UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    FORM 10-Q

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

For the quarterly period ended June 30, 2002

OR

[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
       EXCHANGE ACT OF 1934

For the transition period from ___________ to _________

                         Commission File Number: 0-24802

                           MONTEREY BAY BANCORP, INC.
             (Exact Name Of Registrant As Specified In Its Charter)

            DELAWARE                                   77-0381362
 (State Or Other Jurisdiction Of         (I.R.S. Employer Identification Number)
 Incorporation Or Organization)


              567 Auto Center Drive, Watsonville, California 95076
               (Address Of Principal Executive Offices)(Zip Code)

                                 (831) 768-4800
              (Registrant's Telephone Number, Including Area Code)

                             WWW.MONTEREYBAYBANK.COM
                          (Registrant's Internet Site)

                            INFO@MONTEREYBAYBANK.COM
                     (Registrant's Electronic Mail Address)

Indicate  by check mark  whether  the  registrant  (1) has filed all the 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.

                             YES    X      NO
                                   ---          ---


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock,  as of the latest  practicable  date:  3,485,864  shares of common
stock, par value $0.01 per share, were outstanding as of August 7, 2002.


                                       1
<PAGE>

                                  MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

                                                  INDEX
<TABLE>
<CAPTION>
                                                                                                            PAGE
                                                                                                            ----
<S>              <C>                                                                                       <C>
PART I.          FINANCIAL INFORMATION

                 Item 1.   Financial Statements

                           Condensed Consolidated Statements Of Financial Condition (unaudited)
                           As Of June 30, 2002 And December 31, 2001                                        3-4

                           Condensed Consolidated Statements Of Income (unaudited) For The
                           Three And Six Months Ended June 30, 2002 And June 30, 2001                       5-6

                           Condensed Consolidated Statement Of Stockholders' Equity (unaudited)
                           For The Six Months Ended June 30, 2002                                            7

                           Condensed Consolidated Statements Of Cash Flows (unaudited) For The
                           Six Months Ended June 30, 2002 And June 30, 2001                                 8-9

                           Notes To Condensed Consolidated Financial Statements (unaudited)                10-15

                 Item 2.   Management's Discussion And Analysis Of Financial Condition

                           And Results Of Operations                                                       16-52

                 Item 3.   Quantitative And Qualitative Disclosure About Market Risk                         52


PART II.         OTHER INFORMATION

                 Item 1.   Legal Proceedings                                                                 52

                 Item 2.   Changes In Securities                                                             52

                 Item 3.   Defaults Upon Senior Securities                                                   52

                 Item 4.   Submission Of Matters To A Vote Of Security Holders                               53

                 Item 5.   Other Information                                                                 53

                 Item 6.   Exhibits And Reports On Form 8-K                                                  53

                           (a)  Exhibits

                           (b) Reports On Form 8-K

Signature Page                                                                                               54
</TABLE>


                                       2
<PAGE>

Item 1.  Financial Statements

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
JUNE 30, 2002 AND DECEMBER 31, 2001
(Dollars In Thousands)
<TABLE>
------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                      June 30,  December 31,
                                                                                          2002         2001
                                                                                      --------     --------
<S>                                                                                   <C>          <C>
ASSETS

Cash and cash equivalents                                                             $ 10,423     $ 13,079
Securities available for sale, at estimated fair value:
     Investment securities (amortized cost of $7,713 and $7,707 at
          June 30, 2002 and December 31, 2001, respectively)                             7,240        7,300
     Mortgage backed securities (amortized cost of $42,112 and $30,358 at
          June 30, 2002 and December 31, 2001, respectively)                            42,553       30,644
Loans held for sale, at lower of cost or market                                            480          713
Loans receivable held for investment (net of allowances for loan losses of
     $7,343 at June 30, 2002 and $6,665 at December 31, 2001)                          482,790      465,887
Investment in capital stock of the Federal Home Loan Bank, at cost                       3,302        2,998
Accrued interest receivable                                                              2,955        2,915
Premises and equipment, net                                                              7,387        7,618
Core deposit intangibles, net                                                            1,174        1,514
Other assets                                                                             4,451        4,723
                                                                                      --------     --------

TOTAL ASSETS                                                                          $562,755     $537,391
                                                                                      ========     ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       3
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (Continued)
JUNE 30, 2002 AND DECEMBER 31, 2001
(Dollars In Thousands)
<TABLE>
-------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                             June 30,  December 31,
                                                                                                 2002         2001
                                                                                            ---------    ---------
<S>                                                                                         <C>          <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Non-interest bearing demand deposits                                                        $  21,897    $  21,062
Interest bearing NOW checking accounts                                                         46,514       42,557
Savings deposits                                                                               18,301       19,127
Money market deposits                                                                         109,871      105,828
Certificates of deposit                                                                       257,687      243,765
                                                                                            ---------    ---------
   Total deposits                                                                             454,270      432,339
                                                                                            ---------    ---------

Advances from the Federal Home Loan Bank and other borrowings                                  53,775       53,800
Accounts payable and other liabilities                                                          1,164        1,090
                                                                                            ---------    ---------
     Total liabilities                                                                        509,209      487,229
                                                                                            ---------    ---------


Commitments and contingencies

STOCKHOLDERS' EQUITY

Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued                       --           --
Common stock, $0.01 par value, 9,000,000 shares authorized;
     4,492,085 issued at June 30, 2002 and December 31, 2001;
     3,491,031 outstanding at June 30, 2002 and
     3,456,097 outstanding at December 31, 2001                                                    45           45
Additional paid-in capital                                                                     28,922       28,584
Retained earnings, substantially restricted                                                    39,026       36,473
Unallocated ESOP shares                                                                          (575)        (690)
Treasury shares designated for compensation plans, at cost (15,436 shares
     at June 30, 2002 and 17,969 shares at December 31, 2001)                                    (148)        (173)
Treasury stock, at cost (1,001,054 shares at June 30, 2002 and
     1,035,988 shares at December 31, 2001)                                                   (13,705)     (14,006)
Accumulated other comprehensive loss, net of taxes                                                (19)         (71)
                                                                                            ---------    ---------
     Total stockholders' equity                                                                53,546       50,162
                                                                                            ---------    ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                                  $ 562,755    $ 537,391
                                                                                            =========    =========
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       4
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Dollars In Thousands, Except Per Share Amounts)
<TABLE>
------------------------------------------------------------------------------------------------------
<CAPTION>
                                                       FOR THE THREE MONTHS      FOR THE SIX MONTHS
                                                          ENDED JUNE 30,           ENDED JUNE 30,
                                                      --------------------      ---------------------
                                                         2002         2001         2002         2001
                                                      -------      -------      -------      -------
<S>                                                   <C>          <C>          <C>          <C>
INTEREST AND DIVIDEND INCOME:
   Loans receivable                                   $ 8,435      $ 8,779      $16,749      $17,667
   Mortgage backed securities                             328          675          640        1,483
   Investment securities and cash equivalents             128          256          257          555
                                                      -------      -------      -------      -------
         Total interest and dividend income             8,891        9,710       17,646       19,705
                                                      -------      -------      -------      -------

INTEREST EXPENSE:
   Deposit accounts                                     2,693        4,355        5,506        9,040
   Advances from the FHLB and other borrowings            635          582        1,227        1,140
                                                      -------      -------      -------      -------
         Total interest expense                         3,328        4,937        6,733       10,180
                                                      -------      -------      -------      -------

NET INTEREST INCOME BEFORE PROVISION
     FOR LOAN LOSSES                                    5,563        4,773       10,913        9,525

PROVISION FOR LOAN LOSSES                                 385          300          710          800
                                                      -------      -------      -------      -------
NET INTEREST INCOME AFTER PROVISION
     FOR LOAN LOSSES                                    5,178        4,473       10,203        8,725
                                                      -------      -------      -------      -------

NON-INTEREST INCOME:
   Customer service charges                               392          473          742          882
   Gain on sale of mortgage backed securities              --           --           43           34
   Commissions from sales of noninsured products           34           71           75          188
   Gain on sale of loans                                   21           24           48           29
   Income from loan servicing                              14           41           29           43
   Other income                                            42           86           78          163
                                                      -------      -------      -------      -------
         Total non-interest income                        503          695        1,015        1,339
                                                      -------      -------      -------      -------
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       5
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Dollars In Thousands, Except Per Share Amounts)
<TABLE>
----------------------------------------------------------------------------------------------------
<CAPTION>
                                                         FOR THE THREE MONTHS     FOR THE SIX MONTHS
                                                            ENDED JUNE 30,          ENDED JUNE 30,
                                                          ------------------      -------------------
                                                            2002        2001        2002        2001
                                                          ------      ------      ------      ------
<S>                                                        <C>         <C>         <C>         <C>
NON-INTEREST EXPENSE:
   Compensation and employee benefits                      1,832       1,655       3,737       3,313
   Occupancy and equipment                                   410         432         834         782
   Deposit insurance premiums                                 51          49         102          98
   Data processing fees                                      141         170         277         612
   Legal and accounting expenses                             102         267         221         451
   Supplies, postage, telephone, and office expenses         179         162         347         352
   Advertising and promotion                                  69          27         145          57
   Amortization of intangible assets                         170         170         341         341
   Consulting                                                 21          63          43         306
   Other expense                                             429         525         823       1,051
                                                          ------      ------      ------      ------
         Total non-interest expense                        3,404       3,520       6,870       7,363
                                                          ------      ------      ------      ------
INCOME BEFORE PROVISION FOR
     INCOME TAXES                                          2,277       1,648       4,348       2,701
PROVISION FOR INCOME TAXES                                   930         699       1,795       1,150
                                                          ------      ------      ------      ------

NET INCOME                                                $1,347      $  949      $2,553      $1,551
                                                          ======      ======      ======      ======
EARNINGS PER SHARE:

     BASIC EARNINGS PER SHARE                             $ 0.40      $ 0.29      $ 0.76      $ 0.48
                                                          ======      ======      ======      ======
     DILUTED EARNINGS PER SHARE                           $ 0.38      $ 0.29      $ 0.73      $ 0.47
                                                          ======      ======      ======      ======
</TABLE>
See Notes to Condensed Consolidated Financial Statements


                                       6
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002
(Dollars And Shares In Thousands)
<TABLE>
----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                         Treasury
                                                                                           Shares                Accum-
                                                                                         Designated              ulated
                                                                                 Unal-      for                  Other
                                      Common Stock      Additional              located    Compen-              Compre
                                     ---------------      Paid-In    Retained    ESOP      sation    Treasury   hensive
                                     Shares    Amount     Capital    Earnings    Shares     Plans      Stock      Loss    Total
                                     ------    ------     -------    --------    ------   --------   --------     ----    ------
<S>                                   <C>         <C>    <C>         <C>         <C>        <C>      <C>        <C>     <C>
Balance at December 31, 2001          3,456       $45    $ 28,584    $ 36,473    $ (690)    $ (173)  $(14,006)  $  (71) $ 50,162

Purchase of treasury stock               (5)                                                              (81)               (81)

Exercise of stock options                35                    94                                         331                425

Director fees paid using treasury
  stock                                   5                    41                                          51                 92

Amortization of stock compensation                            203                   115         25                           343

Comprehensive income:
     Net income                                                         2,553                                              2,553

     Other comprehensive income:
         Change in net unrealized
           loss on securities
           available for sale, net
           of taxes of $54                                                                                          77        77

         Reclassification
           adjustment for gains on
           securities available
           for sale included in
           income, net of taxes
           of ($18)                                                                                                (25)      (25)
                                                                                                                          ------
     Other comprehensive income,
         net                                                                                                                  52
                                                                                                                          ------
Total comprehensive income
                                                                                                                           2,605
                                                                                                                          ------

                                     ------    ------     -------    --------    ------   --------   --------     ----    ------
Balance at June 30, 2002              3,491    $   45     $28,922    $ 39,026    $ (575)    $ (148)  $(13,705)  $  (19) $ 53,546
                                     ======    ======     =======    ========    ======   ========   ========     ====    ======
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       7
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Dollars In Thousands)
<TABLE>
---------------------------------------------------------------------------------------------------
<CAPTION>

                                                                              FOR THE SIX MONTHS
                                                                               ENDED  JUNE 30,
                                                                           -----------------------
                                                                               2002           2001
                                                                           --------       --------
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                 $  2,553       $  1,551

Adjustments to reconcile net income to net cash provided by operating
activities:

Depreciation and amortization of premises and equipment                         359            291
Amortization of intangible assets                                               341            341
Amortization of purchase premiums, net of accretion of discounts                497              3
Amortization of deferred loan fees and costs, net                              (115)          (113)
Provision for loan losses                                                       710            800
Federal Home Loan Bank stock dividends                                          (88)           (97)
Gross ESOP expense before dividends received on unallocated shares              308            194
Compensation expense associated with stock compensation plans                    37             60
Director retainer fees paid in stock                                             92            120
Gain on sale of mortgage backed securities                                      (43)           (34)
Gain on sale of loans held for sale                                             (48)           (29)
Loss (gain) on sale of fixed assets                                              11             (9)
Origination of loans held for sale                                           (5,702)        (4,388)
Proceeds from sales of loans held for sale                                    5,983          4,034
Increase in accrued interest receivable                                         (40)          (225)
Decrease (increase) in other assets                                             272           (870)
Increase (decrease) in accounts payable and other liabilities                    74           (435)
Other, net                                                                     (646)          (920)
                                                                           --------       --------
     Net cash provided by operating activities                                4,555            274
                                                                           --------       --------

CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans held for investment                                   (16,903)       (49,308)
Purchases of investment securities available for sale                        (4,854)            --
Proceeds from maturities of investment securities available for sale          4,850             --
Purchases of mortgage backed securities available for sale                  (32,462)       (14,424)
Principal repayments on mortgage backed securities available for sale        17,633         16,712
Proceeds from sales of mortgage backed securities available for sale          2,732          2,907
Purchases of Federal Home Loan Bank stock                                      (216)            --
Proceeds from the sale of premises and equipment                                 --              9
Purchases of premises and equipment                                            (139)          (777)
                                                                           --------       --------
     Net cash used in investing activities                                  (29,359)       (44,881)
                                                                           --------       --------
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       8
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 2002 AND JUNE 30, 2001
(Dollars In Thousands)
<TABLE>
-------------------------------------------------------------------------------------------
<CAPTION>
                                                                      FOR THE SIX MONTHS
                                                                        ENDED JUNE 30,
                                                                   -----------------------
                                                                       2002           2001
                                                                   --------       --------
<S>                                                                  <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits                                             21,931         10,551
Proceeds (repayments) of Federal Home Loan Bank advances, net            --         19,000
(Repayments) proceeds of other borrowings, net                          (25)           184
Purchases of treasury stock                                             (81)            --
Sales of treasury stock for exercise of stock options                   323            863
                                                                   --------       --------
     Net cash provided by financing activities                       22,148         30,598
                                                                   --------       --------

NET DECREASE IN CASH & CASH EQUIVALENTS                              (2,656)       (14,009)

CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD                       13,079         25,159
                                                                   --------       --------

CASH & CASH EQUIVALENTS AT END OF PERIOD                           $ 10,423       $ 11,150
                                                                   ========       ========

SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:

     Interest on deposits and borrowings                           $  6,480       $ 10,131
     Income taxes                                                  $  1,500       $  2,000

SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES

Loan transferred to held for investment, at market value               --               85
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       9
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------


NOTE 1:  Basis Of Presentation

         The accompanying  condensed consolidated unaudited financial statements
have been prepared in accordance with accounting  principles  generally accepted
in the United States of America ("GAAP") for interim  financial  information and
with  the   instructions  to  Form  10-Q  and  Article  10  of  Regulation  S-X.
Accordingly,  they do not include all of the information and footnotes  required
by GAAP for annual  financial  statements.  In the  opinion of  Management,  all
necessary   adjustments,   consisting  only  of  normal  recurring  adjustments,
necessary for a fair presentation have been included.  The results of operations
for the three and six month  periods  ended  June 30,  2002 are not  necessarily
indicative of the results that may be expected for the entire fiscal year or any
other interim period.

         Monterey Bay Bancorp,  Inc.  ("MBBC") is  incorporated  in the State of
Delaware and is the holding  company for Monterey  Bay Bank  ("Bank").  The Bank
maintains a subsidiary,  Portola Investment Corporation ("Portola"). These three
companies are referred to herein on a consolidated  basis as the "Company".  The
Company's  headquarters  are in  Watsonville,  California.  The Company offers a
broad  range  of  financial  services  to both  consumers  and  businesses.  All
significant intercompany transactions and balances have been eliminated.

         Monterey  Bay  Bancorp,  Inc.  operates as a single  business  segment.
Consequently, no segment information is provided in this Form 10-Q.

         These unaudited  condensed  consolidated  financial  statements and the
information under the heading "Item 2.  Management's  Discussion And Analysis Of
Financial  Condition And Results Of Operations"  and the  information  under the
heading "Item 3. Quantitative And Qualitative Disclosure About Market Risk" have
been  prepared  with  the  presumption  that  users  of this  interim  financial
information  have read, or have access to, the most recent audited  consolidated
financial  statements  and notes  thereto of Monterey Bay Bancorp,  Inc. for the
fiscal year ended  December 31, 2001 included in the Company's  Annual Report on
Form 10-K for the fiscal year ended December 31, 2001.

         The preparation of the condensed  consolidated  financial statements of
Monterey Bay Bancorp,  Inc. and subsidiary requires Management to make estimates
and assumptions  that affect the reported  amounts of assets and liabilities and
the reported revenues and expenses for the periods covered.  These estimates are
based  on  information  available  as of the date of the  financial  statements.
Therefore, actual results could significantly differ from those estimates.


                                       10
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------


NOTE 2.  Computation Of Earnings Per Share

         All  of  the  Company's  net  income  has  been   available  to  common
stockholders during the periods covered in this Form 10-Q.

         Basic earnings per share ("EPS") are computed by dividing net income by
the weighted average common shares outstanding for the period.  Diluted earnings
per share  reflect the  potential  dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.

         There was no  difference  in the  numerator,  net  income,  used in the
calculation  of basic  earnings per share and diluted  earnings  per share.  The
denominator  used in the  calculation  of basic  earnings  per share and diluted
earnings per share for the three and six month  periods  ended June 30, 2002 and
2001 is reconciled in the following table. The following table also presents the
calculation  of the  Company's  Basic  EPS  and  Diluted  EPS  for  the  periods
indicated.
<TABLE>
<CAPTION>
                                                     For The Three Months                For The Six Months
                                                         Ended June 30,                     Ended June 30,
                                                 -----------------------------       -----------------------------
(In Whole Dollars And Whole Shares)
                                                        2002              2001              2002              2001
                                                 -----------       -----------       -----------       -----------

<S>                                              <C>               <C>               <C>               <C>
Net income                                       $ 1,347,000       $   949,000       $ 2,553,000       $ 1,551,000
                                                 ===========       ===========       ===========       ===========

Average shares issued                              4,492,085         4,492,085         4,492,085         4,492,085

Less weighted average:
   Uncommitted ESOP shares                           (94,336)         (130,273)          (98,828)         (134,766)
   Non-vested stock award shares                     (16,474)          (30,348)          (16,774)          (31,981)
   Treasury shares                                (1,005,587)       (1,069,461)       (1,014,445)       (1,080,716)
                                                 -----------       -----------       -----------       -----------
Sub-total                                         (1,116,397)       (1,230,082)       (1,130,047)       (1,247,463)
                                                 -----------       -----------       -----------       -----------

Weighted average BASIC shares outstanding          3,375,688         3,262,003         3,362,038         3,244,622

Add dilutive effect of:
   Stock options                                     131,944            38,175           123,739            42,452
   Stock awards                                        1,549               417             1,457               503
                                                 -----------       -----------       -----------       -----------
Sub-total                                            133,493            38,592           125,196            42,955
                                                 -----------       -----------       -----------       -----------

Weighted average DILUTED shares outstanding        3,509,181         3,300,595         3,487,234         3,287,577
                                                 ===========       ===========       ===========       ===========

Earnings per share:
   BASIC                                         $      0.40       $      0.29       $      0.76       $      0.48
                                                 ===========       ===========       ===========       ===========
   DILUTED                                       $      0.38       $      0.29       $      0.73       $      0.47
                                                 ===========       ===========       ===========       ===========
</TABLE>


                                       11
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------


NOTE 3:  Other Comprehensive Income

         The  Company's  only current  source of other  comprehensive  income is
derived from  unrealized  gains and losses on the  portfolios of investment  and
mortgage backed securities classified as available for sale.

         Reclassification  adjustments  for realized net gains included in other
comprehensive income for investment and mortgage backed securities classified as
available  for sale for the three and six month  periods ended June 30, 2002 and
2001 are summarized as follows:
<TABLE>
<CAPTION>

                                             Three Months Ended June 30,       Six Months Ended June 30,
                                             ---------------------------       -------------------------
                                                2002              2001              2002            2001
                                                ----              ----              ----            ----
(Dollars In Thousands)

<S>                                            <C>               <C>               <C>             <C>
Gross reclassification adjustment              $  --             $  --             $  43           $  34
Tax expense                                       --                --               (18)            (14)
                                               -----             -----             -----           -----
Reclassification adjustment, net of tax        $  --             $  --             $  25           $  20
                                               =====             =====             =====           =====
</TABLE>


         A  reconciliation  of the net unrealized  gain or loss on available for
sale securities recognized in other comprehensive income is as follows:

<TABLE>
<CAPTION>
                                                         Three Months Ended              Six Months Ended
                                                               June 30,                      June 30,
                                                        --------------------          ---------------------
                                                         2002           2001           2002            2001
                                                        -----          -----          -----           -----
(Dollars In Thousands)
<S>                                                     <C>            <C>            <C>             <C>
Holding gain arising during the period, net of tax      $ 136          $ 186          $  77           $ 465
Reclassification adjustment, net of tax                    --             --            (25)            (20)
                                                        -----          -----          -----           -----
Net unrealized gain recognized in
     other comprehensive income                         $ 136          $ 186          $  52           $ 445
                                                        =====          =====          =====           =====
</TABLE>


                                       12
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------


NOTE 4:  Stock Option Plans

         The Company  maintains the Amended 1995 Incentive Stock Option Plan and
the 1995 Stock  Option Plan For Outside  Directors.  Under  these  plans,  stock
options  typically  vest over a five year time period,  although  other  vesting
periods are  permitted  under the Amended 1995  Incentive  Stock Option Plan and
have been utilized by the Company in certain  instances.  All outstanding  stock
options  under both of these plans vest upon a change in control of the Company.
The following tables summarize the combined status of these plans:
<TABLE>
<CAPTION>
                                                                  Stock                            Stock       Average
                                                                Options            Stock         Options      Exercise
                                Stock           Stock      Cumulatively          Options       Available      Price Of
                              Options         Options        Vested And     Cumulatively      For Future        Vested
Date                       Authorized     Outstanding       Outstanding        Exercised          Grants       Options
----                       ----------     -----------       -----------        ---------          ------       -------
<S>                           <C>             <C>               <C>              <C>             <C>           <C>
December 31, 2001             757,929         425,104           255,224          195,761         137,064       $ 10.88
March 31, 2002                757,929         390,999           238,390          225,566         141,364       $ 11.07
June 30, 2002                 757,929         386,174           249,915          230,391         141,364       $ 11.06
</TABLE>

Activity during the three and six months ended June 30, 2002 included:

                                   Three Months Ended           Six Months Ended
                                        June 30, 2002              June 30, 2002
                                        -------------              -------------
Granted                                            --                      5,500
Canceled                                           --                      9,800
Exercised                                       4,825                     34,630
Vested                                         16,350                     29,321

         The exercise price of individual vested stock options ranged from a low
of $8.19 per share to a high of $16.60 per share as of June 30, 2002.


                                       13
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------


NOTE 5:  Stock Award Plan

         The  Company  maintains  the  Performance  Equity  Program  ("PEP") for
officers and  employees.  Awards under the PEP  typically  vest over a five year
time period,  although in certain instances the Company has utilized unallocated
or  forfeited  PEP shares for  immediately  vested  stock grants in lieu of cash
compensation.  Awards under the PEP are both  time-based and  performance-based.
All  outstanding  stock  awards  under  the PEP vest in the event of a change in
control  of the  Company.  Compensation  expense  related to the PEP for the six
months  ended June 30,  2002 and 2001 was $37  thousand  and $60  thousand.  The
following table summarizes the status of this plan:

                                           Stock                          Stock
                                          Awards           Stock         Awards
                           Stock     Outstanding          Awards      Available
                          Awards         And Not    Cumulatively     For Future
Date                  Authorized          Vested          Vested         Grants
----                  ----------          ------          ------         ------
December 31, 2001        141,677          17,969         123,708             --
March 31, 2002           141,677          16,486         125,191             --
June 30, 2002            141,677          15,436         126,241             --



         Activity during the three and six months ended June 30, 2002 included:

                     Three Months Ended          Six Months Ended
                          June 30, 2002             June 30, 2002
                          -------------             -------------
Granted                              --                        --
Canceled                             --                        --
Vested                            1,050                     2,533


                                       14
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------


NOTE 6:  Commitments & Contingencies

         At June 30, 2002,  commitments  maintained by the Company included firm
commitments to originate  $31.7 million in various types of loans,  and optional
commitments  to sell $1.9  million  in fixed  rate  residential  mortgages  on a
servicing released basis. The Company maintained no firm commitments to purchase
loans or securities,  to assume  borrowings,  or to sell  securities at June 30,
2002.

NOTE 7:  Recent Accounting Pronouncements

         In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial  Accounting  Standards  ("SFAS") No. 145,  "Rescission of
FASB  Statements  No. 4, 44, and 64,  Amendment  of FASB  Statement  No. 13, and
Technical  Corrections".  SFAS No. 145 rescinds and amends these  Statements  to
eliminate any inconsistency  between the required  accounting for sale-leaseback
transactions and the required  accounting for certain lease  modifications  that
have economic effects that are similar to sale-leaseback transactions.  SFAS No.
145 also amends  other  existing  authoritative  pronouncements  to make various
technical  corrections,  clarify meanings, or describe their applicability under
changed  conditions.  The Company  adopted SFAS No. 145 as of April 1, 2002. The
adoption did not have a significant impact on the Company's  financial position,
results of operations, or cash flows. SFAS No. 145 confirms that gains or losses
from normal  extinguishments  of debt,  such as prepayments of Federal Home Loan
Bank advances in conjunction  with the Company's  interest rate risk  management
program, need not be classified as extraordinary items.

         In June 2002,  the FASB  issued  SFAS No.  146,  "Accounting  for Costs
Associated with Exit or Disposal  Activities",  which  addresses  accounting for
restructuring  and similar costs.  SFAS No. 146 supersedes  previous  accounting
guidance,  principally  Emerging  Issues Task Force Issue No. 94-3.  The Company
will adopt the provisions of SFAS No. 146 for restructuring activities initiated
after  December 31, 2002.  SFAS No. 146 requires  that the  liability  for costs
associated with an exit or disposal activity be recognized when the liability is
incurred.  Under Issue 94-3, a liability for an exit cost was  recognized at the
date of the Company's  commitment to an exit plan. SFAS No. 146 also establishes
that the  liability  should  initially  be measured  and recorded at fair value.
Accordingly,   SFAS  No.  146  may  affect  the  timing  of  recognizing  future
restructuring costs as well as the amounts recognized.

NOTE 8:  Reclassifications

         Certain  amounts in the December  31, 2001 and June 30, 2001  financial
statements  have been  reclassified  to conform to the June 30,  2002  financial
statement presentation.


                                       15
<PAGE>

Item 2.  Management's Discussion And Analysis Of Financial Condition And Results
         Of Operations


Forward-looking Statements

         Discussions  of  certain  matters  in  this  Report  on Form  10-Q  may
constitute  forward-looking  statements within the meaning of the Section 27A of
the  Securities  Act of 1933, as amended,  and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange  Act"), and as such, may involve
risks and uncertainties.  Forward-looking statements, which are based on certain
assumptions  and  describe  future  plans,  strategies,  and  expectations,  are
generally identifiable by the use of words or phrases such as "believe", "plan",
"expect",  "intend",  "anticipate",   "estimate",  "project",  "forecast",  "may
increase",  "may fluctuate",  "may improve" and similar expressions or future or
conditional  verbs  such  as  "will",  "should",  "would",  and  "could".  These
forward-looking  statements  relate to, among other things,  expectations of the
business environment in which Monterey Bay Bancorp, Inc. operates, opportunities
and   expectations   regarding   technologies,    anticipated   performance   or
contributions   from  new  and  existing   employees,   projections   of  future
performance,  potential future credit  experience,  possible changes in laws and
regulations, potential risks and benefits arising from the implementation of the
Company's strategic and tactical plans,  perceived  opportunities in the market,
potential actions of significant  stockholders and investment banking firms, and
statements  regarding the  Company's  mission and vision.  The Company's  actual
results,  performance,  and achievements may differ materially from the results,
performance,  and  achievements  expressed  or implied  in such  forward-looking
statements due to a wide range of factors.  These factors  include,  but are not
limited to, changes in interest rates, general economic  conditions,  the demand
for the Company's  products and services,  accounting  principles or guidelines,
legislative  and  regulatory  changes,  monetary  and fiscal  policies of the US
Government,  US Treasury, and Federal Reserve, real estate markets,  competition
in the financial  services  industry,  attracting  and retaining key  personnel,
performance of new employees,  regulatory actions, changes in and utilization of
new  technologies,  consumer  and  business  response to news events or economic
trends,  and other  risks  detailed  in the  Company's  reports  filed  with the
Securities  and Exchange  Commission  ("SEC") from time to time,  including  the
Annual  Report on Form 10-K for the fiscal year ended  December 31, 2001.  These
factors should be considered in evaluating the forward-looking  statements,  and
undue  reliance  should not be placed on such  statements.  The Company does not
undertake,   and   specifically   disclaims  any   obligation,   to  update  any
forward-looking  statements to reflect  occurrences or  unanticipated  events or
circumstances after the date of such statements.

Availability Of Information

         This Report on Form 10-Q is available at the following Internet sites:

o        www.sec.gov

o        www.montereybaybank.com

Additional  corporate  information  regarding  Monterey  Bay  Bancorp,  Inc. and
Monterey  Bay Bank is also  available  at the  www.montereybaybank.com  Internet
site. This Internet site is not a part of this Report on Form 10-Q.


General

         Monterey Bay  Bancorp,  Inc.  (referred to herein on an  unconsolidated
basis as  "MBBC"  and on a  consolidated  basis as the  "Company")  is a unitary
savings  and loan  holding  company  incorporated  in 1994 under the laws of the
state  of  Delaware.  MBBC  currently  maintains  a single  subsidiary  company,
Monterey Bay Bank (the "Bank"),  a federally  chartered savings & loan. MBBC was
organized  as the  holding  company for the Bank in  connection  with the Bank's
conversion from the mutual to stock form of ownership in 1995.


                                       16
<PAGE>

         At June 30,  2002,  the  Company  had $562.8  million in total  assets,
$483.3 million in net loans  receivable,  and $454.3 million in total  deposits.
The Company is subject to regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC").  The principal executive
offices  of the  Company  and the Bank are  located  at 567 Auto  Center  Drive,
Watsonville,  California,  95076,  telephone number (831) 768 - 4800,  facsimile
number (831) 722 - 6794. The Company may also be contacted via  electronic  mail
at: INFO@MONTEREYBAYBANK.COM. The Bank is a member of the Federal Home Loan Bank
of San  Francisco  ("FHLB")  and its  deposits  are  insured  by the FDIC to the
maximum extent permitted by law.

         The Company conducts business from eight full service branch offices in
its primary market area in Central California, one loan production office in Los
Angeles, 11 automated teller machines ("ATM's") including two stand-alone ATM's,
and its administrative  facilities in Watsonville,  California. In addition, the
Company  supports its customers  through  bilingual  (English / Spanish) 24 hour
telephone  banking,  Internet banking,  electronic bill payment,  and ATM access
through an array of  networks  including  STAR,  CIRRUS,  and PLUS.  Through its
network  of  banking  offices,  the  Bank  emphasizes  personalized  service  in
assisting  individuals,  families,  community  organizations,  and businesses in
attaining  their  financial  objectives.  The Bank offers a wide  complement  of
lending and deposit products.

         The Bank also  supports its customers by  functioning  as a federal tax
depository,  selling and  purchasing  foreign  banknotes,  issuing  debit cards,
providing domestic and international  collection services, and supplying various
forms of electronic funds transfer. Through its wholly owned subsidiary, Portola
Investment  Corporation  ("Portola"),  the Bank  provides,  on an agency  basis,
mortgage,  term,  universal,  and whole life insurance and a large  selection of
non-FDIC insured  investment  products  including fixed and variable  annuities,
mutual funds, and individual securities.

         The Company's  revenues are primarily derived from interest on its loan
and  mortgage  backed  securities  portfolios,  interest  and  dividends  on its
investment  securities,  and fee income associated with the provision of various
customer   services.   Interest  paid  on  deposits  and  borrowings   typically
constitutes the Company's largest type of expense. The Company's primary sources
of funds are deposits,  principal and interest payments on its asset portfolios,
and  various  sources  of  wholesale  borrowings  including  FHLB  advances  and
securities sold under  agreements to repurchase.  The Company's most significant
operating  expenditures are its staffing  expenses and the costs associated with
maintaining its branch network.

Critical Accounting Policies

         The Company's  financial  statements  are prepared in  accordance  with
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP").  The Company's significant accounting policies are presented in Note 1
to the Consolidated  Financial Statements contained in the Company's 2001 Annual
Report on Form 10-K.  The Company  follows  accounting  policies  typical to the
community commercial banking industry and in compliance with various regulations
and  guidelines as  established  by the  Financial  Accounting  Standards  Board
("FASB") and the Bank's primary federal regulator, the OTS.

         The Company's most significant  management  accounting  estimate is the
appropriate  level for the  allowance  for loan  losses.  The Company  follows a
methodology for  calculating  the  appropriate  level for the allowance for loan
losses.  However,  various factors,  many of which are beyond the control of the
Company, could lead to significant revisions in the amount of allowance for loan
losses in future  periods,  with a  corresponding  impact  upon the  results  of
operations.  In addition, the calculation of the allowance for loan losses is by
nature inexact,  as the allowance  represents  Management's best estimate of the
loan losses inherent in the Company's  credit  portfolios at the reporting date.
These loan  losses will occur in the  future,  and as such cannot be  determined
with absolute  certainty at the reporting date. Please see also "Asset Quality /
Credit Profile - Allowance For Loan Losses".

         Other estimates that the Company utilizes in its accounting include the
expected  useful  lives  of  depreciable  assets,  such as  buildings,  building
improvements,  equipment,  and furniture. The useful lives of various technology
related  hardware  and  software  can be subject to change  due to  advances  in
technology  and  the  general  adoption  of  new  standards  for  technology  or
interfaces among computer or telecommunication systems.


                                       17
<PAGE>

         The Company applies Accounting  Principles Board ("APB") Opinion No. 25
and related  interpretations in accounting for stock options.  Under APB No. 25,
compensation  cost for stock  options is measured as the excess,  if any, of the
fair market  value of the  Company's  stock at the date of grant over the amount
the employee or director  must pay to acquire the stock.  Because the  Company's
stock  option  Plans  provide for the  issuance of options at a price of no less
than  the  fair  market  value at the date of  grant,  no  compensation  cost is
required to be recognized for the stock option Plans.

         Had compensation costs for the stock option Plans been determined based
upon  the  fair  value  at the date of  grant  consistent  with  SFAS  No.  123,
"Accounting For Stock Based Compensation", the Company's net income and earnings
per share would have been  reduced.  The amount of the  reduction for the fiscal
years 1999 through 2001 is  disclosed in Note 18 to the  Consolidated  Financial
Statements  contained  in the 2001  Annual  Report on Form 10-K,  based upon the
assumptions listed therein.

         GAAP  itself  may change  over time,  impacting  the  reporting  of the
Company's financial  activity.  Although the economic substance of the Company's
transactions  would not change,  alterations  in GAAP could affect the timing or
manner of accounting or reporting.

Recent Developments

         Recent  regulatory,  financial  industry,  and other  developments have
included the following:

o    On July 30, 2002,  President Bush signed into law the Sarbanes-Oxley Act of
     2002. This new  legislation  addresses  accounting  oversight and corporate
     governance.  The new law creates a five member oversight board appointed by
     the  Securities & Exchange  Commission  ("SEC") that will set standards for
     accountants  and  have  investigative  and  disciplinary  powers.  The  new
     legislation  prohibits  accounting  firms from  providing  various types of
     consulting  services to public attest clients and requires accounting firms
     to rotate partners among public client  assignments  every five years.  The
     new legislation  also increases  penalties for financial  crimes,  requires
     expanded disclosure of corporate operations and internal controls, enhances
     controls on and reporting of insider trading, expands the SEC's budget, and
     places  statutory  separations  between  investment  bankers and  analysts.
     Various  aspects  of the new  legislation  are  dependent  upon  subsequent
     rulemaking by the SEC. Management is currently  evaluating what impacts the
     new legislation will have upon the Company.  The Company currently utilizes
     its external  attestation  auditor only for audit  services and  assistance
     with the preparation of income tax returns.

o    Federal  legislation  reforming the  bankruptcy  code remains in conference
     between  the House of  Representatives  and the Senate.  This  legislation,
     depending upon its final form, if any, could potentially assist the Bank in
     collecting on certain credits.

o    Congress  continues  to  debate  lifting  restrictions  on the  payment  of
     interest on  business  checking  accounts  and easing  restrictions  on the
     number of certain  transactions  for MMDA  accounts  at insured  depository
     institutions.  The potential payment of interest on sterile reserves at the
     Federal Reserve banks is also being considered.  Depending on the nature of
     such changes eventually approved,  if any, there could be various favorable
     and / or unfavorable impacts upon the Company.


                                       18
<PAGE>

o    The new capital plan of the  FHLB-San  Francisco  has been  approved by the
     Federal  Housing  Finance  Board.  The FHLB-SF has not yet  established  an
     implementation  date for the new  capital  plan,  with such  implementation
     required  by June 2005.  The Bank will  receive at least 240 days'  written
     notice of the  implementation  date.  The new capital plan  incorporates  a
     single class of stock and requires each member to own stock in amount equal
     to the greater of: a) a  membership  stock  requirement,  or b) an activity
     based stock requirement. The new capital stock is redeemable on five years'
     written notice, subject to certain conditions. The Company does not believe
     that the initial  implementation  of the  FHLB-SF new capital  plan as most
     recently  communicated  by the FHLB-SF will have a material impact upon the
     Company's  financial  condition,  cash  flows,  or results  of  operations.
     However,  latitude  for the FHLB-SF  included  within the new capital  plan
     could  result in the  Bank's  being  required  to  purchase  as much as 50%
     additional  capital  stock or sell as much as 50% of its  proposed  capital
     stock requirement at the discretion of the FHLB-SF.

o    A possible  increase in (e.g.  from $100,000 to $130,000 per depositor,  or
     special  limits for  retirement  accounts) or  broadening  of (e.g.  higher
     limits for public agency  deposits)  federal  deposit  insurance  coverage,
     which may be combined with a new formula for FDIC  insurance  premiums,  is
     under  evaluation at the FDIC and in Congress.  Congress also  continues to
     discuss the potential merger of the Bank Insurance Fund ("BIF") and Savings
     Association Insurance Fund ("SAIF") of the FDIC.

o    The US House of Representatives is considering a regulatory relief bill for
     the  financial  services  industry.  Similar  legislative  action  has  not
     proceeded in the Senate.

o    The  State of  California  is  facing a  significant  budget  deficit.  The
     potential  imposition of new fees or taxes or higher tax rates by the State
     of  California  could  impact the  Company's  business  and  earnings.  The
     possible suspension,  curtailment, or elimination of various State programs
     could also affect the  Company.  The State of  California  legislature  and
     governor as of late July had not yet adopted a budget for the current State
     fiscal year.  The Company is unable to predict what, if any,  actions might
     be taken by the  State  of  California  and the  possible  impact  of those
     actions upon the Company's  consolidated  financial condition or results of
     operations.

Overview Of Business Activity

         During the second quarter and first half of 2002, the Company continued
the implementation of its strategic plan of transforming the Bank from a 77 year
old  savings  & loan  into a  community  focused  commercial  bank  serving  the
financial needs of individuals,  families,  organizations,  and businesses.  The
Bank focuses on building longstanding customer relationships, investing the time
and  energy  to get to  know  customers  well  and  understand  their  financial
objectives.  Another key aspect of the  Company's  transformation  strategy is a
significant increase in the community  involvement and contributions made by the
Bank, its Directors,  and its  employees.  These efforts are  facilitated by the
Bank's  Director of  Community  Relations.  The Company  seeks to  differentiate
itself from its competition  through various means,  particularly by providing a
superior level of customer service.


                                       19
<PAGE>

         Key accomplishments during the second quarter of 2002 included:

o    record quarterly net income of $1.35 million and diluted earnings per share
     of $0.38

o    the  attainment  of record  levels of total assets,  loans,  deposits,  and
     stockholders' equity at June 30, 2002

o    progress in shifting the composition of the loan portfolio

o    net interest  income rose versus the same period during the prior year, due
     to both a larger  average  balance  sheet fueled by increased  deposits and
     loans and due to expanded  spreads  resulting  from the  planned  change in
     balance sheet composition

o    a further improvement in the Company's  efficiency ratio, to 56.12% for the
     three months ended June 30, 2002

o    continued  maintenance  of  favorable  credit  quality as  measured  by net
     charge-offs, although a rise in non-accrual loans (all real estate secured)
     was experienced

o    increases in local commercial banking business

o    a  continuation  of the  Bank's  quality  customer  service  program,  with
     periodic  measurement  provided by "mystery shoppers" and customer surveys,
     and  branch  staff   performance   directly   integrated   into   incentive
     compensation plans

o    significant business generation from the Los Angeles loan production office
     which opened during the first quarter of 2002

o    concluding the second quarter with a strong loan pipeline

         The Company has realized certain  operating  efficiencies  from the new
technology environment implemented and better optimized over the past 15 months.
Additionally,  the favorable credit quality experienced during the first half of
2002 allowed the Company to avoid  significant  operating  costs for collections
and foreclosures.  The Company's  commitment to quality customer service will be
exemplified  during the third quarter of 2002, when  telecommunications  network
upgrades  speed  transaction  processing  for  both  deposits  and  new  account
openings.

         The Company  continued its focus on stockholder  value during the first
half of 2002,  increasing  its  tangible  book  value per share  from  $14.08 at
December  31,  2001 to  $14.48 at March  31,  2002 to  $15.00 at June 30,  2002.
Coverage  of the Company by a second  equity  analyst  was  obtained  during the
second quarter, and Management is pursuing coverage by a third equity analyst to
begin during the third  quarter of 2002.  The Company has also added  additional
market makers in the past year to facilitate  the liquidity of its common stock.
The  Company's  Directors  continue  to be paid their  retainer  fees in Company
common  stock,  and  stock-based  compensation  is a  significant  component  of
Management compensation.

         At June 30, 2002, there were 109,035  remaining  shares  authorized for
repurchase  under the Company's  current stock repurchase  program.  The Company
repurchased  10,000 shares in early August 2002 at prices ranging from $17.10 to
$17.25 per share, and intends to continue  pursuing  opportunities to repurchase
additional shares during the third quarter of 2002.

         The  Company's   Directors  and  Officers  have  continued  to  be  net
purchasers of the Company's common stock during 2002. For example,  in late July
and early August 2002, the Company's Chief Executive Officer and Chief Financial
Officer  purchased an additional 1,000 and 500 shares,  respectively,  adding to
their investment in the Company.


                                       20
<PAGE>

         Similar  to its  practice  in  2001,  the  Company  intends  to  pursue
opportunities  to utilize  stock  based  compensation  in lieu of  certain  cash
compensation in 2002 as a means of aligning employee interests with improvements
in stockholder value. In addition,  a significant number of the Bank's employees
have an ownership interest in the Company, through one or more of the following:

o    direct stock purchases

o    the Employee Stock Ownership Plan ("ESOP")

o    incentive stock options

o    stock grant awards

o    stock  purchased  with funds  contributed by employees to the Bank's 401(k)
     Plan

         The Board of Directors and Management have targeted the  transformation
strategy  into a community  focused  commercial  bank based on their belief that
this  approach  presents  the best  current  opportunity  to  enhance  long term
stockholder  value.  The  Company  maintains  an  active  relationship  with its
investment banker in monitoring  potential  opportunities to augment stockholder
value,  such as via the cost effective  acquisition of additional  branches from
other financial institutions.

         The  Company's  strategic  plan  envisions  a greater  amount of income
property,  construction, and business lending funded with a higher percentage of
transaction deposit accounts.  The strategic plan also includes  improvements in
the  Company's  efficiency  ratio and return on  stockholders'  equity,  two key
measures of financial  performance  where the Company has lagged high performing
peer institutions.  However, the pace of the Company's conversion from a savings
& loan into a locally focused community bank will be impacted in coming quarters
by multiple factors, many of which are outside the Company's control,  including
the strength of the California and national economies,  competition,  regulatory
and  legislative  changes,  and  trends  in real  estate  values.  The  State of
California  budget  deficit could also  unfavorably  impact the Company and / or
slow its  strategic  transformation.  The strategy  being pursued by the Company
also presents various types of tactical  implementation risks. The Bank is under
no  immediate  pressure  to  pursue a change in  charter  at this  time,  as its
Qualified Thrift Lender ("QTL") ratio was 73.8% at June 30, 2002,  compared to a
minimum requirement of 65.0% to retain its federal thrift charter.

Changes In Financial Condition From December 31, 2001 To June 30, 2002

         Total assets  increased  $25.4  million  (4.7%) from $537.4  million at
December 31, 2001 to a record $562.8 million at June 30, 2002.

         Cash & cash  equivalents  decreased  from $13.1 million at December 31,
2001 to $10.4  million at June 30, 2002 due to the  Company's  using cash & cash
equivalents to fund expansions in the security and loan portfolios.


                                       21
<PAGE>

Securities

         At June 30,  2002,  the  Company  owned no  corporate  bonds  issued by
WorldCom,  Enron,  or any other companies  primarily in the  telecommunications,
technology, or energy industries.

         Investment securities available for sale were little changed during the
first six months of 2002,  totaling  $7.3  million at December 31, 2001 and $7.2
million at June 30, 2002. At both these dates, the Company's investment security
portfolio  was  identically  composed  of  two  floating  rate  corporate  trust
preferred  bonds rated "A" and "A-" by Standard & Poors at June 30, 2002.  These
corporate  trust   preferred   securities  are  issued  by  large  US  financial
institutions.  The slight decrease in balance during 2002 resulted from the mark
to market adjustment for available for sale securities, which reflects increased
credit spreads and reduced demand for long term corporate  bonds repricing based
upon three month LIBOR.

         The average balance of investment  securities  during the first half of
2002 was  increased by the purchase of Agency  debentures  which had been called
for redemption by the issuer.  The Company acquired these bonds, which typically
have a remaining term of ten to fourteen days, as a higher yielding  alternative
to federal funds sold, repurchase agreements,  and other short term investments.
The Company owned no Agency debentures at June 30, 2002.

         Mortgage  backed  securities  available for sale  increased  from $30.6
million at December  31,  2001 to $42.6  million at June 30,  2002.  The Company
purchased   relatively  low  duration  Agency  and  private  label,   AAA  rated
collateralized  mortgage obligations  ("CMO's") during the first half of 2002 to
serve as collateral for certain deposits and to invest available liquidity.  The
low duration was targeted in  conjunction  with the Company's  asset / liability
management  program and in order to provide cash flows later in the year to fund
anticipated  loan  production.  Management  anticipates  a reduction in mortgage
backed  securities  during the third  quarter of 2002,  as proceeds  from sales,
scheduled  amortization,  and prepayments are utilized to fund the loan pipeline
maintained by the Company at June 30, 2002.

         During the first  quarter of 2002,  the Company sold a somewhat  higher
duration  private label CMO with $2.7 million in par value in  conjunction  with
its interest rate risk management  program. In early July 2002, the Company sold
an  Agency  CMO with  $2.0  million  in par value to  further  moderate  its net
liability sensitivity (see Interest Rate Risk Management And Exposure). The vast
majority  of the  Company's  mortgage  backed  securities  at June 30, 2002 were
relatively  low  duration  bonds,  and  all of  the  Company's  mortgage  backed
securities  at  July  31,  2002  passed  the  Federal   Financial   Institutions
Examination  Council  ("FFIEC") test for  volatility.  Management  believes that
allocating  asset  duration to new loans versus  securities  facilitates  better
community  support and derives a higher  yield for the same level of exposure to
future increases in general market interest rates.

Loans

         Loans held for sale totaled $480  thousand at June 30, 2002,  down from
$713  thousand at December  31, 2001.  The Company  sells most of its long term,
fixed  rate  residential  mortgage  production  into the  secondary  market on a
servicing  released  basis,  and purchases more interest rate sensitive loans as
part of its interest rate risk  management  program.  All loans held for sale at
June 30, 2002 were matched with optional  commitments to deliver such loans into
the secondary market.

         Loans  held for  investment,  net,  increased  from  $465.9  million at
December  31, 2001 to a record  $482.8  million at June 30,  2002.  The increase
resulted  from a  combination  of strong  internal  loan  originations  and from
purchases of, or participations  in, individual income property and construction
loans from correspondent  banks. The Company follows its customary  underwriting
policies in evaluating loan purchases and participations.


                                       22
<PAGE>

         The Company  opened its Los Angeles loan  production  office during the
first quarter of 2002. This office concentrates on relationship based lending to
local real estate investors and developers, with a particular emphasis on income
property and construction  lending. The Los Angeles loan production office ended
the second quarter of 2002 with a significant loan pipeline, fueled by the local
market knowledge of the Company's  lending staff and by the relative strength of
the economy and real estate markets in southern California.

         Total net loans as a percentage  of total assets were 85.9% at June 30,
2002.  The Company has  targeted  increasing  this ratio to 90.0% as part of its
strategy of supporting its interest margin,  fostering  economic activity in its
local communities, and effectively utilizing the Bank's capital.

         The loan portfolio product mix shifted during the first half of 2002 in
conformity with the Company's strategic plan. Residential one to four unit loans
declined  from 42.3% of gross loans at December 31, 2001 to 38.1% of gross loans
at June 30, 2002. In contrast,  construction  loans increased from 7.9% to 9.7%,
land loans increased from 2.5% to 3.7%, commercial loans rose from 1.8% to 2.6%,
and consumer loans  (primarily home equity lines of credit)  increased from 1.4%
to 1.9%.  This change in loan mix was  facilitated  by the  commercial  business
relationship  officers  the Company  hired last year and by the Los Angeles loan
production office. To the extent economic and competitive conditions permit, the
Company  plans to  continue  decreasing  the  percentage  of its loan  portfolio
allocated to residential  mortgages in favor of other generally  higher yielding
and more interest rate sensitive types of loans.

         Management anticipates for the third quarter of 2002:

o    a further  rise in loans  outstanding  and  total  assets,  as the  Company
     intends to continue  expanding  the balance sheet  throughout  2002 to more
     extensively meet the credit needs of its customers and local communities

o    an increase in the ratio of loans to assets

o    residential mortgages comprising a smaller percentage of total gross loans

These  expectations  could,  however,  not  occur due a wide  range of  factors,
including,  but not  limited  to,  the rate of loan  prepayments  spurred by the
historically  low  interest  rate  environment,  with new long term,  fixed rate
residential  mortgages  available  to borrowers  during July 2002 with  interest
rates below 7.00%.

         The Company's  commercial  banking group continued to produce increased
business during the first half of 2002.  Commercial  business loans  outstanding
increased  from $8.8 million at December  31, 2001 to $13.3  million at June 30,
2002.  This group has also generated  applications  for  commercial  real estate
mortgages and construction loans in 2002, in addition to acquiring new deposits.
The  commercial  lending  pipeline at June 30, 2002 pointed toward the continued
expansion of commercial banking customer  relationships during the third quarter
of 2002.


                                       23
<PAGE>

         Additional   information   regarding  loan  portfolio   composition  is
presented in the following table:
<TABLE>
<CAPTION>
(Dollars In Thousands)                                               June 30,    December 31,
                                                                         2002            2001
                                                                    ---------       ---------
<S>                                                                 <C>             <C>
Held for investment:
   Loans secured by real estate:
      Residential one to four unit                                  $ 192,551       $ 204,829
      Multifamily five or more units                                  112,024         103,854
      Commercial and industrial                                       110,276         109,988
      Construction                                                     49,117          38,522
      Land                                                             18,692          11,924
                                                                    ---------       ---------

   Sub-total loans secured by real estate                             482,660         469,117

   Other loans:
      Home equity lines of credit                                       9,266           6,608
      Loans secured by deposits                                           295             202
      Consumer lines of credit, unsecured                                 150             170
      Commercial term loans                                             4,632           3,163
      Commercial lines of credit                                        8,645           5,680
                                                                    ---------       ---------

   Sub-total other loans                                               22,988          15,823

   Sub-total gross loans held for investment                          505,648         484,940

   (Less) / Plus:
      Undisbursed construction loan funds                             (15,632)        (12,621)
      Unamortized purchase premiums, net of purchase discounts            596             435
      Deferred loan fees and costs, net                                  (479)           (202)
      Allowance for loan losses                                        (7,343)         (6,665)
                                                                    ---------       ---------

Loans receivable held for investment, net                           $ 482,790       $ 465,887
                                                                    =========       =========

Held for sale:
   Residential one to four unit                                     $     480       $     713
                                                                    =========       =========
</TABLE>

FHLB Stock

         The Company's  investment in the capital stock of the FHLB-SF increased
from $3.0  million at December  31, 2001 to $3.3 million at June 30, 2002 due to
stock dividends and the required purchase of additional stock as a result of the
growth in the Bank's balance sheet.

Premises and Equipment

         Premises and  equipment,  net,  decreased from $7.6 million at December
31,  2001 to $7.4  million  at June  30,  2002,  as  periodic  depreciation  and
amortization  exceeded new purchases.  Because the Company acquired  significant
new  hardware  and  software  during 2001 in support of the new core  processing
system,  fixed asset  acquisitions  in 2002 are  expected to be  moderate.  This
expectation  could,  however,  change in the event the Company is  successful in
opening  a  de  novo  branch  or  acquiring  a  branch  from  another  financial
institution.  Fixed asset  requirements  for the new Los Angeles loan production
office were not significant.


                                       24
<PAGE>

Core Deposit Intangibles

         Core deposit  intangibles,  net, declined from $1.5 million at December
31,  2001 to $1.2  million  at  June  30,  2002  in  conjunction  with  periodic
amortization.  Under OTS regulations,  intangible assets, including core deposit
premiums,  reduce  regulatory  capital,  resulting in lower  regulatory  capital
ratios than would otherwise be the case.

Deposits

         Deposits increased from $432.3 million at December 31, 2001 to a record
$454.3  million at June 30, 2002.  The majority of this increase was  associated
with the Bank's  issuance of its first  brokered  certificate  of deposit ("CD")
during the second quarter of 2002. The Bank issued the $20.0 million one year CD
on an  uncollateralized  basis through one of the country's  largest  investment
banks / securities  dealers at an all-in cost of LIBOR plus 12 basis points. The
brokered  CD was  issued  in order  to  provide  funding  for  anticipated  loan
production in the second and third quarters of 2002.  Funds not utilized  during
the second quarter of 2002 were invested in short term, low duration,  high cash
flow CMO's,  contributing to a $9.6 million increase in mortgage backed security
balances during the second quarter of 2002. While the Company does not intend to
become a significant  issuer of brokered CD's,  Management took advantage of the
opportunity due to:

o    the Company's projected need for funding

o    the efficiency of one relatively large issuance

o    the attractiveness of the pricing

o    the Company's loan to deposit ratio approaching 110%

o    the one  year  term  integrating  effectively  with the  Company's  asset /
     liability management program

         The  Company  continues  to pursue  increases  in  transaction  account
balances as a fundamental  component of the strategic plan. Excluding the impact
of the $20.0 million brokered CD,  transaction  accounts increased from 43.6% of
total deposits at December 31, 2001 to 45.3% of total deposits at June 30, 2002.
Key trends and results within the deposit  portfolio during the first six months
of 2002 included:

o    Non-interest  bearing  demand  deposits  increased  from  $21.1  million at
     December  31,  2001 to  $21.9  million  at June  30,  2002.  This  rise was
     supported by balances  maintained by commercial  banking  customers and the
     Company's targeting demand deposit balances as part of its sales management
     program.

o    Interest bearing NOW checking account balances increased from $42.6 million
     at December 31, 2001 to $46.5  million at June 30, 2002.  The June 30, 2002
     balance was favorably impacted by several large customer deposits made as a
     result of recent  real  estate  sales.  During the first half of 2002,  the
     Company   experienced   particularly   aggressive   advertising  and  price
     competition for consumer NOW deposits from one large national thrift.  This
     thrift paid interest rates far above market and  significantly in excess of
     the federal  funds rate.  The  Company  has been  reluctant  to match these
     prices,   and  has  instead   focused  on  competing  based  upon  service,
     convenience,  flexible access (e.g.  bilingual telephone banking,  Internet
     banking,  ATM  access,  debit card,  and  in-branch  service),  and overall
     business relationships.

o    Savings deposits decreased from $19.1 million at December 31, 2001 to $18.3
     million at June 30, 2002. While the Company  continues to offer traditional
     statement  savings  products,  its sales focus has instead  concentrated on
     checking  and  money  market  accounts  due to  the  greater  features  and
     flexibility offered by those products.


                                       25
<PAGE>

o    Money market deposits increased from $105.8 million at December 31, 2001 to
     $109.9 million at June 30, 2002.  Money market deposit  balances during the
     first half of 2002 were positively  impacted by Bank  advertising and sales
     programs,  and by certain customers waiting to commit funds to certificates
     of  deposit  given the  historically  low  interest  rate  environment.  In
     addition, during the first half of 2002, the Company offered interest rates
     on its Money  Market Plus  product that were in excess of many money market
     mutual funds and money market accounts  offered through  securities  firms.
     The Bank's sales staff was trained to highlight this  differential,  and to
     explain the many  attractive  attributes  of the Money Market Plus product,
     including:

     A.   access via telephone banking,  Internet banking,  ATM's, bank by mail,
          check writing, and in-branch service

     B.   extensively  tiered  interest rates,  whereby  earnings on the account
          increase as each successively higher balance tier is attained

     C.   FDIC insurance to the maximum amount permitted by law

     D.   combined statement with other Bank products

     E.   automatic transfers and direct deposit

o    Certificate  of  deposit  balances  excluding  the $20.0  million  brokered
     certificate  of deposit  decreased from $243.8 million at December 31, 2001
     to $237.7  million at June 30,  2002.  This decline in part  resulted  from
     certain  customers  delaying  committing  funds to fixed  term,  fixed rate
     certificates  of  deposit  due  to  the   historically  low  interest  rate
     environment and from significant  price competition from two large thrifts,
     one local credit union, and several non-traditional competitors,  including
     an insurance  company and a supermarket  seeking customers for new consumer
     banking  operations.  During the first half of 2002, the Company priced its
     longer term (18 to 60 months)  certificates of deposit attractively as part
     of  its  asset  /  liability   management  program  and  to  encourage  the
     development  of longer term  customer  relationships.  In addition,  in the
     second quarter of 2002, the Company conducted a print advertising  campaign
     for 24 to 30  month  certificates  of  deposits  that  attracted  some  new
     customers.  Certificate  of deposit  balances  during the second quarter of
     2002 were also  favorably  affected  by the receipt of an  additional  $3.0
     million deposit from the State of California.

         Demand deposit and money market deposit  balances  declined  during the
second  quarter  of 2002 in part due to  customers  building a  seasonally  high
balance in these accounts at March 31 in  preparation  for the payment of income
and property taxes during April.

         Increasing  the  percentage  of total  deposits  comprised of checking,
savings,  and money market accounts is integral to the Company's strategic plan,
as  transaction  accounts  provide  for a lower cost of funds  versus most other
funding sources,  generate fee income,  furnish  opportunities for cross-selling
other  products and services to customers,  and are typically less interest rate
sensitive than many other funding sources.  The Company plans to introduce a new
suite of transaction  account  products near the conclusion of the third quarter
of 2002. These new products will focus on two key characteristics:

o    providing customer choice and options

o    promoting relationship banking

         For example, the new consumer checking account products will facilitate
the customer's  selection of how they wish to avoid periodic service charges and
how to earn more interest based upon their individual financial profile. Many of
the new accounts  provide  benefits such as free services,  eliminated  periodic
service  charges,  or higher rates of interest for building a relationship  with
the Bank through  multiple  deposit  products and combined  statements.  The new
products  also further  encourage  businesses  to bank with the Company,  as the
principals can obtain  preferred  personal  pricing while the business  benefits
from a new  business  only  money  market  account  complemented  with  Internet
banking.  The Company plans to coordinate the  introduction of these new deposit
products  with local radio  advertisements  in the third and fourth  quarters of
2002.


                                       26
<PAGE>

         The Company's  ratio of loans to deposits was 106.38% at June 30, 2002,
down slightly  from  December 31, 2001. In light of this ratio,  the Company has
implemented the following  strategic and tactical  actions during the first half
of 2002:

o    modified  staff  incentive  programs to more  strongly  focus on  expanding
     deposit relationships

o    directed a higher  percentage of the  advertising  and promotion  budget to
     deposit generation

o    accepted brokered deposits

o    acquired  additional  deposits through the State of California time deposit
     program

In addition,  due to the size of the loan pipeline at June 30, 2002, the Company
is exploring various strategic and tactical  alternatives for further increasing
its funding base, including:

o    pursuing  opportunities for additional branch locations,  either de novo or
     acquisition of existing branches from other financial institutions

o    introducing new deposit products and related services  (discussed above and
     targeted for September 2002)

o    increased  business lending with associated  compensating  customer deposit
     balances

o    relationship loan pricing for income property owners maintaining  operating
     accounts with the Company

o    serving  the  depository  needs  of  customers  at  the  Los  Angeles  loan
     production office in part through a correspondent banking relationship

         During the first half of 2002,  the Company has not,  however,  pursued
the offering of deposit rates substantially above market in order to avoid:

o    attracting highly volatile funds

o    placing pressure on the net interest margin

o    decreasing  focus on its  relationship  banking  approach and commitment to
     providing superior customer service

Borrowings

         Borrowings  were $53.8  million at December 31, 2001 and June 30, 2002.
During the second  quarter of 2002,  the  Company  prepaid a $5.0  million  FHLB
advance originally  scheduled to mature in July 2002 and entered into a new $5.0
million FHLB advance with a maturity date in June 2003 in  conjunction  with its
asset / liability management program. All of the Company's FHLB advances at June
30,  2002 were fixed  rate,  fixed term  borrowings  without  call or put option
features.  The next  scheduled  maturity of an FHLB  advance is $5.0  million in
November 2002.


                                       27
<PAGE>

Stockholders' Equity

         Total stockholders' equity increased from $50.2 million at December 31,
2001 to a record $53.5  million at June 30, 2002.  Factors  contributing  to the
increase included:

o    $2.6 million in 2002 year to date net income

o    continued amortization of deferred stock compensation,  including both ESOP
     and PEP shares

o    the ongoing payment of Director retainer fees with Company common stock

o    the exercise of 34,630 vested stock  options,  generating  $425 thousand in
     additional stockholders' equity

o    appreciation  in the  portfolio of  securities  classified as available for
     sale

         The above  factors  more than  offset the impact of the  repurchase  of
5,000 shares of the Company's  common stock at $16.25 per share during the first
quarter of 2002.  The Company did not  repurchase  any shares  during the second
quarter  of  2002.  At June  30,  2002,  there  were  109,035  remaining  shares
authorized for repurchase under the Company's current  repurchase  program.  The
Company  repurchased  10,000 shares at prices  ranging from $17.10 to $17.25 per
share in early August 2002 and plans to repurchase  additional shares during the
third quarter of 2002 should market conditions be conducive. The Company did not
declare or pay any cash  dividends  during the first half of 2002.  The Board of
Directors  continues to believe that alternative uses for the Company's capital,
at this time, are more attractive than the payment of a cash dividend.

         Tangible  book value per share  increased  from $14.08 at December  31,
2001 to $15.00 at June 30, 2002.

Interest Rate Risk Management And Exposure

         The table below  presents an overview of the interest rate  environment
during the eighteen  months ended June 30,  2002.  The 12 MTA and 11th  District
Cost Of Funds Index ("COFI") are by nature lagging indices that trail changes in
more responsive interest rate indices such as those associated with the Treasury
or LIBOR markets.
<TABLE>
<CAPTION>
Index / Rate (1)        12/31/00    3/31/01   6/30/01    9/30/01  12/31/01    3/31/02   6/30/02
----------------        --------    -------   -------    -------  --------    -------   -------
<C>                        <C>        <C>       <C>        <C>       <C>        <C>       <C>
3 month Treasury bill      5.89%      4.28%     3.65%      2.37%     1.72%      1.78%     1.68%
6 month Treasury bill      5.70%      4.13%     3.64%      2.35%     1.79%      2.10%     1.74%
2 year Treasury note       5.09%      4.18%     4.24%      2.85%     3.02%      3.72%     2.81%
5 year Treasury note       4.97%      4.56%     4.95%      3.80%     4.30%      4.84%     4.03%
10 year Treasury note      5.11%      4.92%     5.41%      4.59%     5.05%      5.40%     4.80%
Target federal funds       6.50%      5.00%     3.75%      3.00%     1.75%      1.75%     1.75%
Prime rate                 9.50%      8.00%     6.75%      6.00%     4.75%      4.75%     4.75%
3 month LIBOR              6.40%      4.88%     3.84%      2.59%     1.88%      2.03%     1.86%
12 month LIBOR             6.00%      4.67%     4.18%      2.64%     2.44%      3.00%     2.29%
1 Year CMT (2)             5.60%      4.30%     3.58%      2.82%     2.22%      2.57%     2.20%
12 MTA (2)                 6.11%      5.71%     5.10%      4.40%     3.48%      2.91%     2.55%
COFI (2)                   5.62%      5.20%     4.50%      3.97%     3.07%      2.65%     2.85%
</TABLE>
-----------------------------------------------------------------
(1)  Indices / rates are spot values unless otherwise noted.
(2)  These indices / rates are monthly averages.


                                       28
<PAGE>

         In an effort to limit the Company's  exposure to interest rate changes,
Management  monitors  and  evaluates  interest  rate  risk on a  regular  basis,
including  participation  in the OTS Net  Portfolio  Value Model and  associated
regulatory  reporting.  Management  believes  that interest rate risk and credit
risk compose the two greatest  financial  exposures  faced by the Company in the
normal  course of its  business.  The Company is not  directly  exposed to risks
associated with commodity prices or fluctuations in foreign currency values.

         The Company has  recently  maintained  a  relatively  balanced,  though
slightly net liability sensitive, exposure to changes in general market interest
rates as measured by potential  prospective changes in net portfolio value, also
referred to as market value of portfolio  equity.  These  potential  prospective
changes in net portfolio value are calculated  based upon immediate,  sustained,
and parallel shifts in the term structure of interest  rates,  often referred to
as the "yield curve". In other words, these calculations highlight that the fair
value of the Company's  assets exhibits  almost the same,  though slightly more,
volatility  as  does  its  liabilities.  However,  in  addition  to the  overall
direction of general market interest rates,  changes in relative rates (i.e. the
slope of the term structure of interest  rates) and relative credit spreads also
impact net portfolio value and the Company's profitability.

         As highlighted in the above table, beginning in early 2001, the Federal
Reserve  commenced  decreasing  its benchmark  interest rates in response to the
slowing national economy, increases in unemployment, falling equity values, weak
manufacturing  activity,  and other negative or unfavorable  economic  trends or
statistics.  By the end of 2001,  the Federal  Reserve had cut interest rates 11
times for a total of 475  basis  points,  representing  one of the  largest  and
fastest  series of rate decreases  ever  experienced  in the United States.  The
Federal  Reserve  continued  cutting  interest rates  throughout 2001 in part in
response to the onset of the first national economic recession in many years. In
addition  to  cutting   interest  rates,   the  Federal  Reserve  also  fostered
significant  expansion in the money supply, with a particular increase following
the events of September 11, 2001.

         The eleven rate cuts in 2001 led to nominal  levels of  interest  rates
that were the lowest in decades,  with the target federal funds rate  decreasing
to 1.75%.  The Prime Rate  followed the target  federal funds rate down in 2001,
while the COFI and 12 MTA indices lagged the more responsive  Treasury and LIBOR
rates  throughout 2001 and into 2002. The low nominal level of interest rates in
effect in the  latter  part of 2001 and in the first  half of 2002  presented  a
particular challenge to the Company, as the rates on its NOW and Savings deposit
accounts  were  already at low levels by mid 2001 and could not be  decreased to
the same extent as declines in many capital markets  interest rates. The Company
addressed this issue through its asset / liability  management program,  whereby
decisions  regarding  pricing,  promotion,  and incentives  are integrated  with
tactical  transactions to moderate the Company's exposure to changes in interest
rates.

         Various  interest rates increased in the first quarter of 2002 once the
capital markets  assumed that the Federal Reserve would not continue  decreasing
its benchmark interest rates. In addition, concerns about the impact of interest
rates  staying at such low levels for an extended  period of time began to raise
worries  about  potential  future  inflation,  leading to a rise in longer  term
interest  rates.  At the end of the first quarter of 2002,  many economists were
predicting  a  relatively  strong  recovery  from  the  US  recession  and  were
forecasting  increases of 100 basis points or more in the target  federal  funds
rate by the end of the year. In March 2002, the Dow Jones Industrial Average had
recovered  the losses that  occurred  in  September  2001,  with the Index again
closing over 10,500.  By the end of the first  quarter,  the Treasury  curve had
become  significantly  steeper,  with the differential between federal funds and
the 2 year Treasury  Note at 197 basis points.  Steep yield curves are generally
beneficial for financial institutions,  including the Bank, as greater income is
derived from short term maturity  mismatches and as customer demand often shifts
toward adjustable  mortgages due to the rate differential between adjustable and
fixed rate loans.


                                       29
<PAGE>

         Most  interest  rates  reversed  course and declined  during the second
quarter of 2002.  Among the factors  leading to this reduction in interest rates
were:

o    the "crisis of  confidence"  stemming  from the  restatement  of  financial
     information by Enron, WorldCom, and other large companies

o    the broad decline in equity indices during the second quarter of 2002, with
     certain  investors seeking relative safe harbor in US government and Agency
     fixed income investments

o    companies being slow to rehire despite growth in gross domestic product

o    ongoing tensions in the Middle East and continued discussion of a potential
     US invasion of Iraq encouraging "flight to quality"  investments by certain
     capital markets participants

The Treasury yield curve was flatter at June 30, 2002 than three months earlier,
with  the  differential  between  federal  funds  and the 2 year  Treasury  Note
declining  from  197  basis  points  to 106  basis  points.  At mid  2002,  many
economists  announced  their  revised  estimates  that  increases  in the target
federal  funds rate would be postponed  until some time in the first  quarter of
2003.

         The  analytical  results of the  Company's  interest rate risk modeling
have been  empirically  validated over the past several years,  as the Company's
interest  margin has remained  stable or expanded  during periods of both rising
and falling general market interest rates. The expansion in interest margin over
the past several years has been significantly  impacted by the implementation of
the Company's  strategic  plan, in addition to being  influenced by the interest
rate environment.

         The Company  plans to maintain its  relatively  balanced  interest rate
risk profile by avoiding  adding  significant  volumes of long term,  fixed rate
assets to the balance sheet.  Long term,  fixed rate assets are relatively  more
challenging to match fund, and therefore can expose the Company to interest rate
risk in rising interest rate environments.  During the first six months of 2002,
the Company  continued  to sell the vast  majority of its long term,  fixed rate
residential  loan production into the secondary  market on a servicing  released
basis. The low interest rate environment contributed to continued prepayments on
the Company's  existing  portfolios of residential fixed rate mortgages held for
investment  and  higher  duration  mortgage  backed  securities   classified  as
available for sale.

         Mortgage backed security  purchases  during the first half of 2002 were
primarily low duration CMO's with limited extension risk and above market coupon
rates. The Company also sold one relatively higher duration CMO during the first
quarter of 2001 and its one  remaining  volatile,  support  tranche CMO in early
July 2002.  Loan purchases  during the first half of 2002 were generally  either
adjustable  rate or fixed rate for a short period of time,  then  converting  to
adjusting  rate  ("hybrid  mortgages").  During the past year,  the  Company has
periodically prepaid and extended certain FHLB advances in order to increase the
duration of its funding and therefore moderate its net liability sensitivity. By
July 1, 2002, the Company was no longer  originating  mortgages tied to the 11th
District COFI Index due to concerns  regarding the capacity of a small number of
large thrifts to dominate  this Index.  In addition,  in July 2002,  the Company
commenced offering two year fixed rate hybrid loans that adjust every six months
thereafter as a means of differentiating itself in the market and increasing the
interest rate sensitivity of its asset portfolio. The Company has also increased
the average  remaining  term of its  certificate  of deposit  portfolio  in 2002
through continued marketing of intermediate to longer term accounts.

         The  aforementioned  and other  tactical  and  strategic  actions  were
conducted as part of the interest rate risk management  program in general,  and
specifically  to prepare the Company  for what  Management  believes is a likely
eventual return to an increasing interest rate environment commencing in 2003.


                                       30
<PAGE>

         The strategic plan of  transforming  the Bank into a community  focused
financial  services  provider  by nature  presents  a lower  interest  rate risk
profile than  historically  experienced  by the Bank when the balance  sheet was
highly concentrated in residential  mortgages (including long term, fixed rate),
which  present  greater  embedded  optionality  than many other  types of loans.
Serving the financial needs of local businesses is by nature asset sensitive, as
primarily  variable rate commercial loans are in part funded with demand deposit
balances. Growth in the Company's business banking thus helps offset some of the
interest rate risk (net  liability  sensitivity)  typically  present in mortgage
lending.

Liquidity

         Liquidity is actively managed to ensure  sufficient funds are available
to meet  ongoing  needs of both the Company and the Bank.  Liquidity  management
includes  projections  of  future  sources  and  uses of  funds  to  ensure  the
availability  of  sufficient   liquid  reserves  to  provide  for  unanticipated
circumstances.  The Company's  primary  sources of funds are customer  deposits,
principal and interest payments on loans and securities, FHLB advances and other
borrowings,  and,  to  a  lesser  extent,  proceeds  from  sales  of  loans  and
securities.  While maturities and scheduled amortization of loans and securities
are  predictable  sources of funds,  deposit flows and  prepayments  on mortgage
related assets are  significantly  influenced by general market  interest rates,
economic conditions, and competition.

         OTS  regulations  require that the Bank maintain a safe and sound level
of  liquidity  at all  times.  Management  believes  that  having a  surplus  of
available  liquidity at all times is prudent and  fundamental  to effective Bank
management.

         At June 30,  2002,  the  Company  had  $10.4  million  in cash and cash
equivalents,  available  borrowing  capacity in excess of $170.0  million at the
FHLB-SF,  $6.2  million in unpledged  securities,  and a  significant  volume of
residential  mortgages  that  could  be  securitized,  liquidated,  or  used  in
collateralized borrowings in order to meet future liquidity requirements.

         The State of California is the Bank's  largest single  depositor,  with
$22.0 million in certificates of deposit placed in the Bank as of June 30, 2002.
Should the State of  California  not renew these  certificates  of deposit  upon
maturity,  replacement  funding would likely be more costly.  The maturity dates
for the State of  California  certificates  of deposit are  staggered to avoid a
concentration of repricing and funding risk. The Bank's second largest depositor
is the $20.0 million brokered CD that matures in May 2003. The Asset / Liability
Management  Committee  ("ALCO") of the Bank is planning  how to best address the
future maturity of that funding, from both liquidity and repricing perspectives.

         MBBC and the Bank have each  entered  into  several  Master  Repurchase
Agreements to permit securities sold under agreements to repurchase transactions
with a  number  of  counterparties.  In  addition,  at June 30,  2002,  the Bank
maintained  $25.5  million in unsecured  federal funds lines of credit from four
correspondent  financial  institutions.  However, there can be no assurance that
funds from these lines of credit  will be  available  at all times,  or that the
lines will be maintained in future periods. The Bank has been recently offered a
$10.0  million  unsecured  federal  funds line of credit by a new  correspondent
bank.   The  Bank  is  currently   evaluating   establishing   that   additional
correspondent relationship.

         The Bank is able to  issue  wholesale  "DTC"  certificates  of  deposit
through three investment banking firms as an additional source of liquidity. The
Bank intends to add the ability to issue DTC  certificates of deposit through an
additional  investment banking firm during the third quarter of 2002 in order to
further  increase its available  liquidity  and to obtain even more  competitive
pricing.

         At  June  30,  2002,  MBBC  on a  stand  alone  basis  had  cash & cash
equivalents of $4.7 million.  In addition,  MBBC had no outstanding balance on a
$3.0 million committed revolving line of credit.


                                       31
<PAGE>

Capital Resources And Regulatory Capital Compliance

         Federal banking  regulatory  agencies  maintain a system  providing for
regulatory  sanctions  against  financial  institutions  that are not adequately
capitalized.  The  severity of these  sanctions  increases to the extent that an
institution's capital falls further below the adequately capitalized thresholds.
OTS Prompt Corrective Action ("PCA") regulations require specific capital ratios
for five separate capital categories as set forth below:
<TABLE>
<CAPTION>
                                         Core Capital            Core Capital            Total Capital
                                         To Adjusted                  To                       To
                                         Total Assets            Risk-weighted           Risk-weighted
                                       (Leverage Ratio)             Assets                   Assets
                                       ----------------             ------                   ------
<S>                                      <C>                      <C>                     <C>
Well capitalized                         5% or above              6% or above             10% or above
Adequately capitalized                   4% or above              4% or above             8% or above
Undercapitalized                           Under 4%                Under 4%                 Under 8%
Significantly undercapitalized             Under 3%                Under 3%                 Under 6%
Critically undercapitalized             Ratio of tangible equity to adjusted total assets of 2% or less
</TABLE>

         As of  June  30,  2002,  the  most  recent  notification  from  the OTS
categorized  the Bank as "well  capitalized".  There are no conditions or events
since  that  notification  that  Management  believes  have  changed  the Bank's
category.  The following  table  summarizes the capital  ratios  required for an
institution  to be  considered  "well  capitalized"  and the  Bank's  regulatory
capital at June 30, 2002 as compared to such ratios.
<TABLE>
<CAPTION>
                                           Core Capital              Core Capital To             Total Capital To
                                           To Adjusted                Risk-weighted               Risk-weighted
(Dollars In Thousands)                     Total Assets                   Assets                      Assets
                                         -------------------         -------------------         --------------------
                                         Balance     Percent         Balance     Percent         Balance     Percent
                                         -------     -------         -------     -------         -------     -------

<S>                                      <C>           <C>           <C>          <C>            <C>          <C>
Bank regulatory capital                  $47,402       8.45%         $47,402      11.79%         $52,448      13.04%
Well capitalized requirement              28,065       5.00%          24,128       6.00%          40,214      10.00%
                                          ------       -----          ------       -----          ------      ------
Excess                                   $19,337       3.45%         $23,274       5.79%         $12,234       3.04%
                                         =======       =====         =======       =====         =======       =====
Adjusted assets (1)                     $561,295                    $402,138                    $402,138
                                        ========                    ========                    ========
</TABLE>
------------------------------------------------
(1) The above line for  "adjusted  assets"  refers to the term  "adjusted  total
assets" as defined in 12 C.F.R.  Section  567.1(a)  for purposes of core capital
requirements, and refers to the term "risk-weighted assets" as defined in C.F.R.
Section 567.1(bb) for purposes of risk-based capital requirements.

         Other  OTS  capital  regulations  require  the  Bank to  maintain:  (a)
tangible  capital of at least 1.5% of adjusted  total  assets (as defined in the
regulations),  (b) core  capital of at least 4.0% of adjusted  total  assets (as
defined in the  regulations)  (unless  the Bank has been  assigned  the  highest
composite  rating under the Uniform  Financial  Institutions  Rating System,  in
which case  3.00%),  and (c) total  capital  of at least  8.0% of  risk-weighted
assets (as defined in the regulations).


                                       32
<PAGE>

         The following table summarizes these  regulatory  capital  requirements
for the Bank. As indicated in the table,  the Bank's  capital levels at June 30,
2002 exceeded all three of the currently  applicable  minimum regulatory capital
requirements.

                                                                   Percent Of
                                                                     Adjusted
(Dollars In Thousands)                                                  Total
                                                  Amount               Assets
                                                 -------               -------
Tangible Capital
----------------
Regulatory capital                               $47,402                8.45%
Minimum required                                   8,419                1.50%
                                                   -----                -----
Excess                                           $38,983                6.95%
                                                 =======                =====
Core Capital
------------
Regulatory capital                               $47,402                8.45%
Minimum required                                  22,452                4.00%
                                                  ------                -----

Excess                                           $24,950                4.45%
                                                 =======                =====


                                                                   Percent Of
                                                                        Risk-
                                                                     weighted
                                                  Amount               Assets
                                                 -------               -------
Risk-based Capital
------------------
Regulatory capital                               $52,448               13.04%
Minimum required                                  32,171                8.00%
                                                  ------                -----

Excess                                           $20,277                5.04%
                                                 =======                =====


         At June 30, 2002, the Bank's  regulatory  capital  levels  exceeded the
thresholds  required to be classified as a "well capitalized"  institution.  The
Bank's  regulatory  capital ratios  detailed above do not reflect the additional
capital (and assets) maintained by MBBC. Management believes that, under current
regulations,  the Bank will continue to meet its minimum  capital  requirements.
However,  events beyond the control of the Bank, such as changing interest rates
or a downturn in the economy or real estate  markets in the areas where the Bank
has most of its loans, could adversely affect future earnings and, consequently,
the  ability  of  the  Bank  to  meet  its  future  minimum  regulatory  capital
requirements.


                                       33
<PAGE>

Asset Quality / Credit Profile

Non-performing Assets

         The following  table sets forth  information  regarding  non-performing
assets at the dates indicated.
<TABLE>
<CAPTION>
(Dollars In Thousands)                                          June 30, 2002   December 31, 2001
                                                                -------------   -----------------

<S>                                                                 <C>                 <C>
Non-accrual loans                                                   $   4,979           $   2,252
Loans 90 or more days delinquent and accruing interest                     --                  --
Restructured loans in compliance with modified terms                       --                  --
                                                                    ---------           ---------
Total gross non-performing loans                                        4,979               2,252
Investment in foreclosed real estate before valuation reserves             --                  --
Repossessed consumer assets                                                --                  --
                                                                    ---------           ---------

Total gross non-performing assets                                   $   4,979           $   2,252
                                                                    =========           =========

Gross non-accrual loans to total loans                                  1.03%               0.48%
Gross non-performing loans to total loans                               1.03%               0.48%
Gross non-performing assets to total assets                             0.88%               0.42%
Allowance for loan losses                                           $   7,343           $   6,665
Allowance for loan losses to non-performing loans                     147.48%             295.96%
Valuation allowances for foreclosed real estate                     $      --           $      --
</TABLE>

         Non-accrual loans at June 30, 2002 are detailed in the following table:

(Dollars In Thousands)                           Number     Principal Balance
                                                     Of        Outstanding At
Category Of Loan                                  Loans         June 30, 2002
----------------                                  -----         -------------
Residential mortgage one to four units                5               $ 1,696
Commercial & industrial real estate                   2                 3,154
Land                                                  1                   129
                                                 ------               -------
Total                                                 8               $ 4,979
                                                 ======               =======

       Non-accrual  loans  increased  from $2.3  million at December 31, 2001 to
$5.0 million at June 30, 2002  primarily  due to the placement of a $2.3 million
commercial  real  estate  mortgage  on  non-accrual  status.  This  credit  is a
participation  loan where the Bank is not the lead  financial  institution.  The
loan is secured by a first deed of trust on a hotel / resort  located within the
Company's primary market area. The borrowers are directly  personally  indebted.
The hotel is a relatively  new  development  that has  experienced  limited cash
flow. The hotel was also adversely impacted by the decline in tourism and travel
following the events of September 11, 2001 and the national economic recession.

       At June 30, 2002, the Company maintained a $754 thousand specific reserve
for this hotel / resort loan,  based upon  estimated net proceeds to the Company
following  foreclosure and sale. The borrowers executed a forbearance  agreement
during  the  second  quarter  of  2002.  In  conjunction  with  the  forbearance
agreement, the borrowers made additional loan payments during the second quarter
of 2002, and a loan payment in early July 2002. The forbearance  agreement calls
for  additional  payments  and for the  borrowers  to  provide  additional  real
property  collateral before the end of the third quarter of 2002. The agent bank
has ordered an updated appraisal of the primary  collateral,  which is scheduled
to be received during the third quarter of 2002. The market value of the hotel /
resort is particularly  volatile at this time,  given the uncertainty  regarding
the economy, the tourism industry, and the outlook for business travel activity.


                                       34
<PAGE>

         Non-accrual loans at June 30, 2002 also included:

o    An $846  thousand  residential  mortgage  secured by a first deed of trust.
     There are  significant  junior  mortgages from other lenders secured by the
     subject  collateral,  which is scheduled  for  foreclosure  sale during the
     third quarter of 2002.

o    Four additional  residential mortgages totaling $851 thousand. One of these
     loans,  with a principal  balance of $72 thousand,  was fully reinstated in
     July 2002.

o    An $842 thousand commercial real estate mortgage secured by a first deed of
     trust.  There is a significant  junior mortgage from another lender secured
     by the subject  collateral.  The borrower made several  payments during the
     second quarter of 2002, but was still delinquent at June 30, 2002.

o    A $129 thousand loan secured by a first deed of trust on residential  land.
     This loan was fully reinstated in July 2002.

         Aside from the $2.3 million hotel / resort loan  discussed  above,  the
Company  does not  anticipate  recording a loss on any of the above  non-accrual
loans due to the estimated value of the underlying real estate  collateral.  All
of the Company's non-accrual loans at June 30, 2002 were secured by real estate.
The Company had no foreclosed real estate at June 30, 2002.

Criticized And Classified Assets

         The  following  table  presents  information  concerning  the Company's
criticized  ("OAEM")  and  classified  ("substandard"  and  lower)  assets.  The
category "OAEM" refers to "Other Assets Especially  Mentioned",  or those assets
that present indications of potential future credit deterioration.
<TABLE>
<CAPTION>
(Dollars In Thousands)                         OAEM     Substandard        Doubtful            Loss           Total
                                               ----     -----------        --------            ----           -----

<S>                                         <C>             <C>                <C>            <C>           <C>
December 31, 2001                           $ 6,207         $ 5,098            $ --           $  --         $11,305
March 31, 2002                              $ 3,296         $ 4,386            $ --           $ 754         $ 8,436
June 30, 2002                               $ 6,230         $ 4,819            $ --           $ 754         $11,803
</TABLE>

         Classified  assets  as a  percent  of  stockholders'  equity  increased
slightly from 10.2% at December 31, 2001 to 10.4% at June 30, 2002.

         The $754 thousand  asset  classified as "Loss" in the above table as of
March 31 and June 30, 2002 is associated with the specific  reserve for the $2.3
million  commercial real estate mortgage  secured by a hotel / resort located in
the  Company's  primary  market area, as described  above under  "Non-performing
Assets".  The remainder of this $2.3 million loan is classified as  substandard.
June 30, 2002 substandard assets in the above table also include:

o    The   Company's   other   non-accrual   loans  as  described   above  under
     "Non-performing Assets".

o    A total of $354  thousand in commercial  loans to a corporation  whose sole
     stockholder has declared personal  bankruptcy.  These loans were current in
     their  payments  as of June 30, 2002 and the  borrower  has  indicated  his
     intent to continue making payments per the terms of the loans.

o    A $180 thousand  commercial loan to a retailer in the Bank's primary market
     area.


                                       35
<PAGE>

         Criticized loans at June 30, 2002 included:

o    A $1.7 million  residential  mortgage in the Company's  primary market area
     where the borrowers have repeatedly failed to make timely payments.

o    A $1.3 million mortgage,  current in its payments at June 30, 2002, secured
     by a motel  located in the  Silicon  Valley area of the San  Francisco  Bay
     Area. The motel's cash flow has been  unfavorably  impacted by the economic
     difficulties  being  experienced  in  the  technology  industry  and  by  a
     reduction in business travel in general.

o    A $983  thousand  mortgage  secured by an apartment  complex in the Silicon
     Valley  area.  This loan was  current  in its  payments  at June 30,  2002;
     however,  rents in the  subject  area have been  adversely  affected by the
     economic difficulties in the technology industry.

o    A $561  thousand  commercial  loan to a business in the  Company's  primary
     market area that participates in the telecommunications industry. This loan
     is  secured by  business  assets  and a deed of trust on  residential  real
     estate,  and was current in its payments at June 30,  2002.  The Company is
     closely  monitoring the condition of this loan due to the general  weakness
     in the telecommunications industry.

         At the present time, the Company does not  anticipate  recording a loss
on any of the above detailed  criticized  loans due to borrower  cooperation and
the estimated fair value of the associated collateral.

Impaired Loans

         At June 30, 2002,  the Company had total gross impaired  loans,  before
specific  reserves,  of  $5.0  million,  constituting  eight  credits.  Specific
reserves on these $5.0 million in impaired  loans  totaled $754  thousand.  This
compares  to total  gross  impaired  loans  of $2.3  million,  with no  specific
reserves,  at December  31,  2001.  Interest  is accrued on impaired  loans on a
monthly  basis  except for those  loans that are 90 or more days  delinquent  or
those  loans which are less than 90 days  delinquent  but where  Management  has
identified  concerns  regarding the collection of the credit. For the six months
ended June 30, 2002, accrued interest on impaired loans was zero and interest of
$133 thousand was received in cash. The average balance of impaired loans during
the three and six months ended June 30, 2002 was $4.7 million and $3.7  million,
respectively.  If all  non-accrual  loans had been performing in accordance with
their original loan terms,  the Company would have recorded  interest  income of
$242  thousand  during the six months ended June 30,  2002,  instead of interest
income actually recognized, based on cash payments, of $133 thousand.

Hotel / Motel / Resort Loans

         At June 30,  2002,  the  Company had $23.6  million in  mortgage  loans
secured by hotel / motel / resort properties.  This compares to $30.8 million in
hotel / motel / resort  mortgages at December 31,  2001.  This  decrease in part
resulted from the  Company's not repricing  certain hotel / motel / resort loans
to reflect  the  decline in general  market  interest  rates over the past year,
thereby leading the borrowers to refinance with other lenders.

         Various reports have indicated that travel industry  businesses such as
hotels / motels /  resorts  have been  particularly  adversely  impacted  by the
national  economic  recession  in 2001,  and by reduced  business  and  pleasure
travel.  The Company's  recent review of its hotel / motel / resort loans has in
general  confirmed  reduced  occupancy rates and lower effective room rates than
experienced in 1999 and 2000, leading to decreased or in some cases negative net
cash flow from the properties. The Company cannot predict when or to what degree
the  hospitality   industry  will  recover,  but  intends  to  continue  closely
monitoring its hotel / motel / resort loan portfolio.  The Company increased its
formula general  valuation reserve factors for these loans in the second quarter
of  2002  to  reflect  the  inherent  loss  in this  portfolio.  The  return  of
unfavorable economic trends, the occurrence of additional terrorist activity, or
other factors could lead to additional reserve  requirements for these loans and
thus impact the levels of future provisions for loan losses.


                                       36
<PAGE>

Allowance For Loan Losses

         The  allowance for loan losses is  established  through a provision for
loan losses based on  Management's  evaluation of the risks inherent in the loan
portfolio,  including unused  commitments to provide  financing.  In determining
levels of risk,  Management considers a variety of factors,  including,  but not
limited to, asset  classifications,  economic  trends,  industry  experience and
trends, geographic concentrations,  estimated collateral values, historical loan
loss experience, and the Company's underwriting policies. The allowance for loan
losses is maintained at an amount Management  considers adequate to cover losses
in loans  receivable  that are deemed probable and estimable.  While  Management
uses the best information available to make these estimates,  future adjustments
to allowances may be necessary due to economic, operating, regulatory, and other
conditions  that may be beyond  the  Company's  control.  In  addition,  various
regulatory  agencies,   as  an  integral  part  of  their  examination  process,
periodically  review the Bank's  allowance  for loan losses.  Such  agencies may
require the Bank to  recognize  additions  to the  allowance  based on judgments
different from those of Management.

         The  allowance  for loan losses is comprised of three  primary types of
allowances:

1.       Formula Allowance

Formula  allowances  are based upon loan loss factors that reflect  Management's
estimate of the inherent loss in various segments of, or pools within,  the loan
portfolio.  The  loss  factor  is  multiplied  by the  portfolio  segment  (e.g.
multifamily  permanent mortgages) balance (or credit commitment,  as applicable)
to  derive  the  formula  allowance   amount.   The  loss  factors  are  updated
periodically by the Company to reflect current information that has an effect on
the amount of loss inherent in each segment.  The formula  allowance at June 30,
2002 was $6.1 million, compared to $6.0 million at December 31, 2001.

2.       Specific Allowance

Specific  allowances are  established  in cases where  Management has identified
significant  conditions or  circumstances  related to an  individually  impaired
credit. In other words,  these allowances are specific to the loss inherent in a
particular loan. The amount for a specific allowance is calculated in accordance
with SFAS No. 114,  "Accounting  By Creditors  For  Impairment  Of A Loan".  The
Company had $754  thousand in specific  allowance at June 30, 2002,  compared to
none at December 31, 2001.

3.       Unallocated Allowance

The Company  maintains an  unallocated  loan loss  allowance  that is based upon
Management's  evaluation  of  conditions  that are not directly  measured in the
determination of the formula and specific allowances. The evaluation of inherent
loss  with  respect  to  these  conditions  is  subject  to a higher  degree  of
uncertainty  because they are not identified  with specific  problem  credits or
historical  performance of loan portfolio segments.  The conditions evaluated in
connection  with  the  unallocated  allowance  at June  30,  2002  included  the
following, which existed at the balance sheet date:

o    General  business and  economic  conditions  affecting  the  Company's  key
     lending areas

o    Real estate values in California

o    Loan volumes and concentrations

o    Seasoning of the loan portfolio

o    Status of the current business cycle

o    Specific industry or market conditions within portfolio segments

The unallocated  allowance at June 30, 2002 was $533 thousand,  compared to $668
thousand at December 31, 2001.


                                       37
<PAGE>

         The following  table presents  activity in the Company's  allowance for
loan losses during the six months ended June 30, 2002 and June 30, 2001:
<TABLE>
<CAPTION>
                                                                                    Six Months Ended June 30,
                                                                                     -----------------------
                                                                                        2002           2001
                                                                                     -------        -------
Allowance For Loan Losses                                                            (Dollars In  Thousands)

<S>                                                                                  <C>            <C>
Balance at beginning of year                                                         $ 6,665        $ 5,364

   Charge-offs:
      Consumer lines of credit                                                            (9)            (1)
      Commercial term loans                                                              (30)          --
      Commercial lines of credit                                                        --              (25)
                                                                                     -------        -------
   Total charge-offs                                                                     (39)           (26)

   Recoveries:
      Consumer lines of credit                                                             4           --
      Commercial lines of credit                                                           3           --
                                                                                     -------        -------
   Total recoveries                                                                        7           --

   Provision for loan losses                                                             710            800
                                                                                     -------        -------

Balance at June 30                                                                   $ 7,343        $ 6,138
                                                                                     =======        =======
Annualized ratio of net charge-offs during the period to average
   loans receivable, net, outstanding during the period                                 0.01%          0.01%
</TABLE>

         Additional ratios applicable to the allowance for loan losses include:
<TABLE>
<CAPTION>
                                                                                June 30, 2002    December 31, 2001
                                                                                -------------    -----------------

<S>                                                                                   <C>                  <C>
Allowance for loan losses as a percent of non-performing loans                        147.48%              295.96%

Allowance  for  loan  losses  as a  percent  of gross  loans  receivable  net of
     undisbursed loan funds and unamortized yield
     Adjustments                                                                        1.50%                1.41%

Allowance for loan losses as a percent of classified assets                           131.76%              130.74%
</TABLE>


                                       38
<PAGE>

         The $533 thousand in  unallocated  allowance at June 30, 2002 reflected
the  Company's  consideration  of the  following  factors,  as well as the  more
general  factors  listed  above  in  conjunction  with  the  definition  of  the
unallocated allowance:

o    The  adverse  impacts  of  the  weak   technology  and   telecommunications
     industries  upon  commercial  real estate  values.  The  Company's  primary
     lending area is near the Silicon Valley area of the San Francisco Bay Area,
     which  has  been  impacted  by the  slump  in  various  telecommunications,
     technology,  and technology related  businesses.  Recent reports indicate a
     rise in office vacancy rates and a decline in rental rates for office space
     in multiple  markets within the greater San Francisco Bay Area. This impact
     could be in the range of $100 thousand to $900 thousand.

o    Recent  reports of selected areas of soft or declining  apartment  rents in
     Northern  California  resulting  from reduced  employment,  weakness in the
     technology and  telecommunications  industries,  and a strong home purchase
     market.  The soft or declining  rents could lead to  decreased  multifamily
     property values. This impact could be in the range of $100 thousand to $800
     thousand.

         As subsequently  discussed (see "Provision For Loan Losses"), the lower
provision  for loan losses  recorded  during the first six months of 2002 versus
the same period in the prior year resulted from multiple factors, including:

o    the  Company's  concerns in the first half of 2001  regarding  the State of
     California  energy crisis and the increasingly  negative trends in national
     economic growth and activity present at mid-year 2001

o    the allocation of increased  reserves during the second quarter of 2001 for
     a pool of residential  mortgages  that  presented a less  favorable  credit
     profile than that typically pursued by the Company

The above referenced  residential mortgage pool has continued to perform for the
Company and at June 30, 2002 had an outstanding balance of $3.6 million.

         Management anticipates that should the Company accomplish its strategic
plan and be successful in:

o    generating further growth in loans receivable held for investment

o    emphasizing the origination, purchase, and participation of income property
     real estate loans

o    expanding the construction loan portfolio

o    continuing expansion of commercial business lending

future  provisions will result and the ratio of the allowance for loan losses to
loans  outstanding  will  increase.  Experience  across the  financial  services
industry indicates that commercial business,  construction,  and income property
loans present greater risks than  residential  real estate loans,  and therefore
should be accompanied by suitably higher levels of reserves.


                                       39
<PAGE>

Comparison Of Operating Results For The Three Months And Six Months
Ended June 30, 2002 and June 30, 2001

General

         During the second  quarter of 2002,  the  Company  reported  net income
$1.35 million,  equivalent to $0.38 diluted earnings per share,  compared to net
income of $949  thousand,  or $0.29  diluted  earnings  per share,  for the same
period in 2001.  Net  income  during  the  quarter  ended  March  31,  2002 (the
immediately  preceding  quarter) was $1.21 million,  equivalent to $0.35 diluted
earnings per share.

         For the six months ended June 30, 2002,  net income was $2.55  million,
equivalent to $0.73 diluted  earnings per share.  This compares to net income of
$1.55 million,  or $0.47 diluted earnings per share, for the first six months of
2001.  The 64.6%  increase in net income for the first half of 2002  compared to
the same period in 2001 primarily resulted from three key factors:

o    the continued  implementation of the Company's  strategic plan to transform
     the Bank into a community  commercial  bank serving the financial  needs of
     individuals, families, local community organizations, and businesses

o    a $1.4 million rise in net interest income  resulting from a combination of
     increased  spreads and larger average  balances of interest  earning assets
     and liabilities

o    during the first half of 2001, the Company incurred pre-tax operating costs
     of $447 thousand for the conversion of the core data processing  system and
     $161 thousand for legal expenses  associated with the arbitration of claims
     by a former executive

         The second  quarter of 2002 earnings were the highest of any quarter in
the  Company's  history.  Annualized  return  on  average  stockholders'  equity
improved  from  8.14%  during the  second  quarter of 2001 to 10.18%  during the
second quarter of 2002.

Interest Rate Environment

         The table  presented  above under  "Interest  Rate Risk  Management And
Exposure" furnishes an overview of the interest rate environment during the most
recent six quarters.  Market interest rates have varied considerably during this
time period,  generally  falling  throughout  2001, with certain  interest rates
rising in the first  quarter of 2002 and then  falling in the second  quarter of
2002. In addition,  the slope of the Treasury curve shifted from inverted at the
beginning  of 2001,  to  flatter  by the end of the first  quarter  of 2001,  to
positively  sloped by mid 2001.  From mid 2001 to March 31,  2002,  the Treasury
curve  generally  became  progressively  more  steeply  sloped  (i.e.  a greater
differential  between  short term and longer term  interest  rates).  During the
second quarter of 2002, the Treasury curve flattened.

         Financial  institutions,  including the Bank,  generally benefit from a
positively  sloped term structure of interest  rates,  whereby  higher  duration
assets may be funded at a favorable  spread with shorter term  liabilities,  and
whereby  fixed rate  assets  appreciate  in market  price as they move nearer to
maturity.  In addition,  steep yield  curves  often lead to  increased  customer
demand for adjustable rate mortgages due to the rate  differential to long term,
fixed rate mortgages.

         As a result of the interest  rate  environment  over the past  eighteen
months,  yields and rates for most  assets and  liabilities  were  substantially
lower in the first half and second  quarter of 2002 compared to the same periods
in 2001.


                                       40
<PAGE>

Net Interest Income

         Net interest income increased from $4.8 million and $9.5 million during
the second  quarter and first half of 2001,  respectively,  to $5.6  million and
$10.9 million  during the same periods in 2002 due to both expanded  spreads and
greater  average  balances  of  interest  earning  assets and  liabilities.  The
Company's ratio of net interest income to average total assets was 3.98% for the
second quarter of 2002, up from 3.79% during the same period in 2001. This ratio
similarly  increased  from  3.81%  during  the first six months of 2001 to 3.98%
during the same period in 2002.  The  increased  spreads in 2002 in part stemmed
from the Company's continued implementation of its strategic plan.

         Margins were  hampered  during the early part of 2001 by the  Company's
offering  higher than  normal  relative  retail  deposit  pricing to  facilitate
customer  retention  following  the core  systems  conversion.  The Company also
maintained  higher levels of  non-interest  earning  correspondent  bank account
balances  than usual  during  March 2001 as a  liquidity  cushion to address any
potential  operational  or financial  settlement  issues  arising  following the
implementation  of the new computer  system.  This additional  liquidity was not
utilized.

         The spread derived from investing the Company's demand deposit balances
and capital was lower in the first half of 2002 than the same period in 2001 due
to the  significantly  lower general  interest rate  environment.  However,  net
interest  income  during the first half of 2002  benefited  from  lifetime  rate
floors on certain  loans and  prepayment  penalties  received on certain  income
property loans that were paid off.

         Other factors influencing net interest income during the second quarter
and first half of 2002 compared to the same periods in 2001 included:

o    Average net loans as a percentage  of average  total assets  improved  from
     82.0% and 81.6%  during the second  quarter and first six months of 2001 to
     85.9% and 86.0% during the same periods in 2002.  Because loans  constitute
     the  Company's  highest  yielding  type of asset,  this change in asset mix
     favorably affected net interest income.

o    Average  transaction  account  (NOW,  savings,  and  MMDA)  deposits  as  a
     percentage  of average total assets  increased  from 29.4% and 29.6% during
     the second  quarter and first six months of 2001 to 31.1% and 31.2%  during
     the same periods in 2002. Because transaction accounts represent relatively
     low cost  funding for the  Company,  this  change in funding mix  favorably
     impacted net interest income.

o    Average demand  deposits as a percentage of average total assets  increased
     from 3.8% and 3.6%  during the second  quarter and first six months of 2001
     to 4.0% and 4.0%  during the same  periods in 2002.  In  addition,  average
     stockholders' equity as a percentage of average total assets increased from
     9.3% and 9.1%  during  the second  quarter  and first six months of 2001 to
     9.5% and 9.5% during the same periods in 2002.  Increases in interest  free
     funding sources favorably impact the Company's spreads.

         The  Company  plans to  further  increase  its net  interest  margin by
continuing the transformation into a community  commercial bank,  increasing the
percentage of total assets  constituted  by loans,  decreasing the percentage of
the loan  portfolio  comprised of  residential  mortgages,  and  increasing  the
percentage of the deposit portfolio composed of transaction  accounts.  However,
no assurance can be provided that the Company will be successful in this regard,
as interest  rates and new  business  activity  are  influenced  by many factors
beyond the control of the  Company,  such as actions by the Federal  Reserve and
competition.


                                       41
<PAGE>

         The following  table presents the average  annualized  rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing  liabilities,  and the resulting net
interest  spread,  net interest  margin,  and average  interest  margin on total
assets for the three months ended June 30, 2002 and 2001.
<TABLE>
<CAPTION>
                                        Three Months Ended June 30, 2002          Three Months Ended June 30, 2001
                                      -------------------------------------     -------------------------------------
(Dollars In Thousands)                 Average                     Average       Average                     Average
                                       Balance      Interest          Rate       Balance      Interest          Rate
                                       -------      --------          ----       -------      --------          ----
<S>                                    <C>            <C>            <C>        <C>             <C>            <C>
Assets
------
Interest earning assets:

   Cash equivalents (1)                $ 4,401        $   20         1.82%      $  9,697        $  103         4.25%
   Investment securities                 7,275            53         2.91%         7,302           111         6.08%
   Mortgage backed securities (2)       37,078           328         3.54%        43,312           675         6.23%
   Loans receivable, net (3)           480,335         8,435         7.02%       413,107         8,779         8.50%
   FHLB stock                            3,243            55         6.78%         2,967            42         5.66%
                                       -------       -------                    --------        ------

Total interest earning assets          532,332         8,891         6.68%       476,385         9,710         8.15%
                                                     -------                                    ------
Non-interest earnings assets            26,729                                    27,281
                                       -------                                  --------

Total assets                         $ 559,061                                 $ 503,666
                                       =======                                  ========

Liabilities & Equity
--------------------
Interest bearing liabilities:
   NOW accounts                       $ 44,561            44         0.39%      $ 40,843           100         0.98%
   Savings accounts                     18,504            26         0.56%        20,927            63         1.20%
   Money market accounts               110,868           599         2.16%        86,283           913         4.23%
   Certificates of deposit             250,751         2,024         3.23%       244,056         3,279         5.37%
                                       -------       -------                    --------        ------

   Total interest-bearing deposits     424,684         2,693         2.54%       392,109         4,355         4.44%
   FHLB advances                        57,606           631         4.38%        43,280           579         5.35%
   Other borrowings (4)                    377             4         4.24%           115             3        10.43%
                                       -------       -------                    --------        ------
Total interest-bearing liabilities     482,667         3,328         2.76%       435,504         4,937         4.53%
                                                     -------                                    ------
Demand deposit accounts                 22,132                                    19,208
Other non-interest bearing liabilities   1,335                                     2,302
                                       -------                                  --------


Total liabilities                      506,134                                   457,014
Stockholders' equity                    52,927                                    46,652
                                       -------                                  --------
Total liabilities & equity           $ 559,061                                 $ 503,666
                                       =======                                  ========

Net interest income                                  $ 5,563                                   $ 4,773
                                                     =======                                   =======
Interest rate spread (5)                                             3.92%                                     3.62%
Net interest earning assets             49,665                                    40,881
Net interest margin (6)                                4.18%                                     4.01%
Net interest income /
     average total assets                              3.98%                                     3.79%
Interest earnings assets /
     Interest bearing liabilities         1.10                                      1.09
</TABLE>

Average balances in the above table were calculated using average daily figures.
--------------------------------------------------------------------------------


(1)  Includes  federal  funds  sold,  money  market fund  investments,  banker's
     acceptances,  commercial  paper,  interest  earning deposit  accounts,  and
     securities purchased under agreements to resell.

(2)  Includes   mortgage   backed   securities   and   collateralized   mortgage
     obligations.

(3)  In computing the average balance of loans receivable, non-accrual loans and
     loans  held for sale have been  included.  Amount is net of  deferred  loan
     fees, premiums and discounts,  and undisbursed loan funds.  Interest income
     on loans  includes  amortized  loan fees and costs,  net,  of  $89,000  and
     $35,000 in 2002 and 2001, respectively.

(4)  Includes  federal  funds  purchased,  securities  sold under  agreements to
     repurchase, and borrowings drawn on MBBC's line of credit.

(5)  Interest rate spread represents the difference  between the average rate on
     interest   earning  assets  and  the  average  rate  on  interest   bearing
     liabilities.

(6)  Net interest  margin equals net interest  income before  provision for loan
     losses divided by average interest earning assets.


                                       42
<PAGE>

         The following  table presents the average  annualized  rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing  liabilities,  and the resulting net
interest  spread,  net interest  margin,  and average  interest  margin on total
assets for the six months ended June 30, 2002 and 2001.
<TABLE>
<CAPTION>

                                          Six Months Ended June 30, 2002            Six Months Ended June 30, 2001
                                      -------------------------------------     -------------------------------------
(Dollars In Thousands)                 Average                     Average       Average                     Average
                                       Balance      Interest          Rate       Balance      Interest          Rate
                                       -------      --------          ----       -------      --------          ----
<S>                                    <C>            <C>            <C>        <C>             <C>            <C>
Assets
------
Interest earning assets:
   Cash equivalents (1)                $ 5,077        $   45         1.77%      $  9,184        $  227         4.94%
   Investment securities                 7,530           110         2.92%         7,332           245         6.68%
   Mortgage backed securities (2)       34,241           640         3.74%        46,097         1,483         6.43%
   Loans receivable, net (3)           471,457        16,749         7.11%       407,924        17,667         8.66%
   FHLB stock                            3,132           102         6.51%         2,945            83         5.64%
                                       -------       -------                    --------        ------

Total interest earning assets          521,437        17,646         6.77%       473,482        19,705         8.33%
                                                     -------                                    ------
Non-interest earnings assets            26,840                                    26,423
                                       -------                                  --------

Total assets                         $ 548,277                                 $ 499,905
                                       =======                                  ========

Liabilities & Equity
--------------------
Interest bearing liabilities:
   NOW accounts                       $ 43,130            84         0.39%      $ 40,746           240         1.18%
   Savings accounts                     18,762            52         0.55%        19,126           136         1.42%
   Money market accounts               109,263         1,192         2.18%        88,185         1,957         4.44%
   Certificates of deposit             245,624         4,178         3.40%       244,264         6,707         5.49%
                                       -------       -------                    --------        ------

   Total interest-bearing deposits     416,779         5,506         2.64%       392,321         9,040         4.61%
   FHLB advances                        55,655         1,220         4.38%        42,052         1,126         5.36%
   Other borrowings (4)                    295             7         4.75%           142            14        19.72%
                                       -------       -------                    --------        ------

Total interest-bearing liabilities     472,729         6,733         2.85%       434,515        10,180         4.69%
                                                     -------                                    ------
Demand deposit accounts                 21,698                                    17,795
Other non-interest bearing liabilities   1,660                                     2,262
                                       -------                                  --------

Total liabilities                      496,087                                   454,572

Stockholders' equity                    52,190                                    45,333
                                       -------                                  --------

Total liabilities & equity           $ 548,277                                 $ 499,905
                                       =======                                  ========

Net interest income                                  $10,913                                   $ 9,525
                                                     =======                                   =======
Interest rate spread (5)                                             3.92%                                     3.64%
Net interest earning assets             48,708                                    38,967
Net interest margin (6)                                4.19%                                     4.02%
Net interest income /
     average total assets                              3.98%                                     3.81%
Interest earnings assets /
     Interest bearing liabilities         1.10                                      1.09
</TABLE>

Average balances in the above table were calculated using average daily figures.

--------------------------------------------------------------------------------

1)   Includes  federal  funds  sold,  money  market fund  investments,  banker's
     acceptances,  commercial  paper,  interest  earning deposit  accounts,  and
     securities purchased under agreements to resell.

2)   Includes   mortgage   backed   securities   and   collateralized   mortgage
     obligations.

3)   In computing the average balance of loans receivable, non-accrual loans and
     loans  held for sale have been  included.  Amount is net of  deferred  loan
     fees, premiums and discounts,  and undisbursed loan funds.  Interest income
     on loans  includes  amortized  loan fees and costs,  net, of  $115,000  and
     $113,000 in 2002 and 2001, respectively.

4)   Includes  federal  funds  purchased,  securities  sold under  agreements to
     repurchase, and borrowings drawn on MBBC's line of credit.

5)   Interest rate spread represents the difference  between the average rate on
     interest   earning  assets  and  the  average  rate  on  interest   bearing
     liabilities.

6)   Net interest  margin equals net interest  income before  provision for loan
     losses divided by average interest earning assets.


                                       43
<PAGE>

Rate / Volume Analysis

         The most  significant  impact upon the  Company's  net interest  income
between periods is derived from the interaction of changes in the volumes of and
rates   earned  or  paid  on   interest-earning   assets  and   interest-bearing
liabilities.  The following  table utilizes the figures from the preceding table
to present a comparison of interest income and interest  expense  resulting from
changes  in the  volumes  and the rates on average  interest-earning  assets and
average  interest-bearing  liabilities  for the  periods  indicated.  Changes in
interest  income  or  interest  expense   attributable  to  volume  changes  are
calculated  by  multiplying  the  change in volume by the prior  period  average
interest rate. The changes in interest income or interest  expense  attributable
to interest rate changes are  calculated by  multiplying  the change in interest
rate by the prior year period volume. The changes in interest income or interest
expense  attributable to the combined impact of changes in volume and changes in
interest rate are calculated by multiplying  the change in rate by the change in
volume.
<TABLE>
<CAPTION>

                                                     Three Months Ended June 30, 2002
                                                                Compared To
                                                     Three Months Ended June 30, 2001
                                             --------------------------------------------------
                                                                          Volume
(Dollars In Thousands)                        Volume          Rate        / Rate           Net
                                             -------       -------       -------       -------
<S>                                          <C>           <C>           <C>           <C>
Interest-earning assets
-----------------------
Cash equivalents                             $   (56)      $   (59)      $    32       $   (83)
Investment securities                              0           (58)            0           (58)
Mortgage backed securities                       (97)         (292)           42          (347)
Loans receivable, net                          1,429        (1,525)         (248)         (344)
FHLB Stock                                         4             8             1            13
                                             -------       -------       -------       -------

     Total interest-earning assets             1,280        (1,926)         (173)         (819)
                                             -------       -------       -------       -------

Interest-bearing liabilities
----------------------------
NOW Accounts                                       9           (60)           (5)          (56)
Savings accounts                                  (7)          (34)            4           (37)
Money market accounts                            260          (447)         (127)         (314)
Certificates of deposit                           90        (1,309)          (36)       (1,255)
                                             -------       -------       -------       -------

Total interest-bearing deposits                  352        (1,850)         (164)       (1,662)
FHLB advances                                    192          (105)          (35)           52
Other borrowings                                   7            (2)           (4)            1
                                             -------       -------       -------       -------

     Total interest-bearing liabilities          551        (1,957)         (203)       (1,609)
                                             -------       -------       -------       -------

Increase in net interest income              $   729       $    31       $    30       $   790
                                             =======       =======       =======       =======
</TABLE>


                                       44
<PAGE>
<TABLE>
<CAPTION>
                                                       Six Months Ended June 30, 2002
                                                                 Compared To
                                                       Six Months Ended June 30, 2001
                                             --------------------------------------------------
                                                                          Volume
(Dollars In Thousands)                        Volume          Rate        / Rate           Net
                                             -------       -------       -------       -------
<S>                                          <C>           <C>           <C>           <C>
Interest-earning assets
-----------------------
Cash equivalents                             $  (102)      $  (146)      $    66       $  (182)
Investment securities                              7          (138)           (4)         (135)
Mortgage backed securities                      (381)         (621)          159          (843)
Loans receivable, net                          2,752        (3,175)         (495)         (918)
FHLB Stock                                         5            13             1            19
                                             -------       -------       -------       -------
     Total interest-earning assets             2,281        (4,067)         (273)       (2,059)
                                             -------       -------       -------       -------

Interest-bearing liabilities
----------------------------
NOW Accounts                                      14          (161)           (9)         (156)
Savings accounts                                  (3)          (83)            2           (84)
Money market accounts                            468          (995)         (238)         (765)
Certificates of deposit                           37        (2,552)          (14)       (2,529)
                                             -------       -------       -------       -------

Total interest-bearing deposits                  516        (3,791)         (259)       (3,534)
FHLB advances                                    364          (204)          (66)           94
Other borrowings                                  15           (11)          (11)           (7)
                                             -------       -------       -------       -------

     Total interest-bearing liabilities          895        (4,006)         (336)       (3,447)
                                             -------       -------       -------       -------

Increase in net interest income              $ 1,386       $   (61)      $    63       $ 1,388
                                             =======       =======       =======       =======
</TABLE>

Interest Income

         Interest  income  decreased  from $9.7 million and $19.7 million during
the three and six months ended June 30, 2001 to $8.9  million and $17.6  million
during the same periods in 2002.  This  decrease was  primarily  due to the much
lower  interest rate  environment  present in 2002.  The effect of lower general
market  interest  rates more than  offset the impact of an 11.7% rise in average
interest earning assets from the second quarter of 2001 to the second quarter of
2002 and a shift in asset  mix  towards  loans,  coincident  with the  Company's
strategic plan of better  supporting its local  communities with the delivery of
credit.

         Interest  income on loans decreased from $8.8 million and $17.7 million
during the three and six months  ended June 30,  2001 to $8.4  million and $16.7
million during the same periods in 2002. The effect of lower interest rates more
than  offset the impact of 16.3% and 15.6%  rises in average  net loan  balances
outstanding  from the three and six months  ended June 30, 2001 to the three and
six months ended June 30, 2002.  The greater  volume  stemmed from the Company's
strategic plan of increasing  the  percentage of the balance sheet  comprised of
loans through internal  originations,  loan purchases from correspondent  banks,
and loan  participations;  with  the  latter  primarily  sourced  through  other
California  community  banks.  The  Company  plans to  increase  total  loans to
approximately 90.0% of total assets over time.  Management believes  stockholder
value is maximized through the extension and effective management of credit.


                                       45
<PAGE>

         Interest  income on cash  equivalents  decreased from $103 thousand and
$227  thousand  for the three and six months ended June 30, 2001 to $20 thousand
and $45 thousand for the same period in 2002. This decline was due to:

o    lower average rates  resulting  from the interest rate cuts  implemented by
     the Federal Reserve in 2001

o    lower average volumes stemming from:

     A.   the Company's  redeploying funds from cash equivalents into loans as a
          result of the demand for credit

     B.   the Company's  purchasing  short term  investment  securities  (called
          Agency  debentures)  during  the  first  quarter  of  2002  in lieu of
          investing in cash equivalents

         Interest  income on investment  securities  declined from $111 thousand
and $245  thousand  during the three and six months  ended June 30,  2001 to $53
thousand and $110 thousand during the same periods in 2002. The reduced interest
income  resulted from lower yields on variable rate  corporate  trust  preferred
securities  that  reprice  quarterly  based  upon  3  month  LIBOR,   which  was
significantly  lower in the first six months of 2002 than during the same period
in 2001.  This impact was only  partially  offset by interest  income  earned on
short term Agency  debentures  purchased  during the first  quarter of 2002 as a
vehicle for investing short term excess liquidity.

         Interest income on mortgage  backed  securities fell from $675 thousand
and $1.5  million  during the three and six months  ended June 30,  2001 to $328
thousand and $640 thousand during the same periods in 2002. These decreases were
caused by reductions in average  volume and average  rates.  Over the past year,
the Company  has  reduced the  percentage  of its  balance  sheet  allocated  to
securities in favor of increased lending. In addition,  the mix of the Company's
mortgage backed securities has changed over the past two years, with an increase
in lower  duration,  high  cash  flow  instruments  and a  reduction  in  higher
duration,  lower cash flow securities in order to better support greater funding
requirements  stemming from the Company's  increased  lending.  The Company also
purchased  additional  adjustable rate mortgage backed  securities  during 2001,
which  adjusted  downward  in rate in  conjunction  with the decline in interest
rates during 2001.

         Interest  income on FHLB  stock  increased  from $42  thousand  and $83
thousand during the three and six months ended June 30, 2001 to $55 thousand and
$102 thousand during the same periods in 2002.  Greater average balances of FHLB
stock  stemming from the expansion in the Bank's  balance sheet  contributed  to
these increases.  In addition,  the FHLB-SF declared a particularly  high fourth
quarter 2001 dividend rate of 5.99% during the first quarter of 2002.  This rate
was above that  accrued by the  Company in 2001,  and  therefore  increased  the
Company's reported yield on FHLB stock during the first half of 2002.

Interest Expense

         Interest  expense  decreased from $4.9 million and $10.2 million during
the three and six months  ended June 30, 2001 to $3.3  million and $6.7  million
during  the same  periods  in 2002,  as the  effect of the lower  interest  rate
environment more than offset the impact of increases in average interest bearing
liabilities.


                                       46
<PAGE>

         Interest  expense on  deposits  decreased  from $4.4  million  and $9.0
million  during the three and six months ended June 30, 2001 to $2.7 million and
$5.5 million during the same periods in 2002. This decline was due to the effect
of a  significant  decrease in average  interest rate more than  offsetting  the
impact of a rise in  average  balances.  The large  decrease  in  average  rates
resulted from the lower interest rate environment and a shift in the composition
of the  deposit  portfolio.  Relatively  higher  cost  certificates  of  deposit
decreased from 59.3% of average total deposits during the second quarter of 2001
to 56.1% during the second quarter of 2002 despite the Company's issuing a $20.0
million brokered  certificate of deposit during May 2002.  Relatively lower cost
transaction deposit accounts  experienced a complementary  increase,  with money
market deposits  experiencing a significant  rise from 21.0% to 24.8% of average
total  deposits  during the same time  periods.  This change in deposit mix is a
fundamental component of the Company's strategic plan.

         At June 30,  2002,  the  Company's  weighted  average  nominal  cost of
deposits was 2.36%,  down from 2.87% at December  31, 2001.  The Company paid an
average rate of just 0.39% on its NOW deposits and 0.56% on its savings deposits
during  the second  quarter of 2002,  highlighting  the  limited  ability of the
Company  to  further  reduce  the cost of this  funding  should  general  market
interest  rates decline in future  periods.  At June 30, 2002,  $80.6 million in
certificates  of deposit  with a  weighted  average  nominal  rate of 3.14% were
scheduled to mature in the next quarter.  This figure  included $16.0 million in
State of California  deposits.  At June 30, 2002,  the longest term permitted by
the State under its time deposit program was six months.

         The Company has worked to more uniformly  distribute its certificate of
deposit  maturities by month in order to facilitate  cash  management  and avoid
concentrated  exposure to capital  market events at any one point in time.  This
objective has been  accomplished  through the use of "odd term"  certificates of
deposit  such as 7, 8, and 19 months,  augmented  by ongoing  sales and periodic
print  advertising  of longer term  certificates  of deposit.  For example,  the
Company conducted two rounds of print advertising  throughout its primary market
area in the second quarter of 2002 promoting 24 month and 30 month  certificates
of deposit.  At June 30, 2002, the weighted  average cost of the  certificate of
deposit portfolio was 3.14%, down from 3.43% at March 31, 2002.

         During  the  third  quarter  of 2002,  the  Company  plans to  continue
promoting  money market  accounts,  including  new  consumer  and business  MMDA
products,   Direct  Deposit  Checking   account  (no-fee   consumer   checking),
intermediate  to longer term  certificates  of deposit,  and  business  checking
accounts. The Company's deposit products are highly tiered,  encouraging greater
account  balances in order to earn higher rates of interest.  Customer  accounts
are accessible via bilingual  telephone  banking,  Internet banking,  global ATM
networks,  mail,  and  in-branch  service.  The Company also intends to continue
pursuing  compensating   balances,   typically  demand  deposit  balances,   for
commercial credit facilities.

         Interest expense on total  borrowings  increased from $582 thousand and
$1.1  million  during  the  three and six  months  ended  June 30,  2001 to $635
thousand and $1.2  million  during the same periods in 2002 due to the effect of
greater average balances more than offsetting the impact of lower average rates.
The Company had higher  levels of  borrowings  outstanding  in the first half of
2002 than the same period in 2001 due to borrowings  being utilized to fund some
of the growth in the loan portfolio.

         The Company's  average  interest rate on other  borrowings was inflated
during 2001 and 2002 as a result of the amortization of loan fees (discount on a
liability) on MBBC's $3.0 million  revolving line of credit combined with a lack
of draws (outstanding balances) on the line.


                                       47
<PAGE>

Provision For Loan Losses

         The Company recorded  provisions for loan losses totaling $385 thousand
and $710 thousand during the three and six months ended June 30, 2002,  compared
to $300 thousand and $800 thousand  during the same periods in 2001. The Company
determines  its  periodic  provision  for loan losses based upon its analysis of
loan loss reserve adequacy.  Net charge-offs during the first six months of 2002
were $32 thousand,  versus $26 thousand during the first six months of 2001. The
Company's ratio of loan loss reserves to loans outstanding  increased from 1.41%
at December 31, 2001 to 1.50% at June 30, 2002,  while the nominal amount of the
loan loss reserve rose from $6.7 million at December 31, 2001 to $7.3 million at
June 30, 2002.

         The primary factor contributing to the provision for loan losses during
the first quarter of 2002 was the need to augment existing reserves to establish
a specific  reserve of $754 thousand  associated with a $2.3 million  commercial
real  estate  mortgage  secured  by a  hotel  /  resort  described  above  under
"Non-performing Assets". Because this loan was already classified as substandard
at December 31, 2001, the  incremental  loan loss reserves  associated with this
loan at March 31, 2002 were less than the $754 thousand specific reserve.

         Other factors  contributing to the provision for loan losses during the
first half of 2002 included:

o    the expansion in the loan portfolio

o    the addition of a large volume of new credits to the loan portfolio

o    the  origination  of  relatively  larger  loans  by the  Los  Angeles  loan
     production office

o    the stage of the economic and credit cycles,  with Management's belief that
     California typically lags national economic trends

o    the change in loan portfolio mix, particularly the reduced concentration of
     relatively lower risk residential mortgages

o    the  Company's  updating its formula  general  reserve  factors  during the
     second quarter of 2002 to reflect current information regarding real estate
     valuations, business conditions, rental and vacancy rates for various types
     of income  property,  and other  factors in  estimating  the amount of loss
     inherent in the loan portfolio at June 30, 2002

         Commercial & industrial  and  multifamily  real estate loans  typically
present  greater  credit,  concentration,  and event risks than home  mortgages,
thereby requiring  proportionately greater reserve levels. Newer loans typically
present  more  credit  exposure  than  seasoned  loans with many years of prompt
payment experience and amortized principal balances.  Commercial lines of credit
and term loans to businesses  also  typically  present a greater level of credit
risk than residential mortgages.

         A reduction in the portfolio of hotel / motel / resort loans during the
first half of 2002 moderated the amount of provision for loan losses.

         The Company  anticipates  that its ratio of loan loss reserves to loans
outstanding  will continue to increase in future  periods to the extent that the
Company is  successful in its  strategic  plan of  increasing  total loans while
expanding the proportion of the loan portfolio  represented by income  property,
construction,  and commercial business lending.  This change in portfolio mix is
anticipated to be accelerated by the Los Angeles loan production  office,  which
concentrates on construction and income property  lending.  The Los Angeles loan
production   office   presents  the  Company  with  the  opportunity  to  better
geographically  diversify its real estate loan portfolio,  such that the Company
becomes less exposed to a downturn in real estate values,  economic weakness, or
a natural  disaster in any one local real estate  market.  The Company does not,
however,  pursue lending outside the State of California,  but does occasionally
make real estate loans  secured by property in other states as an  accommodation
to existing customers.


                                       48
<PAGE>

Non-interest Income

         Non-interest  income  totaled $503 thousand and $1.0 million during the
three and six  months  ended June 30,  2002,  down from $695  thousand  and $1.3
million during the same periods in 2001.

         Customer  service  charge  income was $392  thousand and $742  thousand
during the three and six months ended June 30, 2002, down from $473 thousand and
$882  thousand  during  the  same  periods  in  2001.  In  conjunction  with the
conversion  to the new core data  processing  system in March 2001,  the Company
implemented a revamped consumer checking product line and an associated  revised
fee and service  charge  schedule.  These changes  contributed to the closing of
certain lower balance,  recurring overdraft,  and / or higher transaction volume
consumer  checking  accounts  beginning in the second  quarter of 2001,  as such
accounts  began  incurring  increased  service  charges.  In  addition,  certain
uncollected  funds fees charged in the first half of 2001 were eliminated by the
beginning of 2002 due to competitive factors.

         Commissions from the sale of non-FDIC insured investment  products were
$34  thousand  and $75  thousand  during the three and six months ended June 30,
2002,  down from $71 thousand and $188 thousand during the same periods in 2001.
This  decrease  was  primarily  due  to  vacancies  in  positions  for  licensed
investment sales  representatives and the general state of the equity markets in
the first six months of 2002. The Company expects revenue from these  operations
to remain constrained during the third quarter of 2002.

         Loan servicing  income totaled $14 thousand and $29 thousand during the
three and six months  ended June 30,  2002,  compared  to $41  thousand  and $43
thousand during the same periods in 2001. The Company continues to sell the vast
majority  of its long term,  fixed rate  residential  loan  production  into the
secondary market on a servicing released basis, and purchases more interest rate
sensitive  loans as part of its  interest  rate risk  management  program.  As a
result,  the  portfolio  of loans  serviced for others is declining as loans pay
off. At June 30, 2002,  the Company  serviced  $34.9 million in various types of
loans for other  investors,  compared to $42.6 million at December 31, 2001. The
Company  maintained loan servicing  assets of $46 thousand at June 30, 2002, and
is thus  limited in the  exposure  of its loan  servicing  income to a potential
further acceleration in loan prepayment rates.

         Gains on the sale of loans held for sale were $21  thousand  during the
second  quarter of 2002,  down from $24  thousand  during the second  quarter of
2001.  For the first six months of 2002,  gains on the sale of loans totaled $48
thousand,  a 65.5% increase from the $29 thousand recorded during the first half
of 2001. The Company  anticipates  favorable  results from its mortgage  banking
operations  during the third  quarter of 2002,  spurred by the  availability  of
thirty year fixed rate  residential  mortgages at rates below 7.00% at the start
of the quarter and by recent reports  indicating  strong demand for  residential
real estate in most areas of California.

         There were no sales of mortgage backed or investment  securities during
the second  quarter of either  2002 or 2001.  Gains on sale of  mortgage  backed
securities  were $43  thousand  during the first half of 2002,  compared  to $34
thousand  during  the  same  period  in  2001.  Although  many of the  Company's
securities  appreciated  during the second quarter of 2002 due to the decline in
most  capital  markets  interest  rates,  the  Company  decided  to  retain  the
securities as a means of generating net interest income.

         Other income  declined from $86 thousand and $163  thousand  during the
three and six months ended June 30, 2001 to $42 thousand and $78 thousand during
the  same  periods  in  2002.  Various  factors  contributed  to  this  decline,
including:

o    the  collection  of a $25  thousand  fee in the  second  quarter of 2001 in
     conjunction with the workout of a troubled loan

o    the  Company's  earning $36 thousand more in fees in the first half of 2001
     versus the first half of 2002 associated with the  (discontinued)  issuance
     of Bank official checks drawn on a third party


                                       49
<PAGE>

         The  Company's   strategic  plan   incorporates   non-interest   income
representing  a greater  percentage  of total  revenue.  The Company  intends to
pursue increased non-interest income in future periods through:

o    seeking  additional  remote  ATM  sites  and  increasing  certain  ATM fees
     commencing in the fourth quarter of 2002

o    further increases in the portfolio of deposit transaction accounts

o    the  continued  sale of consumer  Internet  banking  with  electronic  bill
     payment

o    the  expanded  sale of Internet  banking and cash  management  services for
     businesses

o    the continued marketing of debit cards

However,  no assurance can be provided  regarding the amount of or trends in the
Company's future levels and composition of non-interest income.

Non-interest Expense

         Non-interest  expense  totaled $3.4 million and $6.9 million during the
three and six months  ended June 30, 2002,  comparing  favorably to $3.5 million
and $7.4 million during the same periods in 2001.  Factors  contributing  to the
lower expenses included the Company's  incurring  significant costs in the first
half of 2001 associated with its data processing  conversion ($447 thousand) and
the  arbitration  of  claims by a former  executive  ($161  thousand).  The data
processing  conversion costs included  de-conversion  charges from the Company's
external service bureau,  travel and training costs for employees to assist with
the  implementation  of the new system,  printing  and  postage  for  additional
customer mailings, and consultant fees.

       Compensation and employee benefits costs were higher in the three and six
months ended June 30, 2002 than during the same periods the prior year due to:

o    compensation  costs associated with the Los Angeles loan production  office
     which opened during the first quarter of 2002

o    other  staff  additions  and / or  changes  in  support  of  the  Company's
     strategic  plan,  particularly  in the  Company's  commercial  banking  and
     information technology functions

o    higher costs for the Bank's  Employee Stock  Ownership Plan ("ESOP") due to
     the greater average market price of the Company's common stock;  associated
     expenses  were $308  thousand for the first six months of 2002  compared to
     $194 thousand for the first six months of 2001

o    higher costs for payroll taxes on a greater compensation base

         The change in the Company's  systems  environment also impacted various
other operating expenses.  For example,  data processing fees were lower in 2002
versus 2001 due to the  conversion  to in-house  data  processing in March 2001;
however,  equipment expense was higher due to the added  depreciation  costs for
the new system.

         While deposit insurance  premiums increased slightly from the three and
six months  ended June 30, 2001 to the same  periods in 2002 due to expansion in
the deposit portfolio,  the Company anticipates a significant percentage decline
in these  costs  during  the  latter  half of 2002 due to an  adjustment  in its
premium rate.


                                       50
<PAGE>

         Legal and  accounting  expenses  declined  from $267  thousand and $451
thousand  during the three and six months  ended June 30, 2001 to $102  thousand
and  $221  thousand  during  the  same  periods  in  2002  primarily  due to the
aforementioned  arbitration in 2001 and due to the Company's utilizing more cost
effective providers for certain professional services in 2002.

         Advertising  and promotion costs totaled $69 thousand and $145 thousand
during the three and six months  ended June 30,  2002,  up from $27 thousand and
$57 thousand during the same periods in 2001.  These costs were unusually low in
the  first  half of 2001,  as the  Company  postponed  certain  advertising  and
promotional  activities due to the  implementation  of the new computer  systems
environment.  Advertising  during the second quarter of 2002 included  newspaper
ads for deposit  products  and  continued  radio  advertising  in the  Company's
primary  market areas.  The radio  messages  were  targeted at attracting  local
businesses  through  the  Bank's  relationship  focused  approach  to  providing
financial services.  The Company's visibility was also enhanced during the first
half of 2002 by the  extensive  participation  of employees  and  Directors in a
significant number of community events and  organizations.  As just one example,
more than twenty Bank employees  actively  participated  in a fund raising event
for local non-profit organizations.

         Consulting expenses declined from $63 thousand and $306 thousand during
the three and six months  ended June 30, 2001 to $21  thousand  and $43 thousand
during the same periods in 2002. In 2001, the Company hired several  consultants
to  assist  with  the  core  systems   conversion  and  the   implementation  of
complementary technology following the conversion.

         The Company's  efficiency  ratio during the second  quarter of 2002 was
56.12%,  comparing  favorably  to 64.37%  during the second  quarter of 2001 and
improving  from  59.13%  during  the  first  quarter  of 2002  (the  immediately
preceding  quarter).  Despite this progress,  the Company's  efficiency ratio is
still above those of high performing peer financial institutions.  The expansion
in  the  Company's  interest  margin  has  been  a  significant  factor  in  the
improvement in the efficiency ratio during the past year.

         The Company  continues to  restructure  its  operations  both to better
utilize new  technology  and improve  efficiency.  The Company also continues to
evaluate  new vendors for  various  products  and  services,  seeking  more cost
effective  business  relationships.  In 2002, the Company  altered the manner in
which its  facilities  management  is  conducted  to provide for better  expense
control.  By mid 2002,  the  Company  implemented  revised  practices  for check
ordering and printing,  leading to cost savings. In the second half of 2002, the
Company  plans to complete  the  transition  to a higher  quality and lower cost
cellular  phone  service and obtain  better  pricing  for certain  correspondent
banking services. Through these and other initiatives,  the Company continues to
target progress in improving its efficiency ratio.

         However,  the Company's  progress in improving its efficiency  ratio in
the next two  quarters may be slowed by the up front costs  associated  with the
hiring  of  additional  experienced  commercial  bankers  in order to speed  the
implementation of the strategic plan. In addition,  should the Company open a de
novo branch in order to improve its coverage of its local  market area,  attract
additional  deposits and new customers,  build franchise  value,  and reduce the
loan to deposit  ratio,  such would  likely  unfavorably  impact the  efficiency
ratio, as new branches typically generate negative incremental  contributions in
the first year of operation.  Moreover,  the Company is subject to certain third
party pricing  increases  such as higher  postage  rates,  greater  expenses for
health insurance, and the increasing cost of worker's compensation insurance for
many businesses in the State of California.

         In  light  of the  above  and  because  of  the  uncertain  impacts  of
competition,  the  regulatory  environment,  and other  factors  over  which the
Company has no control, Management cannot predict the Company's efficiency ratio
in future periods.


                                       51
<PAGE>

Income Taxes

         Income tax expense increased in 2002 versus 2001 due to greater pre-tax
income.  The  Company's  effective  book income tax rate was 41.3% for the first
half of 2002, down from 42.6% for the first half of 2001 due to:

o    certain  non-deductible  expenses and other  adjustments  to taxable income
     representing a smaller  percentage of the increased  amount of book pre-tax
     income

o    the Company's  filing for additional State income tax credits in 2002 under
     the Enterprise Zone program



Item 3.  Quantitative And Qualitative Disclosures About Market Risk

         For a current  discussion of the nature of market risk  exposures,  see
"Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - Interest Rate Risk Management And Exposure". Readers should also
refer to the quantitative and qualitative  disclosures  (consisting primarily of
interest rate risk) in the  Company's  Annual Report on Form 10-K for the fiscal
year ended  December 31,  2001.  There has been no  significant  change in these
disclosures since the filing of that document.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         From time to time, the Company is party to claims and legal proceedings
         in the  ordinary  course  of  business.  Management  believes  that the
         ultimate aggregate liability represented thereby, if any, will not have
         a  material  adverse  effect on the  Company's  consolidated  financial
         position or results of operations.

Item 2.  Changes In Securities

         None.


Item 3.  Defaults Upon Senior Securities

         Not applicable.


                                       52
<PAGE>

Item 4.  Submission Of Matters To A Vote Of Security Holders

     a)   The Company's Annual Meeting of Stockholders was held on May 23, 2002.

     b)   Not applicable.

     c)   At the Company's Annual Meeting of Stockholders  held on May 23, 2002,
          the Company's stockholders approved the following:

          1.)  The election of the  following  individuals  as Directors for the
               terms indicated:
<TABLE>
<CAPTION>
                                                                     Votes           Votes          Term
                               Individual                              For        Withheld       Expires
                               ----------------------------    ------------     -----------     ---------
<S>                                                              <C>               <C>              <C>
                               Mr. Larry A. Daniels              2,570,223         105,892          2004
                               Mr. Steven Franich                2,564,961         111,154          2005
                               Mr. Stephen G. Hoffmann           2,570,223         105,892          2005
                               Mr. Gary L. Manfre                2,570,223         106,092          2005
</TABLE>


               In  addition  to  the  above  four  individuals,   the  following
          Directors were in office as of July 25, 2002:

                              Mr. Josiah T. Austin
                              Mr. Edward K. Banks
                              Ms. Diane S. Bordoni
                              Mr. C. Edward Holden, Vice Chairman Of The Board
                              Mr. McKenzie Moss, Chairman Of The Board

          2.)  The  ratification  of the appointment of Deloitte & Touche LLP as
               the  independent  auditors  of the  Company  for the fiscal  year
               ending December 31, 2002 was approved as follows:
<TABLE>
<CAPTION>
                                             For              Against             Abstain
                                -----------------    -----------------    ----------------
<S>                                    <C>                      <C>                 <C>
                                       2,665,768                6,897               3,450
</TABLE>

     d)   Not applicable.

Item 5.  Other Information

         None.

Item 6.  Exhibits And Reports On Form 8-K

         A.  Exhibits

                  99.1     Chief Executive Officer Certification Pursuant To  18
                           U.S.C. Section 1350
                  99.2     Chief Financial Officer Certification Pursuant To  18
                           U.S.C. Section 1350

         B.  Reports On Form 8-K

                  The Company has recently filed the following  Current  Reports
                  on Form 8-K:

                      1.   Form 8-K dated July 22,  2002.  This  Current  Report
                           reported  the  Company's  operational  and  financial
                           results  for the three and six month  periods  ending
                           June 30, 2002.


                                       53
<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.

                                              MONTEREY BAY BANCORP, INC.
                                                            (Registrant)



Date:    August 9, 2002                       By:      /s/ C. Edward Holden
                                                       --------------------
                                                       C. Edward Holden
                                                       Chief Executive Officer
                                                       President
                                                       Vice Chairman Of The
                                                       Board Of Directors

Date:    August 9, 2002                       By:      /s/ Mark R. Andino
                                                       ------------------
                                                       Mark R. Andino
                                                       Chief Financial Officer
                                                       Treasurer
                                                       (Principal Financial &
                                                       Accounting Officer)


                                       54