years then ended we had no TDRs and accordingly, no interest income was recorded in 2006 and 2005 on TDRs.

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

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

We had no loans contractually past due 90 days and still accruing interest at December 31, 2006 and 2005.

Other Real Estate and Property Owned.Other real estate and property owned is real estate and personal property that we have taken through
foreclosure, or otherwise, in satisfaction of loans receivable. We carry other real estate and property owned at the lesser of our recorded investment or the fair value less estimated costs to sell. We periodically revalue other real estate and
property owned and charge other expenses for any further write-downs. At December 31, 2006 we had $303,000. We had $1.1 million recorded as other real estate and property owned at December 31, 2005. The property was sold in February of
2006 and we recognized a $48,000 gain.

Impaired Loans.Due to the size and nature of our loan portfolio, impaired loans are
determined by a periodic evaluation on an individual loan basis. At December 31, 2006 and 2005, and for the years then ended, none of our loans were impaired.



35



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Other Interest Bearing Assets.We had no other interest bearing assets that were past due,
nonaccrual or experiencing credit difficulties.

Allowance for Loan and Lease 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 loans receivable on our 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 our commitments to fund loans. As of September 30, 2005, the reserve for contingent
losses on unfunded commitments was reclassified from the allowance for credit losses to other liabilities. The 2004 year end reserve for contingent losses on unfunded commitments was reclassified to conform to the current presentation.

The calculation of the adequacy of the allowance for loan and lease losses is based on a variety of factors (see Allowance for Loan and
Lease Losses under Critical Accounting Policies). Table 13 presents, at the dates indicated, the composition of our allocation of the allowance for loan and lease losses to specific loan categories. Our current practice is to make specific
allocations of the allowance for loan and lease losses to criticized and classified loans, and unspecified allocations to each loan category based on our risk assessment. This allocation should not be interpreted as an indication that loan
charge-offs will occur in the future in these amounts or proportions, or as an indication of future charge-off trends. In addition, the portion of the allowance for loan and lease losses allocated to each loan category does not represent the total
amount available for future losses that may occur within such categories, since the total allowance for loan and lease losses is applicable to the entire portfolio.

Table 13

Allocation of Allowance For Loan and Lease Losses



|                                                                                     |  |                        |       |      |     |   |      |   |       |  |     |      |  |      |       |  |      |   |      |   |       |      |     |      |  |   |       |  |     |  
|------------------------------------------------------------------------------------ |  | ---------------------- | ----- | ---- | --- | - | ---- | - | ----- |  | --- | ---- |  | ---- | ----- |  | ---- | - | ---- | - | ----- | ---- | --- | ---- |  | - | ----- |  | --- | -
|                                                                                     |  | December 31,           |      
|                                                                                     |  | 2006                   |       | %(1) |     |   | 2005 |   | %(1)  |  |     | 2004 |  | %(1) |       |  | 2003 |   | %(1) |   |       | 2002 |     | %(1) | 
|                                                                                     |  | (Dollars in thousands) |      
|Commercial loans  secured and unsecured                                             |  | $                      | 1,384 |      | 29  | % |      | $ | 1,177 |  | 26  | %    |  | $    | 1,097 |  | 31   | % |      | $ | 1,068 |      | 29  | %    |  | $ | 1,528 |  | 31  | %
|Real estate loans:                                                                   |  |                        |       |      |     |   |      |   |       |  |     |      |  |      |       |  |      |   |      |   |       |      |     |      |  |   |       |  |     |  
|Secured by commercial real properties                                                |  |                        | 1,545 |      | 33  |   |      |   | 1,600 |  | 36  |      |  |      | 1,516 |  | 43   |   |      |   | 1,843 |      | 51  |      |  |   | 2,129 |  | 44  |  
|Secured by one to four family residential properties                                 |  |                        | 132   |      | 3   |   |      |   | 138   |  | 3   |      |  |      | 105   |  | 3    |   |      |   | 114   |      | 3   |      |  |   | 192   |  | 4   |  
|Secured by multifamily residential properties                                        |  |                        | 265   |      | 6   |   |      |   | 246   |  | 5   |      |  |      | 204   |  | 6    |   |      |   | 182   |      | 5   |      |  |   | 224   |  | 5   |  
|                                                                                     |  |                        |       |      |     |   |      |   |       |  |     |      |  |      |       |  |      |   |      |   |       |      |     |      |  |   |       |  |     |  
|Total real estate loans                                                              |  |                        | 1,942 |      | 41  |   |      |   | 1,984 |  | 44  |      |  |      | 1,825 |  | 52   |   |      |   | 2,139 |      | 59  |      |  |   | 2,545 |  | 53  |  
|Construction and land development                                                    |  |                        | 1,252 |      | 26  |   |      |   | 1,211 |  | 27  |      |  |      | 561   |  | 16   |   |      |   | 379   |      | 11  |      |  |   | 674   |  | 14  |  
|Consumer installment, home equity lines of credit and unsecured loans to individuals |  |                        | 162   |      | 3   |   |      |   | 95    |  | 2   |      |  |      | 28    |  | 1    |   |      |   | 49    |      | 1   |      |  |   | 99    |  | 2   |  
|                                                                                     |  |                        |       |      |     |   |      |   |       |  |     |      |  |      |       |  |      |   |      |   |       |      |     |      |  |   |       |  |     |  
|Allowance allocable to loans receivable                                              |  | $                      | 4,740 |      | 100 | % |      | $ | 4,468 |  | 100 | %    |  | $    | 3,511 |  | 100  | % |      | $ | 3,635 |      | 100 | %    |  | $ | 4,846 |  | 100 | %
|                                                                                     |  |                        |       |      |     |   |      |   |       |  |     |      |  |      |       |  |      |   |      |   |       |      |     |      |  |   |       |  |     |  

---

|(1) | Percentage of loans in each category to total loans.
|--- | ----------------------------------------------------

The
allowance for loan and lease losses for classified loans graded as criticized by our internal grading system that are collateral-dependent is based upon the net realizable value of the collateral that we periodically



36



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evaluate. The allowance for unsecured classified loans is based upon the severity of the credit weakness based upon an analysis of our historical loan loss
experience over a 10 year period. The volume of more severely classified loans  substandard and doubtful  was $1.8 million, $3.5 million and $8.8 million at December 31, 2006, 2005 and 2004, respectively.

Table 14 presents an analysis of changes in the allowance for loan and lease losses during the periods indicated:

Table 14

Analysis of Changes in Allowance for Loan and Lease
Losses



|                                                                                                       |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|------------------------------------------------------------------------------------------------------ |  | ---------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                                                                                                       |  | December 31,           |       
|                                                                                                       |  | 2006                   |        |   | 2005 |   |        | 2004 |  |   | 2003  |   |  | 2002 |      
|                                                                                                       |  | (Dollars in thousands) |       
|Balance, beginning of period                                                                           |  | $                      | 4,468  |   |      | $ | 3,511  |      |  | $ | 3,635 |   |  | $    | 4,846 |   |  | $ | 6,542 |  
|Loan charged off:                                                                                      |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial loans  secured and unsecured                                                               |  |                        | 26     |   |      |   | 6      |      |  |   | 49    |   |  |      | 2,697 |   |  |   | 3,849 |  
|Real estate loans:                                                                                     |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Secured by commercial real properties                                                                  |  |                        |       |   |      |   |       |      |  |   |      |   |  |      | 75    |   |  |   | 44    |  
|Secured by one to four family residential properties                                                   |  |                        |       |   |      |   |       |      |  |   |      |   |  |      | 38    |   |  |   |      |  
|Secured by multifamily residential properties                                                          |  |                        |       |   |      |   |       |      |  |   |      |   |  |      |      |   |  |   |      |  
|                                                                                                       |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total real estate loans                                                                                |  |                        |       |   |      |   |       |      |  |   |      |   |  |      | 113   |   |  |   | 44    |  
|Construction and land development                                                                      |  |                        |       |   |      |   |       |      |  |   |      |   |  |      |      |   |  |   | 31    |  
|Consumer installment, home equity and unsecured loans to individuals                                   |  |                        | 29     |   |      |   | 4      |      |  |   | 8     |   |  |      | 41    |   |  |   | 138   |  
|                                                                                                       |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total loan charge-offs                                                                                 |  |                        | 55     |   |      |   | 10     |      |  |   | 57    |   |  |      | 2,851 |   |  |   | 4,062 |  
|                                                                                                       |  |                        |        |   |     
|Recoveries of loans previously charged off:                                                            |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Commercial loans  secured and unsecured                                                               |  |                        | 7      |   |      |   | 1,214  |      |  |   | 94    |   |  |      | 291   |   |  |   | 189   |  
|Real estate loans:                                                                                     |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Secured by commercial real properties                                                                  |  |                        |       |   |      |   |       |      |  |   | 6     |   |  |      | 13    |   |  |   |      |  
|Secured by one to four family residential properties                                                   |  |                        |       |   |      |   |       |      |  |   |      |   |  |      | 1     |   |  |   |      |  
|Secured by multifamily residential properties                                                          |  |                        |       |   |      |   |       |      |  |   |      |   |  |      |      |   |  |   |      |  
|                                                                                                       |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total real estate loans                                                                                |  |                        |       |   |      |   |       |      |  |   | 6     |   |  |      | 14    |   |  |   |      |  
|Construction and land development                                                                      |  |                        |       |   |      |   |       |      |  |   |      |   |  |      |      |   |  |   | 191   |  
|Consumer installment, home equity and unsecured loans to individuals                                   |  |                        | 10     |   |      |   | 2      |      |  |   | 30    |   |  |      | 70    |   |  |   | 61    |  
|                                                                                                       |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Total recoveries of loans previously charged off                                                       |  |                        | 17     |   |      |   | 1,216  |      |  |   | 130   |   |  |      | 375   |   |  |   | 441   |  
|                                                                                                       |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net (recoveries) charge-offs                                                                           |  |                        | 38     |   |      |   | (1,206 | )    |  |   | (73   | ) |  |      | 2,476 |   |  |   | 3,621 |  
|Provision (benefit) for credit losses                                                                  |  |                        | 248    |   |      |   | (84    | )    |  |   | 220   |   |  |      | 1,265 |   |  |   | 1,925 |  
|Allowance for unfunded commitments transferred to other liabilities                                    |  |                        | 62     |   |      |   | (165   | )    |  |   | (417  | ) |  |      |      |   |  |   |      |  
|                                                                                                       |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Balance, end of period                                                                                 |  | $                      | 4,740  |   |      | $ | 4,468  |      |  | $ | 3,511 |   |  | $    | 3,635 |   |  | $ | 4,846 |  
|                                                                                                       |  |                        |        |   |      |   |        |      |  |   |       |   |  |      |       |   |  |   |       |  
|Net loan (recoveries) charge-offs as a percentage of allowance for loan and lease losses               |  |                        | 0.80   | % |      |   | -1.86  | %    |  |   | -1.86 | % |  |      | 68.12 | % |  |   | 74.72 | %
|Net loan (recoveries) charge-offs as a percentage of average gross loans outstanding during the period |  |                        | 0.01   | % |      |   | -0.03  | %    |  |   | -0.03 | % |  |      | 0.95  | % |  |   | 1.42  | %
|Recoveries of loans previously charged off as a percentage of loans charged off in the previous year   |  |                        | 170.00 | % |      |   | 4.56   | %    |  |   | 4.56  | % |  |      | 9.23  | % |  |   | 89.82 | %



37



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The allowance for loan and lease losses at December 31, 2006 was $4.7 million compared to $4.5
million at December 31, 2005. The allowance was affected by provisions for credit losses of $248,000, reflecting growth in the loan portfolio, a $62,000 transfer from the allowance for unfunded commitments, partially offset by net loans charged
off of $38,000.

The allowance for loan and lease losses increased in 2005 primarily due to (i) the growth in loans receivable during
2005, (ii) expansion of higher risk film production lending, (iii) the increased credit risk to adjustable rate borrowers in a rising interest rate environment, and (iv) an increase in the average size of individual loans in our
portfolio. There was a negative provision of $84,000 to the allowance for loan and lease losses credited to earnings in 2005; based upon our valuation assessment we recorded a benefit for credit losses. Factors influencing our judgments regarding
provisions for credit losses included: 2004  growth in loans receivable and unfunded commitments; 2003, 2002, and 2001 the level of problem credits and charge offs.

Deposits

We emphasize developing business client relationships at both Banks in order to increase
our core deposit base. We offer internet-based cash management services and, for many business customers, provide regular courier service between their business locations and our banking offices. Additionally, we attract deposits in serving the
specific market niches of escrow and title companies and community-based nonprofit organizations. Each Bank offers its own rates in order to compete in its specific markets. We have entered new geographic markets first with loan production offices
with the intention of later converting the offices to full service branch banking offices.

Table 15

Average Deposit Composition



|                                     |  |                        |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  
|------------------------------------ |  | ---------------------- | ------- | ------- | ---- | - | ------ | ---- | ------- |  | --- | ------ |  | ------- | ------- |  | --- | -
|                                     |  | December 31,           |        
|                                     |  | 2006                   |         |         | 2005 |   |        | 2004 |        
|                                     |  | Amount                 |         | Percent |      |   | Amount |      | Percent |  |     | Amount |  | Percent |        
|                                     |  | (Dollars in thousands) |        
|Noninterest-bearing demand deposits: |  |                        |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  
|Other noninterest-bearing demand     |  | $                      | 114,701 |         | 30   | % |        | $    | 124,789 |  | 37  | %      |  | $       | 124,699 |  | 39  | %
|Interest-bearing demand              |  |                        | 30,737  |         | 8    | % |        |      | 32,497  |  | 10  | %      |  |         | 31,484  |  | 10  | %
|Money market and savings             |  |                        | 124,319 |         | 33   | % |        |      | 103,648 |  | 31  | %      |  |         | 107,981 |  | 34  | %
|Time certificates of deposit:        |  |                        |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  
|Other:                               |  |                        |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  
|$100,000 or more                     |  |                        | 83,993  |         | 21   | % |        |      | 51,995  |  | 15  | %      |  |         | 27,179  |  | 9   | %
|Under $100,000                       |  |                        | 23,708  |         | 6    | % |        |      | 26,031  |  | 8   | %      |  |         | 27,345  |  | 9   | %
|                                     |  |                        |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  
|Total time certificates of deposit   |  |                        | 107,701 |         | 29   | % |        |      | 78,026  |  | 23  | %      |  |         | 54,524  |  | 17  | %
|                                     |  |                        |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  
|Total deposits                       |  | $                      | 377,458 |         | 100  | % |        | $    | 338,960 |  | 100 | %      |  | $       | 318,688 |  | 100 | %
|                                     |  |                        |         |         |      |   |        |      |         |  |     |        |  |         |         |  |     |  

We use Brokered CDs, which are classified as time certificates of deposits $100,000 and over, to
supplement our liquidity and achieve other asset liability management objectives (see the discussion under Net Interest Income). Brokered deposits are wholesale certificates of deposit placed by rate sensitive customers that do not have any other
significant relationship with us. Professionals operating under established investment criteria manage most wholesale funds and the brokered deposits are typically in amounts that exceed the FDIC deposit insurance limit. As a result, these funds are
generally very sensitive to credit risk and interest rates, and pose greater liquidity risk to a bank. They may refuse to renew the certificates of deposit at maturity if higher rates are available elsewhere or if they perceive that creditworthiness
is deteriorating. At December 31, 2006 we had total brokered deposits of $50.0 million all of which had maturities within 12 months.



38



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The Federal Reserve Bank increased the target fed funds rate seventeen times beginning in the second half
of 2004 and market short term interest rates likewise increased. In order to improve net interest margins, we increased the rates paid on our nonmaturity deposits relatively little. Other financial institutions have increased the rates paid on their
deposits more rapidly. While our customers are typically less rate sensitive due to the business relationships with us, it is difficult to grow deposits without offering very competitive rates. Consequently, we increased Brokered CDs and began
offering very competitive rates on certain certificates of deposit targeted to new customers in order to fund our asset growth and any deposit runoff. While these sources of funds are relatively high costing deposits, the higher rates impact only
the incremental deposits acquired through these means.

Additionally, the period 2001 through the first half of 2004 experienced
historically low interest rates. During periods of low interest rates, depositors tend to maintain greater deposit balances in low yielding but readily accessible transaction accounts due to relatively low opportunity costs. As interest rates rise,
and opportunity costs increase, depositors tend to redeploy their funds into higher yielding alternatives. Assuming rates continue to rise, we expect continued growth in certificates of deposit and a resulting change in the composition of our
deposits.

Table 16

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



|                                                    |  |                        |        |      |   |       
|--------------------------------------------------- |  | ---------------------- | ------ | ---- | - | ------
|                                                    |  | December 31,          
|                                                    |  | 2006                   |        | 2005
|                                                    |  | (Dollars in thousands)
|Time certificates of deposit maturing:              |  |                        |        |      |   |       
|In three months or less                             |  | $                      | 46,819 |      | $ | 45,027
|After three months but within six months            |  |                        | 5,122  |      |   | 14,459
|After six months but within twelve months           |  |                        | 23,218 |      |   | 24,377
|After twelve months                                 |  |                        | 4,921  |      |   | 3,605 
|                                                    |  |                        |        |      |   |       
|Total time certificates of deposit $100,000 or more |  | $                      | 80,080 |      | $ | 87,468
|                                                    |  |                        |        |      |   |       

Deposit Concentrations

At December 31, 2006 a single depositor represented $7.5 million, or 2.0%, of our total deposits. Our ten largest depositors represented $47.1
million, or 12.4%, of our total deposits. We maintain contingent sources of liquidity to buffer changes in our deposit balances.

Borrowed Funds

Borrowed funds and related weighted average rates are summarized below in Table 17.

Table 17

Borrowed Funds



|                                                                        |  |                        |        |      |         |   |         |          |        |  |         |         |  |          |        |  |         |   |      |   |        |         |      |      |  |   |         |  |      |   |  |   |        |  |      |  
|----------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | ------- | - | ------- | -------- | ------ |  | ------- | ------- |  | -------- | ------ |  | ------- | - | ---- | - | ------ | ------- | ---- | ---- |  | - | ------- |  | ---- | - |  | - | ------ |  | ---- | -
|                                                                        |  | 2006                   |        |      | 2005    |   |         | 2004     |       
|                                                                        |  | Year-end               |        |      | Average |   |         | Year-end |        |  | Average |         |  | Year-end |        |  | Average |  
|                                                                        |  | Balance                |        | Rate |         |   | Balance |          | Rate   |  |         | Balance |  | Rate     |        |  | Balance |   | Rate |   |        | Balance |      | Rate |  |   | Balance |  | Rate |  
|                                                                        |  | (Dollars in thousands) |       
|Federal funds purchased and securities sold under repurchase agreements |  | $                      | 45,000 |      | 5.40    | % |         | $        | 33,108 |  | 5.46    | %       |  | $        |       |  |        |   |      | $ |       |         |     |      |  | $ |        |  |     |   |  | $ | 113    |  | 0.88 | %
|Other borrowings                                                        |  |                        | 10,300 |      | 5.25    | % |         |          | 13,991 |  | 5.00    | %       |  |          | 28,337 |  | 4.10    | % |      |   | 12,186 |         | 3.38 | %    |  |   | 28,337  |  | 4.10 | % |  |   | 12,186 |  | 3.38 | %



39



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At December 31, 2006, federal funds purchased and securities sold under repurchase agreements
(Repurchase Agreements) were $45.0 million. We had no Repurchase Agreements during 2005. During 2006, we utilized Repurchase Agreements to achieve certain asset liability management objectives. The Repurchase Agreements have original
maturities of two- to three-years with adjustable interest rates indexed to 3-month LIBOR. Additionally, the Repurchase Agreements contain embedded floors at varying strike rates that result in a more rapid decline in cost in a declining interest
rate environment and upon the index rate declining below the strike rates. The embedded floors are clearly and closely related to the host contract and accordingly not bifurcated and accounted for separately. At December 31, 2006, we had $10.3
million of borrowed funds; all were overnight borrowings and the balances scheduled to mature during 2007.

The maximum amount of
securities sold with agreements to repurchase at any month end during 2006 was $45.0 million and during 2005 and 2004 was zero. The maximum amount of other borrowings at any month end was $27.4 million, $28.3 million and $31.9 million during 2006,
2005 and 2004, respectively.

Junior Subordinated Debentures/Trust Preferred Securities

At December 31, 2006, National Mercantile had outstanding $15.5 million aggregate principal amount of 10.25% fixed rate junior subordinated
deferrable interest debentures due July 25, 2031 (2031 Junior Subordinated Debentures). On January 25, 2007, we redeemed all of the 2031 Junior Subordinated Debentures at a price of 107.6875% through the issuance of new debt
securities.

On January 24, 2007, National Mercantile Bancorp and its newly formed subsidiary, First California Capital Trust I
(Trust), a Delaware statutory trust, issued $16.0 million of the Trusts capital securities, liquidation amount $1,000 per capital security. The capital securities represent undivided beneficial interests in the Trusts
assets, which consist primarily of National Mercantile Bancorps Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures described below. The Trusts capital securities mature on March 15, 2037, and are redeemable,
at par, at National Mercantile Bancorps option at any time on or after March 15, 2012.

The holders of the Trusts capital
securities are entitled to quarterly distributions at a fixed annual rate of 6.80% for the first five years, and a variable annual rate thereafter, which resets quarterly, equal to the 3-month LIBOR rate, plus 1.60% per annum, of the
liquidation amount of $1,000 per capital security, subject to National Mercantile Bancorps right to defer interest payments under the Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures as described below.

National Mercantile Bancorp, itself, purchased $495,000 of the Trusts common securities, liquidation amount $1,000 per common security. The
terms and provisions of the Trusts capital securities and common securities are set forth in the Trusts Amended and Restated Declaration of Trust, dated January 25, 2007, under which Wilmington Trust Company serves as institutional
trustee.

In connection with the Trusts sale of the capital securities, National Mercantile Bancorp entered into a Guarantee
Agreement pursuant to which it guaranteed, on a subordinated basis, all distributions and payments under the Trusts capital securities upon liquidation, redemption, or otherwise, but only to the extent the Trust fails to pay such distributions
from payments under the Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures it holds from National Mercantile Bancorp.

The Trust used the proceeds from the sale of its capital securities and its common securities to purchase from National Mercantile Bancorp $16.5 million aggregate principal amount of Fixed/Floating Rate Junior Subordinated Deferrable
Interest Debentures due 2037. The Debentures bear interest at the same rates as the Trusts capital securities. So long as no event of default (as defined in the Indenture relating to the Debentures) has occurred, National
Mercantile Bancorp will have the right to defer the payment of interest on the Debentures for up to 20 consecutive quarterly periods, except that no extension period may extend beyond the maturity of the Debentures. During any deferral period,
National Mercantile Bancorp may not pay dividends or make certain



40



---

other distributions or payments as provided in the Indenture. The Debentures mature on March 15, 2037, and are redeemable at par, at National
Mercantile Bancorps option, at any time on or after March 15, 2012. Upon any redemption by National Mercantile Bancorp of the Debentures, the Trust must redeem a like amount of its capital securities.

Payments under the Debentures are subordinated and junior in right of payment to the prior payment of all other indebtedness of National Mercantile
Bancorp that, by its terms, is not similarly subordinated.

The Debentures may be declared immediately due and payable at the election of
the trustee under the Indenture or the holders of 25% of aggregate principal amount of the Trusts outstanding capital securities if National Mercantile Bancorp defaults in the payment of interest (subject to its right to defer interest
payments as described above) or principal under the Debentures and upon the occurrence of other events of defaults described in the Indenture.

National Mercantile Bancorp used the net proceeds from the trust preferred transactions described above to redeem all $15.5 million principal amount of its previously outstanding 2031 Junior Subordinated Debentures. The redemption
price was 107.6875% of the principal amount of these Debentures, plus accrued interest, or a total of $17.3 million.

As a result of these
transactions, the Company incurred a one-time charge during the first quarter of 2007 for financial statement purposes of approximately $1.6 million. The one-time charge reflects the accrual for the redemption premium and the impairment of the
unamortized Debenture issuance costs.

Off-Balance Sheet Arrangements

Guarantees

National Mercantile has unconditionally guaranteed the Trust Preferred Securities issued
by the Trust (see Junior Subordinated Debentures/Trust Preferred Securities above).

Contractual Obligations

The following table provides the amounts due under specified contractual obligations for the periods indicated as of December 31, 2006.

Table 18

Contractual Obligations



|                                                                      |  |                        |         |                                    |   |                                      |  |                 |       |       |   |       |  |   |        
|--------------------------------------------------------------------- |  | ---------------------- | ------- | ---------------------------------- | - | ------------------------------------ |  | --------------- | ----- | ----- | - | ----- |  | - | -------
|                                                                      |  | Payments Due          
|                                                                      |  | Twelvemonths andless   |         | After oneyear butwithin threeyears |   | After threeyears butwithin fiveyears |  | After fiveyears |       | Total
|                                                                      |  | (Dollars in thousands)
|Commitment to fund loans                                              |  | $                      | 129,829 |                                    | $ |                                     |  | $               |      |       | $ |      |  | $ | 129,829
|Commitments under letters of credit                                   |  |                        | 390     |                                    |   |                                     |  |                 |      |       |   |      |  |   | 390    
|Deposits                                                              |  |                        | 373,751 |                                    |   | 6,863                                |  |                 |      |       |   |      |  |   | 380,614
|Federal funds sold and securities sold under agreements to repurchase |  |                        |        |                                    |   | 45,000                               |  |                 |      |       |   |      |  |   | 45,000 
|Borrowings                                                            |  |                        | 10,300  |                                    |   |                                     |  |                 |      |       |   |      |  |   | 10,300 
|Junior subordinated deferrable interest debentures                    |  |                        | 15,464  |                                    |   |                                     |  |                 |      |       |   |      |  |   | 15,464 
|Interest expense                                                      |  |                        | 4,294   |                                    |   | 2,526                                |  |                 | 6     |       |   | 17    |  |   | 6,843  
|Operating lease obligations                                           |  |                        | 789     |                                    |   | 1,491                                |  |                 | 1,065 |       |   | 1,157 |  |   | 4,502  
|Other liabilities                                                     |  |                        | 5,116   |                                    |   |                                     |  |                 |      |       |   |      |  |   | 5,116  
|                                                                      |  |                        |         |                                    |   |                                      |  |                 |       |       |   |       |  |   |        
|Total                                                                 |  | $                      | 539,933 |                                    | $ | 55,880                               |  | $               | 1,071 |       | $ | 1,174 |  | $ | 598,058
|                                                                      |  |                        |         |                                    |   |                                      |  |                 |       |       |   |       |  |   |        



41



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The obligations are categorized by their contractual due dates. Approximately $35.4 million of the
commitments to fund loans relate to real estate construction and are expected to fund within the next 12 months. The balance of the commitments to fund loans is primarily revolving lines of credit or other commercial loans, and many of these
commitments are expected to expire without being drawn upon. Additionally, payments due for deposits reflect the contractual terms with our depositors to withdraw deposits, however, we do not anticipate the withdrawal of these deposits. Total
contractual obligations, therefore, do not necessarily represent future cash requirements. We may, at our option, prepay certain borrowings prior to their maturity date. Furthermore, the actual payment of certain current liabilities may be deferred
into future periods.

Selected Financial Ratios

The following Table 19 sets forth selected financial ratios:

Table 19

Selected Performance Ratios



|                                               |  |                                |   |  |       |   |  |      |  
|---------------------------------------------- |  | ------------------------------ | - |  | ----- | - |  | ---- | -
|                                               |  | For the Year EndedDecember 31, |  
|                                               |  | 2006                           |   |  | 2005  |   |  | 2004 |  
|Return on average assets                       |  | 1.16                           | % |  | 1.10  | % |  | 0.61 | %
|Return on average shareholders equity         |  | 13.85                          | % |  | 12.15 | % |  | 7.02 | %
|Average shareholders equity to average assets |  | 8.39                           | % |  | 9.04  | % |  | 8.68 | %

Recent Accounting Pronouncements

See Recent Accounting Pronouncements in Note 1-Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

In
light of the completion of the Mergers, summarized below are the material risks related to an investment in the common stock of National Mercantiles successor, First California. You should carefully consider the risks described below in
addition to the other information set forth herein. Unless otherwise specified, references to we, our and us in this subsection mean First California and its consolidated subsidiaries prior the Mergers and
National Mercantile and FCB and their respective consolidated subsidiaries before the Mergers.

Risks Related to the Banking Business

Our growth presents certain risks, including a decline in credit quality or capital adequacy.

The asset growth of recent years experienced by National Mercantile may continue at First California following the Mergers, even if not at the same
percentage rate experienced in recent years. Such growth presents certain risks. While we believe we have maintained good credit quality notwithstanding such growth, rapid growth is frequently associated with a decline in credit quality.
Accordingly, continued asset growth could lead to a decline in credit quality in the future. In addition, continued asset growth could cause a decline in capital adequacy for regulatory purposes, which could in turn cause us to have to raise
additional capital in the future to maintain or regain well capitalized status as defined under applicable banking regulations.

Our
performance and growth are dependent on maintaining a high quality of service for our customers, and will be impaired by a decline in our quality of service.

Our growth will be dependent on maintaining a high quality of service for customers of First California following the Mergers. As a result of the Mergers and the corresponding growth, it may become increasingly
difficult to maintain high service quality for our customers. This could cause a decline in our performance and growth with respect to net income, deposits, assets and other benchmarks.



42



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If borrowers and guarantors fail to perform as required by the terms of their loans, we will sustain losses.

A significant source of risk for First California arises from the possibility that losses will be sustained if our borrowers and
guarantors fail to perform in accordance with the terms of their loans and guaranties. This risk increases when the economy is weak. We have adopted underwriting and credit monitoring procedures and credit policies, including the establishment and
review of the allowance for loan losses, that we believe are appropriate to minimize this risk by assessing the likelihood of nonperformance, tracking loan performance and diversifying our credit portfolio. These policies and procedures, however,
may not prevent unexpected losses that could materially adversely affect our results of operations.

Our allowance for loan losses may not be adequate
to cover actual losses.

In accordance with accounting principles generally accepted in the United States, we maintain an allowance for
loan losses to provide for actual loan losses. Our allowance for loan losses may not be adequate to cover actual loan losses, and future provisions for loan losses could materially and adversely affect our operating results. Our allowance for loan
losses is based on prior experience, as well as an evaluation of the risks in its current portfolio. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates that may be
beyond our control, and these losses may exceed current estimates. Federal regulatory agencies, as an integral part of their examination process, review our loans and allowance for loan losses. While we believe that our allowance for loan losses is
adequate to cover current losses, it is possible that we will further increase the allowance for loan losses or that regulators will require increases. Either of these occurrences could materially and negatively affect our earnings.

The banking business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

Changes in the interest rate environment may reduce our profits. It is expected that we will continue to realize income from the differential or
spread between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Net interest spreads are affected by the difference between the
maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities. In addition, loan volume and yields are affected by market interest rates on loans, and rising interest rates generally are associated with a lower
volume of loan originations. We may not be able to minimize our interest rate risk. In addition, while an increase in the general level of interest rates may increase our net interest margin and loan yield, it may adversely affect the ability of
certain borrowers with variable rate loans to pay the interest on and principal of their obligations. Accordingly, changes in levels of market interest rates could materially and adversely affect our net interest spread, asset quality, loan
origination volume and overall profitability.

We face strong competition from financial services companies and other companies that offer banking
services which could negatively affect our business.

We conduct our combined banking operations primarily in Ventura, Los Angeles and
Orange Counties, California. Increased competition in these markets may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the same banking
services that we offer in our service areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions, including without limitation, savings and loan
institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, competitors include several major financial companies whose greater resources may afford them a
marketplace advantage by enabling them to maintain numerous banking locations and ATMs and conduct extensive promotional and advertising campaigns.

Additionally, banks and other financial institutions with larger capitalizations and financial intermediaries not subject to bank regulatory restrictions have larger lending limits than we have and are thereby able to serve



43



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the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain deposits, and range and quality
of products and services provided, including new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances
enable more companies to provide financial services. We also face competition from out-of-state financial intermediaries that have opened low-end production offices or that solicit deposits in their market areas. If we are unable to attract and
retain banking customers, we may be unable to continue to grow our loan and deposit portfolios and our results of operations and financial condition may otherwise be adversely affected.

Changes in economic conditions, in particular an economic slowdown in Southern California, could materially and negatively affect our business.

Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, legislative and
regulatory changes, changes in government monetary and fiscal policies and inflation, all of which are beyond our control. A deterioration in economic conditions, whether caused by national or local concerns, in particular an economic slowdown in
Southern California, could result in the following consequences, any of which could hurt our business materially: loan delinquencies may increase; problem assets and foreclosures may increase; demand for our products and services may decrease; low
cost or noninterest bearing deposits may decrease; and collateral for loans made by us, especially real estate, may decline in value, in turn reducing customers borrowing power, and reducing the value of assets and collateral associated with
our existing loans. The State of California and certain local governments in our market area continue to face fiscal challenges upon which the long-term impact on the States or the local economy cannot be predicted.

A significant portion of the combined companys loan portfolio consists of construction loans, which have greater risks than loans secured by completed real
properties.

At December 31, 2006, National Mercantile had outstanding construction and land development loans in the amount of
$83.3 million, representing 23% of its loan portfolio. In addition, at December 31, 2006, FCB Bancorp had outstanding construction and land development loans in the amount of $48.3 million, representing 14% of its loan portfolio. These types of
loans generally have greater risks than loans on completed homes, multifamily properties and commercial properties. A construction loan generally does not cover the full amount of the construction costs, so the borrower must have adequate funds to
pay for the balance of the project. Price increases, delays and unanticipated difficulties can materially increase these costs. Further, even if completed, there is no assurance that the borrower will be able to sell the project on a timely or
profitable basis, as these are closely related to real estate market conditions, which can fluctuate substantially between the start and completion of the project. If the borrower defaults prior to completion of the project, the value of the project
will likely be less than the outstanding loan, and we could be required to complete construction with our own funds to minimize losses on the project.

A downturn in the real estate market could negatively affect our business.

A downturn in the real estate market could
negatively affect our business because a significant portion (approximately 83% for National Mercantile and 83% for FCB Bancorp as of December 31, 2006) of our loans are secured by real estate. Our ability to recover on defaulted loans by
selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans.

Substantially
all real property collateral for both companies is located in Southern California. If there is a significant decline in real estate values, especially in Southern California, the collateral for our loans would provide less security. Real estate
values could be affected by, among other things, an economic slowdown, an increase in interest rates, earthquakes and other natural disasters particular to California.



44



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We are subject to extensive regulation which could adversely affect our business.

Our operations are subject to extensive regulation by federal, state and local governmental authorities and are subject to various laws and judicial and
administrative decisions imposing requirements and restrictions on part or all of our operations. Because our business is highly regulated, the laws, rules and regulations applicable to us are subject to regular modification and change. There are
currently proposed laws, rules and regulations that, if adopted, would impact our operations. These proposed laws, rules and regulations, or any other laws, rules or regulations, may be adopted in the future, which could (1) make compliance
much more difficult or expensive, (2) restrict our ability to originate, broker or sell loans or accept certain deposits, (3) further limit or restrict the amount of commissions, interest or other charges earned on loans originated or sold
by us, or (4) otherwise adversely affect our business or prospects for business.

We are exposed to risk of environmental liabilities with respect
to properties to which we take title.

In the course of our business, we may own or foreclose and take title to real estate, and could
be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in
connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In
addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to
significant environmental liabilities, our business, financial condition, liquidity and results of operations could be materially and adversely affected.

Our internal operations are subject to a number of risks.

We are subject to certain operations risks, including, but not
limited to, data processing system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We maintain a system of internal controls to mitigate against such occurrences and
maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls and uninsured or in excess of applicable insurance limits, it could have a significant adverse
impact on our business, financial condition or results of operations.

Risks Related to Our Common Stock

If First California is unable to integrate the operations of National Mercantile and FCB Bancorp successfully, its business and earnings may be negatively affected.

The Mergers involve the integration of companies that have previously operated independently. Successful integration of National
Mercantiles and FCB Bancorps operations will depend primarily on our ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. No assurance can be given that we will be able to integrate the
operations of the two companies without encountering difficulties including, without limitation, the loss of key employees and customers, the disruption of its respective ongoing businesses or possible inconsistencies in standards, controls,
procedures and policies. Estimated cost savings and revenue enhancements are projected to come from various areas identified through the due diligence and integration planning process. The elimination and consolidation of duplicate tasks are
projected to result in annual cost savings. If we have difficulties with the integration process, we might not achieve the economic benefits we expect to result from the Mergers, and this may hurt our business and earnings. In addition, First
California may experience greater than expected costs or difficulties relating to the integration of the businesses of the two companies, and/or may not realize expected cost savings from the Mergers within the expected time frame.



45



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Certain preferences and rights of preferred stockholders of First California may negatively affect the rights of
holders of First California common stock.

First Californias certificate of incorporation authorizes its board of directors to
issue up to 2,500,000 shares of preferred stock and to determine the rights, preferences, powers and restrictions granted or imposed upon any series of preferred stock without prior shareholder approval. The preferred stock that may be authorized
could have preference over holders of First California common stock with respect to dividends and other distributions upon the liquidation or dissolution of First California. If First Californias board of directors authorizes the issuance of
additional series of preferred shares having a voting preference over common stock, such issuances may inhibit or delay the approval of measures supported by holders of common stock that require shareholder approval and consequently may make it
difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and board of directors. Accordingly, such issuance could substantially impede the ability of public
stockholders to benefit from a change in control or change of our management and board of directors and, as a result, may adversely affect the market price of our common stock and the stockholders ability to realize any potential change of
control premium.

Currently, in the event of a voluntary or involuntary liquidation or dissolution, holders of series A convertible
perpetual preferred stock of First California are entitled to receive a liquidation preference of $1,000 plus an amount equal to 8.5% per annum of the $1,000, which is deemed to have commenced accrual on December 10, 2001. This amount is
payable out of the assets of First California before any distribution to holders of common stock. If the number of preferred shares having a similar liquidation preference increases, the chance that holders of common stock may receive a smaller
distribution upon liquidation or dissolution may be higher.

We are dependent on key personnel and the loss of one or more of those key personnel may
materially and adversely affect our prospects.

We depend heavily on the services of our President and Chief Executive Officer, C. G.
Kum, our Executive Vice President and Chief Financial Officer, Romolo C. Santarosa, our Executive Vice President and Chief Credit Officer, Robert W. Bartlett, our Executive Vice President and Chief Strategy Officer, David R. Brown, and our Executive
Vice President and Head of Commercial Banking, Thomas Anthony, and a number of other key management personnel. The loss of any of their services or that of other key personnel could materially and adversely affect our results of operations and
financial condition. Our success also depends in part on our ability to attract and retain additional qualified management personnel. Competition for such personnel is strong in the banking industry and we may not be successful in attracting or
retaining the personnel we require.

We expect only a limited trading market for our common stock, which could lead to significant price volatility.

We expect the trading volumes of the common stock of First California to be modest. The limited trading market for our common stock may
cause fluctuations in the market value of our common stock to be exaggerated, leading to significant price volatility in excess of that which would occur in a more active trading market of our common stock. In addition, even if a more active market
in our common stock develops, it is possible that such a market may not continue or that stockholders may not be able to sell their shares.



46



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|Item 7. | Financial Statements
|------- | --------------------

The
consolidated financial statements required by this Item are included herewith as a separate section of this Report as follows:



|1. | Financial Statements
|-- | --------------------



|                                                                                                                |  |   
|--------------------------------------------------------------------------------------------------------------- |  | --
|Report of Independent Registered Public Accounting Firm  Moss Adams LLP                                        |  | 51
|                                                                                                                | 
|Report of Independent Registered Public Accounting Firm  Ernst & Young LLP                                     |  | 52
|                                                                                                                | 
|Consolidated Balance Sheet at December 31, 2006 and 2005                                                        |  | 53
|                                                                                                                | 
|Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004                      |  | 54
|                                                                                                                | 
|Consolidated Statements of Changes in Shareholders Equity for the years ended December 31, 2006, 2005 and 2004 |  | 55
|                                                                                                                | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                      |  | 56
|                                                                                                                | 
|Notes to Consolidated Financial Statements for the three years ended December 31, 2006                          |  | 57



|Item 8. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|------- | ------------------------------------------------------------------------------------

None.



|Item 8A. | 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 systems, 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.



|Item 8B. | Other Information
|-------- | -----------------

Not
applicable.



47



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PART III



|Item 9. | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance
with Section 16(a) of the Exchange Act
|------- | -------------------------------------------------------------------------------------------------------------------------------------

As a result of the Mergers, National
Mercantile has ceased to exist. Accordingly, there are no longer any directors or executive officers of National Mercantile, nor is there a code of ethics or Board committee charters. Information with respect to the executive officers and directors
of First California and the code of ethics of First California and its committee charters responsive to this item will appear in the proxy statement First California will deliver to its stockholders in connection with the 2007 Annual Meeting of
Stockholders, or the 2007 Proxy Statement, and such information is herein incorporated by reference to such portion of the 2007 Proxy Statement. Additionally, information required with respect to the filings by our former executive officers and
directors under Section 16(a) of the Securities Exchange Act of 1934, as amended, with respect to the fiscal year ended December 31, 2006 responsive to this item will appear in the 2007 Proxy Statement.



|Item 10. | Executive Compensation
|-------- | ----------------------

Information responsive to this item with respect to National Mercantile, including a report of the Compensation Committee of the Board of Directors of its successor, First California, required by this item and other information required in
response to this item, will appear in the 2007 Proxy Statement, and such information is herein incorporated by reference to such portion of the 2007 Proxy Statement.



|Item 11. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|-------- | ----------------------------------------------------------------------------------------------

As a result of the Mergers, National Mercantile has ceased to exist. Accordingly, there are no longer any voting securities of National Mercantile.
Information required by this item with respect to the ownership of First Californias outstanding voting securities will appear in the 2007 Proxy Statement, and such information is herein incorporated by reference to the 2007 Proxy Statement.
Additionally, information required by this item with respect to National Mercantiles compensation plans including any plans under which its equity securities were issuable during the fiscal year ended December 31, 2006 will appear in the
2007 Proxy Statement, and such information is herein incorporated by reference to the 2007 Proxy Statement.



|Item 12. | Certain Relationships and Related Transactions, and Director Independence
|-------- | -------------------------------------------------------------------------

The information required by this item will appear in the 2007 Proxy Statement, and such information is herein incorporated by reference to the 2007 Proxy
Statement.



|Item 13. | Exhibits
|-------- | --------

See Index to
Exhibits on page 85 of this Form 10-KSB.



|Item 14. | Principal Accountant Fees and Services
|-------- | --------------------------------------

The information required by this item will appear in the 2007 Proxy Statement, and such information is herein incorporated by reference to the 2007 Proxy Statement.



48



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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.



|                     |  |  |  |     |  |                                                                                               
|-------------------- |  |  |  | --- |  | ----------------------------------------------------------------------------------------------
|                     |  |  |  |     |  | FIRST CALIFORNIA FINANCIAL GROUP, INC. (as successor by merger to National Mercantile Bancorp)
|                     |  |  | 
|Date: April 12, 2007 |  |  |  | By: |  | /s/    C. G.
KUM                                                                              
|                     |  |  |  |     |  | C. G. Kum Director, President and Chief Executive Officer                                     

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints C. G. Kum and Romolo Santarosa, and each of
them severally, his or her true and lawful attorney-in-fact with power of substitution and resubstitution to sign in his or her name, place and stead, in any and all capacities, to do any and all things and execute any and all instruments that such
attorney may deem necessary or advisable under the Securities Exchange Act of 1934 and any rules, regulations and requirements of the U.S. Securities and Exchange Commission in connection with this Annual Report on Form 10-KSB and any and all
amendments hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.

In accordance with the Exchange Act, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates indicated:



|                                               |  |                                                                                                                     |  |               
|---------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                      |  | Title                                                                                                               |  | Date          
|                                               |  |                                                                                                                    
|/s/    C. G. KUM C. G. Kum                     |  | Director, President and Chief Executive Officer (Principal Executive Officer)                                       |  | April 12, 2007
|                                               |  |                                                                                                                    
|/s/    ROMOLO
SANTAROSA Romolo Santarosa       |  | Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |  | April 12, 2007
|                                               |  |                                                                                                                    
|/s/    RICHARD D.
ALDRIDGE Richard D. Aldridge |  | Director                                                                                                            |  | April 12, 2007
|                                               |  |                                                                                                                    
|/s/    DONALD E.
BENSON Donald E. Benson       |  | Director                                                                                                            |  | April 12, 2007
|                                               |  |                                                                                                                    
|/s/    JOHN W.
BIRCHFIELD John W. Birchfield   |  | Director                                                                                                            |  | April 12, 2007
|                                               |  |                                                                                                                    
|/s/    JOSEPH N.
COHEN Joseph N. Cohen         |  | Director                                                                                                            |  | April 12, 2007
|                                               |  |                                                                                                                    
|/s/    ROBERT E.
GIPSON Robert E. Gipson       |  | Chairman of the Board of Directors                                                                                  |  | April 12, 2007



49



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|                                                             |  |          |  |               
|------------------------------------------------------------ |  | -------- |  | --------------
|Signature                                                    |  | Title    |  | Date          
|                                                             |  |         
|/s/    W. DOUGLAS
HILE W. Douglas Hile                       |  | Director |  | April 12, 2007
|                                                             |  |         
|/s/    ANTOINETTE HUBENETTE,
M.D. Antoinette Hubenette, M.D. |  | Director |  | April 12, 2007
|                                                             |  |         
|/s/    SYBLE R.
ROBERTS Syble R. Roberts                     |  | Director |  | April 12, 2007
|                                                             |  |         
|/s/    THOMAS
TIGNINO Thomas Tignino                         |  | Director |  | April 12, 2007



50



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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

of National Mercantile Bancorp and Subsidiaries:

We have
audited the consolidated balance sheets of National Mercantile Bancorp and Subsidiaries (collectively, the Company) as of December 31, 2006 and 2005, and the related consolidated statements of operations, changes in
shareholders equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over
financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of
National Mercantile Bancorp and Subsidiaries as of December 31, 2006 and 2005, and the consolidated results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the
United States of America.

As discussed in notes 1 and 7 to the consolidated financial statements, effective January 1, 2006, the Company
changed its method of accounting for share-based payment arrangements to conform to Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.

/s/    Moss Adams LLP

Los Angeles, California

April 9, 2007



51



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Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors

of National Mercantile Bancorp and subsidiaries:

We have
audited the consolidated statements of operations, shareholders equity and cash flows of National Mercantile Bancorp (a California corporation) and subsidiaries (collectively, the Company) for the year ended December 31, 2004.
These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash
flows of National Mercantile Bancorp and subsidiaries for the year ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

/s/    Ernst & Young LLP

Los Angeles, California

March 28, 2005

except for Note 14

as to which the date is September 28, 2006



52



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                                             |  | December 31,           |        
|                                                                                                                                                                             |  | 2006                   |         |   | 2005 |  
|                                                                                                                                                                             |  | (Dollars in thousands) |        
|ASSETS                                                                                                                                                                       |  |                        |         |   |      |   |         |  
|Cash and due from banks-demand                                                                                                                                               |  | $                      | 11,438  |   |      | $ | 13,507  |  
|Due from banks-interest bearing                                                                                                                                              |  |                        | 2,000   |   |      |   | 2,000   |  
|Federal funds sold                                                                                                                                                           |  |                        |        |   |      |   | 685     |  
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|Cash and cash equivalents                                                                                                                                                    |  |                        | 13,438  |   |      |   | 16,192  |  
|Securities available-for-sale, at fair value;aggregate amortized cost of $103,059 and $72,428 at December 31, 2006 and 2005,
respectively                                    |  |                        | 102,427 |   |      |   | 71,758  |  
|Securities held-to-maturity, at amortized cost;aggregate fair value of $1,947 and $2,572 at December 31, 2006 and 2005,
respectively                                         |  |                        | 1,987   |   |      |   | 2,612   |  
|Federal Reserve Bank and other stock                                                                                                                                         |  |                        | 3,962   |   |      |   | 3,809   |  
|Loans receivable                                                                                                                                                             |  |                        | 365,718 |   |      |   | 338,558 |  
|Allowance for loan and lease losses                                                                                                                                          |  |                        | (4,740  | ) |      |   | (4,468  | )
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|Net loans receivable                                                                                                                                                         |  |                        | 360,978 |   |      |   | 334,090 |  
|Premises and equipment, net                                                                                                                                                  |  |                        | 5,725   |   |      |   | 5,861   |  
|Other real estate and property owned                                                                                                                                         |  |                        | 303     |   |      |   | 1,056   |  
|Deferred tax asset, net                                                                                                                                                      |  |                        | 1,663   |   |      |   | 4,322   |  
|Goodwill                                                                                                                                                                     |  |                        | 3,225   |   |      |   | 3,225   |  
|Intangible assets, net                                                                                                                                                       |  |                        | 1,184   |   |      |   | 1,407   |  
|Accrued interest receivable and other assets                                                                                                                                 |  |                        | 6,671   |   |      |   | 4,128   |  
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|Total assets                                                                                                                                                                 |  | $                      | 501,563 |   |      | $ | 448,460 |  
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                         |  |                        |         |   |      |   |         |  
|Deposits:                                                                                                                                                                    |  |                        |         |   |      |   |         |  
|Noninterest-bearing demand                                                                                                                                                   |  | $                      | 115,745 |   |      | $ | 115,924 |  
|Interest-bearing demand                                                                                                                                                      |  |                        | 26,372  |   |      |   | 36,018  |  
|Money market                                                                                                                                                                 |  |                        | 118,704 |   |      |   | 76,334  |  
|Savings                                                                                                                                                                      |  |                        | 22,463  |   |      |   | 28,208  |  
|Time certificates of deposit:                                                                                                                                                |  |                        |         |   |      |   |         |  
|$100,000 or more                                                                                                                                                             |  |                        | 80,080  |   |      |   | 87,468  |  
|Under $100,000                                                                                                                                                               |  |                        | 17,250  |   |      |   | 19,256  |  
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|Total deposits                                                                                                                                                               |  |                        | 380,614 |   |      |   | 363,208 |  
|Federal funds purchased and securities sold under agreements to repurchase                                                                                                   |  |                        | 45,000  |   |      |   |        |  
|Other borrowings                                                                                                                                                             |  |                        | 10,300  |   |      |   | 28,337  |  
|Junior subordinated deferrable interest debentures                                                                                                                           |  |                        | 15,464  |   |      |   | 15,464  |  
|Accrued interest payable and other liabilities                                                                                                                               |  |                        | 5,116   |   |      |   | 3,288   |  
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|Total liabilities                                                                                                                                                            |  |                        | 456,494 |   |      |   | 410,297 |  
|                                                                                                                                                                             |  |                       
|Shareholders equity:                                                                                                                                                        |  |                        |         |   |      |   |         |  
|Preferred stock, no par value  authorized 1,000,000 shares:Series B non-cumulative convertible perpetual preferred stock; authorized
1,000 shares; outstanding 1,000 shares |  |                        | 1,000   |   |      |   | 1,000   |  
|Common stock, no par value; authorized 10,000,000 shares;5,650,147 and 5,503,780 shares outstanding at December 31, 2006 and 2005,
respectively                              |  |                        | 46,967  |   |      |   | 45,697  |  
|Accumulated deficit                                                                                                                                                          |  |                        | (1,738  | ) |      |   | (7,380  | )
|Accumulated other comprehensive loss                                                                                                                                         |  |                        | (1,160  | ) |      |   | (1,154  | )
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|Total shareholders equity                                                                                                                                                   |  |                        | 45,069  |   |      |   | 38,163  |  
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  
|Total liabilities and shareholders equity                                                                                                                                   |  | $                      | 501,563 |   |      | $ | 448,460 |  
|                                                                                                                                                                             |  |                        |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



53



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|-------------------------------------------------------------------------- |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                           |  | For the Year Ended December 31,               |       
|                                                                           |  | 2006                                          |        |   | 2005 |   |        | 2004 | 
|                                                                           |  | (Dollars in thousands, except per share data) |       
|Interest income:                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Loans, including fees                                                      |  | $                                             | 30,100 |   |      | $ | 24,039 |      |  | $ | 17,915 |  
|Securities                                                                 |  |                                               | 5,183  |   |      |   | 2,075  |      |  |   | 1,388  |  
|Due from banks                                                             |  |                                               | 131    |   |      |   | 101    |      |  |   | 56     |  
|Federal funds sold and securities purchased under agreements to resell     |  |                                               | 86     |   |      |   | 50     |      |  |   | 95     |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total interest income                                                      |  |                                               | 35,500 |   |      |   | 26,265 |      |  |   | 19,454 |  
|Interest expense:                                                          |  |                                               |        |   |      |   |        |      |  |   |        |  
|Interest-bearing demand                                                    |  |                                               | 221    |   |      |   | 158    |      |  |   | 80     |  
|Money market and savings                                                   |  |                                               | 3,439  |   |      |   | 1,342  |      |  |   | 749    |  
|Time certificates of deposit:                                              |  |                                               |        |   |      |   |        |      |  |   |        |  
|$100,000 or more                                                           |  |                                               | 3,600  |   |      |   | 1,365  |      |  |   | 403    |  
|Under $100,000                                                             |  |                                               | 838    |   |      |   | 620    |      |  |   | 473    |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total interest expense on deposits                                         |  |                                               | 8,098  |   |      |   | 3,485  |      |  |   | 1,705  |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                                               | 1,808  |   |      |   |       |      |  |   | 1      |  
|Junior subordinated deferrable interest debentures                         |  |                                               | 1,546  |   |      |   | 1,585  |      |  |   | 1,585  |  
|Other borrowings                                                           |  |                                               | 700    |   |      |   | 412    |      |  |   | 332    |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total interest expense                                                     |  |                                               | 12,152 |   |      |   | 5,482  |      |  |   | 3,623  |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net interest income before provision for credit losses                     |  |                                               | 23,348 |   |      |   | 20,783 |      |  |   | 15,831 |  
|Provision (benefit) for credit losses                                      |  |                                               | 248    |   |      |   | (84    | )    |  |   | 220    |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net interest income after provision (benefit) for credit losses            |  |                                               | 23,100 |   |      |   | 20,867 |      |  |   | 15,611 |  
|Other operating income:                                                    |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net loss on sale of securities available-for-sale                          |  |                                               |       |   |      |   |       |      |  |   | (197   | )
|Trading gains (losses) on non-hedge derivatives                            |  |                                               | (267   | ) |      |   | (395   | )    |  |   | 229    |  
|Net settlement on interest rate swap                                       |  |                                               | 925    |   |      |   | 347    |      |  |   | 619    |  
|International services                                                     |  |                                               | 71     |   |      |   | 52     |      |  |   | 59     |  
|Investment division                                                        |  |                                               | 36     |   |      |   | 54     |      |  |   | 53     |  
|Deposit-related and other customer services                                |  |                                               | 979    |   |      |   | 1,060  |      |  |   | 1,652  |  
|Gain on sale of OREO                                                       |  |                                               | 48     |   |      |   |       |      |  |   |       |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total other operating income                                               |  |                                               | 1,792  |   |      |   | 1,118  |      |  |   | 2,415  |  
|Other operating expenses:                                                  |  |                                               |        |   |      |   |        |      |  |   |        |  
|Salaries and related benefits                                              |  |                                               | 9,040  |   |      |   | 7,788  |      |  |   | 7,508  |  
|Net occupancy                                                              |  |                                               | 1,040  |   |      |   | 997    |      |  |   | 1,127  |  
|Furniture and equipment                                                    |  |                                               | 545    |   |      |   | 506    |      |  |   | 485    |  
|Printing and communications                                                |  |                                               | 549    |   |      |   | 537    |      |  |   | 546    |  
|Insurance and regulatory assessments                                       |  |                                               | 340    |   |      |   | 421    |      |  |   | 433    |  
|Client services                                                            |  |                                               | 645    |   |      |   | 666    |      |  |   | 590    |  
|Computer data processing                                                   |  |                                               | 747    |   |      |   | 882    |      |  |   | 965    |  
|Legal services                                                             |  |                                               | 126    |   |      |   | 540    |      |  |   | 464    |  
|Other professional services                                                |  |                                               | 1,078  |   |      |   | 1,127  |      |  |   | 854    |  
|Amortization of core deposit intangible                                    |  |                                               | 223    |   |      |   | 223    |      |  |   | 223    |  
|Promotion and other expenses                                               |  |                                               | 695    |   |      |   | 689    |      |  |   | 833    |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Total other operating expenses                                             |  |                                               | 15,028 |   |      |   | 14,376 |      |  |   | 14,028 |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Income before income tax provision                                         |  |                                               | 9,864  |   |      |   | 7,609  |      |  |   | 3,998  |  
|Income tax provision                                                       |  |                                               | 4,222  |   |      |   | 3,159  |      |  |   | 1,678  |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Net income                                                                 |  | $                                             | 5,642  |   |      | $ | 4,450  |      |  | $ | 2,320  |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Earnings per share:                                                        |  |                                               |        |   |      |   |        |      |  |   |        |  
|Basic                                                                      |  | $                                             | 1.02   |   |      | $ | 0.96   |      |  | $ | 0.64   |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  
|Diluted                                                                    |  | $                                             | 0.94   |   |      | $ | 0.75   |      |  | $ | 0.41   |  
|                                                                           |  |                                               |        |   |      |   |        |      |  |   |        |  

See accompanying notes to consolidated financial statements.



54



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY



|                                                           |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|---------------------------------------------------------- |  | ----------------------------------------- | - |  | ----------------------- | ------ | ------------ | ----------- | ----- | ------------------ | - | ----------- | ------------------------------------------- | --------- | ------ | ----- | - | ------ | - |  | - | ------- | - |  | - | ------ | - |  | - | ------ | -
|                                                           |  | Preferred StockSeries A                   |   |  | Preferred StockSeries B |        | Common Stock |             |       | AccumulatedDeficit |   |             | AccumulatedOtherComprehensive Income (Loss) |           |        | Total |  
|                                                           |  | # of Shares                               |   |  | Amount                  |        |              | # of Shares |       | Amount             |   | # of Shares |                                             |           | Amount |       |   |        |  
|                                                           |  | (Dollars in thousands, except share data) |  
|Balance at December 31, 2003                               |  | 729,585                                   |   |  | $                       | 5,959  |              |             | 1,000 |                    | $ | 1,000       |                                             | 3,465,349 |        |       | $ | 38,602 |   |  | $ | (14,150 | ) |  | $ | 71     |   |  | $ | 31,482 |  
|Preferred stock converted into common stock on a 2:1 basis |  | (63,312                                   | ) |  |                         | (517   | )            |             |       |                    |   |             |                                             | 158,280   |        |       |   | 517    |   |  |   |         |   |  |   |        |   |  |   |       |  
|Stock options exercised                                    |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             | 69,031    |        |       |   | 372    |   |  |   |         |   |  |   |        |   |  |   | 372    |  
|Comprehensive income:                                      |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Unrealized holding gain during the period, net             |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   | 203    |   |  |   | 203    |  
|Net income                                                 |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   | 2,320   |   |  |   |        |   |  |   | 2,320  |  
|                                                           |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Comprehensive income                                       |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   | 2,523  |  
|                                                           |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2004                               |  | 666,273                                   |   |  |                         | 5,442  |              |             | 1,000 |                    |   | 1,000       |                                             | 3,692,660 |        |       |   | 39,491 |   |  |   | (11,830 | ) |  |   | 274    |   |  |   | 34,377 |  
|Preferred stock converted into common stock on a 2:1 basis |  | (666,273                                  | ) |  |                         | (5,442 | )            |             |       |                    |   |             |                                             | 1,665,683 |        |       |   | 5,442  |   |  |   |         |   |  |   |        |   |  |   |       |  
|Stock options exercised                                    |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             | 145,438   |        |       |   | 764    |   |  |   |         |   |  |   |        |   |  |   | 764    |  
|Comprehensive income:                                      |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Unrealized holding loss during the period, net             |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   | (1,428 | ) |  |   | (1,428 | )
|Net income                                                 |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   | 4,450   |   |  |   |        |   |  |   | 4,450  |  
|                                                           |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Comprehensive income                                       |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   | 3,022  |  
|                                                           |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2005                               |  |                                          |   |  |                         |       |              |             | 1,000 |                    |   | 1,000       |                                             | 5,503,780 |        |       |   | 45,697 |   |  |   | (7,380  | ) |  |   | (1,154 | ) |  |   | 38,163 |  
|Stock options exercised                                    |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             | 146,445   |        |       |   | 876    |   |  |   |         |   |  |   |        |   |  |   | 876    |  
|Share based compensation cost                              |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   | 395    |   |  |   |         |   |  |   |        |   |  |   | 395    |  
|Redemption of fractional shares in 5 for 4 stock split     |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             | (78       | )      |       |   | (1     | ) |  |   |         |   |  |   |        |   |  |   | (1     | )
|Comprehensive income:                                      |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Unrealized holding loss during the period, net             |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   | (6     | ) |  |   | (6     | )
|Net income                                                 |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   | 5,642   |   |  |   |        |   |  |   | 5,642  |  
|                                                           |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Comprehensive income                                       |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   | 5,636  |  
|                                                           |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  
|Balance at December 31, 2006                               |  |                                          |   |  | $                       |       |              |             | 1,000 |                    | $ | 1,000       |                                             | 5,650,147 |        |       | $ | 46,967 |   |  | $ | (1,738  | ) |  | $ | (1,160 | ) |  | $ | 45,069 |  
|                                                           |  |                                           |   |  |                         |        |              |             |       |                    |   |             |                                             |           |        |       |   |        |   |  |   |         |   |  |   |        |   |  |   |        |  

See accompanying notes to consolidated financial statements.



55



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                           |  |                                |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ------------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                           |  | For the Year EndedDecember 31, |        
|                                                                                           |  | 2006                           |         |   | 2005 |   |         | 2004 | 
|                                                                                           |  | (Dollars in thousands)         |        
|Cash flows from operating activities:                                                      |  |                                |         |   |      |   |         |      |  |   |         |  
|Net income                                                                                 |  | $                              | 5,642   |   |      | $ | 4,450   |      |  | $ | 2,320   |  
|Adjustments to reconcile net income to net cash used in operating activities:              |  |                                |         |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                                                              |  |                                | 483     |   |      |   | 425     |      |  |   | 409     |  
|Provision (benefit) for credit losses                                                      |  |                                | 248     |   |      |   | (84     | )    |  |   | 220     |  
|Trading loss (gain) on non-hedge derivatives                                               |  |                                | 267     |   |      |   | 395     |      |  |   | (229    | )
|Loss on sale of securities available for sale                                              |  |                                |        |   |      |   |        |      |  |   | 197     |  
|Gain on sale of other real estate owned                                                    |  |                                | (48     | ) |      |   |        |      |  |   |        |  
|Stock-based compensation costs                                                             |  |                                | 395     |   |      |   |        |      |  |   |        |  
|Net amortization of premium (accretion of discount) on securities available-for-sale       |  |                                | (281    | ) |      |   | 20      |      |  |   | 250     |  
|Net amortization of premium (accretion of discount) on securities held-to-maturity         |  |                                | (96     | ) |      |   | 29      |      |  |   | 47      |  
|Net amortization of core deposit intangible                                                |  |                                | 223     |   |      |   | 223     |      |  |   | 223     |  
|Net amortization of premium on loans purchased                                             |  |                                | 96      |   |      |   | 159     |      |  |   | 190     |  
|Deferred income taxes                                                                      |  |                                | 2,435   |   |      |   | 2,047   |      |  |   | 1,613   |  
|Increase in accrued interest receivable and other assets                                   |  |                                | (2,084  | ) |      |   | (947    | )    |  |   | (185    | )
|Increase in accrued interest payable and other liabilities                                 |  |                                | 1,889   |   |      |   | 1,137   |      |  |   | 329     |  
|                                                                                           |  |                                |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                                  |  |                                | 9,169   |   |      |   | 7,854   |      |  |   | 5,384   |  
|                                                                                           |  |                                |        
|Cash flows from investing activities:                                                      |  |                                |         |   |      |   |         |      |  |   |         |  
|Purchase of securities available-for-sale                                                  |  |                                | (49,582 | ) |      |   | (47,884 | )    |  |   | (34,987 | )
|Proceeds from sales of securities available-for-sale                                       |  |                                |        |   |      |   |        |      |  |   | 11,759  |  
|Proceeds from repayments and maturities of securities available-for-sale                   |  |                                | 19,219  |   |      |   | 12,457  |      |  |   | 16,517  |  
|Proceeds from repayments and maturities of securities held-to-maturity                     |  |                                | 721     |   |      |   | 866     |      |  |   | 1,043   |  
|Loan originations and principal collections, net                                           |  |                                | (27,294 | ) |      |   | (25,668 | )    |  |   | (53,178 | )
|Proceeds from sale of other real estate owned                                              |  |                                | 1,104   |   |      |   |        |      |  |   |        |  
|Payment for termination of nonhedge swap                                                   |  |                                | (835    | ) |      |   |        |      |  |   |        |  
|Purchase of Federal Reserve stock and other stocks                                         |  |                                | (153    | ) |      |   | (733    | )    |  |   | (1,204  | )
|Expenditures on OREO improvements                                                          |  |                                |        |   |      |   |        |      |  |   | (132    | )
|Purchases of premises and equipment                                                        |  |                                | (347    | ) |      |   | (482    | )    |  |   | (769    | )
|                                                                                           |  |                                |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                      |  |                                | (57,167 | ) |      |   | (61,444 | )    |  |   | (60,951 | )
|                                                                                           |  |                                |        
|Cash flows from financing activities:                                                      |  |                                |         |   |      |   |         |      |  |   |         |  
|Net increase in demand deposits, money market and savings accounts                         |  |                                | 26,800  |   |      |   | 6,041   |      |  |   | 6,749   |  
|Net increase (decrease) in time certificates of deposit                                    |  |                                | (9,394  | ) |      |   | 43,625  |      |  |   | 8,076   |  
|Net increase in securities sold under agreements to repurchase and federal funds purchased |  |                                | 45,000  |   |      |   |        |      |  |   | (399    | )
|Net increase (decrease) in other borrowings                                                |  |                                | (18,037 | ) |      |   | 2,437   |      |  |   | 18,400  |  
|Net proceeds from exercise of stock options                                                |  |                                | 876     |   |      |   | 764     |      |  |   | 372     |  
|Redemption of fractional shares in 5-for 4 stock split                                     |  |                                | (1      | ) |      |   |        |      |  |   |        |  
|                                                                                           |  |                                |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                                  |  |                                | 45,244  |   |      |   | 52,867  |      |  |   | 33,198  |  
|                                                                                           |  |                                |         |   |      |   |         |      |  |   |         |  
|Net decrease in cash and cash equivalents                                                  |  |                                | (2,754  | ) |      |   | (723    | )    |  |   | (22,369 | )
|Cash and cash equivalents, January 1                                                       |  |                                | 16,192  |   |      |   | 16,915  |      |  |   | 39,284  |  
|                                                                                           |  |                                |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents, December 31                                                     |  | $                              | 13,438  |   |      | $ | 16,192  |      |  | $ | 16,915  |  
|                                                                                           |  |                                |         |   |      |   |         |      |  |   |         |  
|Supplemental disclosures of cash flow information:                                         |  |                                |         |   |      |   |         |      |  |   |         |  
|Cash paid for interest                                                                     |  | $                              | 11,072  |   |      | $ | 4,778   |      |  | $ | 3,229   |  
|Cash paid for income taxes                                                                 |  |                                | 1,810   |   |      |   | 1,225   |      |  |   | 51      |  
|Unrealized gain (loss) on securities available-for-sale, net of tax effect                 |  |                                | 16      |   |      |   | (392    | )    |  |   | (40     | )
|Unrealized gain (loss) on cash flow hedges, net of tax effect                              |  |                                | 22      |   |      |   | (762    | )    |  |   | 314     |  
|Transfers to OREO and other property owned from loans receivable, net                      |  |                                | 303     |   |      |   |        |      |  |   | 1,056   |  

See accompanying notes to consolidated financial statements.



56



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1  Summary of Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of National Mercantile Bancorp
(National Mercantile when referring only to the parent company or the Company when such reference includes National Mercantile Bancorp and its subsidiaries, collectively) and of its wholly owned subsidiaries, Mercantile
National Bank (Mercantile) and South Bay Bank, N.A. (South Bay) (and collectively, the Banks). All intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to
conform to the current year presentation.

National Mercantile Capital Trust I (the Trust), a Delaware business trust, was
formed by the Company in 2001 for the sole purpose of issuing certain securities representing undivided beneficial interests in the assets of the Trust and investing the proceeds thereof in the Companys junior subordinated deferrable interest
debentures. The Trusts 464 common securities (liquidation amount of $1,000 per common security) are wholly owned by National Mercantile, however, in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities, the Trust is not consolidated in the Companys financial statements and it is treated as an equity investment.

The
accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States and to prevailing practices within the banking industry. The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, and contingencies at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. The estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan and lease losses, the assessment of goodwill and core
deposit intangible impairment, and the valuation of deferred tax asset. Actual amounts or results could differ from those estimates.

The
Company, through the Banks, engages in commercial banking in the Los Angeles area providing commercial and residential real estate financing, real estate construction financing and commercial lending serving niche markets represented by professional
service providers, entertainment, healthcare and community-based nonprofit borrowers, and associated individuals with commercial banking and personal banking needs.

On March 12, 2007, the Company completed the merger and capital stock exchange with and into First California Financial Group, Inc. (First California), the Companys wholly owned subsidiary. As a
result of the merger, the separate corporate existence of the Company ceased, and First California succeeded, and assumed all the rights and obligations of the Company. See Note 15  Subsequent Events.

Cash and Cash Equivalents

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

Securities

Securities available-for-sale are carried at fair value. Unrealized gains or losses on
available-for-sale securities are excluded from earnings and reported as accumulated other comprehensive income, net of deferred income taxes, in a separate component of shareholders equity until realized. Realized gains or losses on sales of
available-for-sale securities are recorded using the specific identification method.

Securities held-to-maturity are debt instruments in
which management has the positive intent and ability to hold to maturity and are carried at amortized cost.



57



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Premiums or discounts on available-for-sale and held-to-maturity securities are amortized or accreted
into income using the effective interest method.

Federal Reserve Bank and other stock are equity investments without an active secondary
market; however, the issuers typically redeem the membership stock at the stated value. Accordingly, they are carried at historical cost.

We are obligated to assess, at each reporting date, whether there is an other-than-temporary impairment to our investment securities. Such impairment must be recognized in current earnings rather than in other comprehensive
income. We review all individual securities that are in an unrealized loss position at each reporting date for other-than-temporary impairment. Specific investment level factors we examine to assess impairment include the severity and duration of
the loss, an analysis of the issuers of the securities and if there has been any cause for default on the securities and any change in the rating of the securities by the various rating agencies. Additionally, we review the financial resources and
the overall ability that the Company has and the intent that management has to hold the securities until their fair values recover.

Loans

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

Interest income is accrued as earned. Net deferred fees are accreted
into interest income using the effective yield method.

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

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

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

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

Allowance for Loan and Lease Losses

The provisions for credit losses charged to operations reflect managements
judgment of the adequacy of the allowance for loan and lease losses and are determined through periodic analysis of the loan portfolio, problem



58



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



loans and consideration of such other factors as the Companys loan loss experience, trends in problem loans, concentrations of credit risk, and
economic conditions (particularly Southern California), as well as the results of the Companys ongoing examination process and its regulatory examinations.

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

Premises and Equipment, Net

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

Other Real Estate and Property Owned

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

Goodwill and Other Intangible Assets

The Company has goodwill, which represents the excess of purchase price over the fair value of net assets acquired, as a result of a past acquisition. In
accordance with SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized and is reviewed for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair
value of a reporting unit below its carrying value. Core deposit intangibles, which represent the intangible value of depositor relationships resulting from deposit liabilities assumed in acquisitions, are amortized using the straight-line method
over the projected useful lives of the deposits. Core deposit intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment on goodwill and core deposit
intangibles is permanently recognized by writing down the asset to the extent that the carrying value exceeds the estimated fair value.



59



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Federal Funds Purchased and Securities Sold Under Repurchase Agreements (Repurchase
Agreements)

The Company borrows federal funds purchased as part of its short-term financing strategy. Federal funds purchased are
generally overnight borrowings and mature within one to three business days from the transaction date.

The Company sells securities under
repurchase agreements. These transactions are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold. The Company may have to provide additional collateral to the counterparty, as
necessary.

Junior Subordinated Debentures

The Company established a statutory business trust that is a wholly-owned subsidiary of the Company. In a private placement transaction, the Trust issued fixed rate capital securities representing undivided preferred
beneficial interests in the assets of the Trust. The Company is the owner of all the beneficial interests represented by the common securities of the Trusts. The purpose of issuing the capital securities was to provide the Company with a
cost-effective means of obtaining Tier I capital under regulatory capital rules.

Income Taxes

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

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

Stock-Based Compensation

The Company issues stock-based compensation to certain employees, officers, and directors. The Company adopted SFAS No. 123(R), Share-Based
Payment, on January 1, 2006 using the modified prospective method. SFAS No. 123(R) requires companies to account for stock options using the fair value method, which generally results in compensation expense recognition. Prior to
December 31, 2005, the Company accounted for its fixed stock options using the intrinsic-value method, as prescribed in APB Opinion No. 25. Accordingly, no stock option expense was recorded in periods prior to December 31, 2005.

The modified prospective method requires application of the new Statement to new awards and to awards modified, repurchased or cancelled
after the required effective date. Accordingly, prior period amounts have not been restated. Additionally, compensation cost for the portion of awards for which the requisite service had not been rendered that were outstanding as of January 1,
2006 is recognized as the requisite services are rendered on or after January 1, 2006.

Comprehensive Income

Comprehensive income is defined as the change in equity during a period from transactions and other events and circumstances from nonowner sources. The
accumulated balance of other comprehensive income is displayed as a component of equity in the consolidated balance sheet.



60



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Each classification of other comprehensive income together with total comprehensive income is
reported in the consolidated statements of changes in shareholders equity. The following table presents the accumulated balances of each classification of other comprehensive income, and the related income tax expense or benefit, as of the
dates indicated:



|                                                                                          |  |                                                |      |   |                                                       |   |        |                                             |  |   |        |  
|----------------------------------------------------------------------------------------- |  | ---------------------------------------------- | ---- | - | ----------------------------------------------------- | - | ------ | ------------------------------------------- |  | - | ------ | -
|                                                                                          |  | Net gain (loss) onsecuritiesavailable-for-sale |      |   | Net gain (loss) onderivatives used incash flow hedges |   |        | Accumulated othercomprehensiveincome (loss) | 
|                                                                                          |  | (Dollars in thousands)                         |     
|Balance at December 31, 2003                                                              |  | $                                              | 71   |   |                                                       | $ |       |                                             |  | $ | 71     |  
|Gross unrealized holding loss during the period                                           |  |                                                | (260 | ) |                                                       |   | 536    |                                             |  |   | 276    |  
|Less: Income tax benefit (expense)                                                        |  |                                                | 108  |   |                                                       |   | (222   | )                                           |  |   | (114   | )
|Less: Reclassification of losses included in net income, net of income tax benefit of $29 |  |                                                | 41   |   |                                                       |   |       |                                             |  |   | 41     |  
|                                                                                          |  |                                                |      |   |                                                       |   |        |                                             |  |   |        |  
|Other comprehensive income (loss)                                                         |  |                                                | (111 | ) |                                                       |   | 314    |                                             |  |   | 203    |  
|                                                                                          |  |                                                |      |   |                                                       |   |        |                                             |  |   |        |  
|Balance at December 31, 2004                                                              |  |                                                | (40  | ) |                                                       |   | 314    |                                             |  |   | 274    |  
|Gross unrealized holding loss during the period                                           |  |                                                | (604 | ) |                                                       |   | (1,838 | )                                           |  |   | (2,442 | )
|Less: Income tax benefit                                                                  |  |                                                | 252  |   |                                                       |   | 762    |                                             |  |   | 1,014  |  
|                                                                                          |  |                                                |      |   |                                                       |   |        |                                             |  |   |        |  
|Other comprehensive loss                                                                  |  |                                                | (352 | ) |                                                       |   | (1,076 | )                                           |  |   | (1,428 | )
|                                                                                          |  |                                                |      |   |                                                       |   |        |                                             |  |   |        |  
|Balance at December 31, 2005                                                              |  |                                                | (392 | ) |                                                       |   | (762   | )                                           |  |   | (1,154 | )
|Gross unrealized holding loss during the period                                           |  |                                                | 27   |   |                                                       |   | (90    | )                                           |  |   | (63    | )
|Less: Income tax benefit                                                                  |  |                                                | (11  | ) |                                                       |   | 37     |                                             |  |   | 26     |  
|Less: Reclassification of losses included in net income, net of income tax benefit of $22 |  |                                                |      |   |                                                       |   | 31     |                                             |  |   | 31     |  
|                                                                                          |  |                                                |      |   |                                                       |   |        |                                             |  |   |        |  
|Other comprehensive income (loss)                                                         |  |                                                | 16   |   |                                                       |   | (22    | )                                           |  |   | (6     | )
|                                                                                          |  |                                                |      |   |                                                       |   |        |                                             |  |   |        |  
|Balance at December 31, 2006                                                              |  | $                                              | (376 | ) |                                                       | $ | (784   | )                                           |  | $ | (1,160 | )
|                                                                                          |  |                                                |      |   |                                                       |   |        |                                             |  |   |        |  

Stock Split

All share and per share information in the accompanying consolidated financial statements have been retroactively adjusted to reflect the five-for-four stock split in the form of a 25% stock dividend paid
April 16, 2006. All shareholders of record on March 31, 2006 received one additional share of common stock for each four shares held by them at that date.



61



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Earnings per Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock, or resulted from issuance of common stock that then shared in the earnings of the Company. The following table is a
reconciliation of net income and shares used in the computation of basic and diluted earnings per share for the periods indicated:



|                                      |  |                                               |       |                        |           |                 |   |     
|------------------------------------- |  | --------------------------------------------- | ----- | ---------------------- | --------- | --------------- | - | ----
|                                      |  | Net Income                                    |       | Weighted AverageShares |           | Per ShareAmount
|                                      |  | (Dollars in thousands, except per share data)
|For the year ended December 31, 2006: |  |                                               |       |                        |           |                 |   |     
|Basic EPS                             |  | $                                             | 5,642 |                        | 5,551,570 |                 | $ | 1.02
|                                      |  |                                               |       |                        |           |                 |   |     
|Effect of dilutive securities:        |  |                                               |       |                        |           |                 |   |     
|Options                               |  |                                               |       |                        | 218,201   |                 |   |     
|Convertible preferred stock           |  |                                               |       |                        | 237,415   |                 |   |     
|                                      |  |                                               |       |                        |           |                 |   |     
|Diluted earnings per share            |  | $                                             | 5,642 |                        | 6,007,186 |                 | $ | 0.94
|                                      |  |                                               |       |                        |           |                 |   |     
|For the year ended December 31, 2005: |  |                                               |       |                        |           |                 |   |     
|Basic EPS                             |  | $                                             | 4,450 |                        | 4,630,186 |                 | $ | 0.96
|                                      |  |                                               |       |                        |           |                 |   |     
|Effect of dilutive securities:        |  |                                               |       |                        |           |                 |   |     
|Options                               |  |                                               |       |                        | 261,544   |                 |   |     
|Convertible preferred stock           |  |                                               |       |                        | 1,006,028 |                 |   |     
|                                      |  |                                               |       |                        |           |                 |   |     
|Diluted earnings per share            |  | $                                             | 4,450 |                        | 5,897,758 |                 | $ | 0.75
|                                      |  |                                               |       |                        |           |                 |   |     
|For the year ended December 31, 2004: |  |                                               |       |                        |           |                 |   |     
|Basic EPS                             |  | $                                             | 2,320 |                        | 3,619,136 |                 | $ | 0.64
|                                      |  |                                               |       |                        |           |                 |   |     
|Effect of dilutive securities:        |  |                                               |       |                        |           |                 |   |     
|Options                               |  |                                               |       |                        | 191,826   |                 |   |     
|Convertible preferred stock           |  |                                               |       |                        | 1,883,565 |                 |   |     
|                                      |  |                                               |       |                        |           |                 |   |     
|Diluted earnings per share            |  | $                                             | 2,320 |                        | 5,694,528 |                 | $ | 0.41
|                                      |  |                                               |       |                        |           |                 |   |     

Fair Value of Financial Instruments

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

Recent Accounting Pronouncements

In November 2005, the FASB issued Staff Position (FSP) Nos. FAS 115-1 and
124-1 to address the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. This FSP nullified certain requirements of Emerging Issues Task Force 03-1
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF 03-1), and references existing other than temporary guidance. Furthermore, this FSP creates a three step process in determining when
an investment is considered impaired, whether that impairment is other than



62



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



temporary, and the measurement of an impairment loss. The FSP is effective for reporting periods beginning after December 15, 2005. The adoption of this
FSP did not have a material impact on the Companys financial condition or results of operations.

During December 2005, the FASB
issued FSP Statement of Position (SOP) 94-6-1, Terms of Loan Products That May Give Rise to a Concentration of Credit Risk, which addresses the circumstances under which the terms of loan products give rise to such risk and
the disclosures or other accounting considerations that apply for entities that originate, hold, guarantee, service, or invest in loan products with terms that may give rise to a concentration of credit risk. The guidance under this FSP is effective
for interim and annual periods ending after December 19, 2005 and for loan products that are determined to represent a concentration of credit risk, disclosure requirements of SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, should be provided for all periods presented. The adoption of this FSP did not have a significant impact on the Companys consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets, which provides the following: 1) revised
guidance on when a servicing asset and servicing liability should be recognized; 2) requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; 3) permits an entity to elect
to measure servicing assets and servicing liabilities at fair value each reporting date and report changes in fair value in earnings in the period in which the changes occur; 4) upon initial adoption, permits a onetime reclassification of
available-for-sale securities to trading securities for securities which are identified as offsetting the entitys exposure to changes in the fair value of servicing assets or liabilities that a servicer elects to subsequently measure at fair
value; and 5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional footnote disclosures. SFAS No. 156 is effective as of the
beginning of an entitys first fiscal year that begins after September 15, 2006 with the effects of initial adoption being reported as a cumulative-effect adjustment to retained earnings. It is not anticipated that adoption will have a
material impact on the Companys consolidated financial statements.

In June 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes (FIN 48) which supplements SFAS No. 109, Accounting for Income Taxes, by defining the confidence level that a tax position must meet in order to be recognized in the
financial statements. The Interpretation requires that the tax effects of a position be recognized only if it is more-likely-than-not to be sustained based solely on its technical merits as of the reporting date. The more-likely-than-not
threshold represents a positive assertion by management that a company is entitled to economic benefits of a tax position. If a tax position is not considered more-likely-than-not to be sustained based solely on its technical merits, no benefits of
the position are to be recognized. Moreover, the more-likely-than-not threshold must continue to be met in each reporting period to support continued recognition of a benefit. At adoption, companies must adjust their financial statements to reflect
only those tax positions that are more-likely-than-not to be sustained as of the adoption date. Any necessary adjustment would be recorded directly to retained earnings in the period of adoption and reported as a change in accounting principle.
FIN 48 is effective for fiscal years beginning after December 15, 2006. It is not anticipated that adoption will have a material impact on the Companys consolidated financial statement.

In September 2006, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 108, Quantifying
Financial Misstatements, which expresses the Staffs views regarding the process of quantifying financial statement misstatements. Registrants are required to quantify the impact of correcting all misstatements, including both the carryover
and reversing effects of prior year misstatements, on the current year financial statements. The techniques most commonly used in practice to accumulate and quantify misstatements are generally referred to as the rollover (current year
income statement perspective) and iron curtain (year-end balance perspective) approaches. The financial statements would require adjustment when either



63



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



approach results in quantifying a misstatement that is material, after considering all relevant quantitative and qualitative factors. The adoption of this
guidance did not have a material effect on the Companys financial condition and results of operations.

In September 2006, the
FASB issued SFAS No. 157, Fair Value Measurements, which provides a single definition of fair value, establishes a framework for measuring fair value in generally accepted accounting principles, expands required disclosures about fair
value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 12, 2007, and interim periods within those years. The provisions of SFAS No. 157 should be applied
on a prospective basis. Management is assessing the potential impact of this guidance on the Companys financial condition and results of operations.

In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, which requires employers to fully recognize obligations
associated with single-employer defined benefit pension, retiree healthcare and other postretirement plans in their financial statements. The provisions of SFAS No, 158 require employers to (a) recognize in its statement of financial position
an asset for a plans overfunded status or a liability for a plans underfunded status; (b) measure a plans assets and its obligations that determine its funded status as of the end of the employers fiscal year (with
limited exceptions); and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. These changes will be reported in comprehensive income in the statement of changes in
stockholders equity. SFAS No. 158 applies to plan sponsors that are public and private companies and nongovernmental not-for-profit organizations. The requirement to recognize the funded status of a benefit plan and the disclosure
requirements are effective as of the end of the fiscal year ending after December 15, 2006, for entities with publicly traded equity securities, and at the end of the fiscal year ending after June 15, 2007, for all other entities. The
requirement to measure plan assets and benefit obligations as of the date of the employers fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. It is not anticipated that adoption
will have a material impact on the Companys consolidated financial statements.

In February 2007, the FASB issued SFAS
No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an amendment of FASB Statement No. 115, which establishes presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types of assets and liabilities. This standard requires companies to provide additional information that will help investors and other users of financial statements to more
easily understand the effect of the companys choice to use fair value on its earnings. It also requires entities to display the fair value of those assets and liabilities for which the company has chosen to use fair value on the face of the
balance sheet. This new guidance does not eliminate disclosure requirements included in other accounting standards, including fair value measurement disclosures required by SFAS No. 157 and SFAS No. 107, Disclosures about Fair Value
of Financial Instruments. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120
days of that fiscal year and also elects to apply the provisions of SFAS No. 157. Management does not expect this guidance to have a material effect on the Companys financial condition and results of operations.

Note 2  Goodwill and Other Intangible Assets

As of December 31, 2006, the Company had goodwill of $3.2 million and core deposit intangibles with a carrying amount of $2.3 million less accumulated amortization of $1.1 million from the acquisition of South Bay in 2001. In
accordance with SFAS No. 142 goodwill is not amortized. SFAS No. 142 also requires an analysis of impairment of goodwill annually or more frequently upon the occurrence of certain events. The Company has no



64



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



other indefinite-lived intangible assets. The core deposit intangibles were estimated to have an original life of 10 years and 4 months. Amortization of the
core deposit intangibles for 2006, 2005, and 2004 was, and for each of the next four years is estimated to be, $223,000. During 2006, the required impairment tests of goodwill and core deposit intangibles were conducted, and based upon these
evaluations, the Companys goodwill and core deposit intangibles were not impaired at December 31, 2006.

Note 3  Investment Securities

The following is a summary of amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair values of the
Companys investment securities available-for-sale and held-to-maturity at the date indicated:



|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|-------------------------------------------------------------- |  | ---------------------- | ------- | -------------------- | - | ------------------- |  | ------------------- | --- |  | - | -------
|                                                               |  | December 31, 2006     
|                                                               |  | Totalamortizedcost     |         | Grossunrealizedgains |   | Grossunrealizedloss |  | Estimatedfair value
|                                                               |  | (Dollars in thousands)
|Available-For-Sale:                                            |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|U.S. Treasury securities                                       |  | $                      | 599     |                      | $ |                    |  | $                   | 4   |  | $ | 595    
|GNMA-issued/guaranteed mortgage pass-through certificates      |  |                        | 74      |                      |   |                    |  |                     |    |  |   | 74     
|Other U.S. government and federal agency securities            |  |                        | 8,985   |                      |   | 2                   |  |                     | 65  |  |   | 8,922  
|FHLMC/FNMA-issued mortgage pass-through certificates           |  |                        | 57,993  |                      |   | 108                 |  |                     | 607 |  |   | 57,494 
|CMOs and REMICs issued by U.S. government-sponsored agencies |  |                        | 6,417   |                      |   | 41                  |  |                     | 8   |  |   | 6,450  
|Privately issued corporate bonds, CMO and REMIC securities     |  |                        | 28,991  |                      |   | 153                 |  |                     | 252 |  |   | 28,892 
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               |  | $                      | 103,059 |                      | $ | 304                 |  | $                   | 936 |  | $ | 102,427
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|FRB and other stocks                                           |  | $                      | 3,962   |                      | $ |                    |  | $                   |    |  | $ | 3,962  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               |  |                        |         |                     
|Held-to-Maturity:                                              |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|FHLMC/FNMA-issued mortgage pass-through certificates           |  | $                      | 1,987   |                      | $ |                    |  | $                   | 40  |  | $ | 1,947  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        
|                                                               |  | $                      | 1,987   |                      | $ |                    |  | $                   | 40  |  | $ | 1,947  
|                                                               |  |                        |         |                      |   |                     |  |                     |     |  |   |        



65



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|-------------------------------------------------------------- |  | ---------------------- | ------ | -------------------- | - | ------------------- |  | ------------------- | --- |  | - | ------
|                                                               |  | December 31, 2005     
|                                                               |  | Totalamortizedcost     |        | Grossunrealizedgains |   | Grossunrealizedloss |  | Estimatedfair value
|                                                               |  | (Dollars in thousands)
|Available-For-Sale:                                            |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|U.S. Treasury securities                                       |  | $                      | 599    |                      | $ |                    |  | $                   |    |  | $ | 599   
|GNMA-issued/guaranteed mortgage pass-through certificates      |  |                        | 98     |                      |   | 2                   |  |                     |    |  |   | 100   
|Other U.S. government and federal agency securities            |  |                        | 17,931 |                      |   |                    |  |                     | 152 |  |   | 17,779
|FHLMC/FNMA-issued mortgage pass-through certificates           |  |                        | 33,982 |                      |   | 47                  |  |                     | 366 |  |   | 33,663
|CMOs and REMICs issued by U.S. government-sponsored agencies |  |                        | 2,528  |                      |   | 13                  |  |                     |    |  |   | 2,541 
|Mortgage mutual funds                                          |  |                        |       |                      |   |                    |  |                     |    |  |   |      
|Privately issued corporate bonds, CMO and REMIC securities     |  |                        | 17,290 |                      |   | 3                   |  |                     | 217 |  |   | 17,076
|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|                                                               |  | $                      | 72,428 |                      | $ | 65                  |  | $                   | 735 |  | $ | 71,758
|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|FRB and other stocks                                           |  | $                      | 3,809  |                      | $ |                    |  | $                   |    |  | $ | 3,809 
|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|                                                               |  |                        |        |                     
|Held-to-Maturity:                                              |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|FHLMC/FNMA-issued mortgage pass-through certificates           |  | $                      | 2,612  |                      | $ |                    |  | $                   | 40  |  | $ | 2,572 
|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       
|                                                               |  | $                      | 2,612  |                      | $ |                    |  | $                   | 40  |  | $ | 2,572 
|                                                               |  |                        |        |                      |   |                     |  |                     |     |  |   |       

The Company had no gross proceeds and gross realized gains or losses related to the sale of
investment securities for the years ended December 31, 2006 and 2005. The Company had gross proceeds and gross realized losses related to the sale of investment securities of $11.8 million and $197,000, respectively, for the year ended
December 31, 2004.

The estimated fair value and amortized cost of securities available-for-sale and held-to-maturity at
December 31, 2006 by contractual maturity, are shown below:



|                                                               |  |                        |       |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |                  |        |   |       |   |        |       |      |       |  |   |         |  |      |  
|-------------------------------------------------------------- |  | ---------------------- | ----- | ----- | ------------------------------- | - | ------ | ------------------------------- | ----- |  | --------------- | ------ |  | ----- | ----- | ---------------- | ------ | - | ----- | - | ------ | ----- | ---- | ----- |  | - | ------- |  | ---- | -
|                                                               |  | Within one year        |       |       | After one but within five years |   |        | After five but within ten years |       |  | After ten years |        |  |       |       | Weighted Average |       
|                                                               |  | Amount                 |       | Yield |                                 |   | Amount |                                 | Yield |  |                 | Amount |  | Yield |       |                  | Amount |   | Yield |   |        | Total |      | Yield | 
|                                                               |  | (Dollars in thousands) |      
|Securities available-for-sale:                                 |  |                        |       |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |                  |        |   |       |   |        |       |      |       |  |   |         |  |      |  
|U.S Treasury securities                                        |  | $                      | 595   |       | 4.32                            | % |        | $                               |      |  |                |        |  | $     |      |                  |       |   |       | $ |       |       |     |       |  | $ | 595     |  | 4.32 | %
|GNMA-issued/guaranteed mortgage pass-through certificates      |  |                        |      |       |                                |   |        |                                 |      |  |                |        |  |       |      |                  |       |   |       |   | 74     |       | 5.70 | %     |  |   | 74      |  | 5.70 | %
|Other U.S. government and federal agencies                     |  |                        | 3,499 |       | 4.54                            | % |        |                                 | 5,423 |  | 4.44            | %      |  |       |      |                  |       |   |       |   |       |       |     |       |  |   | 8,922   |  | 4.48 | %
|FHLMC/FNMA-issued mortgage pass-through certificates           |  |                        | 78    |       | 5.36                            | % |        |                                 | 59    |  | 5.97            | %      |  |       | 5,503 |                  | 5.11   | % |       |   | 51,854 |       | 5.38 | %     |  |   | 57,494  |  | 5.35 | %
|CMOs and REMICs issued by U.S. government-sponsored agencies |  |                        |      |       |                                |   |        |                                 | 1     |  | 6.56            | %      |  |       |      |                  |       |   |       |   | 6,449  |       | 5.57 | %     |  |   | 6,450   |  | 5.57 | %
|Mortgage mutual funds                                          |  |                        |      |       |                                |   |        |                                 |      |  |                |        |  |       |      |                  |       |   |       |   |       |       |     |       |  |   |        |  |     |  
|Privately issued corporate bonds, CMOs and REMICs securities |  |                        |      |       |                                |   |        |                                 |      |  |                |        |  |       |      |                  |       |   |       |   | 28,892 |       | 5.55 | %     |  |   | 28,892  |  | 5.55 | %
|                                                               |  |                        |       |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |                  |        |   |       |   |        |       |      |       |  |   |         |  |      |  
|                                                               |  | $                      | 4,172 |       | 4.52                            | % |        | $                               | 5,483 |  | 4.46            | %      |  | $     | 5,503 |                  |       |   |       | $ | 87,269 |       | 5.45 | %     |  | $ | 102,427 |  | 5.34 | %
|                                                               |  |                        |       |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |                  |        |   |       |   |        |       |      |       |  |   |         |  |      |  
|Amortized cost                                                 |  | $                      | 4,189 |       |                                 |   |        | $                               | 5,534 |  |                 |        |  | $     | 5,542 |                  |        |   |       | $ | 87,794 |       |      |       |  | $ | 103,059 |  |      |  
|                                                               |  |                        |       |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |                  |        |   |       |   |        |       |      |       |  |   |         |  |      |  
|Securities held-to-maturity:                                   |  |                        |       |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |                  |        |   |       |   |        |       |      |       |  |   |         |  |      |  
|FHLMC/FNMA-issued mortgage pass-through certificates           |  | $                      |      |       |                                |   |        | $                               |      |  |                |        |  | $     | 1,987 |                  | 4.37   | % |       | $ |       |       |     |       |  | $ | 1,987   |  | 4.37 | %
|                                                               |  |                        |       |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |                  |        |   |       |   |        |       |      |       |  |   |         |  |      |  
|                                                               |  | $                      |      |       |                                |   |        | $                               |      |  |                |        |  | $     | 1,987 |                  | 4.37   | % |       | $ |       |       |     |       |  | $ | 1,987   |  | 4.37 | %
|                                                               |  |                        |       |       |                                 |   |        |                                 |       |  |                 |        |  |       |       |                  |        |   |       |   |        |       |      |       |  |   |         |  |      |  



66



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



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

At December 31, 2006, investment securities were pledged
as follows: (i) $46.9 million to secure Federal Home Loan Bank (FHLB) borrowings and available credit, (ii) $52.1 million to secure Repurchase Agreements, (iii) $611,000 to secure interest rate swap agreements, and (iv) $1.1
million to secure government tax deposits, bankruptcy deposits, or for other purposes required or permitted by law.

Impaired Securities

The Company assessed whether there is an other-than-temporary impairment to any investment securities. Any security for
which the current fair value is less than the carrying value is considered impaired. On a quarterly basis, impaired securities are evaluated to determine if the impairments are other-than-temporary. For those securities that are identified as having
an other-than-temporary impairment, the loss is reported as a reduction in current period income. For all other temporary impairments, the current period unrealized losses are recorded to other comprehensive income.

As of December 31, 2006, temporarily impaired securities had a fair value of $67.0 million and unrealized losses of $976,000. Securities that were
not impaired had a fair value of $37.4 million and unrealized gains of $304,000 at December 31, 2006. The following table shows fair value and unrealized loss positions of temporarily impaired securities, categorized by whether the securities
have been impaired for less than twelve months or if they have been impaired for twelve months or more as of December 31, 2006.



|                                                               |  |                        |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|-------------------------------------------------------------- |  | ---------------------- | ------ | ------------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                                               |  | Less than 12 months    |        | 12 months or longer |   | Total    
|                                                               |  | Fairvalue              |        | Unrealizedlosses    |   | Fairvalue |  | Unrealizedlosses |        | Fairvalue |   | Unrealizedlosses
|                                                               |  | (Dollars in thousands)
|U.S. Treasury securities                                       |  | $                      |       |                     | $ |          |  | $                | 595    |           | $ | 4                |  | $ | 595    |  | $ | 4  
|Other U.S. government and federal agency securities            |  |                        | 694    |                     |   | 15        |  |                  | 5,924  |           |   | 50               |  |   | 6,618  |  |   | 65 
|FHLMC/FNMA-issued mortgage pass-through certificates           |  |                        | 13,177 |                     |   | 42        |  |                  | 30,321 |           |   | 605              |  |   | 43,498 |  |   | 647
|CMOs and REMICs issued by U.S. government-sponsored agencies |  |                        |       |                     |   |          |  |                  | 2,506  |           |   | 8                |  |   | 2,506  |  |   | 8  
|Privately issued corporate bonds, CMOs and REMICs securities |  |                        | 1,568  |                     |   | 3         |  |                  | 12,227 |           |   | 249              |  |   | 13,795 |  |   | 252
|                                                               |  |                        |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    
|Total temporarily impaired securities                          |  | $                      | 15,439 |                     | $ | 60        |  | $                | 51,573 |           | $ | 916              |  | $ | 67,012 |  | $ | 976
|                                                               |  |                        |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |    

The securities were impaired due to declines in fair values resulting from increases in market
interest rates from the time of purchase. The privately issued securities were collateralized by mortgages. None of these securities has exhibited a notable decline in value as a result of changes in credit risk. These debt securities are relatively
short in duration, accordingly, any unrealized loss in an individual issue will diminish as the security approaches its maturity, irrespective of market rates of interest.

Furthermore, the company may borrow funds utilizing these securities as collateral at market rates of interest in amounts representing nearly all of the
market value. For that reason the securities achieve their primary purpose of providing liquidity without being sold. As such, the company has the ability to hold the securities to maturity and does not consider the impairment of these securities to
be other-than-temporary.



67



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Note 4  Loans Receivable and Allowance for Loan and Lease Losses

The following is a summary of the major categories of loans outstanding at the dates shown:



|                                                                     |  |                        |         |   |      |   |         |  
|-------------------------------------------------------------------- |  | ---------------------- | ------- | - | ---- | - | ------- | -
|                                                                     |  | December 31,           |        
|                                                                     |  | 2006                   |         |   | 2005 |  
|                                                                     |  | (Dollars in thousands) |        
|Commercial loans  secured and unsecured                             |  | $                      | 105,862 |   |      | $ | 89,474  |  
|Real estate loans:                                                   |  |                        |         |   |      |   |         |  
|Secured by commercial real properties                                |  |                        | 141,741 |   |      |   | 121,641 |  
|Secured by one to four family residential properties                 |  |                        | 8,790   |   |      |   | 10,498  |  
|Secured by multifamily residential properties                        |  |                        | 17,602  |   |      |   | 18,663  |  
|                                                                     |  |                        |         |   |      |   |         |  
|Total real estate loans                                              |  |                        | 168,133 |   |      |   | 150,802 |  
|Construction and land development                                    |  |                        | 83,188  |   |      |   | 92,077  |  
|Consumer installment, home equity and unsecured loans to individuals |  |                        | 9,640   |   |      |   | 7,239   |  
|                                                                     |  |                        |         |   |      |   |         |  
|Total loans outstanding                                              |  |                        | 366,823 |   |      |   | 339,592 |  
|Deferred net loan origination fees and purchased loan discount       |  |                        | (1,105  | ) |      |   | (1,034  | )
|                                                                     |  |                        |         |   |      |   |         |  
|Loans receivable, before allowance for loan and lease losses         |  | $                      | 365,718 |   |      | $ | 338,558 |  
|                                                                     |  |                        |         |   |      |   |         |  

At December 31, 2006 and 2005, the Company had no impaired loans, and therefore, no specific
allowances established for impaired loans. No interest income was recognized on impaired loans during the years ended December 31, 2006 and 2005.

In the normal course of business, the Banks may make loans to officers and directors as well as loans to companies and individuals affiliated with or guaranteed by officers and directors of the Company and the Banks.
Such loans are made in the ordinary course of business at rates and terms no more favorable than those offered to other customers with a similar credit standing. The outstanding principal balance of these loans was $5.5 million at December 31,
2006 and $5.8 million at December 31, 2005. During 2006 there were $3.3 million of advances and $3.6 million of repayments. Interest income recognized on these loans amounted to $397,000 and $199,000 during 2006 and 2005, respectively. At
December 31, 2006, none of these loans were on nonaccrual status. Based on analysis of information presently known to management about the loans to officers and directors and their affiliates, management believes all have the ability to comply
with the present loan repayment terms.

Loans receivable totaling $21.5 million were pledged to the FHLB to collateralize borrowing lines.

The following is a summary of activity in the allowance for loan and lease losses for the periods shown:



|                                                                         |  |                        |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------------------ |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                                         |  | 2006                   |       |   | 2005 |   |       | 2004 | 
|                                                                         |  | (Dollars in thousands) |      
|Balance, beginning of year                                               |  | $                      | 4,468 |   |      | $ | 3,928 |      |  | $ | 3,635 |  
|Provision for credit losses                                              |  |                        | 248   |   |      |   | (84   | )    |  |   | 220   |  
|Reserve for unfunded commitments (transferred to) from other liabilities |  |                        | 62    |   |      |   | (582  | )    |  |   | (417  | )
|Loan charge offs                                                         |  |                        | (55   | ) |      |   | (10   | )    |  |   | (57   | )
|Recoveries of previous loan charge offs                                  |  |                        | 17    |   |      |   | 1,216 |      |  |   | 130   |  
|                                                                         |  |                        |       |   |      |   |       |      |  |   |       |  
|Balance, end of year                                                     |  | $                      | 4,740 |   |      | $ | 4,468 |      |  | $ | 3,511 |  
|                                                                         |  |                        |       |   |      |   |       |      |  |   |       |  

The additional provision for credit losses was recorded based upon the analysis of the adequacy of
allowance for loan and lease losses. The allowance for loan and lease losses for classified loans graded as



68



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



criticized by the Companys internal grading system that are collateral-dependent is based upon the net realizable value of the collateral
that is periodically evaluated. The allowance for unsecured classified loans is based upon the severity of the credit weakness.

The
following is a summary of nonperforming loans at December 31, 2006 and 2005:



|                                                                                                                          |  |                        |   |      |   |    
|------------------------------------------------------------------------------------------------------------------------- |  | ---------------------- | - | ---- | - | ---
|                                                                                                                          |  | 2006                   |   | 2005
|                                                                                                                          |  | (Dollars in thousands)
|Nonaccrual loans                                                                                                          |  | $                      |  |      | $ | 319
|Troubled debt restructurings                                                                                              |  |                        |  |      |   |   
|Loans contractually past due ninety or more days with respect to either principal or interest and still accruing interest |  |                        |  |      |   |   
|                                                                                                                          |  |                        |   |      |   |    
|                                                                                                                          |  | $                      |  |      | $ | 319
|                                                                                                                          |  |                        |   |      |   |    

Interest foregone on nonperforming loans during the year ended December 31, 2006, 2005 and
2004 was $28,000, $11,000 and $12,000, respectively. Foregone interest on nonperforming loans does not include interest forgone on loans on nonperforming status that were restored to performing status prior to year end, or subsequent to either being
charged off prior to year end or transferred to OREO prior to year end.

The ability of the Companys borrowers to fulfill their loan
agreements is substantially dependent upon economic conditions and real estate market values throughout the Companys market area. At December 31, 2006, loans aggregating $304.0 million were collateralized by liens on residential and
commercial real properties, nearly all of which are located in California. The Companys loan portfolio is generally diversified with regard to the industries represented. At December 31, 2006, 45.4% of our loans were at fixed interest
rates that range from 3.75% to 11.00% and 55.6% were adjustable interest rate loans. The adjustable interest rate loans are generally indexed to the prime rate at specific margins that ranges from -3.00% to 4.00% as defined in the loan
agreements. A small amount of our loans are indexed to LIBOR.

Troubled Debt Restructurings (TDRs).A TDR is a loan for
which the Company has, for economic or legal reasons related to a borrowers financial difficulties, granted a concession to the borrower it would not otherwise consider, including modifications of loan terms to alleviate the burden of the
borrowers near-term cash flow requirements in order to help the borrower to improve its financial condition and eventual ability to repay the loan. At December 31, 2006 and 2005, the Company had no TDRs.

Note 5  Premises and Equipment and Lease Commitments

The following is a summary of major components of premises and equipment at December 31, 2006 and 2005:



|                                               |  |                        |        |   |      |   |        |  
|---------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                               |  | 2006                   |        |   | 2005 |  
|                                               |  | (Dollars in thousands) |       
|Land                                           |  | $                      | 1,392  |   |      | $ | 1,392  |  
|Buildings                                      |  |                        | 3,873  |   |      |   | 3,873  |  
|Leasehold improvements                         |  |                        | 1,904  |   |      |   | 1,764  |  
|Furniture, fixtures and equipment              |  |                        | 6,537  |   |      |   | 6,336  |  
|                                               |  |                        |        |   |      |   |        |  
|                                               |  |                        | 13,706 |   |      |   | 13,365 |  
|Less accumulated amortization and depreciation |  |                        | (7,981 | ) |      |   | (7,504 | )
|                                               |  |                        |        |   |      |   |        |  
|                                               |  | $                      | 5,725  |   |      | $ | 5,861  |  
|                                               |  |                        |        |   |      |   |        |  



69



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Depreciation and amortization expense was $483,000, $425,000, $409,000 in 2006, 2005 and 2004,
respectively. Rental expense on operating leases included in occupancy expense in the Consolidated Statements of Operations was $711,000 in 2006, $675,000 in 2005 and $669,000 in 2004.

The future minimum annual rental commitments at December 31, 2006 are summarized below.



|                                |  |                       |      
|------------------------------- |  | --------------------- | -----
|                                |  | 2006                 
|                                |  | (Dollars inthousands)
|For the year ended December 31, |  |                       |      
|2007                            |  | $                     | 789  
|2008                            |  |                       | 804  
|2009                            |  |                       | 687  
|2010                            |  |                       | 582  
|2011                            |  |                       | 483  
|Thereafter                      |  |                       | 1,157
|                                |  |                       |      
|                                |  | $                     | 4,502
|                                |  |                       |      

Note 6  Income Taxes

The components of income tax provision consisted of the following for the years shown:



|                           |  |                        |       |   |      |   |       |      |  |   |      
|-------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | ---- |  | - | -----
|                           |  | 2006                   |       |   | 2005 |   |       | 2004
|                           |  | (Dollars in thousands)
|Current taxes:             |  |                        |       |   |      |   |       |      |  |   |      
|Federal                    |  | $                      | 657   |   |      | $ | 226   |      |  | $ | 2    
|State                      |  |                        | 1,130 |   |      |   | 886   |      |  |   | 63   
|                           |  |                        |       |   |      |   |       |      |  |   |      
|Total current taxes        |  |                        | 1,787 |   |      |   | 1,112 |      |  |   | 65   
|                           |  |                        |      
|Deferred taxes:            |  |                        |       |   |      |   |       |      |  |   |      
|Federal                    |  |                        | 2,447 |   |      |   | 2,089 |      |  |   | 1,245
|State                      |  |                        | (12   | ) |      |   | (42   | )    |  |   | 368  
|                           |  |                        |       |   |      |   |       |      |  |   |      
|Total deferred taxes       |  |                        | 2,435 |   |      |   | 2,047 |      |  |   | 1,613
|                           |  |                        |       |   |      |   |       |      |  |   |      
|Total income tax provision |  | $                      | 4,222 |   |      | $ | 3,159 |      |  | $ | 1,678
|                           |  |                        |       |   |      |   |       |      |  |   |      

A reconciliation of the amounts computed by applying the federal statutory rate of 34% for 2006,
2005 and 2004 to the income before income tax provision and the effective tax rate are as follows:



|                                              |  |                        |       |      |      |   |        |      |       |  |      |        |  |      |       |  |      |  
|--------------------------------------------- |  | ---------------------- | ----- | ---- | ---- | - | ------ | ---- | ----- |  | ---- | ------ |  | ---- | ----- |  | ---- | -
|                                              |  | 2006                   |       |      | 2005 |   |        | 2004 |      
|                                              |  | Amount                 |       | Rate |      |   | Amount |      | Rate  |  |      | Amount |  | Rate |      
|                                              |  | (Dollars in thousands) |      
|Tax provision at statutory rate               |  | $                      | 3,354 |      | 34.0 | % |        | $    | 2,587 |  | 34.0 | %      |  | $    | 1,359 |  | 34.0 | %
|Increase (reduction) in taxes resulting from: |  |                        |       |      |      |   |        |      |       |  |      |        |  |      |       |  |      |  
|State taxes                                   |  |                        | 715   |      | 7.2  | % |        |      | 548   |  | 7.2  | %      |  |      | 287   |  | 7.2  | %
|Permanent differences                         |  |                        | 153   |      | 1.6  | % |        |      | 24    |  | 0.3  | %      |  |      | 32    |  | 0.8  | %
|                                              |  |                        |       |      |      |   |        |      |       |  |      |        |  |      |       |  |      |  
|                                              |  | $                      | 4,222 |      | 42.8 | % |        | $    | 3,159 |  | 41.5 | %      |  | $    | 1,678 |  | 42.0 | %
|                                              |  |                        |       |      |      |   |        |      |       |  |      |        |  |      |       |  |      |  



70



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The major components of the net deferred tax asset at December 31, 2006 and 2005 are as follows:



|                                            |  |                        |       |   |      |   |       |  
|------------------------------------------- |  | ---------------------- | ----- | - | ---- | - | ----- | -
|                                            |  | 2006                   |       |   | 2005 |  
|                                            |  | (Dollars in thousands) |      
|Deferred tax assets:                        |  |                        |       |   |      |   |       |  
|Net operating losses                        |  | $                      |      |   |      | $ | 1,992 |  
|Securities available for sale               |  |                        | 833   |   |      |   | 818   |  
|Nonhedge derivatives                        |  |                        |      |   |      |   | 239   |  
|Accrued expenses                            |  |                        | 395   |   |      |   | 413   |  
|Alternative minimum tax credits             |  |                        |      |   |      |   | 544   |  
|Nonaccrual interest                         |  |                        | 25    |   |      |   | 116   |  
|Loan fees                                   |  |                        | 234   |   |      |   | 212   |  
|Bad debt expense                            |  |                        | 381   |   |      |   | 278   |  
|Core deposits                               |  |                        | 144   |   |      |   | 115   |  
|Securities acquired in business combination |  |                        | 47    |   |      |   | 47    |  
|State taxes                                 |  |                        | 364   |   |      |   | 302   |  
|Other real estate owned                     |  |                        |      |   |      |   | 31    |  
|Other                                       |  |                        | 39    |   |      |   | 49    |  
|                                            |  |                        |       |   |      |   |       |  
|Total deferred tax assets                   |  |                        | 2,462 |   |      |   | 5,156 |  
|                                            |  |                        |       |   |      |   |       |  
|Deferred tax liabilities:                   |  |                        |       |   |      |   |       |  
|Depreciation                                |  |                        | (685  | ) |      |   | (698  | )
|FHLB stock dividend                         |  |                        | (74   | ) |      |   | (56   | )
|Loan premium amortization                   |  |                        | (40   | ) |      |   | (80   | )
|                                            |  |                        |       |   |      |   |       |  
|Total deferred tax liabilities              |  |                        | (799  | ) |      |   | (834  | )
|                                            |  |                        |       |   |      |   |       |  
|Net deferred tax asset                      |  | $                      | 1,663 |   |      | $ | 4,322 |  
|                                            |  |                        |       |   |      |   |       |  

The Company establishes a valuation allowance if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2006 and 2005, the Company believes that it will have sufficient taxable earnings to realize its deferred tax asset and has not
provided an allowance.

Note 7  Benefit Plans

Stock Incentive Plans

At December 31, 2006, the Company had one stock incentive plan pursuant
to which up to a total of 312,500 shares of common stock may be issued. Under this plan, the Company may grant to directors, officers, employees and consultants stock-based incentive compensation in a variety of forms, including without
limitation nonqualified options, incentive options, sales and bonuses of common stock and stock appreciation rights, on such terms and conditions as the Board of Directors of the Company determines. The term of the stock option may not exceed
10 years. Employee stock option grants generally vest over one year or ratable over two years. Director stock options vest in one year. All stock options have vesting conditions that include only service conditions; none of the grants
contains performance or market vesting conditions.



71



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The Company issues new shares upon the exercise of stock options. All of the share-based payment
awards qualify for classification as equity. At December 31, 2006, the only outstanding awards under this plan were stock options, and at that date 195,088 shares were available for future awards. At December 31, 2006, there were
also outstanding options granted under two prior stock incentive plans. The activity of stock options for the year ended December 31, 2006 is as shown:



|                               |  |              |   |  |                              |       |                                         |     |                         |   |      
|------------------------------ |  | ------------ | - |  | ---------------------------- | ----- | --------------------------------------- | --- | ----------------------- | - | -----
|                               |  | No. ofShares |   |  | WeightedAverageExercisePrice |       | WeightedAverageRemainingContractualTerm |     | AggregateIntrinsicValue
|                               |  |              |   |  |                              |       |                                         |     | (Dollars inthousands)  
|Outstanding, December 31, 2005 |  | 649,198      |   |  | $                            | 7.70  |                                         | 6.3 |                         |   |      
|Granted                        |  | 6,975        |   |  |                              | 12.00 |                                         |     |                         |   |      
|Exercised                      |  | (146,445     | ) |  |                              | 5.70  |                                         |     |                         |   |      
|Forefeited                     |  | (17,373      | ) |  |                              | 10.87 |                                         |     |                         |   |      
|Expired                        |  |             |   |  |                              |      |                                         |     |                         |   |      
|                               |  |              |   |  |                              |       |                                         |     |                         |   |      
|Outstanding, December 31, 2006 |  | 492,355      |   |  | $                            | 8.28  |                                         | 6.0 |                         | $ | 2,691
|                               |  |              |   |  |                              |       |                                         |     |                         |   |      
|Exercisable, December 31, 2006 |  | 399,372      |   |  | $                            | 7.68  |                                         | 5.6 |                         | $ | 2,423
|                               |  |              |   |  |                              |       |                                         |     |                         |   |      

The estimated per share weighted average grant date fair value of options granted during the year
ended December 31, 2006, 2005 and 2004 was $4.77, $5.90, and $4.32, respectively. The total intrinsic value of options exercised during the year ended December 31, 2006 was $1.1 million and the total fair value of the shares vested during
2006 was $1.8 million. At December 31, 2006, there was $173,000 of total unrecognized compensation cost related to nonvested share-based compensation awards granted under the stock option plans. The cost is expected to be recognized over a
weighted-average period of 4.6 months.

The Financial Accounting Standards Board issued Statement of Financial Accounting Standards
No. 123R, Share-Based Payment (SFAS 123R) which eliminated the ability to account for share-based compensation transactions, including grants of employee and director stock options, using Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and generally requires that such transactions be accounted for using a fair value-based method with the resulting compensation cost recognized over the period that the employee or director is
required to provide service in order to receive their compensation. The Company adopted SFAS 123R as of January 1, 2006 utilizing the modified prospective application. Under this method, the provisions of SFAS 123R are applied to new
awards and to awards modified, repurchased or canceled after December 31, 2005 and to awards outstanding on December 31, 2005 for which the requisite service has not yet been rendered. Prior to December 31, 2005, the Company
accounted for its stock options using the intrinsic value method, as prescribed by APB 25, and accordingly, no expense for stock options was recorded in periods ending on or prior to December 31, 2005.

For the year ended December 31, 2006, share-based compensation expense reduced income before taxes and net income by $395,000. The share-based
compensation expense decreased both basic and diluted earnings per share by $0.07 for the year ended December 31, 2006. For the year ended December 31, 2006, there was no impact to cash flow from financing activities as there were no
tax deductions that exceeded the compensation cost for share-based payments.



72



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The reported net income and earnings per share for the year ended December 31, 2005 and 2004 are
presented below to reflect the impact had the Company been required to recognize compensation expense based on SFAS 123R:



|                                                                                                                                    |  |                                               |       |      |   |      
|----------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ----- | ---- | - | -----
|                                                                                                                                    |  | For the year ended December 31,              
|                                                                                                                                    |  | 2005                                          |       | 2004
|                                                                                                                                    |  | (Dollars in thousands, except per share data)
|Net income:                                                                                                                         |  |                                               |       |      |   |      
|As reported                                                                                                                         |  | $                                             | 4,450 |      | $ | 2,320
|                                                                                                                                    |  |                                              
|Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                               | 267   |      |   | 196  
|                                                                                                                                    |  |                                               |       |      |   |      
|Pro forma                                                                                                                           |  | $                                             | 4,183 |      | $ | 2,124
|                                                                                                                                    |  |                                               |       |      |   |      
|                                                                                                                                    |  |                                              
|Earnings per share as reported:                                                                                                     |  |                                               |       |      |   |      
|Basic                                                                                                                               |  | $                                             | 0.96  |      | $ | 0.64 
|Diluted                                                                                                                             |  |                                               | 0.75  |      |   | 0.41 
|                                                                                                                                    |  |                                              
|Earnings per share pro forma:                                                                                                       |  |                                               |       |      |   |      
|Basic                                                                                                                               |  | $                                             | 0.90  |      | $ | 0.59 
|Diluted                                                                                                                             |  |                                               | 0.71  |      |   | 0.37 

Under the fair value method, stock option compensation expense is measured on the date of grant
using an option-pricing model. Upon adoption of SFAS 123R, the fair values of the stock options were estimated using a lattice option pricing model. Previously, the fair values of stock options were estimated using the Black-Scholes
option-pricing model. Due to longer contractual terms of the Companys stock options than traded options, suboptimal exercise patterns and risk-free interest rates and dividend rates that may be expected to differ over the option term from
the grant date, the lattice option pricing model better reflects the substantive characteristics of the Companys stock options. The effect of the change to the lattice option pricing model did not have a material impact on the current
period.

The lattice option pricing models require certain assumptions. For the year ended December 31, 2006, the expected
volatility assumption of 32.0% is based upon the weekly historical volatility of the Companys stock price for the period January 1, 2000 through December 31, 2005 using a blend of the unweighted standard deviation of closing price
with a weighted mean reversion formula. The risk-free interest rate assumption ranged from 4.00% to 5.00% for the expected term of the share options and is based upon the U.S. Treasury implied forward yield curve at the time of the
grant. The dividend yield assumption ranged from 0 to 2.5% during the expected term of the options and is based upon the Companys capital planning model. The assumptions used with the Black-Scholes option pricing model, for the year
ended December 31, 2005, are as follows: expected volatility 43%, expected term 10 years, risk-free interest rate 4.38%; and dividend yield 0%.

Defined Contribution Retirement Plan. The Company maintains a defined contribution retirement plan under section 401(k) of the Internal Revenue Code. Employees are eligible to participate following six
months of continuous employment. Under the plan, the Company has partially matched employee contributions since May 1, 2001. Such matching contributions become fully vested when the employee reaches three years of service. The Companys
matching contributions for 2006, 2005 and 2004 were $148,000, $121,000 and $115,000, respectively.



73



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Note 8  Deposits and Borrowed Funds

At December 31, 2006 the scheduled maturity of time deposits are as follows:



|                                   |  |                        |        |               |   |       
|---------------------------------- |  | ---------------------- | ------ | ------------- | - | ------
|                                   |  | December 31, 2006     
|                                   |  | $100,000 andover       |        | Under$100,000
|                                   |  | (Dollars in thousands)
|2007                               |  | $                      | 75,159 |               | $ | 15,308
|2008                               |  |                        | 4,817  |               |   | 1,345 
|2009                               |  |                        | 104    |               |   | 542   
|2010                               |  |                        |       |               |   | 10    
|2011                               |  |                        |       |               |   |      
|Thereafter                         |  |                        |       |               |   | 45    
|                                   |  |                        |        |               |   |       
|Total time certificates of deposit |  | $                      | 80,080 |               | $ | 17,250
|                                   |  |                        |        |               |   |       

The following table shows borrowed funds for the dates and periods shown:



|                                                                        |  |                        |        |      |         |   |         |          |        |  |         |         |  |          |        |  |         |   |      |   |        |         |      |      |  |   |         |  |      |   |  |   |        |  |      |  
|----------------------------------------------------------------------- |  | ---------------------- | ------ | ---- | ------- | - | ------- | -------- | ------ |  | ------- | ------- |  | -------- | ------ |  | ------- | - | ---- | - | ------ | ------- | ---- | ---- |  | - | ------- |  | ---- | - |  | - | ------ |  | ---- | -
|                                                                        |  | 2006                   |        |      | 2005    |   |         | 2004     |       
|                                                                        |  | Year-end               |        |      | Average |   |         | Year-end |        |  | Average |         |  | Year-end |        |  | Average |  
|                                                                        |  | Balance                |        | Rate |         |   | Balance |          | Rate   |  |         | Balance |  | Rate     |        |  | Balance |   | Rate |   |        | Balance |      | Rate |  |   | Balance |  | Rate |  
|                                                                        |  | (Dollars in thousands) |       
|Federal funds purchased and securities sold under repurchase agreements |  | $                      | 45,000 |      | 5.40    | % |         | $        | 33,108 |  | 5.46    | %       |  | $        |       |  |        |   |      | $ |       |         |     |      |  | $ |        |  |     |   |  | $ | 113    |  | 0.88 | %
|Other borrowings                                                        |  |                        | 10,300 |      | 5.25    | % |         |          | 13,991 |  | 5.00    | %       |  |          | 28,337 |  | 4.10    | % |      |   | 12,186 |         | 3.38 | %    |  |   | 25,900  |  | 2.32 | % |  |   | 12,550 |  | 2.65 | %

Other borrowings are comprised of overnight Federal Home Loan Bank (FHLB) advances.
The maximum amount of other borrowings outstanding at any month-end during 2006 and 2005 was $27.4 million and $28.3 million, respectively.

The Banks had $31.6 million of unused borrowing capacity from the FHLB at December 31, 2006 based upon pledged securities and loans.

Note
9  Junior Subordinated Deferrable Interest Debentures

In July 2001 the Company issued $15.5 million aggregate principal amount of
10.25% fixed rate junior subordinated deferrable interest debentures due July 25, 2031 (Junior Subordinated Debentures) that pay interest each January 26 and July 26. The interest is deferrable, at the Companys
option, for a period up to ten consecutive semi-annual payments, but in any event not beyond June 25, 2031. The debentures are redeemable, in whole or in part, at the Companys option on or after five years from issuance at declining
premiums to maturity. The recorded balance of Junior Subordinated Debentures was $15.5 million at December 31, 2006 and 2005.

The
Junior Subordinated Debentures are held by National Mercantile Capital Trust I (the Trust), a Delaware business trust, formed by the Company for the sole purpose of issuing certain securities representing undivided beneficial interests
in the assets of the Trust and investing the proceeds thereof in the Junior Subordinated Debentures. In July 2001 the Trust issued and sold: (i) to the Company 464 common securities (liquidation amount of $1,000 per common security) of the
Trust, representing common beneficial interests in the assets of the Trust; and (ii) $15,000,000 of 10.25% fixed rate securities due July 26, 2031 (the Trust Preferred Securities). The Trust Preferred Securities are
unconditionally guaranteed by the Company with respect to



74



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



distributions and payments upon liquidation, redemption and otherwise to the extent provided in and pursuant to the terms of a Guarantee Agreement.

The Junior Subordinated Debentures were redeemed in January 2007  see Subsequent Events.

Note 10  Availability to National Mercantile of Funds from Banks; Restrictions on Cash Balances; Capital

National Mercantile is a legal entity separate and distinct from the Banks, and as such has separate and distinct financial obligations including annual
deferrable debt service of $1.6 million on the Junior Subordinated Debenture and other modest operating expenses. While National Mercantile from time to time holds short-term investments, its assets primarily consist of the common shares of the
Banks and it has historically not engaged in any other business activity. Accordingly, dividends and capital distributions from the Banks constitute the principal source of cash to the Company. The Banks are subject to various statutory and
regulatory restrictions on their ability to pay dividends to the Company.

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 Board have also issued banking circulars emphasizing
that the level of cash dividends should bear a direct correlation to the level of a national banks current and expected earnings stream, the banks need to maintain an adequate capital base and other factors.

National banks that are not in compliance with regulatory capital requirements generally are not permitted to pay dividends. The OCC also can prohibit a
national bank from engaging in an unsafe or unsound practice in its business. Depending on the banks financial condition, payment of dividends could be deemed to constitute an unsafe or unsound practice. Except under certain circumstances, and
with prior regulatory approval, a bank may not pay a dividend if, after so doing, it would be undercapitalized. The Banks ability to pay dividends in the future is, and could be, further influenced by regulatory policies or agreements and by
capital guidelines.

Mercantile has no retained earnings, and therefore is presently unable to pay dividends. Mercantile has a substantial
accumulated deficit and does not anticipate having positive retained earnings for the foreseeable future. South Bay had retained earnings of $4.9 million as of December 31, 2006. Mercantile and South Bay may from time to time be permitted to
make capital distributions to National Mercantile with the consent of the OCC. It is not anticipated that such consent could be obtained unless the distributing bank were to remain well capitalized following such distribution.

The Company is authorized to issue 1,000,000 shares of preferred stock. The Companys Board of Directors has the authority to issue
the preferred stock in one or more series, and to fix the designations, rights, preferences, privileges, qualifications and restrictions, including dividend rights, conversion rights, voting rights, rights and terms of redemption, liquidation
preferences, and sinking fund terms.

The Company had previously issued 990,000 shares of Series A non-cumulative convertible perpetual
preferred stock (the Series A Preferred). During 2005, pursuant to an election of the holders of a majority of the outstanding shares of Series A Preferred, each outstanding share of the 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, as well as earlier conversions during 2005, 666,273 shares of Series
A Preferred were converted into 1,332,546 shares (1,665,683 shares adjusted for the 5-for-4 stock split) of Common Stock.



75



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



On December 10, 2001, the Company issued 1,000 shares of Series B non-cumulative convertible
perpetual preferred stock (the Series B Preferred) with a $1,000 stated value per share. At any time after June 30, 2005 each holder of the Series B Preferred has the right, exercisable at the option of the holder, to convert some
or all of such holders shares of Series B Preferred into Common Stock at a conversion price of $5.63 per share of Common Stock (the Conversion Price). The number of shares of Common Stock to be issued upon conversion for each share
of Series B Preferred is determined by dividing an amount per share then in effect (the Liquidation Amount) by the Conversion Price. The Liquidation Amount per share of Series B Preferred as of any date is the sum of (i) the stated
value of each share of Series B Preferred, adjusted to reflect stock splits, stock dividends, reorganizations, consolidations and similar changes, plus (ii) an amount equal to 8.5% per annum of the stated value of the shares of Series B
Preferred commencing from the date of issue. The Company, at its sole option, may redeem all Series B Preferred, at any time, from legally available funds at the Liquidation Amount. The Series B Preferred contains a liquidation preference over the
Common Stock in the amount of the Liquidation Amount.

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

Federal Reserve Board regulations
require the Banks to maintain certain minimum reserve balances. Cash balances maintained to meet reserve requirements are not available for use by the Banks or National Mercantile. During 2006 and 2005, the average reserve balances for the Banks
were approximately $1.2 million and $2.7 million, respectively. Neither National Mercantile nor the Banks is required to maintain compensating balances to assure credit availability under existing borrowing arrangements.

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

Quantitative measures established by regulation to ensure capital adequacy require National
Mercantile and the Banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 2006,
National Mercantile and Banks meet all capital adequacy requirements to which they are subject.

At December 31, 2006, each Bank was
categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized under the prompt corrective action rules, each Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier
1 leverage ratios as set forth in the following table. There are no conditions or events since the most recent notification which management believes have changed the Banks category.



76



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The following table presents, at the date indicated, certain information regarding the regulatory
capital of National Mercantile and the Banks and the required minimum amounts of regulatory capital for National Mercantile and the Banks to meet applicable regulatory capital requirements and, in the case of the Banks, to be well capitalized under
the prompt corrective action rules.



|                                       |  |                        |        |       |                              |   |        |                                                                            |        |  |     |        |  |       |        |  |      |  
|-------------------------------------- |  | ---------------------- | ------ | ----- | ---------------------------- | - | ------ | -------------------------------------------------------------------------- | ------ |  | --- | ------ |  | ----- | ------ |  | ---- | -
|                                       |  | Actual                 |        |       | For CapitalAdequacy Purposes |   |        | To be Categorized as Well Capitalized
under Prompt Corrective Action Rules |       
|                                       |  | Amount                 |        | Ratio |                              |   | Amount |                                                                            | Ratio  |  |     | Amount |  | Ratio |       
|                                       |  | (Dollars in thousands) |       
|As of December 31, 2006                |  |                        |        |       |                              |   |        |                                                                            |        |  |     |        |  |       |        |  |      |  
|Total Capital to Risk Weighted Assets  |  |                        |        |       |                              |   |        |                                                                            |        |  |     |        |  |       |        |  |      |  
|National Mercantile Bancorp            |  | $                      | 62,029 |       | 14.88                        | % |        | $                                                                          | 33,336 |  | 8.0 | %      |  | $     | N/A    |  | N/A  |  
|Mercantile National Bank               |  |                        | 28,305 |       | 13.34                        | % |        |                                                                            | 16,973 |  | 8.0 | %      |  |       | 21,216 |  | 10.0 | %
|South Bay Bank, N.A                    |  |                        | 25,476 |       | 11.58                        | % |        |                                                                            | 17,594 |  | 8.0 | %      |  |       | 21,992 |  | 10.0 | %
|Tier 1 Capital to Risk Weighted Assets |  |                        |        |       |                              |   |        |                                                                            |        |  |     |        |  |       |        |  |      |  
|National Mercantile Bancorp            |  |                        | 56,820 |       | 13.63                        | % |        |                                                                            | 16,668 |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Mercantile National Bank               |  |                        | 25,706 |       | 12.12                        | % |        |                                                                            | 8,486  |  | 4.0 | %      |  |       | 12,730 |  | 6.0  | %
|South Bay Bank, N.A                    |  |                        | 22,814 |       | 10.37                        | % |        |                                                                            | 8,797  |  | 4.0 | %      |  |       | 13,195 |  | 6.0  | %
|Tier 1 Capital to Average Assets       |  |                        |        |       |                              |   |        |                                                                            |        |  |     |        |  |       |        |  |      |  
|National Mercantile Bancorp            |  |                        | 56,820 |       | 12.24                        | % |        |                                                                            | 18,573 |  | 4.0 | %      |  |       | N/A    |  | N/A  |  
|Mercantile National Bank               |  |                        | 25,706 |       | 9.34                         | % |        |                                                                            | 11,014 |  | 4.0 | %      |  |       | 13,767 |  | 5.0  | %
|South Bay Bank, N.A                    |  |                        | 22,814 |       | 9.83                         | % |        |                                                                            | 9,286  |  | 4.0 | %      |  |       | 11,608 |  | 5.0  | %

Note 11  Commitments and Contingencies

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

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

The Company had $1.2 million of outstanding letters of credit at December 31, 2006.

Loan commitments are agreements to lend to a customer a specified amount subject to certain conditions. Loan commitments generally have fixed expiration
dates or other termination clauses and may require payment of a fee. Since portions of the commitments are expected to expire without being drawn upon, the total amount of commitments does not necessarily represent future cash requirements. The
Company had outstanding loan commitments aggregating $129.8 million at December 31, 2006, substantially all of which were for adjustable rate loans.

The Company from time to time is party to lawsuits that arise in the normal course of business. The Company does not believe that any pending lawsuit at December 31, 2006 will have a material adverse effect on
the financial position or results of operations of the Company.



77



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Note 12  Disclosures about the Fair Value of Financial Instruments

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

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

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

Federal Reserve Bank (FRB) and other stock: FRB and other stock may be redeemed at the carrying amount, therefore, the carrying amount is a
reasonable estimation of fair value.

Loans: Variable rate loans have carrying amounts that approximate fair value. The fair value
of fixed rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. In establishing the credit risk
component of the fair value calculations for loans, the Company concluded the allowance for loan and lease losses represented a reasonable estimate of the credit risk component of the fair value at December 31, 2006.

Interest rate swaps and floors:The fair value of the interest rate swaps and floors is based upon an estimate derived from broker quotations or
proprietary broker models that consider the relevant characteristics of the instrument.

Deposits: The fair value of demand and
interest checking deposits, money market accounts and savings accounts is the amount payable on demand at the reporting date. The fair value of time certificates of deposit is estimated by discounting the future cash flows using the rates currently
offered for wholesale deposits of similar maturities.

Federal funds purchased and securities sold under agreements to repurchase:
The fair value of adjustable securities sold under agreements to repurchase have fair values that approximate the carrying value.

Other
borrowings: The fair value of fixed-rate borrowings is estimated by discounting the future cash flows using the rates currently offered for borrowings of similar maturities. All other borrowings at December 31, 2006 were overnight
borrowings.

Junior subordinated deferrable interest debentures: The fair value of the junior subordinated deferrable interest
debentures is estimated by discounting the future cash flows using the rates currently offered for similar debt through its maturity date January 25, 2007. As a result of the Companys notice to redeem the debentures early, the fair value
also includes the early redemption price of 107.6875% of aggregate principal outstanding.



78



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



The estimated fair values of financial instruments at the date indicated are presented below.



|                                                                           |  |                        |         |   |                   |   |         |                |  |   |            |   |  |   |         |  
|-------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ----------------- | - | ------- | -------------- |  | - | ---------- | - |  | - | ------- | -
|                                                                           |  | December 31, 2006      |         |   | December 31, 2005 |  
|                                                                           |  | CarryingAmount         |         |   | Fair Value        |   |         | CarryingAmount |  |   | Fair Value |  
|                                                                           |  | (Dollars in thousands) |        
|Financial assets:                                                          |  |                        |         |   |                   |   |         |                |  |   |            |   |  |   |         |  
|Cash, cash equivalents and deposit with other financial institutions       |  | $                      | 13,438  |   |                   | $ | 13,438  |                |  | $ | 16,192     |   |  | $ | 16,192  |  
|Securities available-for-sale                                              |  |                        | 102,427 |   |                   |   | 102,427 |                |  |   | 71,758     |   |  |   | 71,758  |  
|Securities held-to-maturity                                                |  |                        | 1,987   |   |                   |   | 1,947   |                |  |   | 2,612      |   |  |   | 2,572   |  
|FRB and other stock                                                        |  |                        | 3,962   |   |                   |   | 3,962   |                |  |   | 3,809      |   |  |   | 3,809   |  
|Loans, net of allowance for credit losses                                  |  |                        | 360,978 |   |                   |   | 361,616 |                |  |   | 334,090    |   |  |   | 333,791 |  
|Fair value hedges                                                          |  |                        |        |   |                   |   |        |                |  |   | (41        | ) |  |   | (41     | )
|Cash flow hedges:                                                          |  |                        |         |   |                   |   |         |                |  |   |            |   |  |   |         |  
|Interest rate swaps                                                        |  |                        | (1,052  | ) |                   |   | (1,052  | )              |  |   | (1,034     | ) |  |   | (1,034  | )
|Interest rate floors                                                       |  |                        | 25      |   |                   |   | 25      |                |  |   | 286        |   |  |   | 286     |  
|Non-hedge derivatives                                                      |  |                        | (14     | ) |                   |   | (14     | )              |  |   | (575       | ) |  |   | (575    | )
|Financial liabilities:                                                     |  |                        |         |   |                   |   |         |                |  |   |            |   |  |   |         |  
|Demand deposits, money market and savings                                  |  | $                      | 283,284 |   |                   | $ | 283,284 |                |  | $ | 256,484    |   |  | $ | 256,484 |  
|Time certificates of deposit                                               |  |                        | 97,330  |   |                   |   | 97,089  |                |  |   | 106,724    |   |  |   | 106,171 |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                        | 45,000  |   |                   |   | 45,000  |                |  |   |           |   |  |   |        |  
|Other borrowings                                                           |  |                        | 10,300  |   |                   |   | 10,300  |                |  |   | 28,337     |   |  |   | 28,337  |  
|Junior subordinated debentures                                             |  |                        | 15,464  |   |                   |   | 16,658  |                |  |   | 15,464     |   |  |   | 16,039  |  

Note 13  Parent Company Information

The following financial information presents the condensed balance sheet of the Company on a parent-only basis as of December 31, 2006 and 2005, and
the related condensed statements of operations and cash flows for each of the years in the three-year period ended December 31, 2006.

Balance
Sheet



|                                                   |  |                        |        |   |      |   |        |  
|-------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                   |  | December 31,           |       
|                                                   |  | 2006                   |        |   | 2005 |  
|                                                   |  | (Dollars in thousands) |       
|Cash with Banks                                    |  | $                      | 2,090  |   |      | $ | 137    |  
|Due from banks  time                              |  |                        |       |   |      |   | 1,015  |  
|Securities available-for-sale                      |  |                        | 1,929  |   |      |   | 974    |  
|Investment in the Banks                            |  |                        | 51,786 |   |      |   | 48,095 |  
|Other assets                                       |  |                        | 5,399  |   |      |   | 4,183  |  
|                                                   |  |                        |        |   |      |   |        |  
|Total assets                                       |  | $                      | 61,204 |   |      | $ | 54,404 |  
|                                                   |  |                        |        |   |      |   |        |  
|Junior subordinated deferrable interest debentures |  | $                      | 15,464 |   |      | $ | 15,464 |  
|Other liabilities                                  |  |                        | 671    |   |      |   | 777    |  
|                                                   |  |                        |        |   |      |   |        |  
|Total liabilities                                  |  |                        | 16,135 |   |      |   | 16,241 |  
|                                                   |  |                       
|Shareholders equity:                              |  |                        |        |   |      |   |        |  
|Preferred stock                                    |  |                        | 1,000  |   |      |   | 1,000  |  
|Common stock                                       |  |                        | 46,967 |   |      |   | 45,697 |  
|Accumulated deficit                                |  |                        | (1,738 | ) |      |   | (7,380 | )
|Accumulated other comprehensive income             |  |                        | (1,160 | ) |      |   | (1,154 | )
|                                                   |  |                        |        |   |      |   |        |  
|Total shareholders equity                         |  |                        | 45,069 |   |      |   | 38,163 |  
|                                                   |  |                        |        |   |      |   |        |  
|Total liabilities and shareholders equity         |  | $                      | 61,204 |   |      | $ | 54,404 |  
|                                                   |  |                        |        |   |      |   |        |  



79



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Statements of Operations



|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|---------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                           |  | Year ended December 31, |       
|                                                           |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|                                                           |  | (Dollars in thousands)  |       
|Interest income                                            |  | $                       | 109    |   |      | $ | 61     |      |  | $ | 33     |  
|Interest expense                                           |  |                         | 1,546  |   |      |   | 1,585  |      |  |   | 1,563  |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Net interest expense                                       |  |                         | (1,437 | ) |      |   | (1,524 | )    |  |   | (1,530 | )
|                                                           |  |                         |       
|Other operating income                                     |  |                         | (47    | ) |      |   | (47    | )    |  |   | 970    |  
|Other operating expense                                    |  |                         | 377    |   |      |   | 374    |      |  |   | 238    |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Loss before equity in undistributed net income of the Bank |  |                         | (1,861 | ) |      |   | (1,945 | )    |  |   | (798   | )
|Equity in undistributed net income of subsidiaries         |  |                         | 6,693  |   |      |   | 5,588  |      |  |   | 2,790  |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Income before income tax benefit                           |  |                         | 4,832  |   |      |   | 3,643  |      |  |   | 1,992  |  
|Income tax benefit                                         |  |                         | 810    |   |      |   | 807    |      |  |   | 328    |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                                                 |  | $                       | 5,642  |   |      | $ | 4,450  |      |  | $ | 2,320  |  
|                                                           |  |                         |        |   |      |   |        |      |  |   |        |  

Statements of Cash Flow



|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|--------------------------------------------------------------------------------- |  | ----------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                  |  | Year ended December 31, |       
|                                                                                  |  | 2006                    |        |   | 2005 |   |        | 2004 | 
|                                                                                  |  | (Dollars in thousands)  |       
|Cash flows from operating activities:                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Net income                                                                        |  | $                       | 5,642  |   |      | $ | 4,450  |      |  | $ | 2,320  |  
|Adjustment to reconcile net income to net cash provided by operating activities.: |  |                         |        |   |      |   |        |      |  |   |        |  
|Equity in undistributed net income of subsidiaries, net                           |  |                         | (6,693 | ) |      |   | (5,588 | )    |  |   | (2,790 | )
|Trading loss (gain) on economic derivatives                                       |  |                         | 267    |   |      |   | 395    |      |  |   | (229   | )
|Stock-based compensation costs                                                    |  |                         | 395    |   |      |   |       |      |  |   |       |  
|Net amortization of premium on securities available-for-sale                      |  |                         | 24     |   |      |   |       |      |  |   |       |  
|Net increase in other assets and other liabilities                                |  |                         | (727   | ) |      |   | (1,658 | )    |  |   | (520   | )
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash used in operations                                                       |  |                         | (1,092 | ) |      |   | (2,401 | )    |  |   | (1,219 | )
|                                                                                  |  |                         |       
|Cash flows from investing activities:                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Purchase of available-for-sale securities                                         |  |                         | (1,011 | ) |      |   | (536   | )    |  |   | (1,290 | )
|Capital contribution to South Bay Bank                                            |  |                         | (2,000 | ) |      |   |       |      |  |   |       |  
|Payment to terminate interest rate swap                                           |  |                         | (835   | ) |      |   |       |      |  |   |       |  
|Sales and maturities of available-for-sale securities                             |  |                         |       |   |      |   | 1,500  |      |  |   | 1,800  |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by (used in) investing activities                               |  |                         | (3,846 | ) |      |   | 964    |      |  |   | 510    |  
|                                                                                  |  |                         |       
|Cash flows from financing activities:                                             |  |                         |        |   |      |   |        |      |  |   |        |  
|Distribution from subsidiaries                                                    |  |                         | 5,000  |   |      |   |        |      |  |   |        |  
|Proceeds from stock options exercised                                             |  |                         | 876    |   |      |   | 764    |      |  |   | 372    |  
|Redemption of fractional shares in 5- for-4 stock split                           |  |                         | (1     | ) |      |   |       |      |  |   |       |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net cash provided by financing activities                                         |  |                         | 5,876  |   |      |   | 764    |      |  |   | 372    |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                              |  |                         | 938    |   |      |   | (673   | )    |  |   | (337   | )
|Cash and cash equivalents, beginning of the year                                  |  |                         | 1,152  |   |      |   | 1,825  |      |  |   | 2,162  |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Cash and cash equivalents, end of the year                                        |  | $                       | 2,090  |   |      | $ | 1,152  |      |  | $ | 1,825  |  
|                                                                                  |  |                         |        |   |      |   |        |      |  |   |        |  
|Supplemental disclosures of cash flow information:                                |  |                         |        |   |      |   |        |      |  |   |        |  
|Cash paid for interest                                                            |  | $                       | 1,585  |   |      | $ | 1,172  |      |  | $ | 1,020  |  
|Cash paid for income taxes, net                                                   |  | $                       | 1,810  |   |      | $ | 1,225  |      |  | $ | 51     |  



80



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Note 14  Derivatives

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 Statement of Financial
Accounting Standards 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.

Derivative Financial Instruments and Hedging Activities



|                      |  |                        |        |           |                   |        |                |  |           |         |  |   |        |  
|--------------------- |  | ---------------------- | ------ | --------- | ----------------- | ------ | -------------- |  | --------- | ------- |  | - | ------ | -
|                      |  | December 31, 2006      |        |           | December 31, 2005 |       
|                      |  | NotionalAmount         |        | FairValue |                   |        | NotionalAmount |  | FairValue |        
|                      |  | (Dollars in thousands) |       
|Fair value hedges:    |  |                        |        |           |                   |        |                |  |           |         |  |   |        |  
|Interest rate swaps   |  | $                      |       |           | $                 |       |                |  | $         | 30,000  |  | $ | (41    | )
|                      |  |                        |        |          
|Cash flow hedges:     |  |                        |        |           |                   |        |                |  |           |         |  |   |        |  
|Interest rate swaps   |  | $                      | 50,000 |           | $                 | (1,052 | )              |  | $         | 50,000  |  | $ | (1,034 | )
|Interest rate floors  |  | $                      | 50,000 |           | $                 | 25     |                |  | $         | 50,000  |  | $ | 286    |  
|                      |  |                        |        |          
|Nonhedge derivatives: |  |                        |        |           |                   |        |                |  |           |         |  |   |        |  
|Interest rate swaps   |  | $                      | 50,000 |           | $                 | (14    | )              |  | $         | 15,000  |  | $ | (575   | )
|Interest rate floors  |  | $                      |       |           | $                 |       |                |  | $         | 150,000 |  | $ |       |  

Fair value hedges are hedges that reduce 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 portions of its wholesale funding. 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 is 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 were considered highly effective and therefore no ineffectiveness was recognized in earnings related to these swaps. The Company had no fair value hedges at December 31, 2006.

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



81



---

NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



manage the interest rate risk associated with its significant volume of adjustable rate loans. At December 31, 2006 and 2005, losses of $586,000 and
$534,000, respectively, were recorded in accumulated other comprehensive income and no ineffectiveness was recorded to earnings for the years then ended related to these cash flow hedges.

Non-hedge derivatives are interest rate swaps and 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. The
Company entered into an interest rate swap agreement in 2003 to pay an adjustable rate and receive a fixed rate with terms that mirror its Junior Subordinated Debentures, however, because it did not qualify under the strict accounting rules for
short-cut hedge accounting treatment it was accounted for as a non-hedge derivative. The effect of the non-hedge derivative treatment is to reflect the change in fair value of the swap in current income as a trading gain or loss. The Company
terminated the swap in 2006 recording a trading loss of $262,000. There was a $395,000 trading loss recorded in 2005 and a $229,000 trading gain in 2004 reflecting the change in market value of this swap. At December 31, 2006, there were swaps
with a notional value of $50.0 million treated as non-hedge derivatives hedging the fixed-rate brokered CDs. During 2005, the Company purchased a one year interest rate floor to help protect its net interest income in the event of a rapid decline in
interest rates and permit it to execute other strategies to protect against declining interest rates over time. There was an $8,000 charge to earnings during the year ended December 31, 2005 for writing the value of this floor to zero.

Note 15  Subsequent Events

Agreement and Plan of Merger

On June 7, 2006, the Company formed a wholly-owned subsidiary First California Financial
Group, Inc., or First California, incorporated under the laws of the State of Delaware. First California was formed for the purposes of effecting the merger and capital stock exchange with National Mercantile and acquisition of FCB Bancorp, a
California corporation, or FCB.

On June 15, 2006, First California, FCB and the Company entered into an Agreement and Plan of Merger,
or the Merger Agreement, pursuant to which the Company will merge with and into the newly formed wholly-owned subsidiary First California and each share of the Companys common stock was converted into the right to receive one share of newly
issued First California common stock and each share of FCB common stock was converted into the right to receive 1.7904 shares on newly issued First California common stock. In addition, each share of the Companys series B convertible perpetual
preferred stock was converted into the right to receive one share of series A convertible perpetual preferred stock, $0.01 par value per share, or First California Preferred Stock, of First California. The merger and acquisition was approved by both
parties shareholders and regulators.

On March 12, 2007, the Company completed the previously announced merger and capital stock
exchange with First California and acquisition of FCB pursuant to the Merger Agreement. In connection with the Merger Agreement, the Company merged with and into its wholly-owned subsidiary First California and each share of the Companys
common stock was exchanged for one share of First California newly issued common stock and the acquisition of FCB through the issuance of 1.7904 shares of newly issued common stock of First California to the shareholders of FCB for each common
share of FCB then outstanding. In addition, each share of the Companys series B convertible perpetual preferred stock was exchanged for one share of newly issued series A convertible perpetual preferred stock of First California.



82



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



As a result of these transactions, First California issued an aggregate of approximately
12.3 million shares of First California common stock to shareholders of the Company and shareholders of FCB and 1,000 shares of First California Preferred Stock to shareholders of the Companys series B convertible preferred stock. The
consideration paid for the acquisition of FCB was approximately $86.6 million, which included 5.9 million shares of common stock of First California worth $83.0 million, $1.4 million of converted FCB stock-based awards and $2.2 million of
other costs.

The Company acquired all the rights and obligations of FCB, whose principal assets included the capital stock of First
California Bank with operations through eight full service banking offices located in Agoura Hills, Camarillo, Irvine, Oxnard, Simi Valley, Thousand Oaks, Ventura and Westlake Village, California. The acquisition of FCB will be accounted for as a
purchase; accordingly, the results of operations from the acquisition will be included in the financial statements of the Company from the date of acquisition forward.

Trust Preferred Securities and Junior Subordinated Debentures Redemption and Issuance

On
January 24, 2007, National Mercantile Bancorp and its newly formed subsidiary, First California Capital Trust I (Trust), a Delaware statutory trust, issued $16.0 million of the Trusts capital securities, liquidation
amount $1,000 per capital security. The capital securities represent undivided beneficial interests in the Trusts assets, which consist primarily of National Mercantile Bancorps Fixed/Floating Rate Junior Subordinated Deferrable
Interest Debentures described below. The Trusts capital securities mature on March 15, 2037, and are redeemable, at par, at National Mercantile Bancorps option at any time on or after March 15, 2012.

The holders of the Trusts capital securities are entitled to quarterly distributions at a fixed annual rate of 6.80% for the first five years, and
a variable annual rate thereafter, which resets quarterly, equal to the 3-month LIBOR rate, plus 1.60% per annum, of the liquidation amount of $1,000 per capital security, subject to National Mercantile Bancorps right to defer interest
payments under the Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures as described below.

National Mercantile Bancorp,
itself, purchased $495,000 of the Trusts common securities, liquidation amount $1,000 per common security. The terms and provisions of the Trusts capital securities and common securities are set forth in the Trusts Amended and
Restated Declaration of Trust, dated January 25, 2007, under which Wilmington Trust Company serves as institutional trustee.

In
connection with the Trusts sale of the capital securities, National Mercantile Bancorp entered into a Guarantee Agreement pursuant to which it guaranteed, on a subordinated basis, all distributions and payments under the Trusts capital
securities upon liquidation, redemption, or otherwise, but only to the extent the Trust fails to pay such distributions from payments under the Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures it holds from National Mercantile
Bancorp.

The Trust used the proceeds from the sale of its capital securities and its common securities to purchase from National
Mercantile Bancorp $16.5 million aggregate principal amount of Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures due 2037. The Debentures bear interest at the same rates as the Trusts capital securities. So long
as no event of default (as defined in the Indenture relating to the Debentures) has occurred, National Mercantile Bancorp will have the right to defer the payment of interest on the Debentures for up to 20 consecutive quarterly periods,
except that no extension period may extend beyond the maturity of the Debentures. During any deferral period, National Mercantile Bancorp may not pay dividends or make certain other distributions or payments as provided in the
Indenture. The Debentures mature on March 15, 2037, and are redeemable at par, at National Mercantile Bancorps option, at any time on or after March 15, 2012. Upon any redemption by National Mercantile Bancorp of the
Debentures, the Trust must redeem a like amount of its capital securities.



83



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NATIONAL MERCANTILE BANCORP AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  (Continued)



Payments under the Debentures are subordinated and junior in right of payment to the prior payment of
all other indebtedness of National Mercantile Bancorp that, by its terms, is not similarly subordinated.

The Debentures may be declared
immediately due and payable at the election of the trustee under the Indenture or the holders of 25% of aggregate principal amount of the Trusts outstanding capital securities if National Mercantile Bancorp defaults in the payment of interest
(subject to its right to defer interest payments as described above) or principal under the Debentures and upon the occurrence of other events of defaults described in the Indenture.

National Mercantile Bancorp used the net proceeds from the trust preferred transactions described above to redeem all $15.5 million principal amount of
its previously outstanding 2031 Junior Subordinated Debentures. The redemption price was 107.6875% of the principal amount of these Debentures, plus accrued interest, or a total of $17.3 million.

As a result of these transactions, the Company incurred a charge during the first quarter of 2007 for financial statement purposes of approximately $1.6
million. The charge reflects the redemption premium and the impairment of the unamortized Debenture issuance costs.



84



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Index to Exhibits



|        |  |                                                                                                                                                                                                   
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                   
|2.1     |  | Agreement and Plan of Merger, dated as of June 15, 2006, by and among First California Financial Group, Inc., FCB Bancorp and National Mercantile Bancorp (9)                                     
|        | 
|3.1*    |  | Amended and Restated Articles of Incorporation, filed June 20, 1997                                                                                                                               
|        | 
|3.2*    |  | Certificate of Amendment to the Articles of Incorporation, filed May 4, 2000                                                                                                                      
|        | 
|3.3*    |  | Certificate of Determination of Rights, Preferences and Privileges of Series B Convertible Perpetual Preferred Stock, filed December 14, 2001                                                     
|        | 
|3.4     |  | Certificate of Amendment to the Articles of Incorporation filed July 25, 2003 (3)                                                                                                                 
|        | 
|3.5     |  | Certificate of Amendment to the Articles of Incorporation, filed May 25, 2005 (5)                                                                                                                 
|        | 
|3.6     |  | Certificate of Amendment to the Articles of Incorporation, filed June 29, 2006 (7)                                                                                                                
|        | 
|3.7*    |  | Bylaws of the Company, as amended and restated                                                                                                                                                    
|        | 
|4.1     |  | Indenture for Junior Subordinated Debt Securities, dated as of July 16, 2001 (11)                                                                                                                 
|        | 
|4.2     |  | Indenture for Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures, dated as of January 25, 2007 (8)                                                                            
|        | 
|10.1    |  | Employment Agreement dated January 1, 1999 between Mercantile National Bank and Scott A. Montgomery (10)                                                                                          
|        | 
|10.2    |  | Amendment to Employment Agreement among National Mercantile Bancorp, Mercantile National Bank and Scott A. Montgomery (2)                                                                         
|        | 
|10.3    |  | Letter dated June 15, 2006 amending Employment Agreement between National Mercantile Bancorp and Scott A. Montgomery (6)                                                                          
|        | 
|10.4*   |  | Form of Indemnity Agreement between the Company and its directors                                                                                                                                 
|        | 
|10.5    |  | National Mercantile Bancorp Amended 1996 Stock Incentive Plan (1)                                                                                                                                 
|        | 
|10.6    |  | Form of Agreement for National Mercantile Bancorp Amended 1996 Stock Incentive Plan (3)                                                                                                           
|        | 
|10.7    |  | National Mercantile Bancorp 2005 Stock Incentive Plan (4)                                                                                                                                         
|        | 
|10.8    |  | Form of Non-Qualified Stock Option Agreement for National Mercantile Bancorp 2005 Stock Incentive Plan (4)                                                                                        
|        | 
|10.9    |  | Form of Incentive Stock Option Agreement for National Mercantile Bancorp 2005 Stock Incentive Plan (4)                                                                                            
|        | 
|10.10   |  | Amended and Restated Declaration of Trust of National Mercantile Capital Trust I, dated as of June 27, 2001 (11)                                                                                  
|        | 
|10.11   |  | Guarantee Agreement of National Mercantile Bancorp for trust preferred securities dated July 16, 2001 (11)                                                                                        
|        | 
|10.12   |  | Placement Agreement, dated January 24, 2007, among National Mercantile Bancorp, First California Capital Trust I, FTN Financial Capital Markets and Keefe, Bruyette & Woods, Inc.
(8)             
|        | 
|10.13   |  | Amended and Restated Declaration of Trust among National Mercantile Bancorp, as Sponsor, the Administrators named therein, and Wilmington Trust Company, as Institutional and Delaware
Trustee (8)
|        | 
|10.14   |  | Guarantee Agreement between National Mercantile Bancorp and Wilmington Trust Company, as Guarantee Trustee (8)                                                                                    
|        | 
|10.15   |  | Second Amended and Restated Severance Agreement, dated as of June 15, 2006, by and between National Mercantile Bancorp and David Brown (6)                                                        



85



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|        |  |                                                                                                                                                                                                                                                                    
|------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                                    
|10.16   |  | Second Amended and Restated Severance Agreement, dated as of June 15, 2006, by and between National Mercantile Bancorp and Robert W. Bartlett (6)                                                                                                                  
|        | 
|10.17   |  | Lease dated as of November 12, 2003 between Century Park and Mercantile National Bank relating to Suite 800 offices at 1880 Century Park East, Los Angeles, California (2)                                                                                         
|        | 
|10.18   |  | Lease dated as of September 19, 2003 between Metropolitan Life Insurance Company and Mercantile National Bank relating to offices at 3070 Bristol Street, Costa Mesa, California
(3)                                                                               
|        | 
|10.19   |  | Lease dated as of November 12, 2003 between Century Park and Mercantile National Bank relating to ground floor offices at 1880 Century Park East, Los Angeles, California (3)                                                                                      
|        | 
|10.20   |  | Lease dated as of March 29, 2005 between Brighton Enterprises, LLC and Mercantile National Bank relating to offices at 9601 Wilshire Boulevard, Beverly Hills, California (3)                                                                                      
|        | 
|10.21   |  | Lease dated as of September 10, 2004 between Encino Corporate Plaza, LP and Mercantile National Bank relating to offices at 16661 Ventura Boulevard, Encino, California (3)                                                                                        
|        | 
|10.22   |  | Mercantile National Bank Deferred Compensation Plan and Form of Agreement (3)                                                                                                                                                                                      
|        | 
|11*     |  | Statement regarding computation of per share earnings (see Note 1-Summary of Significant Accounting Policies-Earnings Per Share  of the Notes to the Consolidated
Financial Statements in Item 7. Financial Statements in this Annual Report on Form 10-KSB)
|        | 
|21.1*   |  | Subsidiaries of the Registrant                                                                                                                                                                                                                                     
|        | 
|23.1*   |  | Consent of Moss Adams LLP                                                                                                                                                                                                                                          
|        | 
|23.2*   |  | Consent of Ernst & Young LLP                                                                                                                                                                                                                                       
|        | 
|24.1*   |  | Power of Attorney (included on the signature page to this Annual Report on Form 10-KSB).                                                                                                                                                                           
|        | 
|31.1*   |  | Certification of Chief Executive Officer under Section 302 of Sarbanes-Oxley Act                                                                                                                                                                                   
|        | 
|31.2*   |  | Certification of Chief Financial Officer under Section 302 of Sarbanes-Oxley Act                                                                                                                                                                                   
|        | 
|32.1*   |  | Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of Sarbanes-Oxley Act                                                                                                                                                       

---

|* | Filed herewith
|- | --------------

|(1) | Filed as an exhibit to the Companys Registration Statement on Form S-8 dated June 20, 2003 and incorporated herein by reference.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(2) | Filed as an exhibit to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2003 and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Filed as an exhibit to the Companys Annual Report on Form 10-KSB for the year ended December 31, 2004 and incorporated herein by reference.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Filed as an exhibit to the Companys Report on Form S-8 filed May 25, 2005 and incorporated herein by this reference.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(5) | Filed as an exhibit to the Companys Annual Report on Form 10-QSB for the quarter ended June 30, 2005 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Filed as an exhibit to the Companys Report on Form 8-K dated June 21, 2006 and incorporated herein by this reference.
|--- | ----------------------------------------------------------------------------------------------------------------------

|(7) | Filed as an exhibit to the Companys Annual Report on Form 10-QSB for the quarter ended June 30, 2006 and incorporated herein by reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Filed as an exhibit to the Companys Form 8-K filed on January 30, 2007 and incorporated herein by this reference.
|--- | ------------------------------------------------------------------------------------------------------------------

|(9) | Included as an Appendix to the Joint Proxy Statement-Prospectus filed by First California Financial Group, Inc. on February 21, 2007 and incorporated herein by this reference.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Filed as an exhibit to Form S-4/A filed on December 5, 2006 by First California Financial Group, Inc. and incorporated herein by this reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Filed as an exhibit to Form S-4/A filed on January 11, 2007 by First California Financial Group, Inc. and incorporated herein by this reference.
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------



86