<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
 
                                   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 June 30, 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 August 1, 1997 was 338,630.
 
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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......................  9-22

PART II--OTHER INFORMATION
    Item 1. LEGAL PROCEEDINGS.......................................      23

    Item 2. CHANGES IN SECURITIES...................................      23

    Item 3. DEFAULTS UPON SENIOR SECURITIES.........................      23

    Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....      23

    Item 5. OTHER INFORMATION.......................................      23

    Item 6. EXHIBITS AND REPORTS ON FORM 8-K........................      23

SIGNATURES..........................................................      24
</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
 
                      JUNE 30, 1997 AND DECEMBER 31, 1996
 
<TABLE>
<CAPTION>
                                                        JUNE 30,   DECEMBER 31,
                                                          1997         1996
                                                       ----------- ------------
                                                       (UNAUDITED)
                                                        (DOLLARS IN THOUSANDS)
<S>                                                    <C>         <C>
                        ASSETS
                        ------
Cash and due from banks--demand.......................  $  4,325     $  5,113
Federal funds sold and securities purchased under
 agreements to resell.................................    20,300       23,000
                                                        --------     --------
  Cash and cash equivalents...........................    24,625       28,113
Securities available-for-sale, at fair value;
 aggregate amortized cost of $2,927 at
 June 30, 1997 and $4,078 at December 31, 1996........     2,850        4,002
Securities held-to-maturity, at amortized cost;
 aggregate market value of $19,348 at June 30, 1997
 and $14,355 at December 31, 1996.....................    19,392       14,395
Federal Reserve Bank and other stock..................       338          233
Loans receivable......................................    59,560       62,547
Allowance for credit losses...........................    (2,546)      (2,969)
                                                        --------     --------
  Net loans receivable................................    57,014       59,578
Premises and equipment, net...........................       861          943
Other real estate owned...............................       517          556
Accrued interest receivable and other assets..........     1,365        1,596
                                                        --------     --------
                                                        $106,962     $109,416
                                                        ========     ========
         LIABILITIES AND SHAREHOLDERS' EQUITY
         ------------------------------------
Deposits:
  Noninterest-bearing demand..........................  $ 32,188     $ 34,752
  Interest-bearing demand.............................     9,499        7,292
  Money market accounts...............................    15,052       15,512
  Savings.............................................     3,651        5,650
  Time certificates of deposit:
    $100,000 and over.................................     6,244        9,214
    Under $100,000....................................    26,666       31,434
                                                        --------     --------
      Total deposits..................................    93,300      103,854
Securities sold under agreements to repurchase........        61          --
Accrued interest payable and other liabilities........     1,619          717
                                                        --------     --------
      Total liabilities...............................    94,980      104,571
Shareholders' equity:
  6.5% noncumulative convertible preferred stock, $10
   stated value, authorized 1,000,000 shares, issued
   and outstanding 900,000 and 0 at
   June 30, 1997 and December 31, 1996, respectively .     7,350          --
  Common stock, no par value; authorized 10,000,000
   shares; issued and outstanding 338,630 at June 30,
   1997 and December 31, 1996.........................    24,614       24,614
  Accumulated deficit.................................   (19,905)     (19,693)
  Net unrealized loss on securities available-for-
   sale...............................................       (77)         (76)
                                                        --------     --------
      Total shareholders' equity......................    11,982        4,845
                                                        --------     --------
                                                        $106,962     $109,416
                                                        ========     ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       4
<PAGE>
 
                   NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                 SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
                                  (UNAUDITED)
<TABLE>
<CAPTION>
                                               THREE MONTHS      SIX MONTHS
                                              ENDED JUNE 30,   ENDED JUNE 30,
                                              ---------------  ---------------
                                               1997    1996     1997    1996
                                              ------  -------  ------  -------
                                              (DOLLARS IN THOUSANDS, EXCEPT
                                                     PER SHARE DATA)
<S>                                           <C>     <C>      <C>     <C>
Interest income:
  Loans, including fees...................... $1,477  $ 1,730  $2,950  $ 3,530
  Securities held-to-maturity................    323      --      610      --
  Securities available-for-sale..............     46      278     131      560
  Federal funds sold and securities purchased
   under agreements to resell................    150      220     320      483
                                              ------  -------  ------  -------
      Total interest income..................  1,996    2,228   4,011    4,573
Interest expense:
  Interest-bearing demand....................     27       16      46       35
  Money market and savings...................    133      155     272      329
  Time certificates of deposit:
    $100,000 and over........................     74       97     183      225
    Under $100,000...........................    413      504     850    1,067
                                              ------  -------  ------  -------
      Total interest expense on deposits.....    647      772   1,351    1,656
  Federal funds purchased and securities sold
   under agreements to repurchase............      7        9      14       17
                                              ------  -------  ------  -------
      Total interest expense.................    654      781   1,365    1,673
                                              ------  -------  ------  -------
      Net interest income....................  1,342    1,447   2,646    2,900
Provision for credit losses..................    --       --      --       --
                                              ------  -------  ------  -------
      Net interest income after provision for
       credit losses . . ....................  1,342    1,447   2,646    2,900
Other operating income:
  Loss on sale of securities available-for-
   sale......................................    --       --      --        (1)
  International services.....................     29       21      52       63
  Investment services........................      5       26      10       55
  Deposit-related and other customer
   services..................................     76       69     166      167
                                              ------  -------  ------  -------
      Total other operating income...........    110      116     228      284
Other operating expenses:
  Salaries and related benefits..............    733      557   1,458    1,249
  Net occupancy..............................    206      188     415      380
  Furniture and equipment....................     47       82     105      167
  Printing and communications................     54       49     118      111
  Insurance and regulatory assessments.......    139      161     270      327
  Customer services..........................    105      162     230      302
  Computer data processing...................     73       87     157      182
  Legal services and settlements.............     59    1,180     124    1,257
  Other professional services................     57      287     107      478
  Promotion..................................     27       41      51       64
  Other real estate owned expenses...........      5       13      11       20
  Other expenses.............................     24       32      40       59
                                              ------  -------  ------  -------
      Total other operating expenses.........  1,529    2,839   3,086    4,596
                                              ------  -------  ------  -------
      Loss before provision for income taxes
       (benefit).............................    (77)  (1,276)   (212)  (1,412)
Provision for income taxes (benefit).........    --      (579)    --      (579)
                                              ------  -------  ------  -------
      Net loss............................... $  (77) $  (697) $ (212) $  (833)
                                              ======  =======  ======  =======
      Net loss applicable to common stock.... $(0.23) $ (2.06) $(0.63) $ (2.46)
                                              ======  =======  ======  =======
</TABLE>
          See accompanying notes to consolidated financial statements.
 
                                       5
<PAGE>
 
                   NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
 
           CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
 
                      SIX-MONTH PERIOD ENDED JUNE 30, 1997
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                       NET
                                                                    UNREALIZED
                           PREFERRED                                 LOSS ON
                             STOCK       COMMON STOCK               SECURITIES
                         -------------- --------------- ACCUMULATED AVAILABLE-
                         SHARES  AMOUNT SHARES  AMOUNT    DEFICIT    FOR-SALE   TOTAL
                         ------- ------ ------- ------- ----------- ---------- -------
                                (DOLLARS IN THOUSANDS EXCEPT NUMBER OF SHARES)
<S>                      <C>     <C>    <C>     <C>     <C>         <C>        <C>
Balance at January 1,
 1997...................     --  $  --  338,630 $24,614  $(19,693)     $(76)   $ 4,845
  Increase in net
   unrealized loss on
   securities available
   for sale.............     --     --      --      --        --        (1)         (1)
  Net loss..............     --     --      --      --      (212)       --        (212)
  Issuance of 6.5%
   noncumulative
   convertible preferred
   stock, $10 stated
   value, net........... 900,000  7,350     --      --        --        --       7,350
                         ------- ------ ------- -------  --------      ----    -------
Balance at June 30,
 1997................... 900,000 $7,350 338,630 $24,614  $(19,905)     $(77)   $11,982
                         ======= ====== ======= =======  ========      ====    =======
</TABLE>
 
 
 
          See accompanying notes to consolidated financial statements.
 
                                       6
<PAGE>
 
                   NATIONAL MERCANTILE BANCORP AND SUBSIDIARY
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                 SIX-MONTH PERIODS ENDED JUNE 30, 1997 AND 1996
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                         1997         1996
                                                      -----------  -----------
                                                      (DOLLARS IN THOUSANDS)
<S>                                                   <C>          <C>
Net cash flows from operating activities:
  Net loss........................................... $      (212) $      (833)
  Adjustments to reconcile net loss to net cash
   provided by (used in) operating activities:
    Depreciation and amortization....................          89           98
    Net loss on securities available-for-sale........         --             1
    Net accretion of discounts on securities held-to-
     maturity........................................          (2)         --
    Net amortization of premiums (accretion of
     discounts) on securities available-for-sale.....         (26)          36
    Net amortization of premiums (accretion of
     discounts) on loans purchased...................         (18)          27
    Decrease (increase) in accrued interest
     receivable and other assets.....................         270         (185)
    Increase in accrued interest payable and other
     liabilities.....................................         902        1,013
                                                      -----------  -----------
      Net cash provided by operating activities.. . .
       . . . .                                              1,003          157
Cash flows from investing activities:
  Purchase of securities held-to-maturity............      (4,971)         --
  Purchase of securities available-for-sale..........        (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...........................         153        1,959
  Net decrease in loans..............................       2,582       11,966
  Net purchases of premises and equipment............          (7)         (10)
                                                      -----------  -----------
      Net cash provided by (used in) investing
       activities....................................      (1,348)      13,029
Cash flows from financing activities:
  Net decrease in demand deposits, money market and
   savings accounts..................................      (2,816)     (12,268)
  Net decrease in time certificates of deposits......      (7,738)      (7,480)
  Net increase (decrease) in securities sold under
   agreement to repurchase and
   federal funds purchased...........................          61       (3,396)
  Net proceeds from issuance of 900,000 shares of
   preferred stock...................................       7,350          --
                                                      -----------  -----------
      Net cash used in financing activities..........      (3,143)     (23,144)
                                                      -----------  -----------
Net decrease in cash and cash equivalents............      (3,488)      (9,958)
Cash and cash equivalents, January 1.................      28,113       30,272
                                                      -----------  -----------
Cash and cash equivalents, June 30................... $    24,625  $    20,314
                                                      ===========  ===========
Supplemental cash flow information:
  Cash paid for interest............................. $     1,347  $     1,686
  Increase in unrealized loss on securities
   available-for-sale................................ $         1  $       108
</TABLE>
 
          See accompanying notes to 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 consolidated financial statements reflect, in management's
opinion, all adjustments (consisting of normal recurring adjustments)
necessary for the fair presentation of the Company's consolidated financial
position and the results of its operations and cash flows for the periods
presented. The results for the quarter ended June 30, 1997 are not necessarily
indicative of the results expected for any subsequent period or for the full
year ending December 31, 1997. These consolidated financial statements should
be read in conjunction with the consolidated 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 June 30, 1997 and 1996 was 338,630,
after giving effect for the 9.09 to 1 reverse stock split effective June 20,
1997. Accordingly, all periods presented were restated for the reverse stock
split.
 
  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.
 
  In February 1997, this Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per
Share" which specifies the computation, presentation, and disclosure
requirements for earnings per share ("EPS") for entities with publicly held
common stock or potential common stock. The objective of SFAS No. 128 is to
simplify the computation of EPS and to make the U.S. standard for computing
EPS more compatible with the standards of other countries. SFAS No. 128
eliminates both "primary" and "fully diluted" EPS, and requires the
computation and disclosures of "basic" EPS and "diluted" EPS. SFAS No. 128
shall be effective for financial statements for both interim and annual
periods ending after December 15, 1997, and earlier application is not
permitted. The Company's analysis of SFAS No. 128 concluded that its adoption
would have no impact on the EPS disclosures contained herein.
 
                                       8
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
   AND RESULTS OF OPERATIONS
 
  National Mercantile Bancorp (the "Company") is the holding company for
Mercantile National Bank (the "Bank"). Because the Bank constitutes
substantially all of the business of the Company, references to the Company in
this Item 2 reflect the consolidated activities of the Company and the Bank.
 
FINANCIAL CONDITION
 
  The Company's consolidated assets increased during the second quarter of
1997. At June 30, 1997, the Company's consolidated assets increased by $4.2
million or 4.1% to $106.9 million from $102.8 million at March 31, 1997. The
increase was primarily due to an increase in cash and cash equivalents by $7.5
million primarily as a result of the net proceeds received from the issuance
of 900,000 shares of 6.5% noncumulative convertible preferred stock.
("PREFERRED STOCK")
 
  At June 30, 1997, the Company's consolidated assets decreased by $2.5
million or 2.3% to $106.9 million from $109.4 million at December 31, 1996.
This decrease was due primarily to a $3.5 million decrease in cash and cash
equivalents, $1.2 million decrease in securities available-for-sale, $5.0
million increase in securities held-to-maturity and a $2.6 million decrease in
net loans receivable. Consolidated assets decreased by $2.0 million, or 1.8%,
from $108.9 million at June 30, 1996. This decrease was primarily the net
result of a $4.3 million increase in cash and cash equivalents, a $16.1
million decrease in securities available-for-sale, $19.4 million increase in
securities held-to-maturity and a $9.2 million decrease in net loans
receivable. Customer deposits decreased by 10.2%, or $10.6 million to $93.3
million at June 30, 1997 from $103.9 million at December 31, 1996 and $7.2
million, or 7.2% from $100.5 million at June 30, 1996.
 
  Securities increased to $22.6 million at June 30, 1997 from $18.6 million at
December 31, 1996, and $19.2 million at June 30, 1996. The increase was
primarily due to the net purchase of $4.0 million of U.S. government-sponsored
agency and Treasury securities. Net unrealized losses on securities available-
for-sale at June 30, 1997 was $77,000, compared with $76,000 at December 31,
1996.
 
  At June 30, 1997, loans receivables outstanding decreased $3.2 million or
5.1%, to $59.6 million from $62.6 million at December 31, 1996. Loans secured
by real estate comprised 63% and 64% of loans receivables at June 30, 1997 and
December 31, 1996, respectively. The allowance for loan losses as a percentage
of loans receivable decreased to 4.27% at June 30, 1997 from 4.75% at December
31, 1996, and 4.42% at June 30, 1996 due to loans charged-off of $100,000, net
of recoveries of loans previously charged-off of $101,000 during the second
quarter of 1997.
 
  The decline in total deposits of $10.6 million or 10.2%, to $93.3 million at
June 30, 1997 from $103.9 million at December 31, 1996 is consistent with the
Company's planned reduction of high cost time certificates of deposits.
 
OPERATING RESULTS
 
  The Company recorded a net loss for the three and six month periods ended
June 30, 1997 of $77,000 or $0.23 per share, and $212,000 or $0.63 per share,
respectively, compared with a net loss for the three and six month periods
ended June 30, 1996 of $697,000 or $2.06 per share, and $833,000 or $2.46 per
share, respectively, as set forth in the accompanying consolidated statement
of operations.
 
  Total interest income for the three and six month periods ended June 30,
1997 was $2.0 million and $4.0 million, respectively, compared with total
interest income for the corresponding periods of 1996 of $2.2 million and $4.6
million, respectively. Total interest expense for the three and six month
periods ended June 30, 1997 was $654,000 and $1.4 million, respectively,
compared with total interest expense for the corresponding periods in 1996 of
$781,000 and $1.7 million, respectively. The reduction of loans and high cost
time certificates of deposits, as well as the increase in securities held-to-
maturity which caused a decrease in net interest income for the six month
period ended June 30, 1997, is consistent with the Company's planned
restructuring of the balance sheet and contributed to more positive operating
results.
 
                                       9
<PAGE>
 
  Net interest income for the three and six month periods ended June 30, 1997
was $1.3 million and $2.6 million, respectively, compared with net interest
income for the corresponding periods of 1996 of $1.4 million and $2.9 million,
respectively.
 
  No provision was made for loan losses for the six month period ended June
30, 1997. Loans charged-off during the three month period ended June 30, 1997
were $201,000, compared with $449,000 during the previous quarter. Recoveries
of loans previously charged-off totaled $101,000 during the three month period
ended June 30, 1997, compared with $126,000 during the previous quarter. Each
month the Company reviews the allowance for loan losses and makes provision as
needed. As of June 30, 1997, the Company believes, based on its periodic
analysis, the allowance for credit losses is adequate to absorb known as
inherent risk in the loan portfolio.
 
  Other operating income decreased during the three and six month period ended
June 30, 1997 to $110,000 and $228,000, respectively, from $116,000 and
$284,000, respectively, during the corresponding periods in 1996. The decrease
was primarily due to volume reduction in investment and international
services. The international services department was closed in December 1995,
resulting in reduced letter of credit and foreign exchange functions.
 
  Other operating expense decreased during the three and six month periods
ended June 30, 1997 by $310,000 or 16.9%, and $510,000 or 14.2% to $1.5
million and $3.1 million, respectively, from $1.8 million and $3.6 million,
respectively, during the corresponding periods in 1996, excluding the legal
settlement of $1.0 million during the second quarter of 1996. The reduction of
$510,000 or 14.2% for the six month period ended June 30, 1997 was primarily
due to decreases in insurance and regulatory assessments of $57,000, legal
services of $133,000 and other professional services of $371,000, partially
offset by an increase in salaries and related expenses of $209,000. 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.
 
  The following table presents average balance sheet information for the
Company, together with interest income and yields earned on average interest-
earning assets and interest expense and rates paid on average interest-bearing
liabilities for periods indicated.
 
<TABLE>
<CAPTION>
                                          SIX-MONTH PERIODS ENDED
                            ----------------------------------------------------
                                  JUNE 30, 1997             JUNE 30, 1996
                            ------------------------- --------------------------
                            AVERAGE                   AVERAGE
                            BALANCES INTEREST AVERAGE BALANCES  INTEREST AVERAGE
                            -------- INCOME/  YIELD/  --------  INCOME/  YIELD/
                             AMOUNT  EXPENSE   RATE    AMOUNT   EXPENSE   RATE
                            -------- -------- ------- --------  -------- -------
                                          (DOLLARS IN THOUSANDS)
<S>                         <C>      <C>      <C>     <C>       <C>      <C>
Federal funds sold and
 securities purchased
 under agreements to
 resell...................  $ 11,941  $  320   5.40%  $ 18,594   $  483   5.22%
Securities held-to-
 maturity:
 U.S. Treasury and agency,
  corporate and other
  securities..............    18,430     610   6.67%       --       --     --
Securities available-for-
 sale:
 U.S. Treasury and agency,
  corporate and other
  securities..............     4,625     131   5.71%    19,907      560   5.66%
Loans(1)(2)...............    60,404   2,950   9.85%    74,890    3,530   9.48%
                            --------  ------          --------   ------
 Total earning assets.....    95,400   4,011   8.48%   113,391    4,573   8.11%
                                      ------                     ------
Nonearning assets:
 Cash and due from banks--
  demand..................     4,452                     6,450
 Other assets.............     3,735                     2,889
 Allowance for credit
  losses..................   (2,799)                    (3,774)
                            --------                  --------
 Total assets.............  $100,788                  $118,956
                            ========                  ========
Liabilities and
 shareholder's equity:
Interest-bearing deposits:
 Demand...................  $  7,365  $   46   1.26%  $  5,545   $   35   1.27%
 Money market and
  savings.................    18,917     272   2.90%    22,456      329   2.95%
 Time certificates of
  deposit:
 $100,000 or more.........     6,965     183   5.30%     7,902      225   5.73%
 Under $100,000...........    28,801     850   5.95%    36,310    1,067   5.91%
                            --------  ------          --------   ------
 Total time certificates
  of deposit..............    35,766   1,033   5.82%    44,212    1,292   5.88%
                            --------  ------          --------   ------
 Total interest-bearing
  deposits................    62,048   1,351   4.39%    72,213    1,656   4.61%
Federal funds purchased
 and securities sold under
 agreement to repurchase..       340       8   4.74%     1,431       17   2.39%
Other short-term
 borrowings...............       259       6   4.67%       --       --     --
                            --------  ------          --------   ------
 Total interest-bearing
  liabilities.............    62,647   1,365   4.39%    73,644    1,673   4.57%
                                      ------                     ------
Noninterest-bearing
 liabilities:
 Noninterest-bearing
  demand deposits.........    32,479                    37,765
 Other liabilities........       838                     1,385
Shareholders' equity......     4,824                     6,162
                            --------                  --------
 Total liabilities and
  shareholders' equity....  $100,788                  $118,956
                            ========                  ========
Net interest income
 (spread).................            $2,646   4.08%             $2,900   3.54%
                                      ======   ====              ======   ====
Excess of earning assets
 over interest-bearing
 liabilities..............  $ 32,753                  $ 39,747
                            ========                  ========
Net yield on earning
 assets(3)................                     5.59%                      5.14%
                                               ====                       ====
</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 $42,000 and
    $(1,000) for the six-month periods ended June 30, 1997, June 30, 1996,
    respectively.
(3) Computed on a tax equivalent basis. If customer service expense was
    classified as interest expense and deducted in computing net interest
    income, net yield on interest-earning assets would have been 5.32% and
    4.83%, respectively, for the six months ended June 30, 1997 and 1996.
 
                                      11
<PAGE>
 
  The weighted average yield on loans receivable was 9.85% for the six month
period ended June 30, 1997, compared with 9.48% for the corresponding period
in 1996. The weighted average yield on total earning assets was 8.48% for the
six month period ended June 30, 1997, compared with 8.11% for the
corresponding period in 1996. The weighted average rate on interest-bearing
deposits was 4.39% for the six month period ended June 30, 1997, compared with
4.61% 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 six month period ended June 30, 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 six month period ended June 30, 1997 decreased to $95.4
million, compared with $113.4 million for the six month period ended June 30,
1996. Average interest-earning assets as a percentage of total average assets
for the six month period ended June 30, 1997 was 95%, compared with 96% for
the six month period ended June 30, 1996. Average interest-bearing liabilities
for the six month period ended June 30, 1997 decreased to $62.6 million,
compared with $73.6 million for the six month period ended June 30, 1996.
Average interest-bearing liabilities as a percentage of total average assets
for each of the six month period ended June 30, 1997 and 1996 was 62%.
 
  The average balance of noninterest-bearing deposits for the six month period
ended June 30, 1997 decreased to $32.5 million from $37.8 million for the six
month period ended June 30, 1996. The average balance of noninterest-bearing
deposits as a percentage of total deposits decreased to 34% at June 30, 1997,
as compared with 35% and 34% at December 31, 1996 and June 30, 1996,
respectively.
 
  Foregone interest income attributable to nonperforming loans amounted to
$38,000 for the quarter ended June 30, 1997, compared with $36,000 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 $53,000 and $95,000 for the quarters ended June 30, 1997 and 1996,
respectively, and $127,000 and $177,000 for the six month period ended June
30, 1997 and 1996, respectively.
 
                                      12
<PAGE>
 
CREDIT PORTFOLIO COMPOSITION AND CREDIT RISK
 
  The following table sets forth certain information concerning the
composition of the loan portfolio and the allocation of the allowance for
credit losses at the dates indicated.
 
<TABLE>
<CAPTION>
                                    PERCENT            PERCENT               PERCENT
                          JUNE 30,  OF GROSS MARCH 31, OF GROSS DECEMBER 31, OF GROSS
                            1997     LOANS     1997     LOANS       1996      LOANS
                          --------  -------- --------- -------- ------------ --------
                                            (DOLLARS IN THOUSANDS)
<S>                       <C>       <C>      <C>       <C>      <C>          <C>
Loan Portfolio
 Composition:
  Real estate
   construction and land
   development..........  $ 3,295       6%    $ 3,394      6%     $ 3,441        5%
  Commercial loans:
    Secured by one to
     four family
     residential
     properties.........    6,452      11%      6,062     10%       6,233       11%
    Secured by
     multifamily
     residential
     properties.........    2,851       5%      2,869      5%       2,879        5%
    Secured by
     commercial real
     properties.........   24,549      41%     25,654     43%      26,629       42%
    Other--secured and
     unsecured..........   16,429      27%     15,154     25%      16,508       26%
  Home equity lines of
   credit...............      393       1%        462      1%         581        1%
  Consumer installment
   and unsecured loans
   to individuals.......    5,903       9%      6,602     10%       6,545       10%
                          -------     ---     -------    ---      -------      ---
Gross loans outstanding.   59,872     100%     60,197    100%      62,816      100%
  Deferred net loan
   origination fees,
   purchased loan
   discount and gains on
   termination of
   interest rate hedging
   contracts............     (312)               (248)               (269)
                          -------             -------             -------
  Loans receivable......  $59,560             $59,949             $62,547
                          =======             =======             =======
Allocation of the
 allowance for credit
 losses:
  Real estate
   construction and land
   development..........  $    46             $    64             $    42
  Commercial loans:
    Secured by one to
     four family
     residential
     properties.........      257                 231                 479
    Secured by
     multifamily
     residential
     properties.........       37                  54                  41
    Secured by
     commercial real
     properties.........      541                 738                 590
    Other--secured and
     unsecured..........    1,495               1,332               1,642
  Home equity lines of
   credit...............        8                  12                  13
  Consumer installment
   and unsecured loans
   to individuals.......      161                 214                 161
                          -------             -------             -------
    Allowance allocable
     to loans
     receivable.........    2,545               2,645               2,968
  Commitments to extend
   credit under standby
   and commercial
   letters of credit....        1                   1                   1
                          -------             -------             -------
  Total allowance for
   credit losses........  $ 2,546             $ 2,646             $ 2,969
                          =======             =======             =======
Allowance for credit
 losses allocable as a
 percent of loans
 receivable.............     4.27%               4.41%               4.75%
                          =======             =======             =======
</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
 
  The following table sets forth certain information concerning nonperforming
assets at the dates indicated.
 
<TABLE>
<CAPTION>
                                                JUNE 30, MARCH 31, DECEMBER 31,
                                                  1997     1997        1996
                                                -------- --------- ------------
                                                    (DOLLARS IN THOUSANDS)
<S>                                             <C>      <C>       <C>
Nonaccrual loans...............................  $1,271   $  871      $  928
Troubled debt restructurings...................   5,487    5,004       5,016
Loans contractually past due 90 days or more
 with respect to either principal or interest
 and still accruing interest...................       2       14         300
                                                 ------   ------      ------
  Nonperforming loans..........................   6,760    5,889       6,244
Other real estate owned........................     517      519         556
                                                 ------   ------      ------
Total nonperforming assets.....................  $7,277   $6,408      $6,800
                                                 ======   ======      ======
Allowance for loan losses as a percent of
 nonaccrual loans..............................   200.3%   303.8%      319.9%
                                                 ======   ======      ======
Allowance for loan losses as a percent of
 nonperforming loans...........................    37.7%    44.9%       47.5%
                                                 ======   ======      ======
Total nonperforming assets as a percent of
 loans receivable..............................    12.2%    10.7%       10.9%
                                                 ======   ======      ======
Total nonperforming assets as a percent of
 total shareholders' equity....................    60.7%   137.2%      140.4%
                                                 ======   ======      ======
</TABLE>
 
  The level of nonperforming assets, as presented above, increased $900,000
during the second quarter of 1997 to $7.3 million from $6.4 million at March
31, 1997. Included in nonperforming assets is other real estate owned of
$517,000 and $519,000 at June 30, 1997 and March 31, 1997, respectively.
 
  Nonaccrual loans increased $400,000 during the second quarter of 1997 to
$1.3 million consisting of ten loans as compared with $871,000 at March 31,
1997. (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 $5.5 million at June 30, 1997
compared with $5.0 million at March 31, 1997 and December 31, 1996. Included
in TDRs is one loan with a balance of $5.4 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. All TDRs are currently performing in
accordance with their modified terms.
 
  Loan delinquencies greater than 30 days past due decreased to $1.7 million
or 2.8% of loans receivable at June 30, 1997 from $2.5 million or 4.2% of
loans receivable at March 31, 1997. Loans contractually past due 90 days or
more and still accruing interest decreased to $2,000 at June 30, 1997 from
$14,000 at March 31, 1997.
 
  Other real estate owned ("OREO") at June 30, 1997 consisted of two
properties totaling $517,000 representing two undeveloped commercially zoned
parcels and one residential parcel. The Bank is currently marketing these
properties for sale.
 
                                      14
<PAGE>
 
ALLOWANCE FOR CREDIT LOSSES
 
  The following table sets forth information concerning the Company's
allowance for credit losses at the dates and for the periods indicated.
 
<TABLE>
<CAPTION>
                                                THREE-MONTH        SIX-MONTH
                                               PERIODS ENDED     PERIODS ENDED
                                             ----------------- -----------------
                                             JUNE 30, JUNE 30, JUNE 30, JUNE 30,
                                               1997     1996     1997     1996
                                             -------- -------- -------- --------
                                                   (DOLLARS IN THOUSANDS)
<S>                                          <C>      <C>      <C>      <C>
Balance at beginning of period.............   $2,646   $3,837   $2,969   $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..        4      --        56      --
    Other--secured and unsecured...........      185    1,065      344    1,119
  Home equity lines of credit..............      --       --       --       --
  Consumer installment and unsecured loans
   to individuals..........................       12        5       46        5
                                              ------   ------   ------   ------
    Total loan charge-offs.................      201    1,070      650    1,124
Recoveries of loans previously charged-off:
  Real estate construction and land
   development.............................      --       --       --       --
  Commercial loans:
    Secured by one to four family
     residential properties................      --         1      --         2
    Secured by multifamily residential
     properties............................      --       --       --       --
    Secured by commercial real properties..      --       --       --       --
    Other--secured and unsecured...........       38      273      157      348
  Home equity lines of credit..............      --       --       --       --
  Consumer installment and unsecured loans
   to individuals..........................       63       23       70       33
                                              ------   ------   ------   ------
    Total recoveries of loans previously
     charged-off...........................      101      297      227      383
                                              ------   ------   ------   ------
Net loan charge-offs ......................      100      773      423      741
Provision for loan losses..................      --       --       --       --
                                              ------   ------   ------   ------
Balance at end of period...................   $2,546   $3,064   $2,546   $3,064
                                              ======   ======   ======   ======
</TABLE>
 
  Loan charged-offs were $201,000 for the second quarter, as compared with
$1.1 million for the corresponding period in 1996. Recoveries of loans
previously charged-off totaled $101,000 for the second quarter, as compared
with $297,000 during the second quarter of 1996. Loan charge-offs were
$650,000 and $1,124,000 for the six month periods ended June 30, 1997 and
1996, respectively, while recoveries for the same period in 1997 and 1996 were
$227,000 and $383,000, respectively.
 
  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 June 30, 1997 and December 31, 1996, the Bank had classified $1.3 and
$7.2 million of its loans as impaired under SFAS No. 114, respectively, of
which specific reserves of $245,000 and $710,000, respectively were allocated
to such loans. The average recorded investment in impaired loans during the
quarters ended June 30, 1997 and December 31, 1996 was $1.0 million and $7.8
million, respectively. Impaired loans as of June 30, 1997 included nonaccrual
loans of $1.3 million. Interest income on impaired loans which are performing
is recognized on an accrual basis and interest income on such loans totaled
$222 and $175,000 for the second quarters of 1997 and 1996, respectively.
Interest income recognized on impaired loans during the six month periods
ended June 30, 1997 and 1996 was $148,222 and $368,000, respectively.
 
                                      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.
 
  The following table shows interest rate sensitivity gaps for different
intervals as of June 30, 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.................  $20,300   $   --     $   --    $   --   $    --    $ 20,300
Securities held-to-
 maturity...............      996       --      18,396       --        --      19,392
Securities held-for-
 sale...................      --        --         --      2,850       --       2,850
Federal Reserve Bank and
 other stock............      --        --         --        338       --         338
Loans receivable........   23,183    24,209      9,847     2,321       --      59,560
                          -------   -------    -------   -------  --------   --------
  Total earning assets..   44,479    24,209     28,243     5,509       --     102,440
Non-earning assets
Cash and due from banks.      --        --         --        --      4,325      4,325
Other real estate owned.      --        --         --        --        517        517
All other assets........      --        --         --        --      2,226      2,226
Allowance for credit
 losses.................      --        --         --        --     (2,546)    (2,546)
                          -------   -------    -------   -------  --------   --------
  Total assets..........   44,479    24,209     28,243     5,509     4,522    106,962
    LIABILITIES AND
 SHAREHOLDERS' EQUITY:
 ---------------------
Interest-bearing
 Deposits:
  Interest-bearing
   demand, money market
   and savings..........   28,202       --         --        --        --      28,202
  Time certificates of
   deposit..............   11,329    19,379      2,202       --        --      32,910
Federal funds purchased
 and securities sold
 under agreements to
 repurchase.............       61       --         --        --        --          61
                          -------   -------    -------   -------  --------   --------
  Total Interest-bearing
   liabilities..........   39,592    19,379      2,202       --        --      61,173
                          -------   -------    -------   -------  --------   --------
Noninterest-bearing
 liabilities:
    Noninterest-bearing
     deposits...........      --        --         --        --     32,188     32,188
    Other liabilities...      --        --         --        --      1,619      1,619
    Shareholders'
     equity.............      --        --         --        --     11,982     11,982
                          -------   -------    -------   -------  --------   --------
Total liabilities and
 shareholders' equity...   39,592    19,379      2,202       --     45,789    106,962
                          -------   -------    -------   -------  --------   --------
Interest rate-
 sensitivity gap........    4,887     4,830     26,041     5,509   (41,267)         0
                          =======   =======    =======   =======  ========   ========
Cumulative interest
 rate-sensitivity gap     $ 4,887   $ 9,717    $35,758   $41,267         0          0
                          =======   =======    =======   =======  ========   ========
Cumulative rate
 sensitivity gap as a
 percent of cumulative
 earning assets.........       11%       14%        37%       40%
                          =======   =======    =======   =======
</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
 
  On June 30, 1997, Company completed the sale of 900,000 shares of PREFERRED
STOCK through a private offering and rights offering in which the Company
raised net proceeds of $7.35 million. The primary purpose of the offerings was
to enable the Company to downstream capital into the Bank in order to comply
with the requirements of the Formal Agreement (discussed below) and the MOU
(discussed below) entered into between the Bank and the Office of the
Comptroller of the Currency (the "OCC") and the Company and the Federal
Reserve Bank of San Francisco (the "FRB"), respectively. The Company
contributed $2.5 million in capital to the Bank on June 30, 1997. The
remaining portion of the net proceeds have been retained for general corporate
purposes to facilitate the implementation of the business strategies of the
Company.
 
  As a result of the offerings, the total shareholders' equity of the Company
increased to $12.0 million at June 30, 1997 from $4.8 million at December 31,
1996. The following table sets forth the minimum capital ratios required by
federal regulations with respect to the Company and by federal regulations and
the Formal Agreement with respect to the Bank and the Company's and the Bank's
actual ratios as of June 30, 1997 and December 31, 1996, respectively.
 
<TABLE>
<CAPTION>
                                 JUNE 30, 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........  $12,059 17.94%  $ 7,197 10.71% $  4,921 6.96%  $  4,911   6.95 %
  Tier 1 capital minimum
   requirement..........    2,688  4.00%    6,729 10.00%    2,828 4.00%     7,071  10.00 %
                          ------- -----   ------- -----  -------- ----   --------  -----
    Excess (Deficiency).  $ 9,371 13.94%  $   468  0.71% $  2,093 2.96%  $ (2,160) (3.05)%
                          ======= =====   ======= =====  ======== ====   ========  =====
  Total capital.........  $12,920 19.22%  $ 8,058 11.99% $  5,831 8.25%  $  5,820   8.24 %
  Total capital minimum
   requirement..........    5,377  8.00%    5,377  8.00%    5,657 8.00%     5,657   8.00 %
                          ------- -----   ------- -----  -------- ----   --------  -----
    Excess..............  $ 7,543 11.22%  $ 2,681  3.99% $    174 0.25%  $    163   0.24 %
                          ======= =====   ======= =====  ======== ====   ========  =====
Total risk-weighted
 assets.................  $67,207         $67,207        $ 70,710        $ 70,710
Capital Leverage
 Ratio(1)(2)(3):
  Tier 1 capital........  $12,059 12.23%  $ 7,197  7.30% $  4,921 4.68%  $  4,911   4.67 %
  Tier 1 capital minimum
   requirement..........    3,945  4.00%    6,410  6.50%    4,210 4.00%     6,841   6.50 %
                          ------- -----   ------- -----  -------- ----   --------  -----
    Excess (Deficiency).  $ 8,114  8.23%  $   787  0.80% $    711 0.68%  $ (1,930) (1.83)%
                          ======= =====   ======= =====  ======== ====   ========  =====
Average total assets, as
 adjusted, during three-
 month periods ended
 June 30, 1997 and
 December 31, 1996......  $98,615         $98,615        $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.
 
                                      17
<PAGE>
 
(2) The regulatory capital leverage ratio represents the ratio of Tier 1
    capital at June 30, 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.
 
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 June 30, 1997 were 7.30% and 10.71%, respectively. At June 30,
1997, the Bank was 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 in February 1996 to the OCC which was
amended and resubmitted to the OCC in June 1997. In addition, the Company filed
its strategic with the OCC in March 1996, which the Company is currently
updating. As a result of the foregoing actions and the recently completed
offerings, management believes it is currently in compliance with the
requirements of the Formal Agreement. However the OCC will make the final
determination as to compliance and the Bank may be subject to further
regulatory enforcement action by the OCC until the Formal Agreement is lifted.
 
  The Company entered into a Memorandum of Understanding ("MOU") on October 26,
1995 with the 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 believes as of June 30, 1997, that it is in
compliance with the MOU but may be subject to further regulatory enforcement
action by the FRB until the MOU is lifted.
 
RESTRICTIONS ON DIVIDENDS
 
  As a result of the offerings and the contribution of $2.5 million in capital
into the Bank, the Company (parent company only) had cash and liquid assets of
approximately $4.9 million. Despite this fact, the Company is currently
prohibited from paying cash dividends by state law.
 
  As a California corporation, the Company may not make a distribution to its
shareholders (which includes a payment of dividends but not stock dividends)
unless the Company has sufficient retained earnings under the Retained Earnings
Test. The Retained Earnings Test is defined as the Company's retained earnings
(determined on a consolidated basis according to generally accepted accounting
principles) or if, immediately after giving effect to the distribution, all of
the Company's assets equal 1.25 times the Company's liabilities (the "Retained
Earnings Test"). The Company's accumulated deficit of $19.9 million as of June
30, 1997 requires the Company to record cumulative net earnings in excess of
$19.9 million before a dividend can be paid under the Retained Earnings Test.
If assets equal 1.25 times liabilities subsequent to a distribution, the
Company may pay a dividend prior to recording cumulative earnings of $19.9
million. At the present time, the Company does not meet the Retained Earnings
Test and no assurance can be made as to when, if ever, such test will be met.
The terms of the Preferred Stock provide that dividends on the PREFERRED STOCK
may be paid commencing June 30, 1999
 
                                       18
<PAGE>
 
Date of Issuance. Notwithstanding the foregoing, the Company may not pay
dividends unless the Bank is in full compliance with federal regulatory capital
requirements, the Company is permitted by the FRB to pay dividends and the
Company meets the Retained Earnings Test. Dividends on the PREFERRED STOCK will
not accumulate. The Company cannot assess at this time its ability to pay
dividends in the immediate future.
 
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 (parent company only) has only limited expenses and funding
requirements at the present time. Management believes that the $4.9 million in
cash and liquid assets available at the Company (parent company only) at June
30, 1997 will be sufficient to meet its cash flow requirements for the
foreseeable future. Pursuant to the terms of the federal banking law and the
requirements of the Formal Agreement, the Bank is currently prohibited from
paying any cash dividends to the Company, and management does not anticipate
that the dividends from the Bank will be a source of liquidity to the Company
for the foreseeable future.
 
                                       19
<PAGE>
 
LIQUIDITY TRENDS
 
  Time certificates of deposit of $100,000 or more were $3.5 million at June
30, 1997, compared with $5.5 million at December 31, 1996 and $5.2 million at
June 30, 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.
 
  The following table sets forth information concerning average balances
concerning the Company's funding sources and liquidity trends for the periods
indicated.
 
<TABLE>
<CAPTION>
                                              THREE-MONTH PERIOD ENDED
                          -------------------------------------------------------------------------
                           JUNE 30,      MARCH 31,    DECEMBER 31,    SEPTEMBER 30,     JUNE 30,
                             1997          1997           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.............  $ 9,062   10% $ 7,947    8% $  8,419     9% $  8,506     9% $ 11,809   11%
 All other noninterest-
  bearing demand........   23,056   25%  24,897   26%   28,181    29%   25,458    25%   25,149   24%
Interest-bearing demand,
 money market and
 savings................   27,016   29%  25,541   26%   26,587    27%   27,326    27%   26,389   25%
Time certificates of
 deposit:
 Money desk operation...   24,114   26%  26,359   27%   22,729    23%   24,939    25%   28,030   26%
 All other:
   $100,000 or more.....    3,516    4%   5,819    6%    5,487     5%    4,865     5%    5,167    5%
   Under $100,000.......    5,497    5%   6,256    7%    6,726     7%    7,442     8%    8,290    8%
                          -------  ---  -------  ---  --------  ----  --------  ----  --------  ---
     Total time
      certificates of
      deposit...........   33,127   35%  38,434   40%   34,942    35%   37,246    38%   41,487   39%
                          -------  ---  -------  ---  --------  ----  --------  ----  --------  ---
      Total deposits....   92,261   99%  96,819  100%   98,129   100%   98,536    99%  104,834   99%
Securities sold under
 agreements to
 repurchase.............      546    0%     131     %      357      %    1,346     1%    1,517    1%
                          -------  ---  -------  ---  --------  ----  --------  ----  --------  ---
      Total funding
       liabilities......  $92,807  100% $96,950  100% $ 98,486   100% $ 99,882   100% $106,351  100%
                          =======  ===  =======  ===  ========  ====  ========  ====  ========  ===
Average loan-to-deposit
 ratio..................     64.2%         63.6%          64.6%           67.8%           68.7%
                          -------       -------       --------        --------        --------
Period-end pledged
 securities ratio.......     47.6%         21.7%          21.5%           61.3%           61.7%
                          =======       =======       ========        ========        ========
</TABLE>
 
  The Bank maintains a wholesale institutional funds acquisition operation
("money desk"). This operation provided 26.0% of the Bank's average total
funding sources during the second quarter of 1997, as compared with 26% during
the second quarter of 1996, while noninterest-bearing demand deposits provided
35% of average total funding sources during the second quarter of 1997,
compared with 35% 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
 
  (a) On June 18, 1997, the shareholders of National Mercantile Bancorp's (the
"Company") common stock, no par value (the "Common Stock"), approved, and the
Amended and Restated Articles of Incorporation of the Company (the "Articles")
now set forth, a restriction to prohibit, until July 1, 2000 or upon the
occurrence of certain events, the transfer of shares of Common Stock currently
outstanding or issued in the future by the Company to any person (with certain
exceptions for prior contractual obligations of the Company) if such person is
or would become by reason of such transfer the beneficial owner of more than
4.5% of the Company's stock as the term "stock" is defined, and such ownership
is determined, under Section 382 of the Internal Revenue Code of 1986, as
amended.
 
  (b) The Company has created a new series of Series A Preferred Stock (the
"Series A Preferred Stock") the holders of which have certain preferential
rights which impact certain rights of the holders of the Common Stock,
including, but not limited to, liquidation rights. Set forth below is a
summary of certain rights of the holders of the Series A Preferred Stock which
impact the rights of holders of the Common Stock. This summary does not
purport to be complete and is qualified in its entirety by reference to the
Articles.
 
Dividends
 
  The terms of the Series A Preferred Stock provide that dividends may be paid
commencing October 1, 1999. Holders of shares of Series A Preferred Stock will
be entitled to receive, if, when and as declared by the Board of Directors of
the Company out of assets of the Company legally available for payment, non-
cumulative cash dividends, payable quarterly on the first day of January,
April, July, and October in each year, with respect to the three months then
ending, at the rate of 6.5% per share per annum, before any distribution by
way of dividend or otherwise shall be declared or paid upon, or set apart for,
the shares of Common Stock or any other class of shares of the Company ranking
junior to the Series A Preferred Stock with respect to the payment of
dividends or upon liquidation, dissolution or winding up of the Company
("Junior Stock"). Notwithstanding the foregoing, the Company may not pay
dividends following such date unless Mercantile National Bank, the wholly
owned subsidiary of the Company (the "Bank"), is in full compliance with
federal regulatory capital requirements, the Company and the Bank are
permitted to pay dividends by their regulators and the Company meets the
retained earnings test as set forth in the California Corporations Code. The
ability of the Company to pay dividends on the Series A Preferred Stock will
depend on the Company's ability to obtain funds for such purpose from the
Bank. The Company has no funds otherwise available for the payment of
dividends. Both the Bank's ability to pay dividends to the Company and the
Company's ability to pay dividends on the Series A Preferred Stock are subject
to significant regulatory restrictions. The Company cannot assess at this time
its ability to pay dividends in the immediate future. Dividends on the Series
A Preferred Stock will not accumulate.
 
  No dividend (other than dividends or distributions paid in shares of, or
options, warrants or rights to subscribe for or purchase shares of, such class
or series of stock ranking on parity with the Series A Preferred Stock as to
dividends) may be paid upon, or declared or set apart for, any class or series
of stock ranking on a parity with the Series A Preferred Stock as to
dividends, for any dividend period, prior to October 1, 1999, and thereafter,
unless there shall be or have been declared on the Series A Preferred Stock
dividends for the then current quarterly period coinciding with or ending
before such quarterly period, ratably in proportion to the respective annual
dividend rates fixed therefor. Except with respect to the foregoing, prior to
October 1, 1999 and thereafter, whenever full quarterly dividends are in
arrears for the Series A Preferred Stock for a current dividend period, the
Company may not declare or pay or set aside for payment dividends or make any
other distributions (other than dividends or distributions paid in shares of,
or options, warrants or rights to subscribe for or purchase shares of Junior
Stock or Parity Stock (as defined below)) (i) on any Junior Stock or (ii) on
any
 
                                      22
<PAGE>
 
shares of stock ranking on a parity (whether as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock
("Parity Stock"). In addition, the Company may not redeem or purchase or
otherwise acquire for consideration shares of any Junior Stock or Parity Stock
unless in exchange for shares of Junior Stock or Parity Stock.
 
Liquidation Rights
 
  The Series A Preferred Stock will be entitled to, prior to any distribution
to holders of the Company's other capital stock, $10.00 per share upon any
liquidation, dissolution or winding up of the Company, plus an amount equal to
any declared but unpaid dividends (the "Liquidation Amount"). In the event of
either an involuntary or a voluntary liquidation or dissolution of the Company
payment shall be made to the holders of shares of Series A Preferred Stock in
an amount equal to the Liquidation Amount before any payment shall be made or
any assets distributed to the holders of the Common Stock or any other class or
series of capital stock of the Company ranking junior to the Series A Preferred
Stock with respect to payment upon dissolution or liquidation of the Company.
If upon any liquidation or dissolution of the Company the assets available for
distribution shall be insufficient to pay the holders of all outstanding shares
of Series A Preferred Stock and any other class or series of capital stock
ranking on a parity with the Series A Preferred Stock as to payments upon
dissolution or liquidation of the Company the full amounts to which they
respectively shall be entitled, then such assets or the proceeds thereof shall
be distributed among such holders ratably in accordance with the respective
amounts which would be payable on such shares if all amounts payable thereon
were paid in full. After the payment of such amounts, the Series A Preferred
Stock will not be entitled to any further payment. The liquidation rights of
the Preferred Stock will be subordinate to all indebtedness of the Company.
 
  At any time, in the event of the merger or consolidation of the Company into
or with another company or the merger or consolidation of any other company
into or with the Company or a plan of exchange between the Company and any
other company (in which consolidation or merger or plan of exchange any
shareholders of the Company receive distributions of cash or securities or
other property) or the sale, transfer or other disposition of all or
substantially all of the assets of the Company, then, such transaction shall be
deemed, solely for purposes of determining the amounts to be received by the
holders of the Series A Preferred Stock in such merger, consolidation, plan of
exchange, sale, transfer or other disposition, and for purposes of determining
the priority of receipt of such amounts as between the holders of the Series A
Preferred Stock and the holders of other classes or series of capital stock, to
be a liquidation or dissolution of the Company.
 
Conversion
 
  Each share of the Series A Preferred Stock will be immediately convertible at
the option of the holder thereof at the initial rate of one share of Common
Stock for each share of Series A Preferred Stock based on an initial conversion
price of $10.00 per share which shall be subject to adjustment for any stock
dividend or stock split or other recapitalization involving the Common Stock or
the consolidation or merger of the Company or the sale of all or substantially
all of the Company's assets.
 
  In the event the Company shall (i) declare a dividend upon the Common Stock
payable in Common Stock (other than a dividend declared to effect a subdivision
of the outstanding shares of Common Stock) or securities convertible into the
Common Stock ("Convertible Securities"), or in any rights or options to
purchase Common Stock or Convertible Securities, or (ii) declare any other
dividend or make any other distribution upon the Common Stock payable otherwise
than out of earnings or earned surplus, then thereafter each holder of shares
of Series A Preferred Stock upon the conversion thereof will be entitled to
receive the number of shares of Common Stock into which such shares of Series A
Preferred Stock have been converted, and, in addition and without payment
therefor, each dividend described in clause (i) above and each dividend or
distribution described in clause (ii) above which such holder would have
received by way of dividends or distributions if continuously since such holder
became the record holder of such shares of Series A Preferred Stock such holder
(i) had been the record holder of the number of shares of Common Stock then
received, and (ii) had retained all dividends or distributions in stock or
securities (including Common Stock or Convertible Securities, and any rights or
options to purchase any Common Stock or Convertible Securities) payable in
respect of such Common Stock or in
 
                                       23
<PAGE>
 
respect to any stock or securities paid as dividends or distributions and
originating directly or indirectly from such Common Stock. For the purposes of
the foregoing, a dividend or distribution other than in cash shall be
considered payable out of earnings or earned surplus only to the extent that
such earnings or earned surplus are charged an amount equal to the fair value
of such dividend or distribution as determined by the Board of Directors of
the Company.
 
Voting Rights
 
  The Series A Preferred Stock will vote together with the Common Stock on all
matters submitted to a vote of the holders of the Common Stock, with voting
power equal to the number of shares of Common Stock into which the Series A
Preferred Stock is then convertible. In addition, the Series A Preferred Stock
will have the right to vote as a separate class with respect to (a) the
authorization of any additional shares of Series A Preferred Stock or the
authorization or issuance of any class or series of the Company's capital
stock which would rank senior to or on a parity with the Series A Preferred
Stock as to distribution of (i) assets upon the liquidation or dissolution,
voluntary or involuntary, of the Company or (ii) dividends, (b) any other
action to amend, alter or repeal any provisions of the Restatement so as to
adversely affect the rights, preferences and privileges of the Series A
Preferred Stock or the holders thereof or waive any of the rights granted to
the holders of the Series A Preferred Stock, (c) any action to amend, alter or
repeal any of the provisions of the Articles, or the bylaws, of the Company
with respect to the election of directors by cumulative voting or (d) the
issuance of any authorized shares of Series A Preferred Stock except in
connection with the public offering and the private offering by the Company or
the warrant issued by the Company to the Company's landlord. Except as
required by law, the Series A Preferred Stock will not have special voting
rights in the event of a default on the payment of dividends.
 
  (c) Recent sales of unregistered securities
 
  On June 30, 1997, the Company consummated the sale of 453,957 shares of
Series A Preferred Stock and 50,440 shares of Series A Series A Preferred
Stock to Conrad Company, a Montana corporation, and Wildwood Enterprises
Profit Sharing Plan and Trust (the "Purchasers"), respectively, for a purchase
price of $1.10 per share (or $10.00 per share after giving effect to the 9.09
to 1 reverse stock split effected by the Company on June 20, 1997). No
underwriter was utilized. The Company issued the shares of Series A Preferred
Stock in reliance upon Section 4(2) of the Securities Act. The Purchasers are
sophisticated investors and were given access to the same kind of information
as that which would be included in a Registration Statement.
 
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
  None.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  (a) On June 18, 1997, the Company held its annual meeting of shareholders.
 
  (b) At the annual meeting, the following directors were elected: Robert E.
Gipson, Alan Grahm, Joseph W. Kiley III, Scott A. Montgomery and Robert E.
Thomson.
 
  (c) The following proposals were considered at the annual meeting and the
number of shares voting for or against such proposals are listed below.
 
    Proposal #1--Election of Directors
 
<TABLE>
<CAPTION>
                                                                         VOTES
                                NAME                          VOTES FOR WITHHELD
                                ----                          --------- --------
        <S>                                                   <C>       <C>
        Robert E. Gipson..................................... 2,243,974 196,698
        Alan Grahm .......................................... 2,243,974 196,698
        Joseph W. Kiley III.................................. 2,243,974 196,698
        Scott A. Montgomery.................................. 2,243,974 196,698
        Robert E. Thomson.................................... 2,243,974 196,698
</TABLE>
 
                                      24
<PAGE>
 
    Proposal #2--Approval of 1996 Stock Incentive Plan. To approve the
  Company's 1996 Stock Incentive Plan.
 
<TABLE>
<CAPTION>
                                               BROKER NON-
         VOTES FOR   VOTES AGAINST ABSTENTIONS    VOTES
         ---------   ------------- ----------- -----------
         <S>         <C>           <C>         <C>
         1,236,108      578,106      49,069      577,389
</TABLE>
 
    Proposal #3--Approval of Reverse Stock Split. To approve a 9.09 to 1
  reverse stock split by reducing the number of outstanding shares (but not
  the authorized) shares of the Company's common stock.
 
<TABLE>
<CAPTION>
                                               BROKER NON-
         VOTES FOR   VOTES AGAINST ABSTENTIONS    VOTES
         ---------   ------------- ----------- -----------
         <S>         <C>           <C>         <C>
         1,933,375      287,771      17,769      201,757
</TABLE>
 
    Proposal #4--Approval of Transfer Restriction. To approve a restriction
  to prohibit, until July 1, 2000 the transfer of shares of common or Series
  A Preferred Stock currently outstanding or issued in the future by the
  Company to any person (with certain exceptions for prior contractual
  obligations of the Company) if such person is or would become by reason of
  such transfer the beneficial owner of more than 4.5% of the Company's stock
  as the term "stock" is defined, and such ownership is determined, under
  Section 283 of the Internal Revenue Code of 1986, as amended.
 
<TABLE>
<CAPTION>
                                               BROKER NON-
         VOTES FOR   VOTES AGAINST ABSTENTIONS    VOTES
         ---------   ------------- ----------- -----------
         <S>         <C>           <C>         <C>
         1,733,211      106,997      23,075      577,389
</TABLE>
 
    Proposal #5--Approval of terms of Series A Preferred Stock. To approve
  the terms and conditions of the Company's Series A Preferred Stock to be
  issued pursuant to a rights offering to the Company's shareholders and
  pursuant to a private offering.
 
<TABLE>
<CAPTION>
                                               BROKER NON-
         VOTES FOR   VOTES AGAINST ABSTENTIONS    VOTES
         ---------   ------------- ----------- -----------
         <S>         <C>           <C>         <C>
         1,900,757      107,825      31,330      400,760
</TABLE>
 
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.
 
 
                                      25
<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>
 August 14, 1997  /s/ Scott A. Montgomery
                  ____________________________________
                  Scott A. Montgomery
                  Chief Executive Officer

 August 14, 1997  /s/ Joseph W. Kiley III
                  ____________________________________
                  Joseph W. Kiley III
                  Chief Financial Officer
</TABLE>
 
                                       26