<PAGE>
 
-------------------------------------------------------------------------------
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                
                             AMENDMENT NO. 1     
                                       
                                    TO     
                                   FORM 10-Q
 
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934
 
                 For the quarterly period ended March 31, 1997
 
                                      OR
 
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
  SECURITIES EXCHANGE ACT OF 1934
 
               For the transition period from   N/A   to
                                             --------   -------- 
                        COMMISSION FILE NUMBER: 0-15982
 
                          NATIONAL MERCANTILE BANCORP
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                              <C>
                  CALIFORNIA                                     95-3819685
        (STATE OR OTHER JURISDICTION OF                       (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                       IDENTIFICATION NO.)
1840 CENTURY PARK EAST, LOS ANGELES, CALIFORNIA                     90067
   (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                      (ZIP CODE)
</TABLE>
 
       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (310) 277-2265
 
                                NOT APPLICABLE
  (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
                                   REPORT.)
 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [X] Yes [_] No
 
                     APPLICABLE ONLY TO CORPORATE ISSUERS:
 
  The number of shares outstanding of the registrant's Common Stock, no par
value, as of March 31, 1997 was 3,078,146.
 
  This document contains 23 pages.
 
-------------------------------------------------------------------------------
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<PAGE>
 
                                   FORM 10-Q
 
                  TABLE OF CONTENTS AND CROSS REFERENCE SHEET
 
<TABLE>
<CAPTION>
                                                                     PAGE(S) IN
                                                                     FORM 10-Q
                                                                     ----------
<S>                                                                  <C>
PART I--FINANCIAL INFORMATION
    Item 1. FINANCIAL STATEMENTS....................................     3-8
    Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
             CONDITION AND RESULTS OF OPERATIONS....................    9-21
PART II--OTHER INFORMATION
    Item 1. LEGAL PROCEEDINGS.......................................      22
    Item 2. CHANGES IN SECURITIES...................................      22
    Item 3. DEFAULTS UPON SENIOR SECURITIES.........................      22
    Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....      22
    Item 5. OTHER INFORMATION.......................................      22
    Item 6. EXHIBITS AND REPORTS ON FORM 8-K........................      22
SIGNATURES..........................................................      23
</TABLE>
 
 
 
                                       2
<PAGE>
 
ITEM 1. FINANCIAL STATEMENTS
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Consolidated Balance Sheets................................................   4
Consolidated Statements of Operations......................................   5
Consolidated Statement of Changes in Shareholders' Equity..................   6
Consolidated Statements of Cash Flows......................................   7
Notes to Consolidated Financial Statements.................................   8
</TABLE>
 
                                       3
<PAGE>
 
                   NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
 
                          CONSOLIDATED BALANCE SHEETS
 
                      MARCH 31, 1997 AND DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                        MARCH 31,  DECEMBER 31,
                                                          1997         1996
                                                       ----------- ------------
                                                       (UNAUDITED)
                                                        (DOLLARS IN THOUSANDS)
<S>                                                    <C>         <C>
                        ASSETS
                        ------
Cash and due from banks--demand.......................  $  4,932     $  5,113
Federal funds sold and securities purchased under
 agreements to resell.................................    12,400       23,000
                                                        --------     --------
  Cash and cash equivalents...........................    17,332       28,113
Securities available-for-sale, at fair value;
 aggregate amortized cost of $5,009 at March 31, 1997
 and $4,078 at December 31, 1996......................     4,895        4,002
Securities held-to-maturity, at amortized cost;
 aggregate market value of $19,094 at March 31, 1997
 and $14,355 at December 31, 1996.....................    19,379       14,395
Federal Reserve Bank and other stock..................       338          233
Loans receivable......................................    59,949       62,547
Allowance for credit losses...........................    (2,646)      (2,969)
                                                        --------     --------
  Net loans...........................................    57,303       59,578
Premises and equipment, net...........................       899          943
Other real estate owned...............................       519          556
Accrued interest receivable and other assets..........     2,103        1,596
                                                        --------     --------
                                                        $102,768     $109,416
                                                        ========     ========
         LIABILITIES AND SHAREHOLDERS' EQUITY
         ------------------------------------
Deposits:
  Noninterest-bearing demand..........................  $ 35,121     $ 34,752
  Interest-bearing demand.............................     8,399        7,292
  Money market accounts...............................    15,092       15,512
  Savings.............................................     4,399        5,650
  Time certificates of deposit:
    $100,000 and over.................................     5,619        9,214
    Under $100,000....................................    28,533       31,434
                                                        --------     --------
      Total deposits..................................    97,163      103,854
Securities sold under agreements to repurchase........       160          --
Accrued interest payable and other liabilities........       773          717
                                                        --------     --------
      Total liabilities...............................    98,096      104,571
Shareholders' equity:
  Preferred stock, no par value; authorized 1,000,000
   shares.............................................       --           --
  Common stock, no par value; authorized 10,000,000
   shares; issued and outstanding 3,078,146 at March
   31, 1997 and December 31, 1996.....................    24,614       24,614
  Accumulated deficit.................................   (19,828)     (19,693)
  Net unrealized loss on securities available-for-
   sale...............................................      (114)         (76)
                                                        --------     --------
      Total shareholders' equity......................     4,672        4,845
                                                        --------     --------
                                                        $102,768     $109,416
                                                        ========     ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       4
<PAGE>
 
                   NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
               THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                 1997    1996
                                                                ------  ------
                                                                 (DOLLARS IN
                                                                 THOUSANDS,
                                                                 EXCEPT PER
                                                                 SHARE DATA)
<S>                                                             <C>     <C>
Interest income:
  Loans, including fees........................................ $1,473  $1,800
  Securities held-to-maturity..................................    287     --
  Securities available-for-sale................................     85     282
  Federal funds sold and securities purchased under agreements
   to resell...................................................    170     263
                                                                ------  ------
      Total interest income....................................  2,015   2,345
Interest expense:
  Interest-bearing demand......................................     19      19
  Money market and savings.....................................    139     174
  Time certificates of deposit:
    $100,000 and over..........................................    109     128
    Under $100,000.............................................    437     563
                                                                ------  ------
      Total interest expense on deposits.......................    704     884
  Federal funds purchased and securities sold under agreements
   to repurchase...............................................      7       8
                                                                ------  ------
      Total interest expense...................................    711     892
                                                                ------  ------
      Net interest income......................................  1,304   1,453
Provision for credit losses....................................    --      --
                                                                ------  ------
      Net interest income after provision for loan losses......  1,304   1,453
Other operating income (loss):
  Loss on sale of securities available-for-sale................      0      (1)
  International services.......................................     23      42
  Investment services..........................................      5      29
  Deposit-related and other customer services..................     90      98
                                                                ------  ------
      Total other operating income.............................    118     168
Other operating expenses:
  Salaries and related benefits................................    725     692
  Net occupancy................................................    209     192
  Furniture and equipment......................................     58      85
  Printing and communications..................................     64      62
  Insurance and regulatory assessments.........................    131     166
  Customer services............................................    125     140
  Computer data processing.....................................     84      95
  Legal services...............................................     65      77
  Other professional services..................................     50     191
  Promotion....................................................     24      23
  Other real estate owned expenses.............................      6       7
  Other expenses...............................................     16      27
                                                                ------  ------
      Total other operating expenses...........................  1,557   1,757
                                                                ------  ------
      Loss before provision for income taxes...................   (135)   (136)
Provision for income taxes.....................................    --      --
                                                                ------  ------
      Net loss................................................. $ (135) $ (136)
                                                                ======  ======
      Net loss per share....................................... $(0.04) $(0.04)
                                                                ======  ======
</TABLE>
          See accompanying notes to consolidated financial statements.
 
                                       5
<PAGE>
 
                   NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
 
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 
                    THREE-MONTH PERIOD ENDED MARCH 31, 1997
                                  (UNAUDITED)
 
<TABLE>   
<CAPTION>
                                                                NET
                                                             UNREALIZED
                                                              LOSS ON
                                 COMMON STOCK                SECURITIES
                               ----------------- ACCUMULATED AVAILABLE-
                                SHARES   AMOUNT    DEFICIT    FOR-SALE  TOTAL
                               --------- ------- ----------- ---------- ------
                                           (DOLLARS IN THOUSANDS)
<S>                            <C>       <C>     <C>         <C>        <C>
Balance at January 1, 1997.... 3,078,146 $24,614  $(19,693)    $ (76)   $4,845
  Net unrealized loss on
   securities available-for-
   sale.......................       --      --        --        (38)      (38)
  Net loss....................       --      --       (135)      --       (135)
                               --------- -------  --------     -----    ------
Balance at March 31, 1997..... 3,078,146 $24,614  $(19,828)    $(114)   $4,672
                               ========= =======  ========     =====    ======
</TABLE>    
 
 
 
          See accompanying notes to consolidated financial statements.
 
                                       6
<PAGE>
 
                   NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
               THREE-MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                          1997         1996
                                                       -----------  -----------
                                                       (DOLLARS IN THOUSANDS)
<S>                                                    <C>          <C>
Net cash flows from operating activities:
  Net loss............................................ $      (135) $     (136)
  Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
    Depreciation and amortization.....................          44          60
    Net loss on securities available-for-sale.........         --            1
    Net accretion of discounts on securities held-to-
     maturity.........................................         (13)        --
    Net amortization of premiums (accretion of
     discounts) on securities available-for-sale......          (1)         18
    Net amortization of premiums (accretion of
     discounts) on loans purchased....................          (9)         13
    Decrease (increase) in accrued interest receivable
     and other assets.................................        (470)        123
    Increase in accrued interest payable and other
     liabilities......................................          56         363
                                                       -----------  ----------
      Net cash provided by (used in) operating
       activities.....................................        (528)        442
Cash flows from investing activities:
  Purchase of securities held-to-maturity.............      (4,971)        --
  Purchase of securities available-for-sale...........      (2,105)     (1,000)
  Proceeds from sales of securities available-for-
   sale...............................................       1,000         114
  Proceeds from repayments and maturities of securi-
   ties available-for-sale............................          70       1,438
  Net decrease in loans...............................       2,284       6,241
  Net purchases of premises and equipment.............         --           (9)
                                                       -----------  ----------
      Net cash provided by (used in) investing
       activities.....................................      (3,722)      6,784
Cash flows from financing activities:
  Net decrease in demand deposits, money market and
   savings accounts...................................        (195)     (3,698)
  Net decrease in time certificates of deposits.......      (6,496)     (2,307)
  Net increase (decrease) in securities sold under
   agreement to repurchase and
   federal funds purchased............................         160      (3,441)
                                                       -----------  ----------
      Net cash used in financing activities...........      (6,531)     (9,446)
                                                       -----------  ----------
Net decrease in cash and cash equivalents.............     (10,781)     (2,220)
Cash and cash equivalents, January 1..................      28,113      30,272
                                                       -----------  ----------
Cash and cash equivalents, March 31................... $    17,332  $   28,052
                                                       ===========  ==========
Supplemental cash flow information:
  Cash paid for:
    Interest.......................................... $       693  $      901
    Income taxes...................................... $       --   $      --
  Unrealized loss on securities available-for-sale.... $        38  $       68
</TABLE>
 
     See accompanying notes to condensed consolidated financial statements.
 
                                       7
<PAGE>
 
                  NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1--BASIS OF PRESENTATION AND MANAGEMENT REPRESENTATIONS
 
  The unaudited consolidated financial statements include the accounts of
National Mercantile Bancorp (the "Company") and its wholly owned subsidiary,
Mercantile National Bank (the "Bank") both sometimes referred to as "Company".
These unaudited financial statements reflect, in management's opinion, all
adjustments (consisting of normal recurring adjustments) necessary for the
fair presentation of the Company's financial position and the results of its
operations and cash flows for the periods presented. The results for the
quarter ended March 31, 1997 are not necessarily indicative of the results
expected for any subsequent period or for the full year ending December 31,
1997. These financial statements should be read in conjunction with the
financial statements included in the 1996 Annual Report on Form 10-K for the
year ended December 31, 1996 ("1996 Form 10-K").
 
NOTE 2--LOSS PER SHARE
 
  Loss per share is computed using the weighted average number of common
shares outstanding during the period. The weighted average number of common
shares outstanding for the quarters ended March 31, 1997 and 1996 was
3,078,146.
 
  Loss per share computations exclude common share equivalents since the
effect would be to reduce the loss per share amount. Common share equivalents
include the number of shares issuable upon the exercise of stock options less
the number of shares that could have been purchased with the proceeds from the
exercise of the options based upon the higher of the average price of common
shares during the period or the price at the balance sheet date.
 
                                       8
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
   AND RESULTS OF OPERATIONS
 
FINANCIAL CONDITION
 
  The Company's consolidated assets decreased during the first quarter of
1997. At March 31, 1997, the Company's consolidated assets decreased by $6.6
million or 6.1% to $102.8 million from $109.4 million at December 31, 1996.
This decrease was due primarily to a $10.8 million decrease in cash and cash
equivalents, $5.0 million increase in securities held-to-maturity, and a $2.3
million decrease in net loans. Consolidated assets decreased by $19.9 million,
or 16.2%, from $122.7 million at March 31, 1996. This decrease was primarily
the net result of a $14.6 million decrease in securities available-for-sale, a
$14.7 million decrease in net loans and a $19.4 million increase in securities
held-to-maturity. Customer deposits decreased by 6.4%, or $6.7 million to
$97.2 million at March 31, 1997, from $103.9 million at December 31, 1996 and
$17.1 million, or 14.9%, from $114.2 million at March 31, 1996.
 
  Securities increased to $24.6 million at March 31, 1997, from $18.6 million
at December 31, 1996, and $19.8 million at March 31, 1996. The increase was
primarily due to the purchase of $5.0 million of U.S. government-sponsored
agency and Treasury securities. During the first quarter of 1997, securities
valued at $1.0 million were sold at approximately book value. Net unrealized
losses on securities available-for-sale at March 31, 1997 was $114,000,
compared with $76,000 at December 31, 1996.
 
  During the first quarter of 1997, gross loans outstanding decreased $2.6
million or 4.2%, to $60.2 million from $62.8 million at December 31, 1996.
Loans secured by real estate comprised 65% and 64% of gross loans at March 31,
1997 and December 31, 1996. The Bank's allowance for loan losses as a
percentage of loans receivable decreased to 4.41% at March 31, 1997 from 4.75%
at December 31, 1996, and 5.06% at March 31, 1996 due to loan charge-offs of
$323,000, net of recoveries of loans previously charged-off of $126,000,
during the first quarter of 1997.
 
  During the first quarter of 1997, the Bank experienced a decline in total
deposits of $6.7 million or 6.4% to $97.2 million from $103.9 million at
December 31, 1996. This decrease was primarily due to the planned reduction of
high cost time certificates of deposits.
 
OPERATING RESULTS
 
  The Company recorded a net loss for the quarter ended March 31, 1997 of
$135,000 or $0.04 loss per share, as compared with a net loss for the quarter
ended March 31, 1996 of $136,000 or $0.04 loss per share.
   
  Total interest income for the quarter ended March 31, 1997 was $2.0 million
compared to $2.3 million for the corresponding period of 1996. Total interest
expense for the quarters ended March 31, 1997 and 1996 was $711,000 and
$892,000, respectively. Net interest income for the quarters ended March 31,
1997 decreased to $1.3 million from $1.5 million for the quarter ended
December 31, 1996. The reduction in loans, securities and customer deposits
which caused a decrease in net interest income for the quarter ended March 31,
1997, is consistent with the Company's planned restructuring of the balance
sheet.     
 
  No provision was made for credit losses for the quarters ended March 31,
1997 and 1996. Charge-offs for the first quarter of 1997 and 1996 were
$449,000 and $54,000, respectively. Recoveries of loans previously charged-off
for the first quarter of 1997 and 1996 were $126,000 and $86,000,
respectively. Each month the Company reviews the allowance for credit losses
and makes additional transfers to the allowance for credit losses as needed.
As of March 31, 1997, the Company believes based on its periodic analysis that
the allowance for credit losses was adequate.
 
  Other operating income decreased to $118,000 for the quarter ended March 31,
1997 from $168,000 for the corresponding period in 1996. The decrease was
primarily due to volume reductions in investment and international services.
The international services department was closed in December, 1995, resulting
in reduced letter of credit and foreign exchange functions.
 
                                       9
<PAGE>
 
  Other operating expenses decreased $200,000, or 11.4%, to $1.6 million for
the first quarter of 1997 from $1.8 million for the corresponding period in
1996. The reduction between the quarters was primarily the result of the
decrease in insurance and regulatory assessments of $35,000 and a decrease in
other professional services of $141,000, partially offset by an increase in
salaries and related expenses of $33,000. These reductions are the result of
management's continued effort to reduce the utilization of outside consultants
through the addition of executive management and the streamlining of operating
functions.
 
  The Company has recognized losses for financial statement purposes which
have not yet been recognized on an income tax return. No deferred benefit was
recorded for these losses since all available income tax benefits were
recognized in prior years. As a result of existing net operating loss
carryforwards ("NOL") for financial statement purposes (discussed in the 1996
Form 10-K), the Company's 1997 and 1996 net losses did not give rise to
additional income tax benefits. At December 31, 1996, the Company had $22.3
million and $11.8 million of income tax NOL for federal and state income tax
purposes, respectively. The federal NOL expires beginning in 2007 through 2011
and the state NOL expires beginning in 1997 through 2001.
 
                                      10
<PAGE>
 
NET INTEREST INCOME AND INTEREST RATE RISK
 
NET INTEREST INCOME
 
  The Company's earnings depend largely upon net interest income, representing
the amount by which interest generated from earning assets exceeds interest
expense on interest-bearing liabilities. A primary factor affecting the level
of net interest income is the Bank's net interest margin representing the
difference between the yield earned on interest-earning assets and the rate
paid on interest-bearing liabilities. The net interest margin is affected by
the change in the relative amounts of average interest-earning assets and
average interest-bearing liabilities. In addition, the Company's ability to
generate profitable levels of net interest income is dependent on its ability
to maintain sound asset quality and appropriate levels of capital and
liquidity.
 
          AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
 
<TABLE>   
<CAPTION>
                                                    THREE-MONTH PERIODS ENDED
                          --------------------------------------------------------------------------------
                               MARCH 31, 1997            DECEMBER 31, 1996           MARCH 31, 1996
                          -------------------------- -------------------------- --------------------------
                          AVERAGE                    AVERAGE                    AVERAGE
                          BALANCES  INTEREST AVERAGE BALANCES  INTEREST AVERAGE BALANCES  INTEREST AVERAGE
                          --------  INCOME/  YIELD/  --------  INCOME/  YIELD/  --------  INCOME/  YIELD/
                           AMOUNT   EXPENSE   RATE    AMOUNT   EXPENSE   RATE    AMOUNT   EXPENSE   RATE
                          --------  -------- ------- --------  -------- ------- --------  -------- -------
                                                     (DOLLARS IN THOUSANDS)
<S>                       <C>       <C>      <C>     <C>       <C>      <C>     <C>       <C>      <C>
Federal funds sold and
 securities purchased
 under agreements to
 resell.................  $ 12,993   $  170   5.31%  $ 22,867   $  304   5.29%  $ 20,090   $  263   5.27%
Securities held-to-
 maturity:
 U.S. Treasury and
  agency, corporate and
  other securities......    17,463      287   6.67%     3,531       62   6.98%       --       --     --
Securities available-
 for-sale:
 U.S. Treasury and
  agency, corporate and
  other securities......     6,081       85   5.67%    10,263      133   5.16%    19,908      282   5.70%
Loans(1)(2).............    61,599    1,473   9.70%    63,408    1,564   9.81%    77,778    1,800   9.31%
                          --------   ------          --------   ------          --------   ------
 Total earning assets...  $ 98,136   $2,015   8.33%  $100,069   $2,063   8.20%  $117,776   $2,345   8.01%
                                     ------                     ------                     ------
Nonearning assets:
 Cash and due from
  banks--demand.........     4,736                      5,226                      6,990
 Other assets...........     3,199                      2,868                      2,889
 Allowance for credit
  losses................    (2,976)                    (3,034)                    (3,823)
                          --------                   --------                   --------
 Total assets...........  $103,095                   $105,130                   $123,832
                          ========                   ========                   ========
Liabilities and
 shareholder's equity:
Interest-bearing
 deposits:
 Demand.................  $  6,078   $   19   1.27%  $  5,133   $   17   1.32%  $  6,064   $   19   1.26%
 Money market and
  savings...............    19,463      139   2.90%    21,453      158   2.93%    23,571      174   2.97%
 Time certificates of
  deposit:
 $100,000 or more.......     8,081      109   5.47%     7,269       99   5.42%     8,345      128   6.17%
 Under $100,000.........    30,353      437   5.84%    27,673      412   5.92%    38,590      563   5.87%
                          --------   ------          --------   ------          --------   ------
 Total time certificates
  of deposit............    38,434      546   5.76%    34,942      511   5.82%    46,935      691   5.92%
                          --------   ------          --------   ------          --------   ------
 Total interest-bearing
  deposits..............    63,975      704   4.46%    61,528      686   4.44%    76,570      884   4.64%
Federal funds purchased
 and securities sold
 under agreement to
 repurchase.............       131        1   3.10%       357        2   2.23%     1,344        8   2.39%
Other short-term
 borrowings.............       505        6   4.82%       --       --     --         --       --     --
                          --------   ------          --------   ------          --------   ------
 Total interest-bearing
  liabilities...........  $ 64,611   $  711   4.46%  $ 61,885   $  688   4.42%  $ 77,914   $  892   4.60%
                                     ------                     ------                     ------
Noninterest-bearing
 liabilities:
 Noninterest-bearing
  demand deposits.......    32,844                     36,600                     38,579
 Other liabilities......       768                      1,699                      1,112
Shareholders' equity....     4,872                      4,946                      6,227
                          --------                   --------                   --------
 Total liabilities and
  shareholders' equity..  $103,095                   $105,130                   $123,832
                          ========                   ========                   ========
Net interest income
 (spread)...............             $1,304   3.86%             $1,375   3.78%             $1,453   3.40%
                                     ======   ====              ======   ====              ======   ====
Excess of earning assets
 over interest-bearing
 liabilities(2).........  $ 33,525                   $ 38,183                   $ 39,862
                          ========                   ========                   ========
Net yield on earning
 assets.................                      5.39%                      5.47%                      4.96%
                                              ====                       ====                       ====
Loans as a percent of
 total deposits ("loan-
 to-deposit ratio").....      63.6%                      64.6%                      67.5%
                          ========                   ========                   ========
</TABLE>    
-------
(1)Average balances of loans outstanding include all nonperforming loans.
(2) Included in interest income on loans are net loan origination fees
    (costs), representing an adjustment to yield, amounting to $21,000, $5,300
    and $(8,400) for the three-month periods ended March 31, 1997, December
    31, 1996, and March 31, 1996, respectively.
 
                                      11
<PAGE>
 
  The weighted average yield on loans receivable was 9.70% for the quarter
ended March 31, 1997, compared with 9.31% for the corresponding period in
1996. The weighted average yield on total earning assets was 8.33% for the
quarter ended March 31, 1997, compared with 8.01% for the corresponding period
in 1996. The weighted average rate on interest-bearing deposits was 4.46% for
the quarter ended March 31, 1997, compared with 4.64% for the corresponding
period in 1996. The Company analyzes its earnings performance using, among
other measures, the interest rate spread (the difference between the yield
earned on assets and rates paid on liabilities) and net yield on earning
assets (net interest income expressed as a percentage of average total
interest-earnings assets).
 
  During the quarter ended March 31, 1997, the Company's asset base decreased,
and as a result, average interest-earning assets and average interest-bearing
liabilities decreased as well. Average interest-earning assets for the quarter
ended March 31, 1997 decreased to $98.1 million, compared with $100.1 million
for the quarter ended December 31, 1996, and $117.8 million for the quarter
ended March 31, 1996. Average interest-earning assets as a percentage of total
average assets for the quarters ended March 31, 1997 and December 31, 1996 was
95.2%, compared with 95.1% for the quarter ended March 31, 1996. Average
interest-bearing liabilities for the quarter ended March 31, 1997 increased to
$64.6 million, compared with $61.9 million for the quarter ended December 31,
1996, but decreased from $77.9 million for the quarter ended March 31, 1996.
Average interest-bearing liabilities as a percentage of total average assets
for the quarter ended March 31, 1997 increased to 62.7%, compared with 58.9%
for the quarter ended December 31, 1996, and 62.9% for the quarter ended
March 31, 1996.
   
  The average balance of noninterest-bearing deposits for the quarter ended
March 31, 1997 decreased to $32.8 million from $36.6 million for the quarter
ended December 31, 1996 and from $38.6 million for the quarter ended March 31,
1996. The average balance of noninterest-bearing deposits as a percentage of
total deposits decreased to 33.7% at March 31, 1997, as compared with 37.2%
and 33.1% at December 31, 1996 and March 31, 1996, respectively.     
 
  Foregone interest income attributable to nonperforming loans amounted to
$48,000 for the quarter ended March 31, 1997, compared with $56,000 for the
corresponding period in 1996. (See "Credit Portfolio Composition and Credit
Risk" for a discussion of the Company's asset credit quality experience and
the effects of nonperforming loans on the provision and allowance for credit
losses.)
 
  The Company's net yield on interest-earning assets remains high in
comparison with the interest rate spread due to the continued significance of
noninterest-bearing demand deposits relative to total funding sources. While
these deposits are noninterest-bearing, they are not cost-free funds. The
Company incurs substantial other operating expense to provide accounting, data
processing and other banking-related services to real estate title and escrow
clients to the extent that certain average noninterest-bearing deposits are
maintained by such depositors, and such deposit relationships are deemed to be
profitable. Client service expense related to these deposits is classified as
other operating expense. If client service expenses related to real estate
title and escrow clients were classified as interest expense, the Company's
reported interest expense would increase and other operating expense would
decrease by $62,000 and $82,000 for the quarters ended March 31, 1997 and
1996.
 
                                      12
<PAGE>
 
CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK
 
 LOAN PORTFOLIO COMPOSITION AND ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES
 
<TABLE>   
<CAPTION>
                                                          DECEMBER 31,
                                        MARCH 31,    --------------------------
                                          1997          1996          1995
                                       ------------  ------------  ------------
                                             (DOLLARS IN THOUSANDS)
<S>                                    <C>      <C>  <C>      <C>  <C>      <C>
Loan Portfolio Composition:
  Real estate construction and land
   development.......................  $ 3,394    6% $ 3,441    5% $ 4,185    5%
  Commercial loans:
    Secured by one to four family
     residential properties..........    6,062   10%   6,233   11%   9,637   12%
    Secured by multifamily
     residential properties..........    2,869    5%   2,879    5%   2,876    3%
    Secured by commercial real
     properties......................   25,654   43%  26,629   42%  28,734   35%
    Other--secured and unsecured.....   15,154   25%  16,508   26%  27,393   33%
  Home equity lines of credit........      462    1%     581    1%   3,983    5%
  Consumer installment and unsecured
   loans to individuals..............    6,602   10%   6,545   10%   5,435    7%
                                       -------  ---  -------  ---  -------  ---
Gross loans outstanding..............  $60,197  100% $62,816  100% $82,243  100%
  Deferred net loan origination fees,
   purchased loan discount and gains
   on termination of interest rate
   hedging contracts.................     (248)         (269)         (231)
                                       -------       -------       -------
  Loans receivable...................  $59,949       $62,547       $82,012
                                       =======       =======       =======
Allocation of the allowance for
 credit losses:
  Real estate construction and land
   development.......................  $    64       $    42       $    11
  Commercial loans:
    Secured by one to four family
     residential properties..........      231           479           205
    Secured by multifamily
     residential properties..........       54            41            25
    Secured by commercial real
     properties......................      738           590           454
    Other--secured and unsecured.....    1,332         1,642         2,521
  Home equity lines of credit........       12            13            64
  Consumer installment and unsecured
   loans to individuals..............      214           161           523
                                       -------       -------       -------
    Allowance allocable to loans
     receivable......................    2,645         2,968         3,803
  Commitments to extend credit under
   standby and commercial letters of
   credit............................        1             1             2
                                       -------       -------       -------
  Total allowance for credit losses..  $ 2,646       $ 2,969       $ 3,805
                                       =======       =======       =======
Allowance for credit losses allocable
 as a percent of loans receivable....     4.41%         4.75%         4.64%
                                       =======       =======       =======
</TABLE>    
 
  The Bank's real estate construction and land development loans are primarily
short-term interim loans made to finance construction of commercial and single
family residential property. Commercial loans secured by real estate consist
primarily of loans made based on the borrower's cash flow and which are
secured by deeds of trust on commercial and residential property to provide
another source of repayment in the event of default. Other secured and
unsecured commercial loans include revolving lines of credit, term loans for
equipment and short-term working capital lines of credit.
 
                                      13
<PAGE>
 
NONPERFORMING ASSETS
 
                             NONPERFORMING ASSETS
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31,
                                                   MARCH 31, --------------
                                                     1997     1996    1995
                                                   --------- ------  ------
                                                   (DOLLARS IN THOUSANDS)
<S>                                                <C>       <C>     <C>     <C>
Nonaccrual loans.................................   $  871   $  928  $  573
Troubled debt restructurings.....................    5,004    5,016   5,167
Loans contractually past due 90 days or more with
 respect to either principal or interest and
 still accruing interest.........................       14      300     221
                                                    ------   ------  ------
  Nonperforming loans............................    5,889    6,244   5,961
Other real estate owned..........................      519      556     581
                                                    ------   ------  ------
Total nonperforming assets.......................   $6,408   $6,800  $6,542
                                                    ======   ======  ======
Allowance for loan losses as a percent of
 nonaccrual loans................................    303.8%   319.9%  664.0%
                                                    ======   ======  ======
Allowance for loan losses as a percent of
 nonperforming loans.............................     44.9%    47.5%   63.8%
                                                    ======   ======  ======
Total nonperforming assets as a percent of loans
 receivable......................................     10.7%    10.9%    8.0%
                                                    ======   ======  ======
Total nonperforming assets as a percent of total
 shareholders' equity............................    137.2%   140.4%  108.8%
                                                    ======   ======  ======
</TABLE>
   
  The level of nonperforming assets, as presented in Table 3, decreased
$400,000 during the first quarter of 1997 to $6.4 million from $6.8 million at
December 31, 1996. Included in nonperforming assets is other real estate owned
of $519,000 and $556,000 at March 31, 1997 and December 31, 1996,
respectively.     
 
  Nonaccrual loans decreased $57,000 during the first quarter of 1997 to
$871,000 as compared with $928,000 at December 31, 1996 and $1.9 million at
March 31, 1996. (See "Net Interest Income and Interest Rate Risk" for a
discussion of the effects on operating results of nonaccruing loans.)
 
  Troubled debt restructurings ("TDR") represent loans for which the Company
has modified the terms of loans to borrowers by reductions in interest rates
or extensions of maturity dates at below-market rates for loans with similar
credit risk characteristics. TDRs totaled $5.0 million at March 31, 1997 and
December 31, 1996, compared with $5.2 at March 31, 1996. Included in TDRs is
one loan with a balance of $4.9 million that is secured by a first deed of
trust on a single family residence which, as of December 31, 1996, had an
appraised value of $10 million.
 
  Loan delinquencies greater than 30 days past due increased to $2.5 million
or 4.2% of loans receivable at March 31, 1997 from $2.3 million or 3.7% of
loans receivable at December 31, 1996. Loans contractually past due 90 days or
more and still accruing interest decreased to $14,000 at March 31, 1997 from
$300,000 at December 31, 1996.
 
 
                                      14
<PAGE>
 
            ANALYSIS OF CHANGES IN THE ALLOWANCE FOR CREDIT LOSSES
 
<TABLE>   
<CAPTION>
                                                  THREE-MONTH PERIODS ENDED
                                               --------------------------------
                                               MARCH 31, DECEMBER 31, MARCH 31,
                                                 1997        1996       1996
                                               --------- ------------ ---------
                                                    (DOLLARS IN THOUSANDS)
<S>                                            <C>       <C>          <C>
Balance at beginning of period................  $2,969      $3,052     $3,805
Loans charged-off:
  Real estate construction and land
   development................................     --          --         --
  Commercial loans:
    Secured by one to four family residential
     properties...............................     204         --         --
    Secured by multifamily residential
     properties...............................     --          --         --
    Secured by commercial real properties.....      52         --         --
    Other--secured and unsecured..............     159          16         54
  Home equity lines of credit.................     --          --         --
  Consumer installment and unsecured loans to
   individuals................................      34          94        --
                                                ------      ------     ------
    Total loan charge-offs....................     449         110         54
Recoveries of loans previously charged-off:
  Real estate construction and land
   development................................     --          --         --
  Commercial loans:
    Secured by one to four family residential
     properties...............................     --          --           1
    Secured by multifamily residential
     properties...............................     --          --         --
    Secured by commercial real properties.....     --          --         --
    Other--secured and unsecured..............     119          22         75
  Home equity lines of credit.................     --          --         --
  Consumer installment and unsecured loans to
   individuals................................       7           5         10
                                                ------      ------     ------
    Total recoveries of loans previously
     charged-off..............................     126          27         86
                                                ------      ------     ------
Net loan charge-offs (recoveries).............     323          83        (32)
Provision for loan losses.....................     --          --         --
                                                ------      ------     ------
Balance at end of period......................  $2,646      $2,969     $3,837
                                                ======      ======     ======
</TABLE>    
 
  Loan charged-offs were $449,000 for the first quarter, as compared with
$54,000 for the corresponding period in 1996. Recoveries of loans previously
charged-off totaled $126,000 for the first quarter, as compared with $86,000
during the first quarter of 1996.
 
  The Financial Accounting Standards Board issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan" ("SFAS 114") considers a loan impaired
when, based on current information and events, it is probable a creditor will
be unable to collect all amounts contractually due under a loan agreement. Due
to the size and nature of the Bank's loan portfolio, impaired loans are
determined by a periodic evaluation on an individual loan basis.
 
  At March 31, 1997 and 1996, the Bank had classified $910,000 and $2.0
million of its loans as impaired under SFAS No. 114, with specific reserves of
$220,000 and $1.0 million, respectively. In addition, $5.9 million and $7.3
million of the Bank's loans were classified as impaired with no related
specific reserves at March 31, 1997 and 1996, respectively. The average
recorded investment in impaired loans during the quarters ended March 31, 1997
and 1996 was $7.0 million and $9.4 million, respectively. Impaired loans as of
March 31, 1997 included nonaccrual loans of $871,000. Interest income on
impaired loans which are performing is recognized on an accrual basis and
interest income on such loans totaled $148,000 and $193,000 for the first
quarters of 1997 and 1996, respectively. Of the investment in loans that are
considered to be impaired at March 31, 1997, $4.9 million or 72.0% was
represented by a loan that is collateralized by a single family residence
which, as of December 31, 1996, had an appraised value of $10 million.
 
                                      15
<PAGE>
 
INTEREST RATE RISK MANAGEMENT
 
  Interest rate risk management focuses on controlling changes in net interest
income that result from fluctuating market interest rates as they impact the
rates earned and paid on interest-earning assets and interest-bearing
liabilities whose interest rates are subject to change prior to their
maturity. Net interest income is subject to fluctuations arising from changes
in market interest rates to the extent that the yields on various categories
of earning assets respond differently to such changes from the costs of
interest rate-sensitive funding sources.
 
   INTEREST RATE MATURITIES OF ASSETS AND FUNDING SOURCES AT MARCH 31, 1997
 
<TABLE>
<CAPTION>
                                                    1997
                                      AMOUNTS MATURING OR REPRICING IN
                          -----------------------------------------------------------
                                     AFTER
                           LESS      THREE    AFTER ONE
                           THAN      MONTHS      YEAR
                           THREE   BUT WITHIN BUT WITHIN  AFTER   NOT RATE
                          MONTHS    ONE YEAR   5 YEARS   5 YEARS  SENSITIVE   TOTAL
                          -------  ---------- ---------- -------  ---------  --------
                                           (DOLLARS IN THOUSANDS)
<S>                       <C>      <C>        <C>        <C>      <C>        <C>
        ASSETS:
        -------
Federal Funds sold and
 securities purchased
 under agreements to
 resell.................  $12,400   $   --     $   --    $   --   $    --    $ 12,400
Securities held-to-
 maturity...............      --        984     18,395       --        --      19,379
Securities held-for-
 sale...................    2,000       --         --      2,895       --       4,895
Federal Reserve Bank and
 other stock............      --        --         --        338       --         338
Loans receivable........   34,173    19,514      4,028     2,234       --      59,949
                          -------   -------    -------   -------  --------   --------
  Total earning assets..   48,573    20,498     22,423     5,467       --      96,961
Non-earning assets
Cash and due from banks.      --        --         --        --      4,932      4,932
Other real estate owned.      --        --         --        --        519        519
All other assets........      --        --         --        --      3,002      3,002
Allowance for credit
 losses.................      --        --         --        --     (2,646)    (2,646)
                          -------   -------    -------   -------  --------   --------
  Total assets..........   48,573    20,498     22,423     5,467     5,807    102,768
    LIABILITIES AND
 SHAREHOLDERS' EQUITY:
 ---------------------
Interest-bearing
 Deposits:
  Interest-bearing
   demand, money market
   and savings..........   27,890       --         --        --        --      27,890
  Time certificates of
   deposit..............    7,124    20,958      6,070       --        --      34,152
Federal funds purchased
 and securities sold
 under agreements to
 repurchase.............      160       --         --        --        --         160
                          -------   -------    -------   -------  --------   --------
  Total Interest-bearing
   liabilities..........   35,174    20,958      6,070       --        --      62,202
                          -------   -------    -------   -------  --------   --------
Noninterest-bearing
 liabilities:
    Noninterest-bearing
     deposits...........      --        --         --        --     35,121     35,121
    Other liabilities...      --        --         --        --        773        773
    Shareholders'
     equity.............      --        --         --        --      4,672      4,672
                          -------   -------    -------   -------  --------   --------
Total liabilities and
 shareholders' equity...   35,174    20,958      6,070       --     40,566    102,768
                          -------   -------    -------   -------  --------   --------
Interest rate-
 sensitivity gap........   13,399      (460)    16,353     5,467   (34,759)       --
                          =======   =======    =======   =======  ========   ========
Cumulative interest
 rate-sensitivity gap...  $13,399   $12,939    $29,292   $34,759       --         --
                          =======   =======    =======   =======  ========   ========
Cumulative rate
 sensitivity gap as a
 percent of cumulative
 earning assets.........       28%       19%        32%       36%
                          =======   =======    =======   =======
</TABLE>
 
                                      16
<PAGE>
 
  Interest Rate Maturities of Assets and Funding Sources. Management also
monitors the sensitivity of net interest income to potential interest rate
changes by distributing the interest rate maturities of assets and supporting
funding liabilities into interest rate-sensitivity periods, summarizing
interest rate risk in terms of the resulting interest rate-sensitivity "gaps".
The gap position is but one of several variables that affect net interest
income. The gap measure is a static indicator and, as such, is not an
appropriate means for forecasting changes in net interest income in a dynamic
business and economic environment. Consequently, these measures are not used
in isolation by management in forecasting short-term changes in net interest
income.
 
                               CAPITAL RESOURCES
 
REGULATORY CAPITAL REQUIREMENTS AND REGULATORY AGREEMENTS
 
                  SHAREHOLDERS' EQUITY AND REGULATORY CAPITAL
 
<TABLE>
<CAPTION>
                                  MARCH 31, 1997                  DECEMBER 31, 1996
                          -------------------------------   -------------------------------
                              COMPANY          BANK            COMPANY           BANK
                          --------------- ---------------   --------------  ---------------
                           AMOUNT  ASSETS  AMOUNT   RATIO    AMOUNT  RATIO   AMOUNT   RATIO
                          -------- ------ --------  -----   -------- -----  --------  -----
                                   (UNAUDITED)
                                             (DOLLARS IN THOUSANDS)
<S>                       <C>      <C>    <C>       <C>     <C>      <C>    <C>       <C>
Risk-based
 capital(1)(3):
  Tier 1 capital........  $  4,786  7.11% $  4,775   7.10 % $  4,921 6.96%  $  4,911   6.95 %
  Tier 1 capital minimum
   requirement..........     2,692  4.00%    6,729  10.00 %    2,828 4.00%     7,071  10.00 %
                          --------  ----  --------  -----   -------- ----   --------  -----
    Excess (Deficiency).  $  2,094  3.11% $ (1,954) (2.90)% $  2,093 2.96%  $ (2,160) (3.05)%
                          ========  ====  ========  =====   ======== ====   ========  =====
  Total capital.........  $  5,649  8.39% $  5,638   8.38 % $  5,831 8.25%  $  5,820   8.24 %
  Total capital minimum
   requirement..........     5,383  8.00%    5,383   8.00 %    5,657 8.00%     5,657   8.00 %
                          --------  ----  --------  -----   -------- ----   --------  -----
    Excess..............  $    266  0.39% $    255   0.38 % $    174 0.25%  $    163   0.24 %
                          ========  ====  ========  =====   ======== ====   ========  =====
Total risk-weighted
 assets.................  $ 67,291        $ 67,291          $ 70,710        $ 70,710
Capital Leverage
 Ratio(1)(2)(3):
  Tier 1 capital........  $  4,786  4.64% $  4,775   4.63 % $  4,921 4.68%  $  4,911   4.67 %
  Tier 1 capital minimum
   requirement..........     4,127  4.00%    6,706   6.50 %    4,210 4.00%     6,841   6.50 %
                          --------  ----  --------  -----   -------- ----   --------  -----
    Excess (Deficiency).  $    659  0.64% $ (1,931) (1.87)% $    711 0.68%  $ (1,930) (1.83)%
                          ========  ====  ========  =====   ======== ====   ========  =====
Average total assets, as
 adjusted, during three-
 month periods ended
 March 31, 1997 and
 December 31, 1996......  $103,174        $103,174          $105,249        $105,249
</TABLE>
--------
(1) The Bank's minimum Tier 1 risk-based capital and Tier 1 capital leverage
    requirements are based on the provisions of the Formal Agreement, which
    became effective on December 14, 1995.
(2) The regulatory capital leverage ratio represents the ratio of Tier 1
    capital at March 31, 1997 and December 31, 1996 to average total assets
    during the respective three-month periods then ended.
(3) Tier 1 capital excludes any net unrealized gains or losses on securities
    available-for-sale recognized in the balance sheet as a result of
    implementing Statement of Financial Accounting Standards No. 115.
 
                                      17
<PAGE>
 
FORMAL AGREEMENT
 
  The Bank entered into a formal agreement with the OCC on December 14, 1995
(the "Formal Agreement"), pursuant to which the Bank is required to maintain
(i) Tier 1 capital equal to at least 6.5 percent of the Bank's adjusted total
assets ("capital leverage ratio") and (ii) Tier 1 qualifying capital equal to
at least 10.0 percent of the Bank's total risk-weighted assets ("Tier 1 risk-
based capital ratio"). The Bank's capital leverage ratio and Tier 1 risk-based
capital ratio at March 31, 1997 were 4.63% and 7.10%, respectively. At March
31, 1997, the Bank was not in compliance with the capital requirements
required by the Formal Agreement. The Formal Agreement also requires the Bank
to appoint a new chief financial officer (which the Bank had complied with in
August, 1996), to make certain determinations as to the reasonableness of any
salary, consulting fee, expense reimbursement or other type of compensation,
to review the need for, and the reasonableness of, all existing consulting,
employment and severance contracts, to prepare a written analysis of any new
products or services, to maintain the Bank's liquidity at a level sufficient
to sustain current and anticipated operations, to develop a three year capital
plan and strategic plan, and to improve the Bank's loan administration. The
Company submitted a capital plan for the Bank on February 8, 1996 to the OCC
and a copy to the FRB. The Company updated its strategic plan, which was filed
with the "OCC" in March 1996. As a result of the Bank's failure to comply with
all of the requirements of the Formal Agreement, the Bank may be subject to
further regulatory enforcement action by the OCC.
 
  The Company entered into a Memorandum of Understanding ("MOU") on October
26, 1995 with the Federal Reserve Bank of San Francisco ("FRB"). The MOU
prohibits the Company from paying dividends without prior approval of the FRB,
requires the submission of a plan to increase the Bank's capital ratios,
requires the Company to conduct a review of the senior and executive
management of the Company and the Bank, prohibits the incurrence or renewal of
debt without the FRB's approval, restricts cash expenditures in excess of
$10,000 in any month and prohibits the Company from making acquisitions or
divestitures or engaging in new lines of business without the FRB's approval.
The Company may be subject to further regulatory enforcement action by the
FRB.
 
FUTURE EFFECTS OF AGREEMENT ON DIVIDENDS
 
  There are statutory and regulatory limitations on the amount of cash
dividends which may be distributed by a national bank. As a result of those
limitations and reported net losses in 1990, 1991, 1992, 1994, 1996 and the
first quarter of 1997, the Bank could not have declared dividends to the
Company at March 31, 1997 without the prior approval of the OCC. In addition,
management expects the Formal Agreement will substantially impair the ability
of the Bank to declare and pay dividends to the Company during the foreseeable
future, since the Bank currently intends to retain any earnings in order to
augment its regulatory capital. As dividends from the Bank are the principal
source of income to the Company, it is unlikely that the Company will declare
and pay dividends in the foreseeable future. Moreover, the MOU prohibits the
Company from paying dividends to its shareholders without the prior written
approval of the FRB.
 
PLANS TO RAISE ADDITIONAL CAPITAL
 
  On February 10, 1997, the Company filed with the Securities and Exchange
Commission (the "Commission") a Registration Statement on Form S-2 pursuant to
the Securities Act of 1933, as amended, with respect to a proposed rights
offering (the "Public Offering") to its shareholders and certain qualified
investors (the "Standby Purchasers"). The Commission declared the Registration
Statement effective on May 13, 1997. The Public Offering provides for the
purchase of a minimum of $2.5 million to a maximum of $8.0 million of 6.5% non
cumulative convertible preferred stock ("Preferred Stock") with a $10.00
stated value, for a subscription price of $1.10 per share ($10.00 after giving
effect to the Company's proposed 9.09 to 1 reverse stock split). In connection
with the Public Offering, the Company has entered into purchase agreements
with the Standby Purchasers pursuant to which the Standby Purchasers have
agreed to purchase between $1.0 million and $2.5 million of Preferred Stock.
The maximum available to the Standby Purchasers is subject to a reduction
based on the level of shareholder participation.
 
                                      18
<PAGE>
 
  In addition, the Company entered into private purchase agreements with
Conrad Company, a bank holding company which is controlled by Carl Pohlad and
Wildwood Enterprises, Inc. Profit Sharing Plan and Trust (the "Private
Offering"). The Private Offering provides for the acquisition of a minimum of
$2.5 to a maximum of $5.5 million of Preferred Stock at a purchase price per
share of $1.10 per share ($10.00 after giving effect to the reverse stock
split). The shares of Preferred Stock available in the Private Offering are
subject to a reduction based on the level of shareholder participation. The
Company anticipates that between $8.0 million and $9.0 million will be raised
from the Public Offering and the Private Offering.
 
  The primary purposes of the Public Offering and the Private Offering are to
enable the Company to downstream sufficient capital to the Bank, to comply
with the capital requirements of formal regulatory agreements entered into
between the Bank and the OCC and the Company and the FRB and to facilitate the
implementation of the business strategies of the Company and the Bank.
Proceeds from the Public Offering and the Private Offering will not be used to
pay dividends on the Preferred Stock.
 
                                   LIQUIDITY
 
LIQUIDITY MANAGEMENT
 
  The accompanying consolidated statements of cash flows present certain
information about cash flows from operating, investing and financing
activities. The Bank's principal cash flows relate to investing and financing
activities, rather than operating activities. While the statements present the
periods' net cash flows from lending and deposit activities, they do not
reflect certain important aspects of the Bank's liquidity, including
(i) anticipated liquidity requirements under outstanding credit commitments to
customers (ii) intraperiod volatility of deposits, particularly fluctuations
in the volume of commercial customers' noninterest-bearing demand deposits,
and (iii) unused borrowings available under federal funds lines, repurchase
agreements and other arrangements. Management believes that the liquidity
guidelines are generally more indicative of the Bank's overall liquidity
position. A source of operating cash flows is net interest income. See "Net
Interest Income and Interest Rate Risk" for a discussion of the impact of
recent trends and events on this source of operating cash flows. While the
Bank no longer has a credit accommodation facility at a correspondent bank, an
accommodation has been put in place at the Federal Reserve Bank. Management
monitors the Bank's assets and liabilities on a daily basis to ensure that
funding sources remain adequate to meet anticipated demand. While management
believes the Bank's funding sources are adequate to meet anticipated demand,
no assurance can be made that demand on the Bank's resources will not exceed
the Bank's funding sources.
 
  The Company has only limited expenses at the present time and has no ability
to fund the Bank's cash needs. In order to meet the Bank's cash needs the Bank
must demonstrate the ability to produce a consistent level of adequate
earnings. The Bank's ability to establish adequate earnings is dependent
primarily on augmenting capital sufficient to support growth of its asset
base. See "Capital Resources--Plans to Raise Capital."
 
                                      19
<PAGE>
 
LIQUIDITY TRENDS
 
  Time certificates of deposit of $100,000 or more were $5.6 million at March
31, 1997, compared with $9.2 million at December 31, 1996 and $8.5 million at
March 31, 1996. Time certificates of deposit of $100,000 or more continued to
play a less significant role as a source of funding, representing the
continuation of a trend which began in 1991. In general, deposits of more than
$100,000 are considered to be more volatile than fully-insured deposits in
denominations of less than $100,000.
 
                   FUNDING COMPOSITION AND LIQUIDITY TRENDS
                        (BALANCES ARE PERIOD AVERAGES)
 
<TABLE>
<CAPTION>
                                              THREE-MONTH PERIOD ENDED
                          --------------------------------------------------------------------------
                           MARCH 31,    DECEMBER 31,    SEPTEMBER 30,     JUNE 30,      MARCH 31,
                             1997           1996            1996            1996           1996
                          ------------  ---------------------------------------------  -------------
                                               (DOLLARS IN THOUSANDS)
<S>                       <C>      <C>  <C>       <C>   <C>       <C>   <C>       <C>  <C>       <C>
Noninterest-bearing
 demand deposits:
 Real estate title and
  escrow company
  customers.............  $ 7,947    8% $  8,419     9% $  8,506     9% $ 11,809   11% $  8,385    7%
 All other noninterest-
  bearing demand........   24,897   26%   28,181    29%   25,458    25%   25,149   24%   30,194   26%
Interest-bearing demand,
 money market and
 savings................   25,541   26%   26,587    27%   27,326    27%   26,389   25%   29,635   25%
Time certificates of
 deposit:
 Money desk operation...   26,359   27%   22,729    23%   24,939    25%   28,030   26%   32,358   28%
 All other:
   $100,000 or more.....    5,819    6%    5,487     5%    4,865     5%    5,167    5%    5,688    5%
   Under $100,000.......    6,256    7%    6,726     7%    7,442     8%    8,290    8%    8,889    8%
                          -------  ---  --------  ----  --------  ----  --------  ---  --------  ---
     Total time
      certificates of
      deposit...........  $38,434   40% $ 34,942    35% $ 37,246    38% $ 41,487   39% $ 46,935   41%
                          -------  ---  --------  ----  --------  ----  --------  ---  --------  ---
      Total deposits....   96,819  100%   98,129   100%   98,536    99%  104,834   99%  115,149   99%
Securities sold under
 agreements to
 repurchase.............      131    0%      357     0%    1,346     1%    1,517    1%    1,344    1%
                          -------  ---  --------  ----  --------  ----  --------  ---  --------  ---
      Total funding
       liabilities......  $96,950  100% $ 98,486   100% $ 99,882   100% $106,351  100% $116,493  100%
                          =======  ===  ========  ====  ========  ====  ========  ===  ========  ===
Average loan-to-deposit
 ratio..................     63.6%          64.6%           67.8%           68.7%          67.5%
                          -------       --------        --------        --------       --------
Period-end pledged
 securities ratio.......     21.7%          21.5%           61.3%           61.7%          57.6%
                          =======       ========        ========        ========       ========
</TABLE>
 
  The Bank maintains a wholesale institutional funds acquisition operation
("money desk"). This operation provided 27% of the Bank's average total
funding sources during the first quarter of 1997, as compared with 28% during
the first quarter of 1996, while noninterest-bearing demand deposits provided
34% of average total funding sources during the first quarter of 1997,
compared with 33% during the comparable 1996 period. The Bank will enhance its
efforts to obtain direct, non-brokered funds through its own marketing
programs within its own market area, through direct solicitation, as well as
by attracting traditional local market area deposits. However, the Bank's
policy is to activate the money desk operation, as necessary, if the Bank's
liquidity falls below specified levels. Brokered deposits will not be
solicited through Money Desk activities.
 
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
 
  Certain matters discussed in this Quarterly Report and documents
incorporated by reference may constitute forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 as to which are not historical facts. The Company cautions
readers that the following important factors could affect the Company's
business and cause actual results to differ materially from those expressed in
forward-looking statement made by, or on behalf of, the Company.
 
                                      20
<PAGE>
 
  Economic conditions. The Company's results are strongly influenced by
general economic conditions in its market area, Southern California, and a
deterioration in these conditions could have a material adverse impact on the
quality of the Bank's loan portfolio and the demand for its products and
services. In particular, changes in economic conditions in the real estate and
entertainment industries may affect the Company's performance. Although, a
significant percentage of the Company's loan portfolio continues to be
unsecured or collateralized by real property, the prolonged effects of the
Southern California economic recession and depressed residential and
commercial real estate values may continue to adversely impact the financial
condition and liquidity of the Company's borrowing customers. As such, the
Company may continue to experience high levels of, or further increases in,
nonperforming loans, provisions for credit losses and charge-offs of
nonperforming loans.
 
  Interest rates. Management anticipates that interest rate levels will remain
generally constant in 1997, but if interest rates vary significantly from
present levels, this may vary the Company's results to differ materially.
 
  Government regulation and monetary policy. All forward-looking statements
presume a continuation of the existing regulatory environment and U.S.
government monetary policies. The banking industry is subject to extensive
federal and state regulation, and significant new laws or changes in, or
repeals of, existing laws may cause results to differ materially.
 
  Competition. The Bank competes with numerous other financial institutions
and non-depository financial intermediaries. If the circumstances affecting
the nature or level of competition change, such as the merger of competing
financial institutions or the acquisition of California institutions by out of
state banks, the results may differ materially from the results currently
anticipated.
 
  Credit quality. A significant source of risk arises from the possibility
that losses will be sustained because borrowers, guarantors and related
parties may fail to perform in accordance with terms of their loans. The Bank
has implemented an enhanced process by which it reviews and manages the credit
quality of the loan portfolio. The ongoing credit control process includes a
stringent risk rating and monitoring system and a quarterly review of loans by
an independent outside loan review consultant. However, these policies and
procedures may not prevent unexpected losses that could adversely affect the
Company's results of operations and financial condition.
 
  While management believes that its assumptions regarding these and other
factors on which forward-looking statements are based are reasonable, such
assumptions are necessarily speculative in nature, and actual outcomes can be
expected to differ to some degree. Consequently, there can be no assurance
that the results described in such forward-looking statements will, in fact,
be achieved.
 
                                      21
<PAGE>
 
                           PART II--OTHER INFORMATION
 
ITEM 1. LEGAL PROCEEDINGS
 
  None.
 
ITEM 2. CHANGES IN SECURITIES
 
  None.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
  None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  None.
 
ITEM 5. OTHER INFORMATION
 
  None.
 
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
 
  (a) Exhibits.
     
    Ex27  Financial Data Schedule.     
 
  (b) Reports on Form 8-K.
 
    None.
 
 
                                       22
<PAGE>
 
                                   SIGNATURES
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
 
                                               National Mercantile Bancorp
                                                      (Registrant)
 
<TABLE>
<S>            <C>
 May 15, 1997  /s/ Howard P. Ladd
               ____________________________________
               Howard P. Ladd
               Chief Executive Officer

 May 15, 1997  /s/ Joseph W. Kiley III
               ____________________________________
               Joseph W. Kiley III
               Chief Financial Officer
</TABLE>
 
                                       23