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 September 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)

                                (831) 722 - 6794
              (Registrant's Facsimile 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:  3,449,756  shares of common
stock, par value $0.01 per share, were outstanding as of November 11, 2002.


<PAGE>


                    MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

                                      INDEX

<TABLE>
<CAPTION>
                                                                                       PAGE
PART I.    FINANCIAL INFORMATION
<S>        <C>       <C>                                                                 <C>
           Item 1.   Financial Statements

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

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

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

                     Condensed Consolidated Statements Of Cash Flows (unaudited)
                     For The Nine Months Ended September  30, 2002 And September
                     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                                          16-55

           Item 3.   Quantitative And Qualitative Disclosure About Market Risk            56

           Item 4.   Controls And Procedures                                              56


PART II.   OTHER INFORMATION

           Item 1.   Legal Proceedings                                                    56

           Item 2.   Changes In Securities                                                56

           Item 3.   Defaults Upon Senior Securities                                      56

           Item 4.   Submission Of Matters To A Vote Of Security Holders                  57

           Item 5.   Other Information                                                    57

           Item 6.   Exhibits And Reports On Form 8-K                                     57

                     (a)  Exhibits

                     (b)  Reports On Form 8-K


Signature Page                                                                            58

Certifications Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002                59-60

</TABLE>

                                       2

<PAGE>

Item 1.  Financial Statements

<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(Dollars In Thousands)
---------------------------------------------------------------------------------------------------------------------

                                                                                   September 30,         December 31,
                                                                                            2002                 2001
                                                                                            ----                 ----
<S>                                                                                     <C>                  <C>
ASSETS

Cash and cash equivalents                                                               $  9,513             $ 13,079
Securities available for sale, at estimated fair value:
     Investment securities (amortized cost of $7,716 and $7,707 at
          September 30, 2002 and December 31, 2001, respectively)                          7,060                7,300
     Mortgage backed securities (amortized cost of $42,721 and $30,358 at
          September 30, 2002 and December 31, 2001, respectively)                         43,000               30,644
Loans held for sale, at lower of cost or market                                              170                  713
Loans receivable held for investment (net of allowances for loan losses of
     $7,742 at September 30, 2002 and $6,665 at December 31, 2001)                       496,006              465,887
Investment in capital stock of the Federal Home Loan Bank, at cost                         3,347                2,998
Accrued interest receivable                                                                3,024                2,915
Premises and equipment, net                                                                7,278                7,618
Core deposit intangibles, net                                                              1,003                1,514
Other assets                                                                               5,029                4,723
                                                                                        --------             --------

TOTAL ASSETS                                                                            $575,430             $537,391
                                                                                        ========             ========
</TABLE>



See Notes to Condensed Consolidated Financial Statements


                                       3

<PAGE>

<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (Continued)
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001
(Dollars In Thousands)
---------------------------------------------------------------------------------------------------------------------

                                                                                   September 30,         December 31,
                                                                                            2002                 2001
                                                                                            ----                 ----
<S>                                                                                     <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Non-interest bearing demand deposits                                                    $ 24,898             $ 21,062
Interest bearing NOW checking accounts                                                    43,561               42,557
Savings deposits                                                                          18,703               19,127
Money market deposits                                                                    119,398              105,828
Certificates of deposit                                                                  255,118              243,765
                                                                                        --------             --------

   Total deposits                                                                        461,678              432,339
                                                                                        --------             --------

Advances from the Federal Home Loan Bank and other borrowings                             57,654               53,800
Accounts payable and other liabilities                                                     1,328                1,090
                                                                                        --------             --------

     Total liabilities                                                                   520,660              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 September 30, 2002 and December 31, 2001;
     3,480,756 outstanding at September 30, 2002 and
     3,456,097 outstanding at December 31, 2001                                               45                   45
Additional paid-in capital                                                                29,108               28,584
Retained earnings, substantially restricted                                               40,493               36,473
Unallocated ESOP shares                                                                     (518)                (690)
Treasury shares designated for compensation plans, at cost (14,802 shares
     at September 30, 2002 and 17,969 shares at December 31, 2001)                          (142)                (173)
Treasury stock, at cost (1,011,329 shares at September 30, 2002 and
     1,035,988 shares at December 31, 2001)                                              (13,994)             (14,006)
Accumulated other comprehensive loss, net of taxes                                          (222)                 (71)
                                                                                        --------             --------

     Total stockholders' equity                                                           54,770               50,162
                                                                                        --------             --------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $575,430             $537,391
                                                                                        ========             ========
</TABLE>


See Notes to Condensed Consolidated Financial Statements


                                       4

<PAGE>

<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(Dollars In Thousands, Except Per Share Amounts)
---------------------------------------------------------------------------------------------------------------------


                                                             FOR THE THREE MONTHS             FOR THE NINE MONTHS
                                                               ENDED SEPTEMBER 30,              ENDED SEPTEMBER 30,
                                                         -----------------------------    ---------------------------

                                                                2002           2001           2002           2001
                                                              ------         ------        -------        -------
<S>                                                           <C>            <C>           <C>            <C>
INTEREST AND DIVIDEND INCOME:
   Loans receivable                                           $8,549         $9,084        $25,298        $26,753
   Mortgage backed securities                                    323            488            963          1,970
   Investment securities and cash equivalents                    107            186            364            741
                                                              ------         ------        -------        -------

         Total interest and dividend income                    8,979          9,758         26,625         29,464
                                                              ------         ------        -------        -------

INTEREST EXPENSE:
   Deposit accounts                                            2,578          4,032          8,084         13,072
   Advances from the FHLB and other borrowings                   606            711          1,833          1,852
                                                              ------         ------        -------        -------

         Total interest expense                                3,184          4,743          9,917         14,924
                                                              ------         ------        -------        -------

NET INTEREST INCOME BEFORE PROVISION
     FOR LOAN LOSSES                                           5,795          5,015         16,708         14,540

PROVISION FOR LOAN LOSSES                                        400            275          1,110          1,075
                                                              ------         ------        -------        -------

NET INTEREST INCOME AFTER PROVISION
     FOR LOAN LOSSES                                           5,395          4,740         15,598         13,465
                                                              ------         ------        -------        -------

NON-INTEREST INCOME:
   Customer service charges                                      387            401          1,130          1,282
   (Loss) gain on sale of mortgage backed securities              (8)           156             35            190
   Commissions from sales of noninsured products                  25             35            100            223
   Gain on sale of loans                                          33             18             81             47
   Income from loan servicing                                     18             33             47             77
   Other income                                                   35             47            112            209
                                                              ------         ------        -------        -------

         Total non-interest income                               490            690          1,505          2,028
                                                              ------         ------        -------        -------
</TABLE>


See Notes to Condensed Consolidated Financial Statements


                                       5

<PAGE>

<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(Dollars In Thousands, Except Per Share Amounts)
---------------------------------------------------------------------------------------------------------------------


                                                              FOR THE THREE MONTHS             FOR THE NINE MONTHS
                                                               ENDED SEPTEMBER 30,              ENDED SEPTEMBER 30,
                                                         -----------------------------    ---------------------------

                                                                 2002           2001            2002            2001
                                                               ------         ------         -------         -------
<S>                                                            <C>            <C>            <C>             <C>
NON-INTEREST EXPENSE:
   Compensation and employee benefits                           1,960          1,739           5,697           5,052
   Occupancy and equipment                                        444            440           1,277           1,222
   Deposit insurance premiums                                      19             50             121             148
   Data processing fees                                           146            133             423             746
   Legal and accounting expenses                                  107            274             328             724
   Supplies, postage, telephone, and office expenses              158            158             505             510
   Advertising and promotion                                       52             86             214             143
   Amortization of intangible assets                              170            170             511             511
   Consulting                                                      16             31              59             336
   Other expense                                                  370            505           1,176           1,556
                                                               ------         ------         -------         -------

         Total non-interest expense                             3,442          3,586          10,311          10,948
                                                               ------         ------         -------         -------

INCOME BEFORE PROVISION FOR
     INCOME TAXES                                               2,443          1,844           6,792           4,545

PROVISION FOR INCOME TAXES                                        977            787           2,772           1,937
                                                               ------         ------         -------         -------

NET INCOME                                                     $1,466         $1,057         $ 4,020         $ 2,608
                                                               ======         ======         =======         =======


EARNINGS PER SHARE:

     BASIC EARNINGS PER SHARE                                  $ 0.43         $ 0.32         $  1.19         $  0.80
                                                               ======         ======         =======         =======

     DILUTED EARNINGS PER SHARE                                $ 0.42         $ 0.31         $  1.15         $  0.79
                                                               ======         ======         =======         =======
</TABLE>



See Notes to Condensed Consolidated Financial Statements


                                       6

<PAGE>

<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2002
(Dollars And Shares In Thousands)
----------------------------------------------------------------------------------------------------------------------------


                                                                                       Treasury
                                                                                         Shares
                                                                                         Desig-
                                                                                          nated             Accum-
                                                                                            For             ulated
                                                             Addi-                Unal-    Com-              Other
                                          Common Stock      tional              located    pen-            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                 (30)                                                     (512)               (512)

Exercise of stock options                   47                 153                                   450                 603

Director fees paid using treasury            8                  61                                    74                 135
stock

Amortization of stock compensation                             310                172       31                           513

Comprehensive income:
  Net income                                                            4,020                                          4,020

  Other comprehensive income
    (loss):

    Change in net unrealized loss
      on securities available
      for sale, net of
      taxes of $(91)                                                                                        (131)       (131)


    Reclassification adjustment for
      gains on securities available
      for sale included in income,
      net of taxes of ($15)                                                                                  (20)        (20)
                                                                                                                    --------

  Other comprehensive income
       (loss), net
                                                                                                                        (151)
                                                                                                                    --------
Total comprehensive income
                                                                                                                       3,869
                                         ------  ------   --------   --------   ------- ------- --------   -------  --------
Balance at September 30, 2002            3,481   $   45   $ 29,108   $ 40,493   $(518)  $ (142) $(13,994)  $(222)   $ 54,770
                                         ======  ======   ========   ========   ======= ======= =========  =======  ========

</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       7

<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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

                                                                                                    FOR THE NINE MONTHS
                                                                                                    ENDED SEPTEMBER 30,
                                                                                                   ---------------------

                                                                                                      2002          2001
                                                                                                      ----          ----
<S>                                                                                                <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                                         $ 4,020       $ 2,608

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

Depreciation and amortization of premises and equipment                                                542           481
Amortization of intangible assets                                                                      511           511
Amortization of purchase premiums, net of accretion of discounts                                       827            93
Amortization of deferred loan fees and costs, net                                                     (212)         (159)
Provision for loan losses                                                                            1,110         1,075
Federal Home Loan Bank stock dividends                                                                (133)         (141)
Gross ESOP expense before dividends received on unallocated shares                                     467           314
Compensation expense associated with stock compensation plans                                           65           110
Director retainer fees paid in stock                                                                   135           156
Gain on sale of mortgage backed securities                                                             (35)         (190)
Gain on sale of loans held for sale                                                                    (81)          (47)
Loss (gain) on sale of fixed assets                                                                     14            (8)
Origination of loans held for sale                                                                  (9,242)       (6,966)
Proceeds from sales of loans held for sale                                                           9,866         6,559
Increase in accrued interest receivable                                                               (109)         (250)
Increase in other assets                                                                              (306)       (1,208)
Increase (decrease) in accounts payable and other liabilities                                          238          (157)
Other, net                                                                                            (875)         (724)
                                                                                                   -------       -------

     Net cash provided by operating activities                                                       6,802         2,057
                                                                                                   -------       -------


CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans held for investment                                                          (30,119)      (62,672)
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                                         (46,155)      (20,493)
Principal repayments on mortgage backed securities available for sale                               28,683        21,368
Proceeds from sales of mortgage backed securities available for sale                                 4,500        12,097
Purchases of Federal Home Loan Bank stock                                                             (216)         (298)
Proceeds from the sale of premises and equipment                                                        --            13
Purchases of premises and equipment                                                                   (216)       (1,062)
                                                                                                   -------       -------

     Net cash used in investing activities                                                         (43,527)      (51,047)
                                                                                                   -------       -------
</TABLE>

See Notes to Condensed Consolidated Financial Statements


                                       8

<PAGE>

<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2002 AND SEPTEMBER 30, 2001
(Dollars In Thousands)
------------------------------------------------------------------------------------------------------------------------

                                                                                                    FOR THE NINE MONTHS
                                                                                                    ENDED SEPTEMBER 30,
                                                                                                   ---------------------

                                                                                                      2002          2001
                                                                                                      ----          ----
<S>                                                                                                <C>           <C>
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits                                                                            29,339        20,829
Proceeds (repayments) of Federal Home Loan Bank advances, net                                        3,700        15,000
Proceeds of other borrowings, net                                                                      154           361
Purchases of treasury stock                                                                           (512)           --
Sales of treasury stock for exercise of stock options                                                  478         1,021
                                                                                                   -------       -------

     Net cash provided by financing activities                                                      33,159        37,211
                                                                                                   -------       -------

NET DECREASE IN CASH & CASH EQUIVALENTS                                                             (3,566)      (11,779)

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

CASH & CASH EQUIVALENTS AT END OF PERIOD                                                           $ 9,513       $13,380
                                                                                                   =======       =======



SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:
     Interest on deposits and borrowings                                                           $ 8,087       $14,872
     Income taxes                                                                                  $ 2,500       $ 2,850


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  nine  month  periods  ended  September  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 inter-company 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 nine month periods ended September 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 Nine Months
                                                              Ended September 30,                 Ended September 30,
                                                         ----------------------------        ----------------------------

(In Whole Dollars And Whole Shares)
                                                               2002              2001              2002              2001
                                                         ----------        ----------        ----------        ----------
<S>                                                      <C>               <C>               <C>               <C>
Net income                                               $1,466,000        $1,057,000        $4,020,000        $2,608,000
                                                         ==========        ==========        ==========        ==========

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

Less weighted average:
   Uncommitted ESOP shares                                  (85,352)         (121,289)          (94,336)         (130,273)
   Non-vested stock award shares                            (15,166)          (26,903)          (16,238)          (30,289)
   Treasury shares                                       (1,007,045)       (1,050,040)       (1,011,979)       (1,070,491)
                                                         ----------        ----------        ----------        ----------

Sub-total                                                (1,107,563)       (1,198,232)       (1,122,553)       (1,231,053)
                                                         ----------        ----------        ----------        ----------

Weighted average BASIC shares outstanding                 3,384,522         3,293,853         3,369,532         3,261,032

Add dilutive effect of:
   Stock options                                            123,253            90,591           123,577            58,499
   Stock awards                                               1,343             1,112             1,419
                                                         ----------        ----------        ----------        ----------
                                                                                                                      706

Sub-total                                                   124,596            91,703           124,996            59,205
                                                         ----------        ----------        ----------        ----------

Weighted average DILUTED shares outstanding               3,509,118         3,385,556         3,494,528         3,320,237
                                                         ==========        ==========        ==========        ==========

Earnings per share:

   BASIC                                                 $     0.43        $     0.32        $     1.19        $     0.80
                                                         ==========        ==========        ==========        ==========

   DILUTED                                               $     0.42        $     0.31        $     1.15        $     0.79
                                                         ==========        ==========        ==========        ==========
</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 nine month periods ended September 30, 2002
and 2001 are summarized as follows:

<TABLE>
<CAPTION>
                                              Three Months Ended September 30,       Nine Months Ended September 30,
                                             ----------------------------------    ----------------------------------
                                                        2002              2001                 2002             2001
                                                        ----              ----                 ----             ----
(Dollars In Thousands)
<S>                                                    <C>              <C>                   <C>             <C>
Gross reclassification adjustment                      $  (8)           $  156                $  35           $  190
Tax benefit (expense)                                      3               (64)                 (15)             (78)
                                                       -----             -----                -----           ------

Reclassification adjustment, net of tax                $  (5)            $  92                $  20           $  112
                                                       ======            =====                =====           ======
</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                  Nine Months Ended
                                                                  September 30,                      September 30,
                                                       ---------------------------        ---------------------------
                                                               2002          2001                 2002          2001
                                                               ----          ----                 ----          ----
(Dollars In Thousands)
<S>                                                          <C>            <C>                 <C>           <C>
Holding (loss) gain arising during the period, net           $ (208)        $ 208               $ (131)       $  673
of tax
Reclassification adjustment, net of tax                           5           (92)                 (20)         (112)
                                                             ------         -----               ------         ------
Net unrealized (loss) gain recognized in
     other comprehensive income                              $ (203)        $ 116               $ (151)        $  561
                                                             =======        =====               =======        ======
</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
September 30, 2002            757,929         371,866           238,182          242,724         143,339       $ 11.00
</TABLE>

Activity during the three and nine months ended September 30, 2002 included:

                                   Three Months Ended          Nine Months Ended
                                   September 30, 2002         September 30, 2002
                                   ------------------         ------------------
Granted                                         4,500                     10,000
Canceled                                        6,475                     16,275
Exercised                                      12,333                     46,963
Vested                                            600                     29,921

         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 September 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 nine
months ended September 30, 2002 and 2001 was $65 thousand and $110 thousand. The
following table summarizes the status of this plan:

<TABLE>
<CAPTION>
                                                         Stock                              Stock
                                                        Awards             Stock           Awards
                                       Stock       Outstanding            Awards        Available
                                      Awards           And Not      Cumulatively       For Future
Date                              Authorized            Vested            Vested           Grants
----                              ----------            ------            ------           ------
<S>                                  <C>                <C>              <C>                   <C>
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               --
September 30, 2002                   141,677            14,802           126,875               --
</TABLE>


         Activity  during the three and nine  months  ended  September  30, 2002
included:

                     Three Months Ended         Nine Months Ended
                     September 30, 2002        September 30, 2002
                     ------------------        ------------------
Granted                             450                       450
Canceled                            450                       450
Vested                              634                     3,167

                                       14
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 6:  Commitments & Contingencies

         At September 30, 2002,  commitments  maintained by the Company included
firm  commitments  to originate  $25.9 million in various types of loans, a firm
commitment to purchase a $1.0 million  commercial real estate loan, and optional
commitments  to sell $3.6  million  in fixed  rate  residential  mortgages  on a
servicing released basis. The Company maintained no firm commitments to purchase
securities, to assume borrowings, or to sell securities at September 30, 2002.


NOTE 7:  Recent Accounting Pronouncements

         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  September  30,  2001
financial statements have been reclassified to conform to the September 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  free of charge at the  following
Internet sites:

o    www.sec.gov

o    www.montereybaybank.com

         Monterey Bay Bancorp,  Inc. makes  available free of charge through its
Internet  site its Annual Report on Form 10-K,  quarterly  reports on Form 10-Q,
current  reports on Form 8-K,  and all  amendments  to those  reports as soon as
reasonably  practicable  after such  material  is  electronically  filed with or
furnished to the Securities & Exchange Commission ("SEC").

         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.

                                       16
<PAGE>

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.

         At September 30, 2002,  the Company had $575.4 million in total assets,
$496.2 million in net loans  receivable,  and $461.7 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,  remote deposit
capability,  bank by mail, 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.

                                       17
<PAGE>

         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.

         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 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,  including a likely increase in
     certain outside  professional  costs.  The Company  currently  utilizes its
     external  attestation  auditor only for audit  services  and other  closely
     related  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 certain credits.

                                       18
<PAGE>

o    The  Federal  Reserve is  pursuing  modifications  in its  discount  window
     program to encourage borrowings from financial institutions.  These changes
     are projected to favorably impact the liquidity of financial  institutions,
     including the Bank.

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.

o    The new capital plan of the FHLB-San  Francisco was approved by the Federal
     Housing Finance Board on June 12, 2002. 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 FDIC has scheduled a meeting in November  2002 to determine  whether to
     implement  higher federal  deposit  insurance  premium rates in 2003.  This
     evaluation  has been spurred by a decline in the BIF reserve  ratio to near
     the 1.25% statutory minimum.  An increase in premium rates,  depending upon
     how  implemented,   could  adversely   affect  the  Company's   results  of
     operations.

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 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.

o    The State of  California  legislature  approved and the governor  signed in
     September  2002 new tax laws that impact the  utilization  of net operating
     losses and conform  bank bad debt  deductions  to federal  tax law,  with a
     transition  provision  for 2002.  The  Company  has no net  operating  loss
     carryovers,   and  the  transition  provision  associated  with  the  State
     treatment  of bad  debt  deductions  provided  a one  time  benefit  to the
     Company,  but will also  accelerate the payment (but not impact the amount)
     of certain tax obligations.

                                       19
<PAGE>

Strategic Plan

         The Company's strategic plan envisions  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
strategic plan  incorporates 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 71.0% at September 30, 2002,  compared
to a minimum requirement of 65.0% to retain its federal thrift charter.


Overview Of Business Activity

         During the third  quarter  and first nine  months of 2002,  the Company
continued the implementation of its strategic plan. 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 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.

         Key accomplishments during the third quarter of 2002 included:

o    record quarterly net income of $1.47 million and diluted earnings per share
     of $0.42

o    improving  the  Company's  return on average  assets to 1.03% and return on
     average equity to 10.73%,  from 0.80% and 8.76%,  respectively,  during the
     same quarter the prior year

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

o    significant 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 54.77% for the
     three months ended September 30, 2002

o    continued  maintenance  of  favorable  credit  quality as  measured  by net
     charge-offs,  with a decline in  non-accrual  loans  from June 30,  2002 to
     September 30, 2002

o    increased local commercial banking business

o    expanded local community and financial  benefits arising from the Company's
     participation in the State of California Enterprise Zone program

o    the Bank's visibility and relationships with community leaders and business
     associations  continued  to  strengthen,  as  evidenced by the Bank's being
     nominated for "Business Of The Year" by a local Chamber of Commerce

                                       20
<PAGE>

         The Company has realized certain  operating  efficiencies  from the new
technology environment implemented and better optimized over the past 18 months.
Additionally,  the favorable  credit quality  experienced  during the first nine
months of 2002  allowed the  Company to avoid  significant  operating  costs for
collections  and  foreclosures.  The Company's  commitment  to quality  customer
service was  exemplified  during the third  quarter and early fourth  quarter of
2002,  when  telecommunications  network  upgrades  were  implemented  to  speed
transaction processing for both deposits and new account openings.


Stockholder Value

         The Company has  continued  its strong focus on  enhancing  stockholder
value  during  2002.  Tangible  book value per share  increased  from  $14.08 at
December 31, 2001 to $15.45 at September 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 fourth quarter
of 2002. The Company has also added additional market makers in the past year to
facilitate the liquidity of its common stock.  Subject to the terms of its stock
repurchase  plan, the Company has accelerated the pace of its stock  repurchases
during the third and fourth quarters of 2002.

         Effective November 1, 2002, the Company's  Directors will be paid under
a revised  Director  fee  program.  The new program  provides  for all  Director
compensation  of  any  type,  other  than  travel  reimbursement,   to  be  paid
exclusively  in Company  common  stock.  In addition,  base  retainer  fees were
reduced,  with new fees implemented based upon meeting attendance and the number
of Board  committees  served.  In adopting the new Director fee plan,  the Board
sought to even more closely align their compensation with stockholder  interests
by making Director  compensation  more  performance  and activity  based.  Total
annual costs under the new Director fee plan are  projected to be close to those
associated with the prior program that was primarily  focused upon flat retainer
fees.

         The Company's executive  Management has volunteered to accept a portion
of their 2002 cash incentive  compensation  in Company  common stock,  repeating
elections made in prior years.

         The  Company's   Directors  and  Officers  have  continued  to  be  net
purchasers of the Company's  common stock during 2002.  For example,  in October
2002,  the  Company's  Chief  Executive  Officer  and  Chief  Financial  Officer
purchased an additional 1,000 and 300 shares, respectively,  on the open market,
adding to their investment in the Company.

         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. The Company selected as its investment  banker a firm that specializes in
financial institutions.

                                       21
<PAGE>

Holding Company Bylaw Changes

         At its October 2002 meeting,  the MBBC Board of Directors  approved two
changes to the bylaws of the holding company.  The retirement date for Directors
was modified  from no later than December 31 of the year in which they attain an
age of 72 to no later than  December  31 of the year in which they attain an age
of 73. In addition,  the total Company stock ownership requirement for Directors
was increased, subject to certain conditions, from 1,000 shares to 5,000 shares.
McKenzie Moss, Chairman of the Board, is currently 72 years old. The amended and
restated bylaws,  effective  October 24, 2002, are attached to this Form 10-Q as
an Exhibit.


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

         Total assets  increased  $38.0  million  (7.1%) from $537.4  million at
December 31, 2001 to a record $575.4 million at September 30, 2002.

         Cash & cash  equivalents  decreased  from $13.1 million at December 31,
2001 to $9.5 million at September  30, 2002 due to the Company using cash & cash
equivalents to fund expansions in the security and loan portfolios.


Securities

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

         Investment securities available for sale were little changed during the
first nine months of 2002,  totaling  $7.3 million at December 31, 2001 and $7.1
million at September  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  September  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 nine
months 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 September 30, 2002.

         Mortgage  backed  securities  available for sale  increased  from $30.6
million at December 31, 2001 to $43.0 million at September 30, 2002. The Company
continued to purchase  relatively low duration  Agency  collateralized  mortgage
obligations  ("CMO's")  during the third  quarter 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 in  subsequent  periods to fund  anticipated
loan production.

         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 September 30, 2002 were
relatively  low  duration  bonds,  and  all of  the  Company's  mortgage  backed
securities  at  September  30, 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.

                                       22
<PAGE>

Loans

         Loans held for sale totaled $170 thousand at September  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
September 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 $496.0 million at September 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.

         Relatively high loan payoff volumes stemming from the low interest rate
environment restrained the rate of loan portfolio growth during 2002.

         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 third 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 86.2% at September
30,  2002,  down  slightly  from 86.8% at  December  31,  2001.  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 nine months 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 35.5% of
gross loans at September  30, 2002.  In contrast,  commercial  real estate loans
rose from 22.6% to 23.9%,  construction loans increased from 7.9% to 10.2%, land
loans increased from 2.5% to 4.1%,  commercial loans rose from 1.8% to 3.1%, 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 over the past year and by the new 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 fourth quarter of 2002:

o    a  significant  volume  of  new  loans,  as the  Company  intends  to  more
     extensively meet the credit needs of its customers and local communities

o    historically  high  prepayment  rates for  mortgages  and mortgage  related
     securities,  fueled by the record  level of refinance  activity  occurring,
     which in turn has been supported by historically low interest rates

o    residential mortgages comprising a smaller percentage of total gross loans

Despite the  Company's  concluding  the third quarter of 2002 with a significant
loan pipeline,  Management is uncertain regarding the projected size of the loan
portfolio  at  the  end  of  2002,  as  prepayments  during  October  2002  were
historically  high at $18.5  million,  and could continue at  historically  high
levels in the current low interest rate  environment.  Other factors,  including
many outside the control of the Company,  could  affect the  realization  of the
above expectations.

                                       23
<PAGE>

         The Company's  commercial  banking group continued to produce increased
business  during  the first  nine  months  of 2002.  Commercial  business  loans
outstanding increased from $8.8 million at December 31, 2001 to $16.7 million at
September 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 September 30, 2002 pointed
toward  the  continued   gradual   expansion  of  commercial   banking  customer
relationships during the fourth quarter of 2002.

         During  the third  quarter  of 2002,  the  Company  introduced  "remote
deposit"  services to its business and high net worth individual  accounts.  Via
this new service,  the Bank's  customers can make deposits to their Monterey Bay
Bank  checking  account  at any branch of a  correspondent  bank with over 4,900
banking  locations in 23 states.  Remote  deposit  services were  implemented to
offer  improved  convenience  and  assist  the  Bank in  competing  with  larger
financial institutions with more extensive branch networks.  Management plans to
utilize this new service to continue  expanding  deposits by commercial  banking
group customers, which totaled $8.5 million at September 30, 2002.

         Additional   information   regarding  loan  portfolio   composition  is
presented in the following table:

<TABLE>
<CAPTION>
(Dollars In Thousands)                                                       September 30,       December 31,
                                                                                      2002               2001
                                                                                      ----               ----
<S>                                                                               <C>                <C>
Held for investment:
   Loans secured by real estate:
      Residential one to four unit                                                $187,484           $204,829
      Multifamily five or more units                                               112,407            103,854
      Commercial and industrial                                                    126,606            109,988
      Construction                                                                  54,207             38,522
      Land                                                                          21,598             11,924
                                                                                  --------           --------
   Sub-total loans secured by real estate                                          502,302            469,117

   Other loans:
      Home equity lines of credit                                                    9,574              6,608
      Loans secured by deposits                                                        215                202
      Consumer lines of credit, unsecured                                              155                170
      Commercial term loans                                                          5,130              3,163
      Commercial lines of credit                                                    11,520              5,680
                                                                                  --------           --------
   Sub-total other loans                                                            26,594             15,823

   Sub-total gross loans held for investment                                       528,896            484,940

   (Less) / Plus:
      Undisbursed construction loan funds                                          (24,935)           (12,621)
      Unamortized purchase premiums, net of purchase discounts                         568                435
      Deferred loan fees and costs, net                                               (781)              (202)
      Allowance for loan losses                                                     (7,742)            (6,665)
                                                                                  --------           --------

Loans receivable held for investment, net                                         $496,006           $465,887
                                                                                  ========           ========

Held for sale:
   Residential one to four unit                                                   $    170           $    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 September 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.

                                       24
<PAGE>

Premises and Equipment

         Premises and  equipment,  net,  decreased from $7.6 million at December
31, 2001 to $7.3 million at September  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 have been and are expected to continue
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.


Core Deposit Intangibles

         Core deposit  intangibles,  net, declined from $1.5 million at December
31, 2001 to $1.0  million at September  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
$461.7 million at September 30, 2002. This increase primarily resulted from:

o    The Bank's  issuance of its first brokered  certificate of deposit  ("CD"),
     for $20.0 million, during the second quarter of 2002.

o    A $9.0  million  increase in  deposits  from the State of  California  time
     deposit program during 2002. The State places funds with  California  banks
     as a vehicle for encouraging employment and economic growth.

         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.  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 its strategic plan. Excluding the impact
of the aggregate  $29.0 million  increase in brokered and State  certificates of
deposit, transaction accounts increased from 43.6% of total deposits at December
31, 2001 to 47.7% of total  deposits at September  30,  2002.  This shift in mix
contributed to the Company's reducing its weighted average cost of deposits from
2.41%  during the second  quarter of 2002 to 2.26%  during the third  quarter of
2002.  This 15 basis point  reduction in deposit  cost was attained  despite the
historically  low level of interest  rates and therefore  the Company's  limited
ability to decrease  interest rates on many deposit  products that are currently
priced between zero and one percent.

                                       25
<PAGE>

         Key trends and results  within the deposit  portfolio  during the first
nine months of 2002 included:

o    Non-interest  bearing  demand  deposits  increased  from  $21.1  million at
     December  31, 2001 to $24.9  million at September  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 $43.6  million at September  30, 2002.  The Company
     has pursued new consumer checking accounts  throughout 2002, with a special
     promotion during October  providing new checking account customers with the
     opportunity to earn a bonus yield on a new three year CD placed on combined
     statement  with the new checking  account.  During the first nine months 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 $18.7
     million  at  September  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.

o    Money market deposits increased from $105.8 million at December 31, 2001 to
     $119.4 million at September 30, 2002.  Money market deposit balances during
     the first nine months 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 nine months 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 CD and
     the  $9.0  million  rise in time  deposits  from the  State  of  California
     decreased  from $243.8  million at December  31, 2001 to $226.1  million at
     September 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.   Price   competition  from  banks
     specializing in credit card lending has also been significant  during 2002,
     as certain  customers needing a given level of nominal interest income have
     pursued  national  avenues for their CD funds due to the  historically  low
     interest  rate  environment.  During  the first  nine  months of 2002,  the
     Company priced its longer term (18 to 60 months) CD's  attractively as part
     of  its  asset  /  liability   management  program  and  to  encourage  the
     development of longer term customer relationships. In addition, the Company
     has conducted various print  advertising  campaigns for 24 to 36 month CD's
     during  2002.  These  campaigns  attracted  new  customers,  with  whom the
     Company's  employees discussed the establishment of a more complete banking
     relationship.

                                       26
<PAGE>

         Management  is,  however,  not  satisfied  with the  volume of  deposit
acquisition  achieved by its eight full service retail branches during the first
nine months of 2002,  particularly  in light of general deposit inflows into the
banking system from investors leaving the equity markets.  Management  responded
to this performance by:

o    designing new relationship oriented deposit products, as detailed below

o    recruiting a Branch Sales Manager during the second quarter of 2002,  whose
     primary responsibility is to implement and manage an improved sales culture
     throughout the branch network

o    adjusting branch staff  compensation to provide for an increased  incentive
     opportunity based upon deposit growth and quality customer service

         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  expanding
business   relationships  and  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  during  the fourth  quarter of 2002 and the first  quarter of
2003. 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 new products and services. The Company plans to coordinate the introduction
of these new deposit products with marketing and promotion activities.

         The Company  plans to introduce  two new money  market  accounts in the
latter part of the fourth quarter of 2002:  Investors  Money Market and Business
Money  Market.  Investors  Money Market is a highly tiered  product  targeted to
attract funds from money market mutual funds and brokerage firms. Business Money
Market  is a product  designed  specifically  for the  Bank's  local  commercial
customers  seeking an attractive  return on liquid funds while also enjoying the
many attractive  attributes  provided by the Bank,  including  Internet banking,
global ATM access, 24 hour bilingual telephone banking, and, above all, superior
customer service by local bankers familiar with their business.

         The  Company's  ratio of loans to deposits was 107.47% at September 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
nine months 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  a  brokered   deposit  and   established  a  new  deposit  broker
     relationship

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

o    implemented  "remote  deposit"  services for  businesses  (including  those
     introduced to the Company through the Los Angeles loan  production  office)
     and individuals maintaining relatively higher deposit balances

                                       27
<PAGE>

         In addition,  due to the Company's objective of effectively  leveraging
its capital position through lending, 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, as discussed above

o    increased  business lending with associated  compensating  customer deposit
     balances

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

         Early in the fourth quarter of 2002,  Management initiated  discussions
to negotiate  the lease of  commercial  retail space for a de novo branch in the
Company's  primary market area.  However,  no assurance can be provided that the
Company will be  successful  in securing the site and adding this de novo branch
to its current network.

         Despite  Management's lack of satisfaction with the deposit  generation
stemming from its eight full service  branches,  during the first nine months 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  increased  from $53.8 million at December 31, 2001 to $57.7
million at September 30, 2002. The increase was associated with funding the rise
in the loan and security portfolios.  The $57.7 million balance at September 30,
2002 included  $53.6 million in term FHLB advances and a $3.7 million  overnight
FHLB  advance.  All of the  Company's  FHLB  advances at September 30, 2002 were
fixed  rate,  fixed  term or  overnight  borrowings  without  call or put option
features.  The Company has $8.0  million in term FHLB  advances  with a weighted
average  interest rate of 2.33% scheduled to mature during the fourth quarter of
2002.  Management plans to roll over this debt for the terms that best integrate
with the Company's objectives for interest rate risk management.


Stockholders' Equity

         Total stockholders' equity increased from $50.2 million at December 31,
2001 to a record $54.8 million at September 30, 2002.  Factors  contributing  to
the increase included:

o    $4.0 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 46,963 vested stock  options,  generating  $603 thousand in
     additional stockholders' equity

                                       28
<PAGE>

         The above factors more than offset the impact of:

o    the repurchase of 30,000 shares of the Company's common stock

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

         Repurchases   of  the   Company's   common   stock  under  the  current
authorization during 2002 are summarized as follows:

                                    Number Of Shares            Price Range Of
Quarter In 2002                          Repurchased            Repurchases
---------------------           ---------------------           ----------------

First                                          5,000            $16.25
Second                                            --            --
Third                                         25,000            $17.10 - $17.36
Fourth [1]                                    31,000            $18.15
                                              ------            ------

Total / Average                               61,000            $17.62
                                              ======            ======

-----------------------------------------
[1] Through November 11, 2002


         At November 11, 2002, there were 53,035 remaining shares authorized for
repurchase under the Company's current repurchase program.

         The Company did not declare or pay any cash dividends  during the first
nine  months  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 $15.45 at September  30, 2002.  The amount of increase in tangible  book
value per share during the fourth quarter of 2002 may be favorably impacted by:

o    the impact on  additional  paid-in  capital of the  Company's  higher stock
     price as reflected in the accounting for the ESOP

o    the effect of utilizing deferred stock compensation in lieu of certain cash
     incentive compensation

o    the adoption of a new Director fee plan effective November 1, 2002, whereby
     all Director compensation, except for travel reimbursement, will be paid in
     Company  common  stock,  with the number of shares  earned by each Director
     dependent  upon the  quantity of  meetings  attended  and Board  committees
     served

                                       29
<PAGE>

Interest Rate Risk Management And Exposure

         The table below  presents an overview of the interest rate  environment
during the 21 months ended September 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    9/30/02
----------------        --------    -------   -------    -------  --------    -------   -------    -------
<S>                        <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%      1.55%
6 month Treasury bill      5.70%      4.13%     3.64%      2.35%     1.79%      2.10%     1.74%      1.50%
2 year Treasury note       5.09%      4.18%     4.24%      2.85%     3.02%      3.72%     2.81%      1.68%
5 year Treasury note       4.97%      4.56%     4.95%      3.80%     4.30%      4.84%     4.03%      2.56%
10 year Treasury note      5.11%      4.92%     5.41%      4.59%     5.05%      5.40%     4.80%      3.59%
Target federal funds       6.50%      5.00%     3.75%      3.00%     1.75%      1.75%     1.75%      1.75%
Prime rate                 9.50%      8.00%     6.75%      6.00%     4.75%      4.75%     4.75%      4.75%
3 month LIBOR              6.40%      4.88%     3.84%      2.59%     1.88%      2.03%     1.86%      1.79%
12 month LIBOR             6.00%      4.67%     4.18%      2.64%     2.44%      3.00%     2.29%      1.73%
1 Year CMT (2)             5.60%      4.30%     3.58%      2.82%     2.22%      2.57%     2.20%      1.72%
12 MTA (2)                 6.11%      5.71%     5.10%      4.40%     3.48%      2.91%     2.55%      2.18%
COFI (2)                   5.62%      5.20%     4.50%      3.97%     3.07%      2.65%     2.85%      2.76%
</TABLE>

-----------------------------------------------
(1) Indices / rates are spot values unless  otherwise noted.
(2) These indices / rates are monthly averages.


         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.

                                       30
<PAGE>

         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. The low nominal level of interest rates in effect in the
latter part of 2001 and in the first nine months 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 when 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.

         Most interest rates reversed  course and declined during the second and
third quarters 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 and third quarters 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,
     contributing to the term "jobless recovery"

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

o    increasing  discussion of new rounds of rate cuts by the Federal Reserve in
     the latter half of 2002,  facilitated by low measured  inflation and a lack
     of inflationary  pressures  stemming from higher rates of unemployment  and
     continuing  jobless claims,  low capacity  utilization at factories,  and a
     general  lack  of  pricing  power  reinforced  by  high  levels  of  global
     competition

o    uncertainty  regarding  control of both  houses of Congress  following  the
     November 2002 elections  leading  certain  investors and companies to avoid
     committing to significant new investments

The Treasury yield curve was flatter at September 30, 2002 than three,  six, and
nine months earlier,  with the differential between federal funds and the 2 year
Treasury Note  declining from a positive 197 basis points at March 31, 2002 to a
negative 7 basis points at September 30, 2002. The negative 7 basis point spread
was one of many capital  market  indicators  at the end of the third  quarter of
2002 that pointed toward  additional rate reductions by the Federal Reserve.  In
an unusual announcement, the Federal Open Market Committee ("FOMC") communicated
that two Federal Reserve  governors  dissented from the majority  opinion at the
September 24, 2002 meeting and voted for a rate cut at that time. On November 6,
2002,  the FOMC voted to reduce the target federal funds rate by 50 basis points
to 1.25%.

                                       31

<PAGE>

         Management is uncertain  regarding  the  potential  impacts of interest
rates being at low levels not seen in many decades,  and thus never  experienced
by the modern economy and capital markets. For example,  with the target federal
funds rate at 1.25%, many money market mutual funds will be paying rates of less
than 1.00%,  possibly  encouraging  some consumers to shift funds into federally
insured  deposit  accounts  or  pursue  other,  and  perhaps  less  traditional,
investment alternatives.

         The  divergence of the COFI index in the above table from other capital
markets  interest  rates may have been in part  caused by the payment of deposit
rates  significantly  above market by two very large thrifts with  operations in
the 11th  Federal  Home Loan Bank  District - the largest  component of which is
California.

         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 nine 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 nine months 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 2002 and its one remaining volatile, support tranche CMO in
the third quarter of 2002.  Loan purchases  during the first nine months of 2002
were generally either  adjustable rate or fixed rate for a short period of time,
then converting to adjustable 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.  Effective  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  from 228 days at December  31, 2001 to 303 days at September
30, 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 some time
in 2003. In other words,  Management  believes it unlikely  that interest  rates
will remain at historically low levels, with negative real federal funds, for an
extended  period  of time.  Management  has  recently  considered  shifting  the
Company's  interest  rate risk profile to very  slightly net asset  sensitive at
some  point in the next  several  quarters  in  preparation  for a return  to an
increasing interest rate environment.

         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.

                                       32
<PAGE>

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 September  30,  2002,  the Company had $9.5 million in cash and cash
equivalents,  available  borrowing  capacity in excess of $180.0  million at the
FHLB-SF,  $2.9  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
$28.0 million in  certificates of deposit placed in the Bank as of September 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 a $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 September 30, 2002, the Bank
maintained  $34.5  million in unsecured  federal funds lines of credit from five
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 is able to  issue  wholesale  "DTC"  certificates  of  deposit
through four 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  firm during the fourth quarter of 2002 in order to further  increase
its available liquidity and to obtain even more competitive pricing.

         At  September  30,  2002,  MBBC on a stand  alone basis had cash & cash
equivalents of $4.4 million.  In addition,  MBBC had no outstanding balance on a
$3.0  million  committed  revolving  line of  credit.  This  line of  credit  is
scheduled  to mature at the end of 2002.  The  Company is  currently  pursuing a
renewal of, and possible increase in, this credit facility.

                                       33
<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 September  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 September 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                 $ 49,221       8.57%        $ 49,221      11.76%        $ 54,480      13.01%
Well capitalized requirement              28,718       5.00%          25,122       6.00%          41,869      10.00%
                                        --------       -----        --------      -----         --------      -----

Excess                                  $ 20,503       3.57%        $ 24,099       5.76%        $ 12,611       3.01%
                                        ========       =====        ========      =====         ========      =====

Adjusted assets (1)                     $574,356                    $418,693                    $418,693
                                        ========                    ========                    ========
</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).

                                       34
<PAGE>

         The following table summarizes these  regulatory  capital  requirements
for the Bank. As indicated in the table,  the Bank's capital levels at September
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                                  $49,221                8.57%
Minimum required                                      8,615                1.50%
                                                    -------                ----

Excess                                              $40,606                7.07%
                                                    =======                ====


Core Capital
Regulatory capital                                  $49,221                8.57%
Minimum required                                     22,974                4.00%
                                                    -------                ----

Excess                                              $26,247                4.57%
                                                    =======                ====


                                                                      Percent Of
                                                                           Risk-
                                                                        weighted
                                                     Amount               Assets
                                                     ------               ------
Risk-based Capital
Regulatory capital                                  $54,480               13.01%
Minimum required                                     33,495                8.00%
                                                    -------                ----

Excess                                              $20,985                5.01%
                                                    =======                ====

         At September 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.

                                       35
<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)                                               September 30, 2002       December 31, 2001
                                                                     ------------------       -----------------
<S>                                                                             <C>                     <C>
Outstanding Balances Before Valuation Reserves
Non-accrual loans                                                               $ 3,554                 $ 2,252
Loans 90 or more days delinquent and accruing interest                               --                      --
Restructured loans in compliance with modified terms                                 --                      --
                                                                                -------                 -------

Total gross non-performing loans                                                  3,554                   2,252

Investment in foreclosed real estate before valuation reserves                       --                      --
Repossessed consumer assets                                                          --                      --
                                                                                -------                 -------

Total gross non-performing assets                                               $ 3,554                 $ 2,252
                                                                                =======                 =======

Gross non-accrual loans to total loans                                            0.72%                   0.48%
Gross non-performing loans to total loans                                         0.72%                   0.48%
Gross non-performing assets to total assets                                       0.62%                   0.42%
Allowance for loan losses                                                       $7,742                  $6,665
Allowance for loan losses to non-performing loans                               217.84%                 295.96%
Valuation allowances for foreclosed real estate                                 $   --                  $   --
</TABLE>

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

<TABLE>
<CAPTION>
(Dollars In Thousands)                                       Number               Principal Balance
                                                                 Of                  Outstanding At
Category Of Loan                                              Loans              September 30, 2002
----------------                                              -----              ------------------
<S>                                                               <C>                       <C>
Residential mortgage one to four units                            2                         $ 1,148
Commercial & industrial real estate                               1                           2,277
Land                                                              1                             129
                                                                  -                         -------

Total                                                             4                         $ 3,554
                                                                  =                         =======
</TABLE>

       Non-accrual  loans  increased  from $2.3  million at December 31, 2001 to
$3.6  million at September  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 and by a first deed of trust on a residential lot
located in California. The borrowers are directly personally indebted. The hotel
/ resort is a relatively new development that has experienced limited cash flow.
The hotel / resort was also  adversely  impacted  by the  decline in tourism and
travel  following  the events of September  11, 2001 and the  national  economic
recession.

                                       36
<PAGE>

       At September 30, 2002,  the Company  maintained a $475 thousand  specific
reserve  for  this  hotel / resort  loan,  based  upon  estimated  net  proceeds
following  foreclosure and sale.  This specific  reserve was decreased from $754
thousand at June 30, 2002 due to payments received from the borrowers during the
third quarter,  the borrowers  providing  additional real estate collateral (the
first  deed of trust on the  residential  lot),  and the  Company's  receipt  of
updated  valuation  and  financial  information  regarding  the  hotel / resort.
Although the loan was current in its payments at September 30, 2002, the Company
maintained the loan on  non-accrual  status at September 30, 2002 due to concern
about the future net cash flow of the hotel / resort  following  the peak summer
season,  particularly  in  light  of the  status  of the  economy,  the  tourism
industry,  and the outlook for  business  travel  activity.  These  factors also
create particular volatility in the market value of the hotel / resort.

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

o    An $846 thousand residential mortgage secured by a first deed of trust. The
     borrowers have declared bankruptcy.  There are significant junior mortgages
     from  other  lenders  secured by the  subject  collateral.  The  Company is
     currently  pursuing  approval  from the  bankruptcy  court to proceed  with
     foreclosure.

o    A  residential  mortgage with a balance of $303 thousand that is associated
     with a chronically late paying borrower.

o    A $129 thousand loan secured by a first deed of trust on residential  land.
     This loan has matured. The Company has conducted a recent site visit and is
     currently pursuing foreclosure.

         The Company  does not  anticipate  recording a loss on any of the above
three non-accrual loans due to the estimated value of the underlying real estate
collateral.  All  non-accrual  loans at September  30, 2002 were secured by real
estate. The Company had no foreclosed real estate at September 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
September 30, 2002                          $ 6,234         $ 5,022            $ --           $ 475         $11,731

</TABLE>

         Classified  assets  as a  percent  of  stockholders'  equity  decreased
slightly from 10.2% at December 31, 2001 to 10.0% at September 30, 2002.

                                       37
<PAGE>

         The amounts classified as "Loss" in the prior table are 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. September 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    An $836 thousand commercial real estate mortgage secured by a first deed of
     trust.  The borrower fully reinstated this loan during the third quarter of
     2002 and paid in full all  delinquent  property  taxes.  This  loan is well
     secured  by the  value of the real  property,  and  there is a  significant
     junior mortgage from another lender secured by the subject collateral.

o    A total  of  $419  thousand  in  commercial  loans  to a  corporation  that
     experienced  a slowdown in sales during the first half of 2002, in part due
     to staff  turnover.  The  slowdown in sales  contributed  to loan  covenant
     violations. The loans were current in their payments at September 30, 2002.
     The  Company  is  presently  working  with  the  borrowers  to pay down the
     outstanding debt. The Company has obtained real estate collateral to secure
     a portion of the debt.

o    A total of $334  thousand in commercial  loans to a corporation  whose sole
     stockholder has declared personal  bankruptcy.  These loans were current in
     their  payments as of September 30, 2002 and the borrower has indicated his
     intent to continue making payments per the terms of the loans.

o    A total  of  $298  thousand  in  commercial  loans  to a  corporation  that
     experienced a slowdown in sales during the first half of 2002, resulting in
     loan  covenant  violations.  The loans were  current in their  payments  at
     September 30, 2002, and the borrowers have been  cooperative.  Recent sales
     have improved. The loans are secured by business assets and real estate.

         Criticized loans at September 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.  This
     loan was current in its payments as of early November 2002.

o    A $1.3 million  mortgage,  current in its  payments at September  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 $981  thousand  mortgage  secured by an apartment  complex in the Silicon
     Valley area.  This loan was current in its payments at September  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 September 30, 2002. At September
     30,  2002,  the  borrower  was  in  the  process  of  refinancing   certain
     residential  real estate with the  intention of using the net proceeds from
     such refinancing to pay off the Company's commercial loan.

o    A total of $299  thousand  in  commercial  loans to a  winery.  The  winery
     experienced some financial  difficulty  during 2002,  resulting in sporadic
     late payments.  The loans were fully current in early November 2002 and the
     borrowers have been cooperative. The loans are secured by real estate.

         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 /
or the estimated fair value of the associated collateral.

                                       38
<PAGE>

Impaired Loans

         At September  30,  2002,  the Company had total gross  impaired  loans,
before specific reserves, of $3.6 million,  constituting four credits.  Specific
reserves on these $3.6 million in impaired  loans  totaled $475  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 nine months
ended  September  30,  2002,  accrued  interest on  impaired  loans was zero and
interest of $132 thousand was received in cash. The average  balance of impaired
loans during the three and nine months ended September 30, 2002 was $4.7 million
and $4.0 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 $201  thousand  during the nine months ended  September  30,
2002, instead of interest income actually recognized, based on cash payments, of
$132 thousand.


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  judgements
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.  For example, the Company increased
the formula allowance for commercial  business loans during the third quarter of
2002 in  response  to reports of weaker  sales by a number of  borrowers  across
several industries, as described above under "Criticized And Classified Assets".
The formula  allowance at September 30, 2002 was $6.8 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 $475 thousand in specific allowance at September 30, 2002,  compared
to none at December 31, 2001.

                                       39
<PAGE>

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 September  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 September 30, 2002 was $509 thousand,  compared to
$668 thousand at December 31, 2001.


         The following  table presents  activity in the Company's  allowance for
loan losses  during the nine months ended  September  30, 2002 and September 30,
2001:

<TABLE>
<CAPTION>
                                                                                  Nine Months Ended September 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                                                           (10)                  (2)
      Commercial term loans                                                              (30)                  --
      Commercial lines of credit                                                          --                  (50)
                     --                                                              -------              -------
   Total charge-offs                                                                     (40)                 (52)

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

   Provision for loan losses                                                           1,110                1,075
                     --                                                              -------              -------

Balance at September 30                                                              $ 7,742              $ 6,387
                                                                                     =======              =======

Annualized ratio of net charge-offs during the period to average
   loans receivable, net, outstanding during the period                                0.01%                0.02%


</TABLE>
                                       40
<PAGE>


         Additional ratios applicable to the allowance for loan losses include:

<TABLE>
<CAPTION>
                                                                          September 30, 2002      December 31, 2001
                                                                          ------------------      -----------------
<S>                                                                                  <C>                    <C>
Allowance for loan losses as a percent of non-performing loans                       217.84%                295.96%

Allowance for loan losses as a percent of gross loans
     receivable  net of undisbursed loan funds and
     unamortized yield adjustments                                                     1.54%                  1.41%

Allowance for loan losses as a percent of classified assets                          140.84%                130.74%
</TABLE>

         The $509  thousand  in  unallocated  allowance  at  September  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.  Based on
     Management estimates, this impact could be in the range of $100 thousand to
     $1.1 million.

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. Based on Management estimates, this impact could be in the
     range of $100 thousand to $900 thousand.

         As  subsequently  discussed  (see  "Provision  For Loan  Losses"),  the
Company recorded similar provisions for loan losses during the first nine months
of 2002 versus the same period in the prior year. The primary factors  impacting
the Company's  reserve  requirements,  and resulting  provision for loan losses,
however,  varied between the first nine months of 2002 and the first nine months
of 2001, as highlighted in the following table:

<TABLE>
<CAPTION>
First Nine Months Of 2002                                         First Nine Months Of 2001
------------------------------------------------------            ---------------------------------------------------
<S>                                                               <C>
1)  Change in loan portfolio product mix                          1)  National economic recession

2)  Growth in loan portfolio                                      2)  Growth in loan portfolio

3)  Impact of weak economic recovery upon                         3)  Portfolio of residential mortgages with less
     commercial business credits                                      favorable credit profile than typically
                                                                      pursued by the Company (paid down to
                                                                      $3.3 million at September 30, 2002,
4)  Establishment of $475 thousand specific                           with no credit losses)
     reserve for $2.3 million hotel / resort loan
                                                                  4)   Uncertain impacts from the events of
5)  Origination of relatively larger loans in                          September 11, 2001, particularly in regards to
     conjunction with change in product mix and                        business travel and tourism
     opening of the Los Angeles loan production
     office in 2002                                               5)  "Business Express" commercial portfolio
                                                                       (discontinued product in 2002)
6) State of California budget deficit
                                                                  6)   Recapture of $600 thousand specific reserve

                                                                  7)   State  of California energy crisis
</TABLE>
                                       41

<PAGE>

         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.


Comparison Of Operating Results For The Three Months And Nine Months
Ended September 30, 2002 and September 30, 2001


General

         During the third quarter of 2002, the Company reported net income $1.47
million,  equivalent to $0.42 diluted earnings per share, compared to net income
of $1.06 million,  or $0.31 diluted  earnings per share,  for the same period in
2001.  Net  income  during the  quarter  ended  June 30,  2002 (the  immediately
preceding  quarter) was $1.35 million,  equivalent to $0.38 diluted earnings per
share.  The  Company's  diluted  earnings  per  share  have  increased  for  six
consecutive quarters.

         For the nine months  ended  September  30,  2002,  net income was $4.02
million,  equivalent to $1.15 diluted  earnings per share.  This compares to net
income of $2.61 million, or $0.79 diluted earnings per share, for the first nine
months of 2001.  The 54.1%  increase  in net income for the first nine months 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 $2.2 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 nine months of 2001,  the  Company  incurred  pre-tax  operating
     costs of $447  thousand  for the  conversion  of the core  data  processing
     system and $284 thousand for legal expenses associated with the arbitration
     of claims by a former executive

         The third  quarter of 2002  earnings were the highest of any quarter in
the  Company's  history.  Annualized  return  on  average  stockholders'  equity
improved  from 8.76% during the third quarter of 2001 to 10.73% during the third
quarter of 2002.

                                       42
<PAGE>

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 nine 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 and third
quarters 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 and third quarters 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 21 months,
yields and rates for most assets and liabilities were substantially lower in the
first nine  months and third  quarter of 2002  compared  to the same  periods in
2001.


Net Interest Income

         Net  interest  income  increased  from $5.0  million and $14.5  million
during the third  quarter and first nine months of 2001,  respectively,  to $5.8
million and $16.7  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 4.07% for
the third  quarter of 2002,  up from 3.79% during the same period in 2001.  This
ratio  similarly  increased  from 3.80%  during the first nine months of 2001 to
4.01%  during the same  period in 2002.  The  increased  spreads in 2002 in part
stemmed from the Company's continued implementation of its strategic plan.

         The spread derived from investing the Company's demand deposit balances
and  capital  was lower in the first nine months of 2002 than the same period in
2001 due to the significantly lower general interest rate environment.  However,
net interest income during the first nine months 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 third quarter
and first nine months of 2002 compared to the same periods in 2001 included:

o    Average net loans as a percentage  of average  total assets  improved  from
     85.5% and 83.0%  during the third  quarter and first nine months of 2001 to
     86.0% 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 28.5% and 29.2% during
     the third  quarter and first nine months of 2001 to 31.3% and 31.3%  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.

                                       43
<PAGE>

o    Average demand  deposits as a percentage of average total assets  increased
     from 3.8% and 3.6%  during the third  quarter and first nine months of 2001
     to 4.1% and 4.0%  during the same  periods in 2002.  In  addition,  average
     stockholders' equity as a percentage of average total assets increased from
     9.1% and 9.1%  during the third  quarter  and first nine  months of 2001 to
     9.6% and 9.5% during the same periods in 2002.  Increases in interest  free
     funding sources favorably impact the Company's spreads.

o    The ratio of  interest  earning  assets  to  interest  bearing  liabilities
     increased  slightly  from 1.10 and 1.09 during the third  quarter and first
     nine  months  of 2001 to 1.11 and 1.11  during  the same  periods  in 2002.
     Increases in this ratio favorably impact average spreads, as this indicates
     that the Company is earning interest income on a relatively  larger base of
     assets versus the quantity of liabilities upon which it is paying interest.
     The  Company  regularly  endeavors  to  allocate  as much of its  assets as
     operationally practicable to interest earning alternatives.

         The Company's ratio of net interest income to average  interest earning
assets  rose from  4.18%  during the  second  quarter of 2002 to a record  4.27%
during the third quarter of 2002.  Approximately 3 basis points of this increase
resulted from a reduction in earned,  but uncollected  and unrecorded,  interest
income on non-accrual  loans, which declined from $109 thousand at June 30, 2002
to $69 thousand at September  30, 2002.  During the third  quarter of 2002,  the
Company had several loans that were on non-accrual status at June 30, 2002 fully
reinstate.  The  majority  of the  $69  thousand  earned,  but  uncollected  and
unrecorded,  interest  income at September 30, 2002 was associated with a single
residential mortgage with a principal balance of $846 thousand,  as described in
more detail under "Non-performing Assets".

         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.

                                       44
<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 September 30, 2002 and 2001.

<TABLE>
<CAPTION>
                                    Three Months Ended September 30, 2002     Three Months Ended September 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)                 $  1,621    $      6           1.48%    $  6,035     $     50          3.31%
   Investment securities                   7,265          52           2.86%       7,404           93          5.02%
   Mortgage backed securities (2)         40,806         323           3.17%      32,883          488          5.94%
   Loans receivable, net (3)             489,713       8,549           6.98%     453,030        9,084          8.02%
   FHLB stock                              3,323          49           5.90%       3,259           43          5.28%
                                        --------    --------                    --------     --------

Total interest earning assets            542,728       8,979           6.62%     502,611        9,758          7.77%
                                                    --------                                 --------
Non-interest earnings assets              26,466                                  27,353
                                        --------                                --------
Total assets                            $569,194                                $529,964
                                        ========                                ========

Liabilities & Equity
Interest bearing liabilities:
   NOW accounts                         $ 44,318          39           0.35%    $ 40,907           77          0.75%
   Savings accounts                       18,731          26           0.56%      19,694           51          1.04%
   Money market accounts                 115,357         621           2.15%      90,186          807          3.58%
   Certificates of deposit               254,003       1,892           2.98%     252,369        3,097          4.91%
                                        --------    --------                    --------     --------

   Total interest-bearing deposits       432,409       2,578           2.38%     403,156        4,032          4.00%
   FHLB advances                          56,557         603           4.26%      55,365          708          5.12%
   Other borrowings (4)                      319           3           3.76%         356            3          3.37%
                                        --------    --------                    --------     --------
Total interest-bearing liabilities       489,285       3,184           2.60%     458,877        4,743          4.13%
                                                    --------                                 --------
Demand deposit accounts                   23,365                                  20,067
Other non-interest bearing liabilities     1,893                                   2,752
                                        --------                                --------
Total liabilities                        514,543                                 481,696
Stockholders' equity                      54,651                                  48,268
                                        --------                                --------
Total liabilities & equity              $569,194                                $529,964
                                        ========                                ========

Net interest income                                 $  5,795                                 $  5,015
                                                    ========                                 ========
Interest rate spread (5)                                               4.02%                                   3.64%
Net interest earning assets               53,443                                  43,734
Net interest margin (6)                                4.27%                                    3.99%
Net interest income /
     average total assets                              4.07%                                    3.79%
Interest earnings assets /
     Interest bearing liabilities           1.11                                    1.10

</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  $96,000  and
     $45,000 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.

                                       45
<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 nine months ended September 30, 2002 and 2001.

<TABLE>
<CAPTION>
                                    Nine Months Ended September 30, 2002      Nine Months Ended September 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)              $   3,912        $   51         1.74%     $   8,123        $  277         4.55%
   Investment securities                 7,441           162         2.90%         7,356           338         6.13%
   Mortgage backed securities (2)       36,454           963         3.52%        41,644         1,970         6.31%
   Loans receivable, net (3)           477,609        25,298         7.06%       423,124        26,753         8.43%
   FHLB stock                            3,196           151         6.30%         3,051           126         5.51%
                                     ---------        ------                   ---------        ------
Total interest earning assets          528,612        26,625         6.72%       483,298        29,464         8.13%
                                                      ------                                    ------
Non-interest earnings assets            26,714                                    26,748
                                     ---------                                 ---------
Total assets                         $ 555,326                                 $ 510,046
                                     =========                                 =========
Liabilities & Equity
Interest bearing liabilities:
   NOW accounts                       $ 43,530           123         0.38%      $ 40,811           317         1.04%
   Savings accounts                     18,752            78         0.55%        19,318           187         1.29%
   Money market accounts               111,316         1,813         2.17%        88,859         2,764         4.15%
   Certificates of deposit             248,448         6,070         3.26%       246,996         9,804         5.29%
                                     ---------        ------                   ---------        ------
   Total interest-bearing deposits     422,046         8,084         2.55%       395,984        13,072         4.40%
   FHLB advances                        55,959         1,823         4.34%        46,538         1,834         5.25%
   Other borrowings (4)                    303            10         4.40%           214            18        11.21%
                                     ---------        ------                   ---------        ------
Total interest-bearing liabilities     478,308         9,917         2.76%       442,736        14,924         4.49%
                                                      ------                                    ------
Demand deposit accounts                 22,260                                    18,561
Other non-interest bearing
liabilities                              1,738                                     2,427
                                     ---------                                  --------
Total liabilities                      502,306                                   463,724
Stockholders' equity                    53,020                                    46,322
                                     ---------                                  --------
Total liabilities & equity           $ 555,326                                 $ 510,046
                                     =========                                 =========

Net interest income                                  $16,708                                  $ 14,540
                                                     =======                                  ========
Interest rate spread (5)                                             3.96%                                     3.64%
Net interest earning assets             50,304                                    40,562
Net interest margin (6)                                4.21%                                     4.01%
Net interest income /
     average total assets                              4.01%                                     3.80%
Interest earnings assets /
     Interest bearing liabilities         1.11                                      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  $212,000  and
     $159,000 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.

                                       46
<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 September 30, 2002
                                                                          Compared To
                                                             Three Months Ended September 30, 2001
                                             ----------------------------------------------------------------------
                                                                                          Volume
(Dollars In Thousands)                                Volume              Rate            / Rate               Net
                                                      ------              ----            ------               ---
<S>                                                   <C>               <C>               <C>               <C>
Interest-earning assets
Cash equivalents                                      $  (37)           $  (28)           $   21            $  (44)
Investment securities                                     (2)              (40)                1               (41)
Mortgage backed securities                               118              (228)              (55)             (165)
Loans receivable, net                                    735            (1,175)              (95)             (535)
FHLB Stock                                                 1                 5                 0                 6
                                                      ------            ------            ------            ------
     Total interest-earning assets                       815            (1,466)             (128)             (779)
                                                      ------            ------            ------            ------
Interest-bearing liabilities
NOW Accounts                                               6               (41)               (3)              (38)
Savings accounts                                          (2)              (24)                1               (25)
Money market accounts                                    225              (322)              (89)             (186)
Certificates of deposit                                   20            (1,217)               (8)           (1,205)
                                                      ------            ------            ------            ------
Total interest-bearing deposits                          249            (1,604)              (99)           (1,454)
FHLB advances                                             15              (118)               (2)             (105)
Other borrowings                                           0                 0                 0                 0
                                                      ------            ------            ------            ------
     Total interest-bearing liabilities                  264            (1,722)             (101)           (1,559)
                                                      ------            ------            ------            ------

Increase in net interest income                       $  551            $  256            $  (27)           $  780
                                                      ======            ======            =======           ======
</TABLE>
                                       47

<PAGE>

<TABLE>
<CAPTION>
                                                             Nine Months Ended September 30, 2002
                                                                          Compared To
                                                             Nine Months Ended September 30, 2001
                                             ----------------------------------------------------------------------
                                                                                          Volume
(Dollars In Thousands)                                Volume              Rate            / Rate               Net
                                                      ------              ----            ------               ---
<S>                                                  <C>               <C>                <C>              <C>
Interest-earning assets
Cash equivalents                                     $  (144)          $  (171)           $   89           $  (226)
Investment securities                                      4              (178)               (2)             (176)
Mortgage backed securities                              (246)             (871)              110            (1,007)
Loans receivable, net                                  3,445            (4,341)             (559)           (1,455)
FHLB Stock                                                 6                18                 1                25
                                                     -------            ------             -----          --------
     Total interest-earning assets                     3,065            (5,543)             (361)           (2,839)
                                                     -------            ------             -----          --------
Interest-bearing liabilities
NOW Accounts                                              21              (202)              (13)             (194)
Savings accounts                                          (5)             (107)                3              (109)
Money market accounts                                    699            (1,317)             (333)             (951)
Certificates of deposit                                   58            (3,769)              (23)           (3,734)
                                                     -------            ------             -----          --------
Total interest-bearing deposits                          773            (5,395)             (366)           (4,988)
FHLB advances                                            371              (318)              (64)              (11)
Other borrowings                                           7               (11)               (4)               (8)
                                                     -------            ------             -----          --------
     Total interest-bearing liabilities                1,151            (5,724)             (434)           (5,007)
                                                     -------            ------             -----          --------
Increase in net interest income                      $ 1,914            $  181             $  73          $  2,168
                                                     =======            ======             =====          ========

</TABLE>
Interest Income

         Interest  income  decreased  from $9.8 million and $29.5 million during
the three and nine months  ended  September  30, 2001 to $9.0  million and $26.6
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 8.0% rise in
average  interest  earning  assets  from the third  quarter of 2001 to the third
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 $9.1 million and $26.8 million
during the three and nine months  ended  September  30, 2001 to $8.5 million and
$25.3  million  during the same  periods in 2002.  The effect of lower  interest
rates more than  offset the impact of 8.1% and 12.9%  rises in average  net loan
balances  outstanding from the three and nine months ended September 30, 2001 to
the three and nine months ended  September 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.

                                       48
<PAGE>

         Interest  income on cash  equivalents  decreased  from $50 thousand and
$277  thousand  for the three and nine  months  ended  September  30, 2001 to $6
thousand and $51 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 $93 thousand and
$338 thousand  during the three and nine months ended  September 30, 2001 to $52
thousand and $162 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 nine 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 $488 thousand
and $2.0 million  during the three and nine months ended  September  30, 2001 to
$323 thousand and $963 thousand during the same periods in 2002. These decreases
were primarily caused by reductions in average rates. Average volumes were lower
for  the  nine  month  comparative  period,  but  higher  for  the  three  month
comparative  period.  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 and 2002.  The
Company's effective yield on mortgage backed securities during the third quarter
of 2002 was unfavorably  impacted by the Company's  purchasing short term, above
market  coupon  CMO's in  conjunction  with its  interest  rate risk  management
program.  When residential  mortgage  prepayment speeds  accelerated  during the
third quarter of 2002,  the Company's  effective  yield on CMO's was  negatively
impacted by faster amortization of the purchase premium.

         Dividend  income on FHLB stock  increased  from $43  thousand  and $126
thousand  during  the three and nine  months  ended  September  30,  2001 to $49
thousand  and $151  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 2002.


Interest Expense

         Interest  expense  decreased from $4.7 million and $14.9 million during
the three and nine months  ended  September  30,  2001 to $3.2  million and $9.9
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.

                                       49
<PAGE>

         Interest  expense on  deposits  decreased  from $4.0  million and $13.1
million  during  the three and nine  months  ended  September  30,  2001 to $2.6
million and $8.1 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 59.6% of average total deposits during the third quarter
of 2001 to 55.7% during the third 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 21.3% to 25.3%
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 September 30, 2002, the Company's  weighted  average nominal cost of
deposits was 2.15%,  down from 2.87% at December  31, 2001.  The Company paid an
average rate of just 0.35% on its NOW deposits and 0.56% on its savings deposits
during  the third  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 September 30, 2002,  $56.1 million
in  certificates  of deposit with a weighted  average nominal rate of 2.58% were
scheduled to mature in the next  quarter.  This figure  included $6.0 million in
State of California deposits.  At September 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.  Three year  certificates  of deposit  were  extensively  advertised
during the early part of the fourth  quarter of 2002. At September 30, 2002, the
weighted  average cost of the certificate of deposit  portfolio was 2.81%,  down
from 3.14% at June 30, 2002.

         During  the fourth  quarter  of 2002,  the  Company  plans to  continue
promoting  money market  accounts,  including  new  consumer  and business  MMDA
products,  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 FHLB advances and other  borrowings  decreased from
$711 thousand  during the three months ended September 30, 2001 to $606 thousand
during  the same  period in 2002 due to the effect of lower  average  rates more
than offsetting a slight increase in average balances.  Interest expense on FHLB
advances and other  borrowings  was little  changed for the first nine months of
2002 compared to the same period during the prior year, as the impact of greater
average  balances  negated the effect of lower  average  rates.  The Company had
higher  levels of borrowings  outstanding  in the first nine months 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.

                                       50
<PAGE>

Provision For Loan Losses

         The Company recorded  provisions for loan losses totaling $400 thousand
and $1.1  million  during the three and nine months  ended  September  30, 2002,
compared to $275 thousand and $1.1 million  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 nine
months of 2002 were $33 thousand (of which less than $1 thousand occurred in the
third  quarter),  versus $52 thousand  during the first nine months of 2001. The
Company's ratio of loan loss reserves to loans outstanding  increased from 1.41%
at December 31, 2001 to 1.54% at September 30, 2002, while the nominal amount of
the loan loss  reserve  rose from $6.7  million  at  December  31,  2001 to $7.7
million at September 30, 2002.

         Factors  contributing to the provision for loan losses during the first
nine months of 2002 included:

o    the establishment of a specific reserve of $475 thousand  associated with a
     $2.3 million  commercial real estate  mortgage  secured by a hotel / resort
     described above under "Non-performing Assets"

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 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 September 30, 2002

o    year to date net charge-offs

Because the $2.3 million  commercial real estate  mortgage  secured by a hotel /
resort  was  already  classified  as  substandard  at  December  31,  2001,  the
incremental  loan loss reserves  associated with this loan at September 30, 2002
were less than the $475 thousand specific reserve.

         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.

         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 continue 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.

                                       51
<PAGE>

Non-interest Income

         Non-interest  income  totaled $490 thousand and $1.5 million during the
three and nine months ended September 30, 2002, down from $690 thousand and $2.0
million during the same periods in 2001.

         Customer  service  charge  income was $387  thousand  and $1.1  million
during  the three and nine  months  ended  September  30,  2002,  down from $401
thousand and $1.3 million 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.  The  closure  of these
accounts  contributed to the reduced  levels of customer  service charge income,
but also decreased certain operating costs for the Company. In addition, certain
uncollected  funds fees charged in 2001 were eliminated by the beginning of 2002
due to competitive factors.

         Commissions from the sale of non-FDIC insured investment  products were
$25 thousand and $100 thousand  during the three and nine months ended September
30, 2002,  down from $35 thousand and $223  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 capital markets in
the first nine months of 2002. The Company expects revenue from these operations
to remain constrained during the fourth quarter of 2002.

         Loan servicing  income totaled $18 thousand and $47 thousand during the
three and nine months ended September 30, 2002, compared to $33 thousand and $77
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.  Additions
to loans  serviced  for  others  during  2002  have thus  been  limited  to loan
participations sold to correspondent  banks. As a result, the portfolio of loans
serviced for others is declining  as loans pay off. At September  30, 2002,  the
Company  serviced  $38.3 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 $39 thousand at September 30, 2002,  and is thus limited in
its exposure of loan servicing income to the accelerated loan prepayment  speeds
now occurring as a result of the low interest rate  environment  and high volume
of residential mortgage refinance activity.

         Gains on the sale of loans were $33 thousand  during the third  quarter
of 2002, up from $18 thousand  during the third  quarter of 2001.  For the first
nine months of 2002,  gains on the sale of loans totaled $81  thousand,  a 72.3%
increase  from the $47 thousand  recorded  during the first nine months of 2001.
The Company  anticipates  continued  favorable results from its mortgage banking
operations during the fourth quarter of 2002,  stimulated by the availability of
thirty and fifteen  year fixed rate  residential  mortgages at rates below 6.25%
and 5.75%, respectively, at the beginning of the quarter.

         The  Company  recorded a loss of $8  thousand  on the sale of an Agency
collateralized  mortgage  obligation  ("CMO")  during the third quarter of 2002,
compared  to  realizing a gain of $156  thousand  on the sale of two  non-Agency
CMO's  during  the third  quarter  of 2001.  The recent  sale was  conducted  in
conjunction with the Company's asset / liability  management  program.  Gains on
sale of  mortgage  backed  securities  were $35  thousand  during the first nine
months  of 2002,  compared  to $190  thousand  during  the same  period in 2001.
Although many of the Company's  mortgage backed  securities  appreciated in fair
value  during the first nine months of 2002 due to the  decline in most  capital
markets  interest  rates,  the Company  retained  the  securities  as a means of
generating net interest income.

                                       52
<PAGE>

         Other income  declined from $47 thousand and $209  thousand  during the
three and nine months ended September 30, 2001 to $35 thousand and $112 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 $39 thousand more in fees in the first nine months of
     2001  versus the same  period in 2002  associated  with the  (discontinued)
     issuance of Bank official checks drawn on a third party

o    the Company's  collecting $3 thousand less in rent from sub-leased space in
     its branches and  administrative  buildings during the first nine months of
     2002  versus  the same  period in 2001,  as  certain  rent  increases  were
     insufficient to offset the loss of two tenants

         The  Company's   strategic  plan   incorporates   non-interest   income
representing  a greater  percentage of total revenue.  The Company's  efforts in
this regard  during the third  quarter of 2002  included  an employee  incentive
campaign to provide  debit cards to existing  customers,  highlighting  the many
attractive  benefits  of paying for  purchases  with a debit card  rather than a
check.  The Company intends to pursue  increased  non-interest  income in future
periods through:

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

o    the recent  introduction of trade and standby letter of credit services for
     business customers in conjunction with a correspondent bank

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 $10.3 million during the
three and nine months  ended  September  30, 2002,  comparing  favorably to $3.6
million and $10.9 million during the same periods in 2001. Factors  contributing
to the lower expenses included the Company's incurring  significant costs in the
first nine months of 2001 associated with its data processing  conversion  ($447
thousand) and the arbitration of claims by a former  executive ($284  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.

                                       53

<PAGE>

         Compensation  and employee  benefits costs were higher in the three and
nine months ended September 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 changes in support of the  Company's  strategic
     plan,  particularly in the Company's  commercial  banking,  income property
     lending, and information technology functions

o    higher  costs  for the  Bank's  Employee  Stock  Ownership  Plan due to the
     greater  average  market price of the Company's  common  stock;  associated
     expenses  were $467  thousand for the first nine months of 2002 compared to
     $314 thousand for the first nine months of 2001

o    higher costs for payroll taxes on a greater compensation base

o    increased expenses for worker's compensation insurance,  which is a general
     problem faced by businesses in the State of California

         Deposit  insurance  premiums  decreased  from  $50  thousand  and  $148
thousand for the three and nine months ended  September 30, 2001 to $19 thousand
and $121 thousand during the same periods in 2002,  despite the expansion in the
Company's  deposit  portfolio.  The decline  resulted  from an adjustment in the
Company's  insurance  premium rate effective  July 1, 2002. The lower  insurance
premium rate will also favorably  impact deposit  insurance  expenses during the
fourth quarter of 2002.

         Legal and  accounting  expenses  declined  from $274  thousand and $724
thousand  during the three and nine  months  ended  September  30,  2001 to $107
thousand and $328 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 $52 thousand during the third
quarter of 2002,  down from $86 thousand during the same period during the prior
year. The Company limited its print and broadcast  advertising  during the third
quarter of 2002 in light of the  challenges  of  advertising  for deposits  with
interest rates at historic low levels.  Advertising  and promotion costs totaled
$214 thousand during the first nine months of 2002, up from $143 thousand during
the same period the prior year. 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.   In
conjunction with the Company's strategic plan and as an alternative to print and
broadcast  media,  the Company's  employees  and  Directors  enhanced the Bank's
visibility during 2002 by their extensive  participation in a significant number
of community events and organizations. As just one example, the Bank's employees
logged over 150 volunteer hours during the month of September  participating  in
various  community  events,  the majority of which were  fundraisers  to support
local non-profit organizations in the Bank's primary market area.

         Consulting expenses declined from $31 thousand and $336 thousand during
the three and nine  months  ended  September  30, 2001 to $16  thousand  and $59
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 third  quarter of 2002 was
54.77%,  comparing  favorably  to 62.86%  during  the third  quarter of 2001 and
improving  from  56.12%  during  the  second  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.

                                       54
<PAGE>

         The Company  continues to  restructure  its  operations  both to better
utilize new technology and improve efficiency.  A major upgrade of the Company's
core banking  system is planned for the fourth quarter of 2002. 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 third quarter of
2002,  the Company  completed the  transition to a higher quality and lower cost
cellular  phone  service  and   streamlined   certain   electronic   transaction
processing. In upcoming quarters, the Company plans to obtain better pricing for
certain  correspondent   banking  services,   reconfigure  its  item  processing
operations,  and improve the cost effectiveness of its Internet banking program.
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 several  quarters may be tempered 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  for  health  insurance  and  worker's   compensation
insurance,  which  are  common  issues  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.


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 40.8% for the first
nine months of 2002, down from 42.6% for the first nine months 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

In addition,  net income  during the third  quarter of 2002 was increased by $32
thousand  associated with a non-recurring  reduction in the Company's  provision
for income taxes  resulting  from a change in California  tax law. This one time
reduction  contributed  to the Company's  reporting an effective book income tax
rate of 40.0% for the third quarter of 2002, compared to the Company's effective
book income tax rate of 40.8% for the first nine months of 2002.

                                       55

<PAGE>

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.



Item 4.  Controls And Procedures

(a)  The Company maintains  disclosure controls and procedures that are designed
     to ensure  that  information  required  to be  disclosed  in the  Company's
     reports in compliance with the Securities  Exchange Act of 1934, as amended
     ("Exchange Act"), is recorded,  processed,  summarized, and reported within
     the time periods  specified  in the  Securities  and Exchange  Commission's
     ("SEC")  rules and forms,  and that such  information  is  accumulated  and
     communicated  to the Company's  Management,  including its Chief  Executive
     Officer  and Chief  Financial  Officer,  as  appropriate,  to allow  timely
     decisions  regarding required disclosure based closely on the definition of
     "disclosure  controls and procedures" in Rule 13a-14(c)  promulgated  under
     the  Exchange  Act.  Within 90 days prior to the date of this  report,  the
     Company  carried  out an  evaluation,  under the  supervision  and with the
     participation  of the Company's  Management,  including the Company's Chief
     Executive  Officer  and  the  Company's  Chief  Financial  Officer,  of the
     effectiveness  of the  design and  operation  of the  Company's  disclosure
     controls  and  procedures.  Based on the  foregoing,  the  Company's  Chief
     Executive  Officer and Chief Financial Officer concluded that the Company's
     disclosure controls and procedures were effective.

(b)  There have been no significant  changes in the Company's  internal controls
     or in other factors that could  significantly  affect the internal controls
     subsequent to the date of the evaluation referenced in paragraph (a) above.




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.

                                       56
<PAGE>

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

         No matters  were  submitted  to a vote of security  holders  during the
quarter ended September 30, 2002.


Item 5.  Other Information

         None.


Item 6.  Exhibits And Reports On Form 8-K

         A.  Exhibits

                  10.23    Monterey Bay Bancorp,  Inc.  Form Of  Indemnification
                           Agreement  Between The Company And All Directors Plus
                           The Chief Financial Officer

                  10.24    Monterey Bay Bank Form Of  Indemnification  Agreement
                           Between The Company And All Directors  Plus The Chief
                           Financial Officer

                  10.25    Amended And Restated  Bylaws Of Monterey Bay Bancorp,
                           Inc.

                  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 September 9, 2002. This Current Report
                           reported:

                           o        an   expansion  in  the  number  of  Company
                                    Directors from nine to ten

                           o        the   appointment  of  a  new  Director  for
                                    Monterey   Bay   Bancorp,   Inc.   and   its
                                    subsidiary, Monterey Bay Bank

                           o        third quarter 2002 share  repurchases by the
                                    Company

                           o        increased Insider ownership of the Company

                  2.       Form 8-K dated October 21, 2002.  This Current Report
                           reported  the   Company's   financial  and  operating
                           results  for the three  month and nine month  periods
                           ending September 30, 2002.

                                       57
<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:    November 12, 2002       By:  /s/ C. Edward Holden
                                      --------------------
                                      C. Edward Holden
                                      Chief Executive Officer
                                      President
                                      Vice Chairman Of The Board Of Directors



Date:    November 12, 2002       By:  /s/ Mark R. Andino
                                      ------------------
                                      Mark R. Andino
                                      Chief Financial Officer
                                      Treasurer
                                      (Principal Financial & Accounting Officer)

                                       58
<PAGE>


                Certification of the Principal Executive Officer
                 (Section 302 of the Sarbanes-Oxley Act of 2002)


I, C. Edward Holden, Chief Executive Officer and President, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Monterey Bay Bancorp,
     Inc.;

2.   Based on my knowledge,  this  quarterly  report does not contain and untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a)       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this quarterly report is being prepared;

         b)       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing  date of this  quarterly  report  (the  "Evaluation
                  Date"); and

         c)       presented in this quarterly  report our conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of the registrant's board of directors (or persons performing the
     equivalent function):

         a)       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors and any material weakness in internal controls; and

         b)       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.

Date: November 12, 2002

                                               By:      /s/ C. Edward Holden
                                                        --------------------
                                                        C. Edward Holden
                                                        Chief Executive Officer
                                                        President
                                                        Vice Chairman

                                       59
<PAGE>


                Certification of the Principal Financial Officer
                 (Section 302 of the Sarbanes-Oxley Act of 2002)


I, Mark R. Andino, Chief Financial Officer and Treasurer, certify that:

1.   I have reviewed this quarterly report on Form 10-Q of Monterey Bay Bancorp,
     Inc.;

2.   Based on my knowledge,  this  quarterly  report does not contain and untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this quarterly report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information  included  in this  quarterly  report,  fairly  present  in all
     material respects the financial  condition,  results of operations and cash
     flows of the  registrant  as of, and for,  the  periods  presented  in this
     quarterly report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a.       designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this quarterly report is being prepared;

         b.       evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing  date of this  quarterly  report  (the  "Evaluation
                  Date"); and

         c.       presented in this quarterly  report our conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of the registrant's board of directors (or persons performing the
     equivalent function):

         a.       all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors and any material weakness in internal controls; and

         b.       any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     quarterly report whether or not there were significant  changes in internal
     controls  or in other  factors  that could  significantly  affect  internal
     controls  subsequent to the date of our most recent  evaluation,  including
     any corrective actions with regard to significant deficiencies and material
     weaknesses.


Date: November 12, 2002

                                             By:      /s/ Mark R. Andino
                                                      ------------------
                                                      Mark R. Andino
                                                      Chief Financial Officer
                                                      Treasurer

                                       60