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**U.S. SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-QSB**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE****SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period endedJune 30, 2001**

**Commission File Number: 0-15982**

 
| **NATIONAL MERCANTILE  BANCORP**                                   |
|--------------------------------------------------------------------|
| ****                                                               |
| (Exact name of small  business issuer as specified in its charter) |
|                                                               |
| **California**                                                     |   | **95-3819685** |   |
|                                                                    |   |  |   |
| (State  or other jurisdiction of  incorporation or organization)   |   | (I.R.S.  Employer  Identification No.) |   |
|                                                               |   |   |   |
| **1840  Century Park East, Los Angeles, California**               |   | **90067** |   |
|                                                                    |   |  |   |
| (Address  of principal executive offices)                          |   | (Zip Code) |   |
|                                                                    |  |  |  |  |  |

Issuer'stelephone number, including area code**(310)277-2265**

Indicate by check markwhether the issuer (1) has filed all reports required to be filed by Section 13or 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 suchreports), and (2) has been subject to such filing requirements for the past 90days.

YES   ý                          NO   o

APPLICABLE ONLY TO CORPORATE ISSUERS:

Thenumber of shares outstanding of the issuer's Common Stock, no par value, as ofJuly 31, 2001 was 1,621,055.

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**NATIONAL MERCANTILE BANCORP ANDSUBSIDIARYCONSOLIDATED BALANCE SHEETS**

 

|                                                                                                                                                 | **June 30,**                                                                                                                                                                                                                                              |       | **December 31,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|---------|
|                                                                                                                                                 | **2001**                                                                                                                                                                                                                                                  |       |             |
|                                                                                                                                                 | **(Unaudited)**                                                                                                                                                                                                                                           |       | **2000**         |    |
|                                                                                                                                                 | ****                                                                                                                                                                                                                                                      |       | ****             |    |
|                                                                                                                                                 | **(Dollars in thousands)**                                                                                                                                                                                                                                |       |
|                                                                                                                                                 |                                                                                                                                                                                                                                                      | ** ** |
|                                                                                                                                                 |                                                                                                                                                                                                                                                      |       |             |    |
| ASSETS                                                                                                                                               |                                                                                                                                                                                                                                                      |       |             |    |
| Cash  and due from banks-demand                                                                                                                      | $                                                                                                                                                                                                                                                         | 11,959     |             | $       | 7,897 |   |
| Federal  funds sold and securities purchased under agreements to resell                                                                              | 34,000                                                                                                                                                                                                                                                    |       | 19,700           |    |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                 | Cash  and cash equivalents                                                                                                                                                                                                                                | 45,959     |             | 27,597  |   |
| Securities  available-for-sale, at fair value; aggregate amortized cost of $49,536 and  $64,953 at June 30, 2001 and December 31, 2000, respectively | 49,231                                                                                                                                                                                                                                                    |       | 64,417           |    |
| FRB  and other stock, at cost                                                                                                                        | 2,740                                                                                                                                                                                                                                                     |       | 2,733            |    |
| Loans  receivable                                                                                                                                    | 106,670                                                                                                                                                                                                                                                   |       | 110,248          |    |
|                                                                                                                                                 | Allowance  for credit losses                                                                                                                                                                                                                              | (2,363     | )                | (2,597  | ) |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                 | Net  loans receivable                                                                                                                                                                                                                                     | 104,307    |             | 107,651 |   |
| Premises  and equipment, net                                                                                                                         | 633                                                                                                                                                                                                                                                       |       | 526              |    |
| Accrued  interest receivable and other assets                                                                                                        | 1,601                                                                                                                                                                                                                                                     |       | 1,919            |    |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                 | Total  assets                                                                                                                                                                                                                                             | $          | 204,471          |    | $ | 204,843 |   |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                 |                                                                                                                                                                                                                                                      |       |             |    |
| LIABILITIES  AND SHAREHOLDERS' EQUITY                                                                                                                |                                                                                                                                                                                                                                                      |       |             |    |
| Deposits:                                                                                                                                            |                                                                                                                                                                                                                                                      |       |             |    |
|                                                                                                                                                 | Noninterest-bearing  demand                                                                                                                                                                                                                               | $          | 60,092           |    | $ | 59,935 |   |
|                                                                                                                                                 | Interest-bearing  demand                                                                                                                                                                                                                                  | 9,280      |             | 9,004   |   |
|                                                                                                                                                 | Money  market                                                                                                                                                                                                                                             | 39,400     |             | 32,351  |   |
|                                                                                                                                                 | Savings                                                                                                                                                                                                                                                   | 1,263      |             | 1,144   |   |
|                                                                                                                                                 | Time  certificates of deposit:                                                                                                                                                                                                                            |       |             |    |   |
|                                                                                                                                                 | $100,000  or more                                                                                                                                                                                                                                         | 33,092     |             | 25,865  |   |
|                                                                                                                                                 | Under  $100,000                                                                                                                                                                                                                                           | 3,387      |             | 6,248   |   |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                 | Total  deposits                                                                                                                                                                                                                                           | 146,514    |             | 134,547 |   |
| Federal  funds purchased and securities sold under agreements to repurchase                                                                          | 5,000                                                                                                                                                                                                                                                     |       | 7,500            |    |
| Other  borrowings                                                                                                                                    | 29,000                                                                                                                                                                                                                                                    |       | 40,000           |    |
| Accrued  interest payable and other liabilities                                                                                                      | 1,628                                                                                                                                                                                                                                                     |       | 2,093            |    |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                 | Total  liabilities                                                                                                                                                                                                                                        | 182,142    |             | 184,140 |   |
|                                                                                                                                                 |                                                                                                                                                                                                                                                      |       |             |    |
| Shareholders'  equity:                                                                                                                               |                                                                                                                                                                                                                                                      |       |             |    |
|                                                                                                                                                 | Preferred  stock: (10,000 shares undesignated) Series A non-cumulative convertible  perpetual preferred stock; authorized 990,000 shares; issued and outstanding  750,680 shares and 770,423 shares at June 30, 2001 and December 31, 2000,  respectively | 6,131      |             | 6,292   |   |
|                                                                                                                                                 |                                                                                                                                                                                                                                                      |       |             |    |   |
|                                                                                                                                                 | Common  stock, no par value; authorized 10,000,000 shares; issued and outstanding  1,620,455 shares and 1,547,429 shares at June 30, 2001 and December 31, 2000,  respectively                                                                            | 30,252     |             | 29,905  |   |
|                                                                                                                                                 | Accumulated  deficit                                                                                                                                                                                                                                      | (13,749    | )                | (14,958 | ) |
|                                                                                                                                                 | Accumulated  other comprehensive income                                                                                                                                                                                                                   | (305       | )                | (536    | ) |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                 | Total  shareholders' equity                                                                                                                                                                                                                               | 22,329     |             | 20,703  |   |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                 | Total  liabilities and shareholders' equity                                                                                                                                                                                                               | $          | 204,471          |    | $ | 204,843 |   |
|                                                                                                                                                 |                                                                                                                                                                                                                                                           |       |                  |    |
|                                                                                                                                                      |                                                                                                                                                                                                                                                           |            |                  |         |  |  |  |  |  |

See accompanyingnotes to consolidated financial statements.
**NATIONAL MERCANTILE BANCORP ANDSUBSIDIARY****CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)**
 **Three months ended  June 30,** **Six months ended  June 30,**  **** ****  **2001** **2000** **2001** **2000**  **** **** **** ****  **(Dollars in thousands except  per share amounts)**                 Interest  income:         Loans,  including fees$2,332 $2,049 $4,922 $3,849  Securities  available-for-sale902 1,224 1,992 2,433  Federal  funds sold and securities purchased under agreements to resell170 92 322 174       Total  interest income3,404 3,365 7,236 6,456 Interest  expense:         Interest-bearing  demand20 29 42 56  Money  market and savings293 300 583 531  Time  certificate of deposits:         $100,000  or more393 244 828 489  Under  $100,00052 80 141 168       Total  interest expense on deposits758 653 1,594 1,244  Federal  funds purchased and securities sold under agreements to repurchase22 - 28 1  Other  borrowings251 410 712 865       Total  interest expense1,031 1,063 2,334 2,110       Net  interest income before provision for credit losses2,373 2,302 4,902 4,346 Provision  for credit losses- (576)- (576)      Net  interest income after provision for credit losses2,373 2,878 4,902 4,922 Other  operating income:         Net  gain on sale of securities available-for-sale96 18 146 18  International  services21 29 27 57  Investment  division30 22 53 42  Deposit-related  and other customer services179 164 309 300  Gain  on sale of other real estate owned- 59 - 69       Total  other operating income326 292 535 486 Other  operating expenses:         Salaries  and related benefits1,121 948 2,218 1,858  Net  occupancy227 250 470 499  Furniture  and equipment65 115 138 169  Printing  and communications83 75 154 145  Insurance  and regulatory assessments81 71 162 141  Customer  services227 214 430 411  Computer  data processing124 116 238 192  Legal  services21 35 51 84  Other  professional services72 91 209 205  Other  real estate owned expenses(25)- (25)3  Promotion  and other expenses63 74 136 138        Total  other operating expenses2,059 1,989 4,181 3,845       Net  income before provision for income taxes640 1,181 1,256 1,563 Provision  for income taxes34 19 47 26       Net  income$606 $1,162 $1,209 $1,537       Earnings  per share:         Basic$0.38 $1.28 $0.76 $1.80       Diluted$0.19 $0.45 $0.38 $0.61      
See accompanyingnotes to consolidated financial statements.
**NATIONAL MERCANTILE BANCORP ANDSUBSIDIARY****CONSOLIDATED STATEMENTS OF CASH FLOWS**

 
 **For the six-months  ended June 30,**  ****  **2001** **2000**  **** ****  **(Dollars in thousands)**      Cash  flow from operating activities:     Net  income$1,209 $1,537  Adjustments  to reconcile net income to net cash provided by operating activities:           Depreciation  and amortization114 96  Gain  on sale of other real estate owned- (69) Provision  for credit losses- (576) Net  gain on sale of securities available-for-sale(146)(18) Net  accretion of discount on securities(3)(14) Net  accretion of discounts on loans purchased(18)(18) Decrease  (increase) in accrued interest receivable and other assets318 (59) (Decrease)  increase in accrued interest payable and other liabilities(465)159     Net  cash provided by operating activities1,009 1,038 Cash  flows from investing activities:     Purchase  of securities available-for-sale(2,086)(2,675) Proceeds  from sales of securities available-for-sale6,169 1,891  Proceeds  from repayments and maturities of securities available-for-sale11,476 2,507  Loan  originations and principal collections, net3,362 (19,104) Proceeds  from sale of other real estate owned- 486  Proceeds  from sale of other assets-SBA guaranteed loans- 209  Purchases  of premises and equipment(221)(33)    Net  cash provided by (used in) investing activities18,700 (16,719)Cash  flows from financing activities:     Net  increase in demand deposits, money market and savings accounts7,601 6,053  Net  increase (decrease) in time certificates of deposit4,366 (1,725) Net  decrease in securities sold under agreements to repurchase and federal funds  purchased(2,500)-  Net  (decrease) increase in other borrowings(11,000)15,600  Net  proceeds from exercise of stock options186 1     Net  cash (used in) provided by financing activities(1,347)19,929    Net  increase in cash and cash equivalents18,362 4,248 Cash  and cash equivalents, January 127,597 10,239    Cash  and cash equivalents, June 30$45,959 $14,487         Supplemental  cash flow information:          Cash  paid for interest$2,409 $2,163  Cash  paid for income taxes59 5  Non-cash  investing and financing transactions:     Transfer  to OREO from loans receivable, net- 35 
See accompanyingnotes to consolidated financial statements.****NATIONAL MERCANTILE BANCORP AND SUBSIDIARYNOTES TO THE UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS**

NOTE 1—BASIS OF PRESENTATION ANDMANAGEMENT REPRESENTATIONS

             Theunaudited consolidated financial statements include the accounts of NationalMercantile Bancorp (the ''Company'') and its wholly owned subsidiary,Mercantile National Bank (the ''Bank''). The unaudited consolidated financial statements reflect the interimadjustments, all of which are of a normal recurring nature and which, inmanagement's opinion, are necessary for the fair presentation of the Company'sconsolidated financial position and the consolidated results of its operationsand cash flows for such interim periods. The results for the three and sixmonth periods ended June 30, 2001 are not necessarily indicative of the resultsexpected for any subsequent period or for the full year ending December 31,2001. The unaudited consolidated financial statements should be read inconjunction with the audited consolidated financial statements included in theCompany’s Annual Report on Form 10-KSB for the year ended December 31, 2000("2000 Form 10-KSB").

NOTE 2—EARNINGS PER SHARE

             Basicearnings per share is computed using the weighted average number of commonshares outstanding during the period. The weighted average number of common shares outstanding used incomputing basic earnings per share was 1,613,383 and 906,576 for the threemonths ended June 30, 2001 and 2000, respectively, and 1,594,019 and 852,447,respectively, for the six months ended June 30, 2001 and 2000.  The weighted average number of common sharesand common share equivalents outstanding used in computing diluted earnings pershare was  3,231,429 and 2,588,451,respectively, for the three months ended June 30, 2001 and 2000 and 3,213,359and 2,535,429, respectively, for the six months ended June 30, 2001 and 2000.
             Thefollowing table is a reconciliation of net income and shares used in thecomputation of earnings per basic and diluted common share:
     **Per share**  **Net Income** **Shares** **amount**  **** **** ****  **(in thousands)**            *For the three months ended June 30, 2001:*       Basic  EPS$606 1,613,383 $0.38               Effect  of dilutive securities:       Options  and warrants  116,686    Convertible  preferred stock  1,501,360         Diluted  EPS$606 3,231,429 $0.19            *For the three months ended June 30, 2000:*       Basic  EPS$1,162 906,576 $1.28               Effect  of dilutive securities:       Options  and warrants  111,025    Convertible  preferred stock  1,570,850         Diluted  EPS$1,162 2,588,451 $0.45            *For the six months ended June 30, 2001:*       Basic  EPS$1,209 1,594,019 $0.76               Effect  of dilutive securities:       Options  and warrants  117,980    Convertible  preferred stock  1,501,360         Diluted  EPS$1,209 3,213,359 $0.38            *For the six months ended June 30, 2000:*       Basic  EPS$1,537 852,447 $1.80               Effect  of dilutive securities:       Options  and warrants  112,132    Convertible  preferred stock  1,570,850         Diluted  EPS$1,537 2,535,429 $0.61     
 

NOTE 3—CASH AND CASH EQUIVALENTS

             Forpurposes of reporting cash flows, cash and cash equivalents include cashand  due from banks – demand, federalfunds sold and securities sold under agreements to resell.

NOTE 4—INCOME TAXES

             Noincome tax provision was recorded during the three and six months ended June30, 2001 and 2000 (other than alternative minimum tax) due to the utilizationof previously unrecognized tax benefits to offset the current period taxliability.

             Fortax purposes at December 31, 2000, the Company had: (i) federal net operatingloss carry forwards of $18.4 million, which begin to expire in the year 2009;(ii) California net operating loss carry forwards of $1.5 million, of which$1.2 million will expire in 2001and $300,000 will expire in 2002; and (iii) anAlternative Minimum Tax credit at December 31, 2000 of $295,000 which may becarried forward indefinitely.
NOTE 5—SUBSEQUENT EVENT

             TheCompany entered into an Agreement and Plan of Reorganization dated July 18,2001 (the “Agreement”) with South Bay Bank, National Association, pursuant towhich the Company has agreed to acquire South Bay on the terms and conditionsset forth in the Agreement.  Theacquisition will be accomplished through the consolidation of South Bay and aninterim national bank to be formed by the Company.  As a result of the consolidation, South Bay will become a whollyowned subsidiary of the Company and the shareholders of South Bay will receivecash in the aggregate amount of approximately $29.1 million, or approximately$10.33 per share (subject to adjustment in certain circumstances) whichrepresents approximately 1.93 times the book value of South Bay at December 31,2000.  The Company intends to accountfor the consolidation as a “purchase” for financial reporting purposes.

NOTE 6—RECLASSIFICATIONS

             Certainprior year data have been reclassified to conform with current yearpresentation.

***Item 2.***             ***MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION                           AND RESULTS OFOPERATIONS***

             NationalMercantile Bancorp (the ''Company'') is the holding company for MercantileNational Bank (the ''Bank''). In light of the fact that the Bank constitutessubstantially all of the business of the Company, references to the Company inthis Item 2 reflect the consolidated activities of the Company and the Bank.

***RESULTS OFOPERATIONS***

             TheCompany recorded net income of $606,000, or $0.19 diluted earnings per share,during the second quarter of 2001, compared to net income of $1.2 million, or$0.45 diluted earnings per share, during the second quarter of 2000.   Net income per basic share was $0.38 and$1.28 during the second quarter of 2001 and 2000, respectively. The decrease inearnings during the second quarter of 2001 compared to 2000 resulted primarilyfrom a $576,000 reverse provision for credit losses  recognized during the second quarter of 2000 related to therecovery of a loan previously charged off. The core earnings of the Company, however, increased slightly to$606,000 during the second quarter of 2001 compared to $586,000 during thesecond quarter of 2000 as a result of $71,000 or 3.1% increase in net interest income and $34,000 or 11.6%increase in other operating income, partially offset by $70,000 increase inother operating expense.

             Netincome during the first six months of 2001 was $1.2 million, or $0.38 dilutedearnings per share, compared to net income of $1.5 million, or $0.61 diluted earnings per share, during the first sixmonths of 2000.  Net income per basicshare was $0.76 and $1.80 during the first six months of 2001 and 2000,respectively. The decrease in net income during the first half of 2001 comparedto the first half of 2000 resulted primarily from the $576,000 reverseprovision for credit losses discussed above. The Company increased its core earnings during the first half of 2001 to$1.2 million compared to $961,000 during the same period in 2000 resultingprimarily from $556,000 or 12.8% increase in net interest income and $49,000 or10.1% increase in other operating income, partially offset by $336,000 or 8.7%increase in other operating expense.

             Returnon average assets during the second quarter and first half of 2001 was 1.28%and 1.26%, respectively, compared to 2.77% and 1.86% during the second quarterand first half of 2000, respectively. Return on average equity during the second quarter and first half of2001 was 10.94% and 11.13%, respectively, compared to 38.74% and 26.27% duringthe second quarter and first half of 2000, respectively.

NET INTEREST INCOME

             Theincrease in net interest income during the three and six months ended June 30,2001 compared to the corresponding periods during 2000 resulted primarily froman increase in net average interest earning assets (the difference betweenaverage interest earning assets and average interest bearing liabilities) of$6.3 million and $8.6 million, respectively. This increase in net average interest earning assets during the threeand six months ended June 30, 2001 compared to corresponding periods during2000 was attributable primarily to an increase in average loans receivable of24.4% and 32.0%, respectively.  Thisgrowth in average loans receivable during the three and six months ended June30, 2001 was funded by an increase in average deposits of 17.9% and 21.4%,respectively, and an increase in average stockholders’ equity of 84.2% and86.2%, respectively.   The growth inboth average loans receivable and average deposits was a result of theCompany’s effort toward expanding and building new customer relationshipswithin existing market niches of business, entertainment, healthcare andcommunity based nonprofit organizations.

             Duringthe quarter ended June 30, 2001 average loans receivable increased 24.4% to$104.3 million compared to $83.8 million during the quarter ended June 30,2000.  The weighted average yield onloans receivable during the quarter ended June 30, 2001 decreased to 8.97%compared to 9.83% during the quarter ended June 30, 2000, reflecting decliningmarket interest rates and to a lesser extent, competitive pressures from othercommercial banks.

             Averagesecurities decreased 18.4% to $59.1 million during the quarter ended June 30,2001 compared to $72.4 million during the quarter ended June 30, 2000 as aresult of a planned sales of securities and increased principal paydowns onamortizing mortgaged-backed securities due to declining market interestrates.  The weighted average yield onsecurities decreased to 6.13% during the second quarter of 2001 compared to6.80% during the second quarter 2000, primarily due to decreased marketinterest rates which impacted the Company’s variable-rate mortgaged-backedsecurities, which comprised 25% of the securities portfolio at June 30, 2001.

             Averageinterest-bearing liabilities increased 11.2% to $107.7 million during thequarter ended June 30, 2001 compared to $96.9 million during the quarter endedJune 30, 2000 due primarily to increased average interest-bearingdeposits.  Average interest-bearingdeposits increased 17.9% to $84.6 million during the quarter ended June 30,2001 from $71.7 million during the quarter ended June 30, 2000, due primarilyto the growth of time certificates of deposit of $100,000 and over. Averageborrowed funds during the second quarter of 2001 decreased 8.0% to $23.2million from $25.2 million during the same period in 2000.

             Theweighted average cost of interest-bearing liabilities decreased to 3.84% duringthe second quarter of 2001 from 4.41% during the same period of 2000, dueprimarily to decreased weighted average cost of other borrowings and weightedaverage cost of interest-bearing deposits as a result of declining marketinterest rates.  The weighted averagecost of borrowed funds decreased to 4.73% during the second quarter of 2001from 6.56% during the same period in 2000. The weighted average cost of interest-bearing deposits decreased to3.59% during the second quarter of 2001 from 3.66% during the same period of2000.
              Average total deposits increased 10.1% to$143.2 million during the second quarter of 2001 compared to $130.1 millionduring the second quarter of 2000 due primarily to a $12.1 million or 48.3%increase in average total time certificates of deposit of $100,000 and more.

             Duringthe six months ended June 30, 2001 average loans receivable increased 32.0 % to$106.1 million compared to $80.4 million during the same period in 2000.  Average securities decreased 14.2% to $62.6million during the six months ended June 30, 2001 compared to $73.0 millionduring the same period in 2000.  Averagetotal deposits during the six months ended June 30, 2001 increased 13.6% to $141.2million compared to $124.6million during the same period in 2000.  The growth in both average loans receivableand average deposits was a result of the Company’s effort toward expanding andbuilding new client relationships within existing market niches of business,entertainment, healthcare and community based nonprofit organizations.  Average borrowed funds decreased 1.3% to$27.8 million during the six months ended June 30, 2001 compared to $28.1million during the same period in 2000.

             TheCompany had improved its cumulative one year interest rate sensitivity gap ofan asset sensitive position to $61.7 million at June 30, 2001 compared to anasset sensitive position of $40.2 million at December 31, 2000 as a result ofthe Company’s continuing effort to minimize its exposure to changes in netinterest income due to a rapid movements in interest rates.  The Company’s asset sensitive positionduring a period of slowly declining interest rates is not expected to have asignificant negative impact on net interest income since the Company has alarge base of immediately adjustable interest bearing demand, savings and moneymarket deposit accounts.  However, sincethe Company is asset sensitive, in a period of rapidly declining rates, such as275 basis points reduction in the discount rate by the Federal Reserve duringthe first six months of 2001, the rapid decline will have a negative effect onthe Company’s net interest income as changes in the rates of interest-bearingdeposits historically have not changed proportionately with changes in marketinterest rates.

PROVISION FOR CREDIT LOSSES

             TheCompany did not record a provision for credit losses during the six monthsended June 30, 2001 and 2000.  Duringthe second quarter of 2000 the Company recorded a reverse provision for creditlosses of $576,000 as a result of approximately $1.3 million net recoveryrelated to a previously charged off loan. The Company did not record any reverse provision for credit losses duringthe second quarter and first half of 2001.
OTHER OPERATING INCOME

Other operating income, excluding gains and losses onthe sale of securities and assets, totaled $230,000 during the second quarterof 2001, an increase of 7.0% from $215,000 during the second quarter of 2000.During the six months ended June 30, 2001, other operating income, excludinggains and losses on the sale of securities and assets, totaled $389,000, adecrease of 2.5% from $399,000 during the comparable period of 2000.  Service charges on deposit accountsincreased  $15,000 or 9.1% and $9,000 or3.0% during the three and six months ended June 30, 2001, respectively,compared to corresponding periods in 2000. This increase reflects the growth of average “transaction type” depositaccounts (demand, money market and savings) during the first half of 2001compared to the same period of 2000.

             TheCompany realized net gains on sale of securities of $96,000 and $146,000 duringthe second quarter and first half of 2001, respectively, compared to a net gainof $18,000 during the corresponding periods in 2000.  The Company had no outstanding other real estate owned andaccordingly did not record any gain or loss on sale of other real estate ownedduring the second and first half of 2001 compared to a net gain of $59,000 and$69,000, respectively, during the second quarter and first half of 2000.

OTHER OPERATING EXPENSES

             Otheroperating expenses increased 3.5% to $2.1 million during the second quarter of2001 compared to $2.0 million during the second quarter of 2000.  This increase was due primarily to increasein salaries and related benefits of $173,000, partially offset by decreases infurniture and equipment expense of $50,000, other real estate owned expense of$25,000 and net occupancy expense of $23,000. The increase in salaries and related benefits was due to the Company’scontinued expansion of business and entertainment loan production staffincluding additional staffing for new market niches of healthcare and communitybased nonprofit organizations and a new branch office opened in March 2001.

             Otheroperating expenses increased 8.7% to $4.2 million during the six months endedJune 30, 2001 compared to $3.8 million during the same period of 2000, dueprimarily to $360,000 increase in salaries and related benefits expense resultingfrom costs associated with the Company’s expansion of banking services andstaff mentioned above, and to $46,000 increase in computer data processingexpense resulting from costs associated with conversion to a new data serviceprovider.
             Thefollowing table presents the components of net interest income for the quartersended June 30, 2001 and 2000.

**Average Balance Sheet and****Analysisof Net Interest Income**
 **Three months ended**  ****  **June 30, 2001** **June 30, 2000**  **** ****      **Weighted**     **Weighted**    **Interest** **Average**   **Interest** **Average**  **Average** **Income/** **Yield/** **Average** **Income/** **Yield/**  **Amount** **Expense** **Rate** **Amount** **Expense** **Rate**  **** **** **** **** **** ****  (Dollars in thousands)              Assets:            Federal  funds sold and securities purchased under agreements to resell$15,990 $170 4.26 %$5,975 $92 6.19%Securities  available-for-sale59,066 902 6.13%72,376 1,224 6.80%Loans  receivable (1) (2)104,253 2,332 8.97%83,833 2,049 9.83%          Total  interest earning assets179,309 $3,404 7.61%162,184 $3,365 8.34%                        Noninterest  earning assets:             Cash  and due from banks - demand10,916     9,591      Other  assets2,758     2,527      Allowance  for credit losses and net unrealized loss on securities available-for-sale(2,611)    (5,497)                Total  assets$190,372     $168,805                             Liabilities  and shareholders' equity:            Interest  bearing deposits:             Demand$8,356 $20 0.96%$8,270 $29 1.41% Money  market and savings39,135 293 3.00%38,452 300 3.14% Time  certificates of deposit:             $100,000  or more33,114 393 4.76%18,742 244 5.24% Under  $100,0003,972 52 5.25%6,269 80 5.13%          Total  time certificates of deposit37,086 445 4.81%25,011 324 5.21%          Total  interest bearing deposits84,577 758 3.59%71,733 653 3.66%Federal  funds purchased and securities sold under agreements to repurchase1,758 22 5.02%13 - 0.00%Other  borrowings21,396 251 4.71%25,155 410 6.56%          Total  interest bearing liabilities107,731 $1,031 3.84%96,901 $1,063 4.41%                        Noninterest  bearing liabilities:             Noninterest  bearing demand deposits58,591     58,325      Other  liabilities1,826     1,514     Shareholders'  equity22,224     12,065                Total  liabilities and shareholders' equity$190,372     $168,805                             Net  interest income (spread)  $2,373 3.78%  $2,302 3.93%                                      Net  yield on earning assets (2)    5.31%    5.71%(1)Includes average balance of nonperforming  loans of $500,000 and $700,000 for 2001 and 2000, respectively.(2)Yields and amounts earned on loans receivable  include loan fees of $119,000 and $35,000 for the three months ended June 30,  2001 and 2000, respectively.
             The following table presentsthe components of net interest income for the six months ended June 30, 2001and 2000.**AverageBalance Sheet andAnalysis of Net Interest Income** **Six months ended**  ****  **June 30, 2001**     **June 30, 2000**      ****      **Weighted**     **Weighted**    **Interest** **Average**   **Interest** **Average**  **Average** **Income/** **Yield/** **Average** **Income/** **Yield/**  **Amount** **Expense** **Rate** **Amount** **Expense** **Rate**  **** **** **** **** **** ****  (Dollars in thousands)              Assets:            Federal  funds sold and securities purchased under agreements to resell$13,464 $322 4.82 %$5,842 $174 5.99%Securities  available-for-sale62,647 1,992 6.41%73,001 2,433 6.70%Loans  receivable (1) (2)106,089 4,922 9.36%80,378 3,849 9.63%          Total  interest earning assets182,200 $7,236 8.01%159,221 $6,456 8.15%                        Noninterest  earning assets:             Cash  and due from banks - demand10,886     9,235      Other  assets2,606     2,644      Allowance  for credit losses and net unrealized loss on securities available-for-sale(2,673)    (5,151)                Total  assets$193,019     $165,949                             Liabilities  and shareholders' equity:            Interest  bearing deposits:             Demand$8,189 $42 1.03 %$8,435 $56 1.34% Money  market and savings37,824 583 3.11%34,812 531 3.07% Time  certificates of deposit:             $100,000  or more32,278 828 5.17%18,855 489 5.22% Under  $100,0005,158 141 5.51%6,628 168 5.10%          Total  time certificates of deposit37,436 969 5.22%25,483 657 5.18%          Total  interest bearing deposits83,449 1,594 3.85%68,730 1,244 3.64%Federal  funds purchased and securities sold under agreements to repurchase1,060 28 5.33%23 1 7.17%Other  borrowings26,720 712 5.37%28,115 865 6.19%          Total  interest bearing liabilities111,229 $2,334 4.23%96,868 $2,110 4.38%                        Noninterest  bearing liabilities:             Noninterest  bearing demand deposits58,114     55,907      Other  liabilities1,766     1,409     Shareholders'  equity21,910     11,765                Total  liabilities and shareholders' equity$193,019     $165,949                             Net  interest income (spread)  $4,902 3.78%  $4,346 3.77%                                      Net  yield on earning assets (2)    5.43%    5.49%(1)Includes average balance of nonperforming  loans of $550,000 and $700,000 for 2001 and 2000, respectively.(2)Yields and amounts earned on loans receivable  include loan fees of $210,000 and $59,000 for the six months ended June 30,  2001 and 2000, respectively.
 

             Thefollowing tables set forth, for the periods indicated, the changes in interestearned and interest paid resulting from changes in volume and changes inrates.  Average balances in allcategories in each reported period were used in the volume computations.  Average yields and rates in each reportedperiod were used in rate computations.

**Increase (Decrease) in Interest Income/Expense Due to ChangeinAverage Volume and Average Rate**

 
 **Six months ended June 30,  2001 vs 2000**  ****  **Increase (decrease) due to(1)** **Net  Increase  (Decrease)**  **** **Volume** **Rate** **** **** ****        Interest  Income:      Federal  funds sold and securities purchased under agreements to resell$184 $(36)$148 Securities  available-for-sale(339)(102)(441)Loans  receivable (2)1,182 (109)1,073      Total  interest earning assets$1,027 $(247)$780            Interest  Expense:      Interest  bearing deposits:       Demand$(2)$(12)$(14) Money  market and savings48 4 52  Time  certificates of deposit:       $  100,000 or more343 (4)339  Under  $100,000(40)13 (27)     Total  time certificates of deposit303 9 312      Total  interest bearing deposits349 1 350 Federal  funds purchased and securities sold under agreements to repurchase28 (1)27 Other  borrowings(53)(100)(153)     Total  interest bearing liabilities$324 $(100)$224             Net  interest income$703 $(147)$556     (1)The change in interest income or interest  expense that is attributable to both changes in average volume and average  rate has been allocated to the changes due to (i) average volume and (ii)  average rate in proportion to the relationship of the absolute amounts of  changes in each.(2)Table does not include interest income that  would have been earned on nonaccrual loans.
 

***BALANCE SHEET ANALYSIS***

INVESTMENTSECURITIES

             The following comparativeperiod-end table sets forth certain information concerning the estimated fairvalues andunrealized gains and losses of investment securities portfolio, consisting ofavailable-for-sale securities:

**Estimated Fair Values of and UnrealizedGains and Losses on Investment Securities**

 
 **June 30, 2001** **December 31, 2000**  **** ****  **Total** **Gross** **Gross** **Estimated** **Total** **Gross** **Gross** **Estimated**  **amortized** **unrealized** **unrealized** **fair** **amortized** **unrealized** **unrealized** **fair**  **cost** **gains** **loss** **value** **cost** **gains** **loss** **value**  **** **** **** **** **** **** **** ****  **(Dollars in thousands)** **(Dollars in thousands)**                                   U.S.  Treasury securities$2,004  $26 $- $2,030 $2,008  $9 $- $2,017 GNMA-issued/guaranteed  mortgage pass through certificates3,267 69 - 3,336 5,288 118 - 5,406 Other  U.S. government and federal agency securities- - - - 1,952 42 - 1,994 FHLMC/FNMA-issued  mortgage pass through certificates10,121 66 7 10,180 15,172 86 36 15,222 CMO's  and REMIC's issued by U.S. government-sponsored agencies31,002 66 407 30,661 36,532 1 669 35,864 Privately  issued Corporate bonds, CMO's and REMIC's securities3,142 4 122 3,024 4,001 - 87 3,914 FRB  and other equity stocks2,740 - - 2,740 2,733 - - 2,733           $52,276 $231 $536 $51,971 $67,686 $256 $792 $67,150          
 

             The total amortized cost ofinvestment securities decreased $15.4 million to $52.3 million at June 30, 2001from $67.7 million at December 31, 2000 due primarily to $6.2 million plannedsales of securities and  $9.4 millionprincipal paydowns on amortizing mortgaged-backed securities brought about bydecreasing market interest rates.  TheCompany recorded a net unrealized loss of $305,000 at June 30, 2001 compared to$ 536,000 at December 31, 2000.

             At June 30, 2001 the Company didnot hold securities of any issuer, other than the U.S. government and U.S.government agencies and corporations, in which the aggregate book valueexceeded 10% of the Company's shareholders' equity.
LOAN PORTFOLIO

             Thefollowing comparative period-end table sets forth certain informationconcerning the composition of the loan portfolio.

                           **Loan PortfolioComposition**
 **June 30,  2001** **December 31,  2000**  **** ****  **Amount** **Percent** **Amount** **Percent**  **** **** **** ****  **(Dollars in thousands)**          Commercial  loans:         Secured  by one to four family residential properties$5,627 5%$6,578 6% Secured  by multifamily residential properties3,408 3 3,765 3  Secured  by commercial real properties37,091 35 40,540 37  Other  - secured and unsecured54,099 51 53,433 48 Real  estate construction and land development2,931 3 1,890 2 Home  equity lines of credit348 - 644 1 Consumer  installment and unsecured loans to individuals3,346 3 3,729 3       Total  loans outstanding106,850 100%110,579 100%       Deferred  net loan origination fees and purchased loan discount(180)  (331)         Loans  receivable, net$106,670   $110,248          
 

                           Totalloans outstanding decreased by $3.7 million to $106.9 million at June 30, 2001compared to $110.6 million at December 31, 2000.  This decrease resulted primarily from $3.4 million or 8.5%decrease in commercial loans secured by commercial real estate properties asthe Company experienced a higher volume of payoffs than loan originations inthis category during the first six months of 2001 from its level at December31, 2000.
The following comparative period-endtable sets forth certain information concerning nonperforming assets.

**Nonperforming Assets**
 **June 30,** **December 31,**  **2001** **2000**  **** ****  **(Dollars in thousands)**      Nonaccrual  loans$449 $683 Troubled  debt restructurings- - Loans  contractually past due ninety or more days with respect to either principal  or interest and still accruing interest147    -       Nonperforming  loans596 683 Other  real estate owned- -    Total  nonperforming assets$596 $683         Allowance  for credit losses as a percent of nonaccrual loans526.3%380.2%Allowance  for credit losses as a percent of nonperforming loans396.5%380.2%Total  nonperforming assets as a percent of loans receivable0.6%0.6%Total  nonperforming assets as a percent of total shareholders' equity2.7%3.3%     
 

             Nonaccrualloans decreased by $234,000 or 34.3% during the first half of 2001 to $449,000compared to $683,000 at December 31, 2000 due primarily to a loan charge-off of$164,000.

             Loanscontractually past due 90 days or more with respect to either principal orinterest and still accruing interest increased to $147,000 during the firsthalf of 2001 compared to zero at December 31, 2000.  This increase is represented mostly by credit cards and relatedplan accounts.

             Asa result of these changes, the amount of nonperforming assets at June 30, 2001decreased 12.7% from the level at December 31, 2000.

             Loandelinquencies greater than 30 days past due decreased to $700,000 or 0.7% ofloans outstanding at June 30, 2001 compared to $1.3 million or 1.2% of loansoutstanding at December 31, 2000.

*ALLOWANCE FOR CREDIT LOSSES*

             Provisionsfor credit losses charged to operations reflect management’s judgment of theadequacy of the allowance for credit losses and are determined through periodicanalysis of the loan portfolio.  Thisanalysis includes a detailed review of the classification and categorization ofproblem loans and loans to be charged off; an assessment of the overall qualityand collectibility of the portfolio; and consideration of the loan lossexperience, trends in problem loan concentrations of credit risk, as well ascurrent and expected future economic conditions (particularly SouthernCalifornia). Management, in combination with an outside firm, performs aperiodic risk and credit analysis, the results of which are reported to theBoard of Directors.
             Loanscharged off during the second quarter and first half of 2001 were $171,000 and$350,000, respectively, compared to $77,000 and $107,000 during the secondquarter and first half of 2000, respectively. Recoveries of loans previously charged off were $82,000 and $116,000during the second quarter and first half of 2001 compared to $1.3 millionduring the second quarter and first half of 2000.  The decrease in recoveries during the second quarter and firsthalf of 2001 was due primarily to one large loan recovery of approximately $1.3million during the second quarter 2000.

             Thefollowing table sets forth information concerning the Company's allowance forcredit losses for the periods indicated.

**                           Analysisof Changes in Allowance for Credit Losses**

 
 **Three months ended** **Six months ended**  **** ****  **June 30,** **June 30,**           **2001** **2000** **2001** **2000**  **** **** **** ****  **(Dollars in thousands)**                   Balance,  beginning of period$2,452 $1,917 $2,597 $1,896 Loan  charged off:         Commercial  loans:         Other  - secured and unsecured89 - 268 -  Consumer  installment and unsecured loans to individuals82 77 82 107       Total  loan charge-offs171 77 350 107          Recoveries  of loans previously charged off:         Commercial  loans:         Secured  by one to four family residential properties6 - 6 -  Other  - secured and unsecured74 1,279 103 1,324  Consumer  installment and unsecured loans to individuals2 3 7 9       Total  recoveries of loans previously charged off82 1,282 116 1,333       Net  charge-offs (recoveries)89 (1,205)234 (1,226) Provision  for credit losses- (576)- (576)      Balance,  end of period$2,363 $2,546 $2,363 $2,546               
 

             Creditquality is affected by many factors beyond the control of the Company,including local and national economies, and facts may exist which are not knownto the Company which adversely affect the likelihood of repayment of variousloans in the loan portfolio and realization of collateral upon a default.Accordingly, no assurance can be given that the Company will not sustain loanlosses materially in excess of the allowance for credit losses. In addition,the Office of the Comptroller of the Currency (“OCC”), as an integral part ofits examination process, periodically reviews the allowance for credit lossesand could require additional provisions for credit losses.

             Basedon continued loan growth, the level of nonperforming loans and a relativelyconstant level of charge-offs, it is anticipated that the level of theallowance for credit losses will remain adequate through the remainder of 2001.
***Recent Accounting Pronouncements***

             TheFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards ("SFAS") No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” as amended by SFAS No. 137, “Accountingfor Derivative Instruments and Hedging Activities – Deferral of the EffectiveDate of FASB Statement No. 133”, and SFAS No. 138, “Accounting for CertainDerivative Instruments and Certain Hedging Activities – an Amendment of SFASNo. 133”.   SFAS Nos. 133 and 138establish accounting and reporting standards requiring that every derivativeinstrument be recorded in the balance sheet as either an asset or as aliability measured at its fair value and that changes in the fair value berecognized currently in the statements of operations.  The Company adopted SFAS Nos. 133, 137 and 138 on January 1,2001.  The impact of the adoption didnot have a material effect on the Company’s financial position or result ofoperations at June 30, 2001 or for the period then ended.

             InSeptember 2000, the FASB issued SFAS No. 140, “Accounting for Transfer andServicing of Financial Assets and Extinguishments of Liabilities – areplacement of FASB Statement No. 125”. As of December 31, 2000, the Company has adopted accounting anddisclosure requirements of SFAS No. 140 as set forth in paragraphs 15 and 17 ofthe Statement, respectively.  All otherprovisions of the statement were adopted as of June 30, 2001.  The adoption of SFAS No. 140 did not have animpact on the financial condition or the results of operations of the Company.

             InJune 2001, the FASB issued SFAS No. 141, “Business Combinations”, SFAS 141supersedes Accounting Principles Board (APB) Opinion No. 16, “BusinessCombinations” and requires that all business combinations within the scope ofthe Statement are to be accounted for using only the purchase method, providesa change in criteria for the separate recognition of intangible assets and requiresmore detailed disclosures.  Theprovisions of SFAS No.141 apply to business combinations initiated after June30, 2001, therefore, the Company intends to account for its announcedacquisition of South Bay Bank, N.A. under the provisions of SFAS No. 141 uponconsummation.

             Alsoin June 2001, the FASB issued SFAS No. 142, “Goodwill and other IntangibleAssets”, which supersedes APB Opinion No. 17, “Intangibles“, and stipulates,among other provisions, that goodwill shall not be amortized.  SFAS No. 142 requires that goodwill beregularly tested for impairment and recognize a goodwill impairment loss whenthe carrying amount of goodwill exceeds it implied fair value.  The Company intends to account for anygoodwill recognized in its proposed acquisition of South Bay Bank, N.A. underthe provisions of SFAS No. 142 upon consummation.  The Company carries no existing goodwill on its books.
***CAPITALADEQUACY REQUIREMENTS***

             AtJune 30, 2001 the Company and the Bank were in compliance with all applicableregulatory capital requirements and the Bank was “well capitalized” under thePrompt Corrective Action rules of the OCC. The following table sets forth the regulatory capital standards for wellcapitalized institutions and the capital ratios for the Company and the Bank asof June 30, 2001 and December 31, 2000.

**Regulatory Capital Informationof the Company and Bank**

 
 **Well Capitalized** **June 30,** **December 31,**  **Standards** **2001** **2000**  **** **** **** **Company:**      Tier  1 leverageN/A 11.88%10.73%Tier  1 risk-based capitalN/A 17.97%17.00%Total  risk-based capitalN/A 19.23%18.26%       **Bank:**      Tier  1 leverage5.00%10.28%9.31%Tier  1 risk-based capital6.00%15.48%14.74%Total  risk-based capital10.00%16.74%16.00%
*** ***

***LIQUIDITY***

             TheCompany continues to manage its liquidity through a combination of coredeposits, federal funds purchased, repurchase agreements, collateralizedborrowing lines at the FHLB, and a portfolio of securities available-for-sale.  Liquidity is also provided by maturinginvestment securities and loans. Average core deposits (excludes money desk and escrow deposits) andshareholders’ equity comprised 84.2% of total funding in the second quarter of2001, compared to 79.5% in the fourth quarter of 2000.

***ASSETLIABILITY MANAGEMENT***

             Thefollowing table shows that the Company’s cumulative one year interest ratesensitivity gap indicated an asset sensitive position of $61.7 million at June30, 2001, an increase from an asset sensitive position of $40.2 million atDecember 31, 2000.  This improvementresulted from the Company’s continuing effort to minimize its exposure tochanges in net interest income due to rapid movements in interest rates.  During the last six months, the Company hasincreased its portfolio of loans that reprice within one year to $85.9 millionat June 30, 2001 from $82.8 million at December 31, 2000 and decreased itsother borrowings that reprice within one year to $31.5 million at June 30, 2001from $45.0 million at December 31, 2000. These changes were offset by a decrease in investment securitiesportfolio that reprice within one year to $26.4 million at June 30, 2001 from$28.2 million at December 31, 2000 and an increase in interest bearingtransaction deposit accounts that reprice within one year to $53.1 million atJune 30, 2001 from $45.6 million at December 31, 2000.  The Company’s asset sensitive positionduring a period of slowly declining interest rates is not expected to have asignificant negative impact on net interest income since the Company has alarge base of immediately adjustable interest bearing demand, savings and moneymarket deposit accounts.  However, sincethe Company is asset sensitive, in a period of rapidly declining rates, such as275 basis points reduction in the discount rate by the Federal Reserve duringthe first six months of 2001, the rapid decline will have a negative effect onthe Company’s net interest income as changes in the rates of interest-bearingdeposits historically have not changed proportionately with changes in marketinterest rates.
**Rate-SensitiveAssets and Liabilities**

 
 **June 30, 2001**  ****  **Maturing or repricing in**  ****  **Less** **After three** **After one**      **than** **months** **year**      **three** **but within** **but within** **After**    **months** **one year** **5 years** **5 years** **Total**        **(Dollars in thousands)**            Rate-Sensitive  Assets:          Federal  funds sold and securities purchased under agreements to resell$34,000    $-    $-    $-    $34,000 Securities  available-for-sale, at amortized cost16,016 10,347 15,953 7,220 49,536 FRB  and other stock, at cost- - - 2,740 2,740 Loans  receivable71,153 14,789 19,185 1,543 106,670        Total  rate-sensitive assets121,169 25,136 35,138 11,503 192,946                       Rate-Sensitive  Liabilities: (1)          Interest  bearing deposits:           Demand,  money market and savings5,426    12,208    17,701    14,608    49,943  Time  certificates of deposit27,867 7,627 590 395 36,479 Other  borrowings31,500 - 2,500 - 34,000        Total  rate-sensitive liabilities64,793 19,835 20,791 15,003 120,422 Interest  rate-sensitivity gap56,376 5,301 14,347 (3,500)72,524       Cumulative  interest rate-sensitivity gap$56,376 $61,677 $76,024 $72,524          Cumulative  ratio of rate sensitive assets to rate-sensitive liabilities187%173%172%160%            (1) Deposits which are subject to immediate  withdrawal are presented as repricing within three months or less. The  distribution of other time deposits is based on scheduled maturities.
 

**Rate-SensitiveAssets and Liabilities**
 **December 31, 2000**  ****  **Maturing or repricing in**  ****  **Less** **After three** **After one**      **than** **months** **year**      **three** **but within** **but within** **After**    **months** **one year** **5 years** **5 years** **Total**        **(Dollars in thousands)**            Rate-Sensitive  Assets:          Federal  funds sold and securities purchased under agreements to resell$19,700 $- $- $- $19,700 Securities  available-for-sale, at amortized cost18,014 10,227 24,728 11,984 64,953 FRB  and other stock, at cost- - - 2,733 2,733 Loans  receivable68,667 14,149 23,871 3,561 110,248        Total  rate-sensitive assets106,381 24,376 48,599 18,278 197,634                       Rate-Sensitive  Liabilities: (1)          Interest  bearing deposits:           Demand,  money market and savings4,512 10,152 15,457 12,378 42,499  Time  certificates of deposit21,150 9,782 753 428 32,113 Other  borrowings45,000 - 2,500 - 47,500        Total  rate-sensitive liabilities70,662 19,934 18,710 12,806 122,112 Interest  rate-sensitivity gap35,719 4,441 29,889 5,472 75,522       Cumulative  interest rate-sensitivity gap$35,719 $40,160 $70,049 $75,522          Cumulative  ratio of rate sensitive assets to rate-sensitive liabilities151%144%164%162%         
 
(1) Deposits which are subject to immediate  withdrawal are presented as repricing within three months or less. The  distribution of other time deposits is based on scheduled maturities.
 

**FACTORS WHICH MAY AFFECT FUTURE OPERATING RESULTS**

**We face risk from changes in interest rates.**

             Thesuccess of our business depends, to a large extent, on our net interestincome.  Changes in market interestrates can affect our net interest income by affecting the spread between ourinterest earning assets and interest bearing liabilities.  This may be due to the different maturitiesof our interest earning assets and interest bearing liabilities, as well as anincrease in the general level of interest rates.  Changes in market interest rates also affect, among other things:

•            Our ability to originate loans;

•            The ability of our borrowers to makepayments on their loans;

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

•            The average life of our interestearning assets;

•            Our ability to generate depositsinstead of other available funding alternatives; and

•            Our ability to access the wholesalefunding market.

             Interestrates are highly sensitive to many factors, including governmental monetarypolicies, domestic and international economic and political conditions andother factors beyond our control.

**We face risk from possible declines in the quality of ourassets.**

             Ourfinancial condition depends significantly on the quality of our assets.  While we have developed and implementedunderwriting policies and procedures to guide us in the making of loans,compliance with these policies and procedures in making loans does notguarantee repayment of the loans.  Ifthe level of our nonperforming assets rises, our results of operations andfinancial condition will be affected.  Aborrower’s ability to pay its loan in accordance with its terms can beadversely affected by a number of factors, such as a decrease in the borrower’srevenues and cash flows due to adverse changes in economic conditions or adecline in the demand for the borrower’s products and/or services.

**Our allowances for credit losses may be inadequate.**

             Weestablish allowances for credit losses against each segment of our loanportfolio.  At June 30, 2001, ourallowance for credit losses equaled 2.2% of loans receivable and 396.5% ofnonperforming loans.  Although webelieved that we had established adequate allowances for credit losses as ofJune 30, 2001, the credit quality or our assets is affected by many factorsbeyond our control, including local and national economic conditions, and thepossible existence of facts which are not known to us which adversely affectthe likelihood of repayment of various loans in our loan portfolio andrealization of the collateral upon a default. Accordingly, we can give no assurance that we will not sustain loanlosses materially in excess of the allowance for credit losses.  In addition, the OCC, as an integral part ofits examination process, periodically reviews our allowance for credit lossesand could require additional provisions for credit losses.  Material future additions to the allowancefor credit losses may also be necessary due to increases in the size andchanges in the composition of our loan portfolio.  Increases in our provisions for credit losses would adversely affectour results of operations.****Economic conditions may worsen.**

             Ourbusiness is strongly influenced by economic conditions in our market area(principally, the Greater Los Angeles metropolitan area) as well as regionaland national economic conditions and in our niche markets, including the entertainmentindustry in Southern California.  Duringthe past several years economic conditions in these areas have beenfavorable.  Should the economiccondition in these areas deteriorate, the financial condition of our borrowerscould weaken, which could lead to higher levels of loan defaults or a declinein the value of collateral for our loans. In addition, an unfavorable economy could reduce the demand for ourloans and other products and services.

**Because a significant amount of the loans we make are toborrowers in California, our operations could suffer as a result of localrecession or natural disasters in California.**

             AtJune 30, 2001, approximately 46% of our loans outstanding were collateralizedby properties located in California. Because of this concentration in California, our financial position andresults of operations have been and are expected to continue to be influencedby general trends in the California economy and its real estate market.  Real estate market declines may adverselyaffect the values of the properties collateralizing loans.  If the principal balances of our loans,together with any primary financing on the mortgaged properties, equal orexceed the value of the mortgaged properties, we could incur higher losses onsales of properties collateralizing foreclosed loans.  In addition, California historically has been vulnerable tocertain natural disaster risks, such as earthquakes and erosion-causedmudslides, which are not typically covered by the standard hazard insurance policiesmaintained by borrowers.  Uninsureddisasters may adversely impact our ability to recover losses on propertiesaffected by such disasters and adversely impact our results of operations.

             Inaddition, California is undergoing an energy crisis and expected to worsenduring the summer months, including the threat of rolling power outages or"blackouts" which have occurred during the past few months. TheCompany’s main office and its branch office are serviced by Los AngelesDepartment of Water and Power (“DWP”). The DWP has reported that it has adequate power supplies and the poweroutages have not occurred in its service areas.  The Company, however, utilizes third party vendors that are notin DWP service areas and are exposed to power outages.  Such outages could disrupt our operations,increase our operating costs and reduce the productivity of staff andoperations. Power outages could also cause delays in processing bankingtransactions. Unscheduled power outages could result in the shut down of informationsystems that could cause financial data to be lost. The Company has developedcontingency plans to deal with such power outages, including the review ofplans and procedures of major vendors who provide processing services.
             TheCompany has extensions of credit to borrowers that are exposed to the poweroutages.  Likewise, such outages coulddisrupt their operations, increase their operating costs, and reduce theproductivity of staff and operations impacting their ability to meet their debtobligations to the Company.  The Companycannot predict the frequency or duration of the power outages that may occur.

**Our business is very competitive.**

             Thereis intense competition in Southern California and elsewhere in the UnitedStates for banking customers.  Weexperience competition for deposits from many sources, including credit unions,insurance companies and money market and other mutual funds, as well as othercommercial banks and savings institutions. We compete for loans and deposits primarily with other commercial banks,mortgage companies, commercial finance companies and savings institutions.  In recent years certain out-of-statefinancial institutions have entered the California market, which has also increasedcompetition.  Many of our competitorshave greater financial strength, marketing capability and name recognition thanwe do, and operate on a statewide or nationwide basis.  In addition, recent developments intechnology and mass marketing have permitted larger companies to market loans anddeposits more aggressively to our small business customers.  Such advantages may give our competitorsopportunities to realize greater efficiencies and economies of scale than wecan.  We can provide no assurance thatwe will be able to compete effectively against our competition.

**Our business is heavily regulated.**

             BothNational Mercantile Bancorp, as a bank holding company, and Mercantile NationalBank, as a national bank, are subject to significant governmental supervisionand regulation, which is intended primarily for the protection ofdepositors.  Statutes and regulationsaffecting us may be changed at any time, and the interpretation of thesestatutes and regulations by examining authorities also may change.  We cannot assure you that future changes inapplicable statutes and regulations or in their interpretation will notadversely affect our business.
**Our ability to use our netoperating losses may be limited.**

             Duringthe past three years, although we have had taxable income, we have not paid anyincome taxes other than alternative minimum taxes because of our net operatingloss carryforwards.  As of December 31,2000, we had net operating loss carryforwards of $18.4 million and $1.5 millionfor federal and state tax purposes, respectively.  Our federal net operating loss carryforward begins to expire in2009.  Our state net operating losscarryforwards continue to expire but remain available in reducing amountsthrough 2002.  Our ability to use thesecarryforwards in the future would be significantly limited if we experience an“ownership change” within the meaning of Section 382 of the Internal RevenueCode.  Future issuances of common stockand transfers of our capital stock could have that effect.  If our use of these carryforwards islimited, we would be required to pay taxes on our taxable income to the extentour taxable income exceeded the limited amounts which could be offset, and ournet income would be lower.

**PART II—OTHER INFORMATION**

***Item 1. LEGAL PROCEEDINGS***

None.

***Item 2.******CHANGES IN SECURITIES***

None.

***Item 3. DEFAULTS UPON SENIOR SECURITIES***

None.

***Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDER***

None.

***Item 5.******OTHER INFORMATION***

             The Company formed National Mercantile Capital Trust I(the “Trust”), a statutory business trust under the Delaware Business Trust Actpursuant to a Declaration of Trust dated as of June 27, 2001, and a Certificateof Trust filed with the Secretary of State of the State of Delaware on June 27,2001, for the sole purpose of issuing and selling certain securitiesrepresenting undivided beneficial interests in the assets of the Trust andinvesting the proceeds thereof in certain debentures of the Company.

             On July 16, 2001 the Trust issued and sold to theCompany 464 common securities (liquidation amount of $1,000 per commonsecurity) of the Trust (the “Common Securities”), representing commonbeneficial interests in the assets of the Trust.

             Also, on July 16, 2001 the Trust issued 15,000 of 10.25percent fixed rate securities (the “Capital Securities”), with a liquidationamount of $1,000 per Capital Security and an aggregate liquidation amount of$15,000,000 due July 25, 2031.  TheCapital Securities are guaranteed by the Company with respect to distributionsand payments upon liquidation, redemption and otherwise to the extent providedin and pursuant to the terms of a Guarantee Agreement.

             The Trust used the proceeds from the issuance and thesale of the Capital Securities and the Common Securities to purchase$15,464,000 aggregate principal amount of the Company’s 10.25 percent fixedrate junior subordinated deferrable interest debentures due July 25, 2031 (theSubordinated Debt Securities”).

             The Company intends to utilize the proceeds from theissuance and sale of the Subordinated Debt Securities for possible businesscombination activities.
***Item 6.******EXHIBITS AND REPORTS ON FORM 8-K***

(a)*Exhibits.*

                   None.

(b)*Reportson Form 8-K.*

             On July 24, 2001, the Company fileda report on Form 8-K reporting under Item 5 the Agreement and Plan ofReorganization dated July 18, 2001 with South Bay Bank, N.A.

**SIGNATURES**

             Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
   **National  Mercantile Bancorp**    (Registrant)           DATE:August  10, 2001 /s/   SCOTT A. MONTGOMERY       **SCOTT  A. MONTGOMERY**    Chief  Executive Officer      DATE:August  10, 2001 /s/   DAVID R. BROWN       **DAVID  R. BROWN**    Chief  Financial Officer 
 

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