UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

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

                  For the quarterly period ended June 30, 1999

                                       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 0-24842


                           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 No.)
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)

                                 Not Applicable
--------------------------------------------------------------------------------
(Former  name,  former  address and former  fiscal year,  if changed  since last
report)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.  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:  3,535,387 shares of
common stock, par value $.01 per share, were outstanding as of August 6, 1999.


<PAGE>

<TABLE>
                                            MONTEREY BAY BANCORP, INC.

                                                       Index
<CAPTION>

PART I.   FINANCIAL INFORMATION                                                                              Page
<S>       <C>                                                                                                 <C>
          Item 1.    Consolidated Statements of Financial Condition as of
                     June 30, 1999 and December 31, 1998...................................................... 1

                     Consolidated Statements of Operations for the Three and
                     Six Months Ended June 30, 1999 and 1998.................................................. 2

                     Consolidated Statement of Stockholders' Equity for the
                     Six Months Ended June 30, 1999........................................................... 3

                     Consolidated Statements of Cash Flows for the
                     Six Months Ended June 30, 1999 and 1998.................................................. 4

                     Notes to Consolidated Financial Statements............................................... 6

          Item 2.    Management's Discussion and Analysis of Financial Condition
                     and Results of Operations................................................................ 7

          Item 3.    Quantitative and Qualitative Disclosure of Market Risk.................................. 18

PART II.  OTHER INFORMATION

          Item 1.    Legal Proceedings....................................................................... 19

          Item 2.    Changes in Securities................................................................... 19

          Item 3.    Defaults Upon Senior Securities......................................................... 19

          Item 4.    Submission of Matters to a Vote of Security Holders..................................... 19

          Item 5.    Other Information....................................................................... 20

          Item 6.    Exhibits and Reports on Form 8-K........................................................ 20

SIGNATURES................................................................................................... 21
</TABLE>


<PAGE>

Item 1.  Financial Statements.
<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998 (Dollars in thousands)
--------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                June 30,          December 31,
                                                                                  1999                1998
                                                                            --------------      --------------
<S>                                                                             <C>                <C>
ASSETS

Cash and due from depository institutions                                       $   8,119          $  11,626
Overnight deposits                                                                  2,475              5,325
                                                                                ---------          ---------

      Total cash and cash equivalents                                              10,594             16,951

Loans held for sale, at market                                                        290              2,177
Securities available for sale:
   Mortgage-backed securities (amortized cost of $66,119 at June 30, 1999
      and $97,158 at December 31, 1998)                                            65,359             98,006

   Corporate trust preferreds (amortized cost, of $11,446 at June 30, 1999
      and $18,658 at December 31, 1998)                                            11,553             19,154

   Investment securities (amortized cost of $252 at December 31, 1998)                  -                256
Securities held to maturity:
   Mortgage-backed securities (market value of $74 at June 30, 1999
      and $96 at December 31, 1998)                                                    76                 97

Loans receivable held for investment (net of allowance for loan losses
   at June 30, 1999, $3,087; and at December 31, 1998, $2,780)                    336,522            298,775

Federal Home Loan Bank stock, at cost                                               3,129              3,039
Premises and equipment, net                                                         7,127              6,316
Accrued interest receivable                                                         2,555              2,537
Core deposit premiums and other intangibles, net                                    3,281              3,630
Other assets                                                                        4,115              3,881
                                                                                ---------          ---------
TOTAL ASSETS                                                                    $ 444,601          $ 454,819
                                                                                =========          =========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
   Savings deposits                                                             $ 363,618          $ 370,677
   Federal Home Loan Bank advances                                                 34,082             35,182
   Securities sold under agreements to repurchase                                   2,530              4,490
   Accounts payable and other liabilities                                           1,612              2,581
                                                                                ---------          ---------
      Total liabilities                                                           401,842            412,930
                                                                                ---------          ---------

COMMITMENTS AND CONTINGENCIES                                                           -                  -

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value, 2,000,000 shares authorized and unissued            -                  -

   Common stock,  $.01 par value,  9,000,000  shares  authorized  and  4,378,289
      shares issued (3,535,387 shares outstanding at June 30, 1999;
      and 3,505,355 shares outstanding at December 31, 1998)                           45                 45
   Additional paid-in capital                                                      27,713             27,586
   Unearned shares held by employee stock ownership plan (197,656 at
      June 30, 1999; and 215,623 at December 31, 1998)                             (1,265)            (1,380)
   Treasury stock, at cost (956,699 shares at June 30, 1999;
      and 986,731 shares at December 31, 1998)                                    (12,625)           (12,920)
   Retained earnings, substantially restricted                                     29,275             27,764
   Accumulated other comprehensive income - unrealized gain (loss) on
     securities                                                                      (384)               794
                                                                                ---------          ---------
      Total stockholders' equity                                                   42,759             41,889
                                                                                ---------          ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                      $ 444,601          $ 454,819
                                                                                =========          =========

<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>


                                                      1

<PAGE>

<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX  MONTHS  ENDED  JUNE 30,  1999 AND 1998  (UNAUDITED)
(Dollars  in thousands, except per share amounts)
---------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                           Three Months Ended             Six Months Ended
                                                                June 30,                      June 30,
                                                      ----------------------------   --------------------------
                                                            1999        1998              1999        1998
<S>                                                      <C>         <C>               <C>         <C>
INTEREST INCOME:
   Loans receivable                                      $ 6,596     $ 4,944           $ 12,892    $ 10,360
   Mortgage-backed securities                              1,229       1,826              2,757       2,974
   Other investment securities                               348         777                749       1,537
                                                        --------    --------           --------    --------

      Total interest income                                8,173       7,547             16,398      14,871
                                                        --------    --------           --------    --------

INTEREST EXPENSE:
   Savings deposits                                        3,758       4,204              7,672       8,068
   FHLB advances and other borrowings                        510         387              1,047         899
                                                        --------    --------           --------    --------

      Total interest expense                               4,268       4,591              8,719       8,967
                                                        --------    --------           --------    --------

NET INTEREST INCOME BEFORE PROVISION
   FOR LOAN LOSSES                                         3,905       2,956              7,679       5,904

PROVISION FOR LOAN LOSSES                                    200         496                420         605
                                                        --------    --------           --------    --------

NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                                         3,705       2,460              7,259       5,299
                                                        --------    --------           --------    --------

NONINTEREST INCOME:
   Gain (loss) on sale of investment securities              285           -                503         (17)
   Gain  on sale of real estate owned                          1           -                 11           9
   Commissions from sales of noninsured products             139         166                271         289
   Customer service charges                                  243         195                476         366
   Income from loan servicing                                 48          78                 65         124
   Other income                                               62          53                136         121
                                                        --------    --------           --------    --------

      Total noninterest income                               778         492              1,462         892
                                                        --------    --------           --------    --------

GENERAL AND ADMINISTRATIVE EXPENSE:
   Compensation and employee benefits                      1,362       1,341              2,721       2,513
   Occupancy and equipment                                   286         291                571         567
   Deposit insurance premiums                                 41          40                 83          62
   Data processing fees                                      245         200                488         383
   Legal and accounting expenses                             121         322                228         418
   Stationery, telephone and office expenses                 146         143                287         251
   Advertising and promotion                                 108         102                165         162
   Amortization of core deposit premiums                     174         168                349         346
   Other expenses                                            407         379                821         725
                                                        --------    --------           --------    --------

      Total general and administrative expense             2,890       2,986              5,713       5,427
                                                        --------    --------           --------    --------

INCOME BEFORE INCOME TAX EXPENSE                           1,593         (34)             3,008         764

INCOME TAX EXPENSE
                                                             691          31              1,302         391
                                                        --------    --------           --------    --------

NET INCOME (LOSS)                                       $    902    $    (65)          $  1,706    $    373
                                                        ========    ========           ========    ========

BASIC EARNINGS (LOSS) PER SHARE                         $    .27    $    (.02)         $    .51    $    .10
                                                        ========    =========          ========    ========
DILUTED EARNINGS (LOSS) PER SHARE                       $    .26    $    (.02)         $    .50    $    .09
                                                        ========    =========          ========    ========
CASH DIVIDENDS PER SHARE                                $      -    $       -          $    .07    $    .05
                                                        ========    =========          ========    ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
                                                      2

<PAGE>

<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 (Dollar amounts in thousands)
----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                      Additional
                                                 Common Stock          Paid in     Acquired    Treasury    Retained
                                              Shares(1)    Amount      Capital     by ESOP     Stock(2)    Earnings
                                              ------      --------     -------     -------     --------    --------
<S>                                          <C>              <C>      <C>         <C>         <C>         <C>
Balance at
   December 31, 1998                         3,505,355        $ 45     $27,586     $(1,380)    $(12,920)   $27,764

Options exercised
   using treasury stock                         30,032                                              294         52

Dividends paid                                                                                                (246)

Earned ESOP shares                                                         127         115

   Net income                                                                                                1,706

Change in unrealized gains
   on securities available for
   sale, net of taxes

Reclassification adjustment
   for gains on securities
   available for sale included in
   income, net of taxes

                                       -------------------------------------------------------------------------------
Balance at
   June 30, 1999                             3,535,387        $ 45     $27,713     $(1,265)    $(12,626)   $29,276
                                       ===============================================================================


                                        Accumulated
                                           Other
                                       Comprehensive
                                       Income (loss),
                                         net of tax       Total
                                         ----------       -----

Balance at
   December 31, 1998                         $ 794      $41,889

Options exercised
   using treasury stock                                     346

Dividends paid                                             (246)

Earned ESOP shares                                          242

   Net income                                             1,706

Change in unrealized gains
   on securities available for
   sale, net of taxes                       (884)          (884)

Reclassification adjustment
   for gains on securities
   available for sale included in
   income, net of taxes                     (294)          (294)

                                       ------------------------
Balance at
   June 30, 1999                           $(384)       $42,759
                                       ========================


<FN>
(1)   The number of shares of common  stock  includes  359,375  shares which are pledged as security for a loan to the
      Bank's ESOP. Shares earned at June 30, 1999 and December 31, 1998 were 161,719 and 143,750, respectively.

(2)   The Company  held  956,699  shares of  repurchased  Company  common  stock as of June 30, 1999 and 986,731 as of
      December 31, 1998.


See notes to consolidated financial statements.
</FN>
</TABLE>

                                                          3

<PAGE>

<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) (Dollars in thousands)
----------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                        Six Months Ended
                                                                                            June 30,
                                                                                 -------------------------------
OPERATING ACTIVITIES:                                                                1999              1998
                                                                                 -------------     -------------
<S>                                                                                <C>                 <C>
   Net income                                                                      $ 1,706             $ 373
   Adjustments to reconcile net income to net cash provided by
      operating activities:
   Depreciation and amortization of premises and equipment                             237               227
   Amortization of core deposit premiums                                               349               346
   Amortization of purchase premiums, net of discounts                                 207               543
   Loan origination fees deferred, net                                                 120               (86)
   Amortization of deferred loan fees                                                  (70)             (147)
   Provision for loan losses                                                           420               605
   Compensation expense related to ESOP shares released                                242               304
   (Gain) loss on sale of mortgage-backed securities and investment securities        (503)               17
   Gain on sale of real estate owned                                                   (11)               (9)
   Losses on sale of fixed assets                                                        -                 8
   Charge-offs on loans receivable, net of recoveries                                 (113)                3
   Originations of loans held for sale                                              (5,390)           (5,888)
   Proceeds from sales of loans originated for sale                                  7,277             5,307
   Change in income taxes payable and deferred income taxes                           (434)             (403)
   Change in other assets                                                              479              (182)
   Change in interest receivable                                                       (18)             (434)
   Change in accounts payable and other liabilities                                   (416)              466
                                                                                 ---------         ---------

         Net cash  provided by operating activities                                  4,082             1,050
                                                                                 ---------         ---------

INVESTING ACTIVITIES:

   Loans originated for the portfolio, net                                         (85,443)          (46,101)
   Purchases of loans receivable                                                      (551)          (32,099)
   Principal payments on loans receivable                                           47,792            46,708
   Proceeds from sales of corporate securities available for sale                    7,746                 -
   Principal paydowns on mortgage-backed securities                                 14,002            10,785
   Proceeds from sales of mortgage-backed securities available for sale             16,920                 -
   Purchases of investment securities available for sale                                (7)          (15,331)
   Proceeds from sales of investment securities available for sale                     259             4,971
   Proceeds from maturities of investment securities                                     -             8,245
   Decreases in certificates of deposit                                                  -                99
   Purchases of FHLB stock                                                             (90)              (99)
   Purchases of premises and equipment, net                                         (1,048)           (1,390)
                                                                                 ---------         ---------

         Net cash used in investing activities                                        (420)          (24,212)
                                                                                 ---------         ---------

</TABLE>


                                           -continued-


                                                      4

<PAGE>

<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) (Dollars in thousands)
----------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                        Six Months Ended
                                                                                            June 30,
                                                                                 -------------------------------
                                                                                     1999              1998
                                                                                 -------------     -------------
<S>                                                                              <C>               <C>
FINANCING ACTIVITIES:

   Net increase (decrease) in savings deposits                                   $  (7,059)        $  14,745
   Purchase of savings deposits, net of core deposit premiums                            -            28,554
   Repayments of Federal Home Loan Bank advances, net                               (1,100)          (16,100)
   Repayments of reverse repurchase agreements, net                                 (1,960)              (90)
   Purchases of treasury stock, net of exercise of stock options                       346            (2,012)
   Cash dividends paid to stockholders                                                (246)             (226)
                                                                                 ---------         ---------


      Net cash provided by (used in) financing activities                          (10,019)          24,871
                                                                                 ---------         ---------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                           (6,357)           1,709

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    16,951            13,514
                                                                                 ---------         ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                       $  10,594         $  15,223
                                                                                 =========         =========


CASH PAID DURING THE PERIOD FOR:

   Interest on savings deposits and advances                                     $   8,747         $   9,217

   Income taxes                                                                      1,664               719

NONCASH INVESTING ACTIVITIES:

   Loans transferred to held for investment at market value                            171                 -

   Mortgage-backed securities acquired in exchange for securitized
      loans, net of deferred fees                                                        -            47,703

   Real estate acquired in settlement of loans                                         280                 -


<FN>
See notes to consolidated financial statements.
</FN>

</TABLE>

                                                     5

<PAGE>

                           MONTEREY BAY BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1999

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance with generally  accepted  accounting  principles and with
the  instructions  to Form 10-Q and Rule  10-01 of  Regulation  S-X for  interim
financial  information.  Accordingly,  the adequacy of the disclosure  contained
herein has been determined with the presumption  that the users of these interim
financial  statements have read or have access to the Annual Report on Form 10-K
of Monterey Bay Bancorp,  Inc. (the  "Company")  for the year ended December 31,
1998. Only material changes in financial condition and results of operations are
discussed in the remainder of Part I of this Quarterly Report.

         In the opinion of the  management  of the  Company and its  subsidiary,
Monterey  Bay  Bank  (the  "Bank"),  the  accompanying   unaudited  consolidated
financial  statements  contain  all  adjustments  (consisting  solely  of normal
recurring   accruals)  necessary  for  a  fair  presentation  of  the  Company's
consolidated  financial  condition at June 30, 1999,  and December 31, 1998, the
results of its  operations  for the three and six months ended June 30, 1999 and
1998,  and its cash flows for the six months  ended June 30, 1999 and 1998.  All
significant  inter-company  balances and  transactions  have been  eliminated in
consolidation.  Results of operations for any interim period are not necessarily
indicative of the  operating  results that may be expected for any other interim
period or for the entire year.

Note 1.

Recently issued Accounting Pronouncements

         In June 1998, the Financial  Accounting  Standards  Board (FASB) issued
Statement of  Financial  Accounting  Standards  (SFAS) No. 133  "Accounting  for
Derivative  Instruments  and  Hedging  Activities".  The  statement  establishes
accounting  and  reporting  standards  for  derivative  instruments  and hedging
activities.  The statement is effective for all fiscal  quarters of fiscal years
beginning  after June 15, 2000. The Company is in the process of determining the
impact of SFAS No. 133 on the Company's financial statements.

         In  October  1998,  the FASB  issued  SFAS  No.  134,  "Accounting  for
Mortgage-Backed  Securities  Retained after the Securitization of Mortgage Loans
Held for Sale by a  Mortgage  Banking  Enterprise".  The  Company  adopted  this
statement on January 1, 1999. It allows  companies  that hold mortgage loans for
sale to classify mortgage-backed securities retained in a securitization of such
loans as either  held-to-maturity,  available  for  sale,  or  trading  based on
management's  intentions.   This  guidance  is  consistent  with  the  treatment
established  for  investments  covered  by SFAS  115,  "Accounting  for  Certain
Investments in Debt and Equity  Securities".  The adoption of this statement was
not material to the financial results of the Company.


                                       6

<PAGE>


Note 2.

Comprehensive Income

         The following tables disclose  comprehensive  income for the six months
ended June 30, 1999 and 1998 (dollars in thousands).

                                                         Six Months Ended
                                                             June 30
                                                   -----------------------------
                                                        1999          1998

Comprehensive income:
   Net income                                          $ 1,706       $  373

Change in unrealized gains (loss) on
   securities available for sale,
   net of taxes                                           (884)         568

Reclassification adjustment for net gains
   (losses) on securities available for sale
   included in income, net of taxes                       (294)          13
                                                       -------       ------

Total comprehensive income                             $   528       $  954
                                                       =======       ======


Note 3.

Use of Estimates in the Preparation of Financial Statements

         In preparing  the  consolidated  financial  statements,  management  is
required to make estimates and assumptions  that affect the reported  amounts of
assets and  liabilities  as of the dates of the balance  sheets and revenues and
expenses for the periods covered. Actual results could differ significantly from
those estimates and assumptions.

Item 2.  Management's  Discussion  and  Analysis  of Results of  Operations  and
Financial Condition

         Monterey  Bay  Bancorp,  Inc.  (the  "Company")  is a savings  and loan
holding  company  incorporated  in 1994 under the laws of the State of Delaware.
The Company was  organized  as the holding  company for  Monterey Bay Bank ("the
Bank") in connection with the Bank's conversion from the mutual to stock form of
ownership. On February 14, 1995, the Company issued and sold 4,492,086 shares of
its common stock at an issuance  price of $6.40 per share,  adjusted for splits,
to complete the  conversion.  Net  proceeds to the Company  were $27.1  million,
including shares purchased by the employee stock ownership plan, after deduction
of conversion  expenses and underwriting fees of $1.6 million.  The Company used
$13.5  million of the net proceeds to acquire all of the stock of the Bank.  The
Bank owns a subsidiary,  Portola Investment Corporation ("Portola"), which sells
insurance and brokerage services.

         The  Company's  primary  business  is  providing  conveniently  located
deposit facilities to attract checking, money market, savings and certificate of
deposit  accounts,  and  investing  such deposits and other  available  funds in
mortgage  loans  secured  by  one-to-four   family   residences,   construction,
commercial  real estate,  and business loans.  The Bank's deposit  gathering and
lending markets are primarily  concentrated  in the communities  surrounding its
full service offices located in Santa Cruz, Monterey,  and Santa Clara counties,
in California. At June 30, 1999, the Bank had eight full service offices and one
administrative office.


                                       7

<PAGE>


Safe Harbor Statement for Forward-Looking Statements

         This report  contains  certain  forward-looking  statements  within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E  of the  Securities  Exchange  Act  of  1934,  as  amended.  Forward-looking
statements,  which are based on certain  assumptions  and describe future plans,
strategies,  and expectations of the Company, are generally  identifiable by use
of the words "believe," "expect," "intend," "anticipate,"  "estimate," "project"
or similar  expressions.  The Company's ability to predict results or the actual
effect of future plans or  strategies  is  inherently  uncertain.  Factors which
could have a material  adverse affect on the operations and future  prospects of
the Company include, but are not limited to, changes in: interest rates, general
economic  conditions,   legislative/regulatory   changes,  monetary  and  fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Board of Governors of the Federal Reserve System,  the quality or composition of
the loan or investment  portfolios,  demand for loan  products,  deposit  flows,
competition,  demand for  financial  services in the  Company's  market area and
accounting  principles,  policies and guidelines.  These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.

RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998

Overview

         The Company  reported net income of $902,000,  or $.27 per basic share,
for the quarter  ended June 30,  1999,  compared  to a net loss of  $65,000,  or
$(.02) per basic  share,  for the same period last year.  Diluted  earnings  per
share were $.26 for the second  quarter of 1999,  compared to $(.02) a year ago.
Second  quarter 1999 earnings were higher than earnings for the similar period a
year ago primarily due to substantial increases in net interest income resulting
from  higher  levels of loans  receivable  and  decreases  in the cost of funds.
Return on average equity was 8.63% and return on average assets was .81% for the
three  month  period  ended June 30,  1999  compared to a loss of .58% and .06%,
respectively  a year  ago.  Net  income  for the  first  six  months of 1999 was
$1,706,000,  or $.51 per basic share,  an increase  from  $373,000,  or $.10 per
basic  share,  recorded for the first six months of 1998.  Diluted  earnings per
share for the six month period ended June 30, 1999 was $.50 compared to $.09 for
the same period in 1998.

         Net interest  income  before  provision  for loan losses and  recurring
noninterest income rose $949,000 and $1.8 million during the three month and six
month periods ended June 30, 1999, respectively,  from the comparable periods in
1998.  The increase in net interest  income was primarily due to growth in loans
receivable  and  decreases in the cost of funds.  While  deposits have not grown
during either the three or six month  periods  ended June 30, 1999,  compared to
the same periods in 1998, the mix of deposits has changed.  Transaction accounts
(defined as checking,  money market,  and passbook  accounts)  represent  $146.5
million or 40.3% of total deposits at June 30, 1999,  compared to $113.6 million
or 30.6% at  December  31,  1998.  During the second  quarter of 1998,  the Bank
opened its eighth full service branch location.

         The most significant component of the Company's revenue is net interest
income, which represents the difference between interest income,  primarily from
loans,  mortgage-backed  securities,  and the investment portfolio, and interest
expense, primarily on deposits and borrowings. The Company's net interest income
and net  interest  margin,  which is defined as net interest  income  divided by
average  interest-earning  assets, are affected by its asset growth and quality,
its asset and liability composition, and the general interest rate environment.


                                       8

<PAGE>


         Service charges, mortgage loan servicing fees, and commissions from the
sale of insurance products and investments through Portola also have significant
effects on the  Company's  results of  operations.  General  and  administrative
expenses consist primarily of employee compensation, occupancy expenses, federal
deposit insurance  premiums,  data processing fees and other operating expenses.
The Company's results of operations are also  significantly  affected by general
economic and  competitive  conditions,  particularly  changes in market interest
rates, government policies, and actions of regulatory agencies.

         Recently,  the Company has focused its efforts on becoming  more like a
community-based  commercial  bank by  increasing  its  commercial  real  estate,
construction, multi-family and business lending activities. As well, the Company
is focusing its deposit  gathering  efforts on small  businesses  in its primary
market,  which will complement the business lending  function.  Separately,  the
Company  will  continue  to pursue  growth  in lower  cost  transaction  deposit
accounts (checking, passbook, and money market accounts).

Interest Income

         Interest income for the quarter ended June 30, 1999,  increased by 8.3%
to $8.2 million,  compared to $7.5 million for the second  quarter of 1998.  For
the six months ended June 30, 1999,  total interest income was $16.4 million,  a
10.3%  increase  compared to $14.9 million  during the same period in 1998.  The
primary  reason for the increase in interest  income for the three and six month
periods  ended  June 30,  1999,  compared  to the same  period in 1998,  was the
increase in average  interest  earning  assets.  The average balance of interest
earning assets was $430.2 million and $432.5 million for the three and six month
periods ended June 30, 1999,  respectively.  These balances compare favorably to
the $408.7 million and $399.1 million average balance of interest earning assets
for the three and six month periods ended June 30, 1998. The increase in average
interest  earning assets for the three month period ended June 30, 1999 compared
to the  same  period  in 1998  was due to an  $84.9  million  increase  in loans
receivable,  offset  by a $36.6  million  decrease  in the  average  balance  of
mortgage-backed  securities and a $26.7 million  decrease in the average balance
of corporate securities.

         The weighted  average  yield on interest  earning  assets  increased to
7.60% and 7.58% for the quarter and six months ended June 30, 1999,  compared to
7.39%  and  7.45%  for the same  periods  in 1998.  The  average  yield on loans
receivable  was slightly lower at 8.00% and 8.02% for the quarter and six months
ended June 30,  1999,  compared  to 8.07% for  comparable  periods in 1998.  The
weighted  average  yield on  interest  earning  assets  during the three and six
months ended June 30, 1999 increased compared to the same periods in 1998 due to
loans  receivable  for the  quarter  ended June 30, 1999  representing  a larger
percentage of total interest  earning assets.  Average loans  receivable for the
quarter  and six  months  ended  June 30,  1999  represented  76.7%  and  74.3%,
respectively,  of total  interest  earning  assets  compared to 60.0% and 64.3%,
respectively,  for the same periods in 1998.  The yield on loans  receivable  is
substantially   higher  than  the  yield  on   mortgage-backed   and  investment
securities.  The Company is continuing to pursue its long-term strategic goal to
increase the net interest  margin by replacing  lower-yielding  securities  with
higher-yielding loans.

         Interest  expense was $4.3 million and $8.7 million,  respectively  for
the quarter and six months  ended June 30,  1999,  compared to $4.6  million and
$9.0  million,  respectively  for the same  periods  a year  ago.  The  $300,000
decrease  for both the quarter  and six months  ended June 30, 1999 was due to a
decline  in both  the rate and  average  balances  in  certificate  of  deposits
accounts, partially offset by an increase in the average balance in money market
accounts. Average certificate of deposit account balances declined $41.9 million
and $24.5 million, respectively for the quarter and six month periods ended June
30,  1999  compared  to the same  periods  in 1998.  The  decreases  in  average
certificate of deposit  accounts was offset by a $43.8 million and $40.3 million
increase in the  weighted  average


                                       9
<PAGE>

balances in money market  accounts for the quarter and six month  periods  ended
June 30, 1999 compared to the same periods in 1998.  Additionally,  the weighted
average rate on  certificate of deposit  accounts  decreased to 4.79% and 4.91%,
respectively  for the quarter and six months  ended June 30,  1999,  compared to
5.47% and 5.49%,  respectively  for the same periods in 1998. The decline in the
weighted  average  cost of deposits is due to the success the Company has had in
achieving  its  strategic  goal of  changing  the mix of  deposits  to  increase
transaction accounts (checking,  passbook, and money market accounts) as well as
a decline in rates paid on time  deposits.  At June 30,  1999,  the  company had
$146.5  million  in  transaction  accounts  or 40.3% of  total  deposits  with a
weighted  average  cost of 3.09%  compared  to $90.7  million  or 24.8% of total
deposits with a weighted average cost of 2.53% at June 30, 1998.
<TABLE>
         The changes in net  interest  income for the three and six months ended
June 30, 1999  compared with the  corresponding  periods in 1998 are analyzed in
the following  table.  The table shows the changes by major  component,  setting
forth changes attributable to changes in volume, changes attributable to changes
in  interest  rates,  and  the  net  effect  of  both  (in  thousands).  Changes
attributable to both rate and volume have been attributed to rate:
<CAPTION>
                                                             Three Months Ended June 30,
                                                               1999 Compared with 1998
                                                                 Increase (Decrease)
                                                    -----------------------------------------------
                                                     Volume             Rate               Net
                                                    -----------       -----------       -----------
<S>                                                 <C>               <C>                <C>
         Interest income:
            Loans                                   $ 1,713           $   (61)           $ 1,652
            Mortgage-backed securities                 (600)                3               (597)
            Investment securities                      (405)              (24)              (429)
                                                    -------           -------            -------
                                                        708               (82)               626
                                                    -------           -------            -------
         Interest expense:
            On customer deposits                       (116)             (330)              (446)
            On borrowings                               191               (68)               123
                                                    -------           -------            -------
                                                         75              (398)              (323)
                                                    -------           -------            -------

         Change in net interest income              $   633           $   316            $   949
                                                    =======           =======            =======



                                                              Six Months Ended June 30,
                                                               1999 Compared with 1998
                                                                 Increase (Decrease)
                                                    -----------------------------------------------
                                                     Volume             Rate               Net
                                                    -----------       -----------       -----------
         Interest income:
            Loans                                   $ 2,608           $   (76)           $ 2,532
            Mortgage-backed securities                 (189)              (28)              (217)
            Investment securities                      (746)              (42)              (788)
                                                    -------           -------            -------
                                                      1,673              (146)             1,527
                                                    -------           -------            -------

         Interest expense:
            On customer deposits                        174              (570)              (396)
            On borrowings                               272              (124)               148
                                                    -------           -------            -------
                                                        446              (694)              (248)
                                                    -------           -------            -------

         Change in net interest income              $ 1,227           $   548            $ 1,775
                                                    =======           =======            =======
</TABLE>


                                                10

<PAGE>

<TABLE>
         Average  assets and  liabilities  together with average  interest rates
earned  and paid for the three and six months  ended June 30,  1999 and 1998 are
summarized as follows (dollars in millions):
<CAPTION>
                                                                Three Months Ended June 30,
                                              ----------------------------------------------------------------
                                                         1999                                 1998
                                              ---------------------------          ---------------------------

                                               Average          Yield/              Average          Yield/
       Interest earning assets:                Balance           Rate               Balance           Rate
                                              -----------     -----------          -----------     -----------
<S>                                           <C>               <C>                <C>              <C>
          Loans                               $  330            8.00%              $  245           8.07%
          Mortgage-backed securities              75            6.58                  111           6.56
          Investment securities                   25            5.44                   52           5.93
                                              ------                               -----
             Total interest earning assets       430            7.60                  408           7.39
       Noninterest earning assets                 19                                   19
                                              ------                               ------
             Total assets                     $  449                               $  427
                                              ======                               ======

       Interest bearing liabilities:
          Deposits                            $  369            4.09%              $  354           4.76%
          Borrowings                              37            5.52                   25           6.22
                                              ------                               ------
             Total interest bearing
               liabilities                       406            4.22                  379           4.86
       Noninterest bearing liabilities             1                                   3
       Stockholders' equity                       42                                  45
                                              ------                               ------

             Total liabilities and
                stockholders' equity          $  449                               $  427
                                              ======                               ======

       Net interest rate spread                                 3.38%                               2.54%
       Net interest margin                                      3.63%                               2.89%

       Ratio of interest bearing assets to
          interest bearing liabilities                           106%                                108%

                                                                 Six Months Ended June 30,
                                              ----------------------------------------------------------------
                                                         1999                                 1998
                                              ---------------------------          ---------------------------

                                               Average        Yield/                Average        Yield/
       Interest earning assets:                Balance           Rate               Balance           Rate
                                              -----------     -----------          -----------     -----------

          Loans                               $  321            8.02%              $  257           8.07%
          Mortgage-backed securities              85            6.53                   90           6.60
          Investment securities                   27            5.65                   52           5.88
                                              ------                               ------
             Total interest earning assets       433            7.58                  399           7.45
       Noninterest earning assets                 18                                   17
                                              ------                               ------
             Total assets                     $  451                               $  416
                                              ======                               ======

       Interest bearing liabilities:
          Deposits                            $  369            4.19%              $  338           4.81%
          Borrowings                              38            5.52                   29           6.15
                                              ------                               ------
             Total interest bearing
                liabilities                      407            4.31                  367           4.92
       Noninterest bearing liabilities             2                                    3
       Stockholders' equity                       42                                   46
                                              ------                               ------

             Total liabilities and
                stockholders' equity          $  451                               $  416
                                              ======                               ======

       Net interest rate spread                                 3.27%                               2.53%
       Net interest margin                                      3.55%                               2.96%

       Ratio of interest bearing assets to
          interest bearing liabilities                           106%                                108%
</TABLE>


                                                11

<PAGE>


Provision for Loan Losses

         The  allowance  for loan  losses is  maintained  at a level  considered
appropriate  by  management  and is based on an ongoing  assessment of the risks
inherent in the loan portfolio.  The allowance is increased by the provision for
estimated loan losses, which is charged against operations,  and is decreased by
the amount of net loans  charged  off  during  the  period.  In  evaluating  the
adequacy of the allowance for loan losses,  management incorporates such factors
as collateral  value,  portfolio  composition and  concentration,  and trends in
local and national  economic  conditions and the related impact on the financial
strength of the Company's borrowers. (See "-Asset Quality.")

         For the three and six months ended June 30,  1999,  the  provision  for
loan losses was $200,000 and  $420,000,  respectively,  compared to $496,000 and
$605,000  for the same  periods in 1998.  The Company  continued to increase its
provision for loan losses  largely due to a net increase in higher risk forms of
lending.  At June 30, 1999, the Company's allowance for loan losses totaled $3.1
million or .91% of loans  receivable,  compared to $2.8 million or .92% of loans
receivable at December 31, 1998.  At June 30, 1999,  the Company had real estate
owned totaling $159,300,  consisting of a single one-to four-family  residential
property  acquired  through  foreclosure  in 1998.  Nonperforming  loans totaled
$908,566 or .27% of loans  receivable at June 30, 1999 compared to $1.5 million,
or .60% of loans receivable at June 30, 1998 and $1.5 million,  or .50% of loans
receivable at December 31, 1998.

Noninterest Income

         Noninterest income for the three and six months ended June 30, 1999 was
$778,000  and $1.5 million  compared to $492,000  and  $892,000  for  comparable
periods in 1998,  primarily  due to increases in gain on the sale of  investment
securities. Excluding the increases in gain on the sale of investment securities
for the six month  period  ended June 30,  1999  compared  to the same period in
1998,  noninterest income increased $50,000 due primarily to a $110,000 increase
in customer  service  charges,  partially  offset by a $59,000  decrease in loan
servicing income. No new loan servicing income sources are planned. The increase
in customer service charges continuing growth in the number of customer checking
accounts  resulting  primarily  from the  continued  consolidation  of financial
institutions in the Company's market.

General and Administrative Expenses

         General and administrative  expenses were $2.9 million and $5.7 million
for the three and six months ended June 30,  1999,  compared to $3.0 million and
$5.4  million for similar  periods in 1998.  The slight  decrease in general and
administrative expenses for the three months ended June 30, 1999 compared to the
same period in 1998 was  primarily  attributable  to  approximately  $210,000 in
charges  during the 1998  period,  including  legal  costs,  resulting  from the
settlement  of two  outstanding  legal  matters.  The  increase  in general  and
administrative  expenses for the six months ended June 30, 1999  compared to the
same period in 1998 was  primarily due to higher  compensation  and benefits and
data  processing  fees,  as new  employees  were hired to support the  Company's
deposit  growth and the expansion of its branch  locations and new product lines
and services.

         General and  administrative  expense as a percentage of average  assets
for the three and six months ended June 30, 1999 were 2.58% and 2.53%,  compared
to 2.80%  and  2.61% for  comparable  periods  in 1998.  More  importantly,  the
efficiency  ratio,  which is general and  administrative  expense divided by net
interest  income  before  provision  for loan losses plus  noninterest  revenue,
improved during the three and six months ended June 30, 1999 compared to similar
periods in 1998. The efficiency  ratio for the quarter and six months ended June
30, 1999 was 62% and 63% respectively, compared to 87% and 80%, respectively for
comparable  periods in 1998. The improvement in the


                                       12

<PAGE>

efficiency  ratio in 1999 was  primarily  due to  improvements  in net  interest
income and securities gains, and to a lesser extent efforts to contain growth in
general and administrative expenses.

COMPARISON OF CHANGES IN FINANCIAL CONDITION

         Total  assets of the  Company  were  $444.6  million at June 30,  1999,
compared to $454.8  million at December 31,  1998, a decrease of $10.2  million.
The slight decrease in assets during the first half of 1999 was primarily due to
the sale of mortgage-backed  securities and corporate securities and prepayments
on  mortgage-backed  securities,  with  the  utilization  of a  majority  of the
proceeds to fund net loan growth and to pay down short-term borrowings.

         Mortgage-backed  securities and investment  securities  decreased $40.5
million, or 34.4%, to $76.9 million,  during the six months ended June 30, 1999.
These decreases were partially offset by an increase of $37.7 million, or 12.6%,
in loans receivable during the same period.

         Loans  receivable  held for investment  were $336.5 million at June 30,
1999,  compared to $298.8 million at December 31, 1998.  Residential real estate
loans continue to represent the largest category in the loan portfolio.  At June
30, 1999,  total  one-to-four  family  residential real estate loans were $171.4
million,  or 51.0% of loans receivable,  compared to $183.9 million, or 61.0% of
total loans, at December 31, 1998. The Company  successfully  continued to focus
its  efforts on  changing  its mix of  interest  earning  assets by  emphasizing
construction, commercial real estate, and business lending activities, resulting
in increased loan yields.  Loans other than one-to-four  family residential real
estate loans comprise 49% or $165.1 million of loans receivable at June 30, 1999
compared to 39% or $119.8  million at December 31, 1998 and 38% or $95.6 million
at June 30, 1998. During the quarter ended June 30, 1999, the Company originated
$54.1 million in loans.  Loans  originated  and funded during the second quarter
were earning a weighted  average yield of 8.39%. The Company  originated  $19.7,
$26.4,  $22.3,  and $36.4 million,  respectively  of portfolio  loans during the
first,  second,  third,  and fourth  quarters  of 1998,  respectively  and $41.7
million  during the first three  months of 1999.  The growth in  portfolio  loan
fundings  was  due to a low  interest  rate  environment,  which  promotes  loan
production,  additions  to  sales  staff,  and the  expansion  of the  Company's
portfolio  lending into  construction,  commercial,  multi-family,  and business
lending.

         At June 30, 1999, the Company's  permanent  commercial real estate loan
portfolio was $51.3 million,  or 15.3% of total loans receivable,  up from $37.9
million,  or 12.7% of total loans  receivable  at December 31, 1998. At June 30,
1999, the Company had $46.9 million or 13.9% of net construction  loans compared
to $27.5  million,  or 9.2%, at December 31, 1998.  Construction  loans are made
primarily to residential builders and to commercial property developers. At June
30, 1999, the Company had $40.0 million of  multi-family  residential  loans, or
11.9% of total loans  receivable,  up from $35.4 million,  or 11.9%, at December
31, 1998.  The  remainder of the loans  receivable  was  comprised  primarily of
business loans totaling $26.9 million,  or 8.0%, of total loans  receivable,  at
June 30, 1999, compared to $19.0 million, or 6.4%, at December 31, 1998.

         During the six months ended June 30, 1999,  the  Company's  liabilities
decreased by $11.1 million to $401.8  million,  from $412.9  million at December
31, 1998. The decrease in liabilities was primarily attributable to a decline in
deposits of $7.1 million and a $2.0  million  decline in  securities  sold under
agreements to repurchase.  Total savings deposits decreased during the six month
period ended June 30, 1999 to $363.6 million, or by 1.9%, from $370.7 million at
December  31,  1998.  Continued  emphasis  has been placed on growth of low-cost
transaction  deposit  accounts.  Transaction  deposit  accounts  are  made up of
passbook  savings,  checking,  and money market accounts.  Transaction  accounts
increased from $113.6 million,  or 30.6%, of total deposits at December 31, 1998
to $146.5  million,  or 40.3%, of total deposits at June 30, 1999. Time deposits
declined from $257.1  million at


                                       13

<PAGE>

December  31,  1998 to $217.0  million  at June 30,  1999.  Average  transaction
deposits at June 30, 1999, bore a weighted average interest rate of 3.09%.

         At June 30, 1999,  shareholders' equity was $42.8 million,  compared to
$41.9 million at December 31, 1998.  Equity increased by $0.9 million due to net
income for the first six months of 1999 of $1.7 million, partially offset by the
payment of cash dividends totaling $246,000, or $.07 per share, on the Company's
outstanding  common stock, and an $0.9 million change in the unrealized gains on
securities  available for sale,  net of taxes.  Tangible book value per share of
Monterey Bay Bancorp, Inc. common stock was $11.83 at June 30, 1999, compared to
$11.60 at December 31, 1998.

Interest Rate Sensitivity and Market Risk Analysis

         Market risk is the risk of losses  resulting  from  adverse  changes in
market pricing and rates. The Company's  market risk is primarily  interest rate
risk associated with its lending, deposit and borrowing functions. Interest rate
risk arises when interest  rates on assets change in a different  time period or
in a different proportion from that of liabilities. Management actively monitors
its interest rate sensitivity  position with the primary  objective of prudently
structuring  the balance sheet so that movements of interest rates on assets and
liabilities  are highly  correlated and produce  reasonable net interest  margin
even in periods of volatile interest rates.  Interest rate risk is considered by
management  to be the  Company's  most  significant  market  risk  in  terms  of
potential for material impact upon the Company's  financial position and results
of operations.  In the normal course of business,  the Company is not exposed to
other  types of market risk such as risk  associated  with  commodity  prices or
foreign currencies.

         Management  seeks to manage its asset and liability  portfolios to help
reduce any  adverse  impact on its net  interest  income  caused by  fluctuating
interest  rates.  A key  objective of  asset/liability  management  is to manage
interest rate risk  associated  with changing asset and liability cash flows and
market  interest  rate  movements.  Interest rate risk occurs when interest rate
sensitive  assets and  liabilities  do not reprice  simultaneously  and in equal
volumes.  The  Company's  asset/liability  committee  provides  oversight to the
interest rate risk management process and recommends policy guidelines regarding
exposure to interest rates for approval by the Board of Directors.  Adherence to
these  policies is monitored on an ongoing basis,  and decisions  related to the
management of interest  rate exposure due to changes in balance sheet  structure
and/or market  interest  rates are made when  appropriate  and agreed to by this
committee.

         The Company manages interest rate risk principally  through emphasizing
the origination of adjustable  rate loans and short or  intermediate  term fixed
rate loans and the  matching of these  assets with short and  intermediate  term
certificates of deposit and adjustable rate borrowings. The Company's monitoring
activities  related to managing  interest  rate risk include both  interest rate
sensitivity "gap" analysis and the use of a simulation model. While gap analysis
provides a picture of the interest rate risk embedded in the balance  sheet,  it
provides only a static view of interest rate  sensitivity at a specific point in
time,  and does not measure  the  potential  volatility  in  forecasted  results
relating to changes in market interest rates over time. Accordingly, the Company
combines the use of gap analysis with use of a simulation model,  which provides
a dynamic  assessment  of interest rate  sensitivity.  The  simulation  model is
designed to enable the Company to generate a forecast of net interest income and
market value of equity given  various  interest rate  forecasts and  alternative
strategies.  The model is also designed to measure the  anticipated  impact that
prepayment  risk,  basis risk,  customer  maturity  preferences,  volumes of new
business and changes in the relationship  between long- and short-term  interest
rates have on the performance of the Company.


                                       14

<PAGE>

         Interest rate sensitivity  estimated by management,  as measured by the
change in the market  value of equity as a  percentage  of the present  value of
assets if interest  rate levels  were to increase by 2%, was  negative  1.77% at
March 31,  1999  indicating  that the  Company is  vulnerable  to  increases  in
interest  rates and  advantaged  if interest  rates  decline.  The change in the
market  value of  equity  as a  percentage  of the  present  value of  assets if
interest  rate levels were to increase  by 2% was  negative  1.92% and  negative
3.11% at December 31, 1998 and December 31, 1997,  respectively.  While progress
in reducing  interest rate  sensitivity has been made,  management  continues to
pursue  strategies  to reduce the impact of  changes  in  interest  rates on its
market  value  of  equity,   primarily  by  shortening  asset  maturities,   and
lengthening  maturities of  interest-bearing  liabilities when possible,  and by
originating and retaining variable-rate consumer,  business,  construction,  and
commercial real estate loans,  which generally have higher yields than permanent
residential loans.

Asset Quality

         At June 30, 1999, the Company had $382,000 in nonaccrual loans past due
90 days or more  compared to $1.5  million of  nonaccrual  loans at December 31,
1998. At June 30, 1999,  impaired  loans totaled $1.8 million,  compared to $3.8
million at December 31, 1998.

         At June 30, 1999, the Company had real estate owned totaling  $159,300,
consisting of a single one-to-four family residential  property acquired through
foreclosure in 1998.

         To measure the quality of assets, the Company has established  internal
asset  classification  guidelines  as part of its credit  monitoring  system for
identifying  and  reporting  problem  assets  and  determining   provisions  for
anticipated  loan  losses.   The  Company  classifies  assets  it  considers  of
questionable  quality  using  the  classification   categories  of  substandard,
doubtful,  and loss.  The  Company's  classified  assets  consist of  foreclosed
residential properties,  nonperforming assets, and assets that are performing in
accordance with their  contractual  terms but are adversely  classified  because
they  exhibit  one or more  well-defined  weaknesses.  Management  monitors  the
Company's assets regularly, classifies any problem assets, and provides specific
or general valuation allowances when necessary and appropriate.

         Total classified  assets of the Company  decreased to $4.4 million,  or
1.02% of total assets,  at June 30, 1999 from $5.1 million,  or 1.13% of assets,
at December 31, 1998.  At June 30, 1999,  the Company had $4.4 million of assets
classified  as  substandard  and no  assets  classified  as  doubtful  or  loss.
Substandard  assets are comprised of loans with identified risk  characteristics
indicating the asset maybe  inadequately  protected by the current net worth and
paying  capacity  of the  obligor  or of the  collateral  pledged.  The  largest
substandard loan at June 30, 1999 was a one-to-four family residential  mortgage
with an outstanding principal balance of $314,050.

         The majority of the Company's mortgage loans are secured by real estate
located within the state of  California.  The majority of such loans are secured
by real estate in Santa Cruz,  Monterey,  Santa Clara,  and San Benito counties;
therefore,  the  Company's  credit  risk is  primarily  related to the  economic
conditions of this region.

Capital and Regulatory Standards

         In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation ("FDIC") and general regulatory oversight by the Office of
Thrift Supervision  ("OTS"),  the Bank is required to maintain minimum levels of
regulatory capital, including tangible, core and risk-based capital. At June 30,
1999 and December  31,  1998,  the Bank was in  compliance  with all  regulatory
capital  requirements.  OTS prompt corrective  action (PCA) regulations  include
five capital tiers ranging


                                       15

<PAGE>

from well  capitalized  to  critically  undercapitalized.  At June 30,  1999 and
December  31,  1998,  the  Bank  met  the   definition  of  a   well-capitalized
institution.
<TABLE>
         The following  table sets forth the Bank's  capital  amounts and ratios
regarding   actual  and  minimum   tangible,   core,  and   risk-based   capital
requirements, together with the amounts and ratios required in order to meet the
definition of a "well capitalized" institution.
<CAPTION>
                                         Minimum Capital         Well Capitalized
                                           Requirements            Requirements               Actual
                                       ---------------------   ---------------------   ---------------------
                                       Amount       Ratio       Amount      Ratio       Amount      Ratio
                                       --------    ---------   ---------   ---------   ---------   ---------
<S>                                     <C>         <C>        <C>         <C>         <C>         <C>
      As of June 30, 1999:
         Total capital
            (to risk-weighted assets)   $24,545     8.00%      $30,681     10.00%      $34,207     11.15%
         Tier 1 capital
            (to risk-weighted assets)     N/A        N/A        18,409      6.00%       31,309     10.30%
         Tier 1 capital
            (to adjusted assets)         17,752     4.00%       21,565      5.00%       31,309      7.26%
         Tangible capital
            (to tangible assets)          6,469     1.50%        N/A         N/A        31,309      7.26%

      As of December 31, 1998:
         Total capital
            (to risk-weighted assets)   $21,980     8.00%      $27,475     10.00%      $31,882     11.60%
         Tier 1 capital
            (to risk-weighted assets)     N/A        N/A        16,334      6.00%       29,319     10.77%
         Tier 1 capital
            (to adjusted assets)         17,522     4.00%       21,902      5.00%       29,319      6.69%
         Tangible capital
            (to tangible assets)          6,571     1.50%        N/A         N/A        29,319      6.69%
</TABLE>

Liquidity

         The  Company's   primary  sources  of  funds  are  customer   deposits,
principal, and interest payments on loans and mortgage-backed  securities,  FHLB
advances and other  borrowings  and, to a lesser extent,  proceeds from sales of
securities and loans.  While maturities and scheduled  amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, and competition.

         The Company is required by OTS regulations to maintain an average daily
balance of liquid assets in each calendar  quarter of not less than 4% of either
the amount of its liquidity base at the end of the preceding calendar quarter or
the average daily balance of its  liquidity  base during the preceding  calendar
quarter.  In  addition  to this  minimum  requirement,  the Bank is  required to
maintain  sufficient  liquidity  to ensure  its safe and sound  operations.  The
minimum liquidity requirement may be changed by the OTS to any amount within the
range of 4% to 10%,  depending upon economic  conditions and the savings deposit
flows of savings institutions.  Monetary penalties may be imposed for failure to
meet these liquidity  requirements.  The Bank's average  liquidity ratio for the
quarter  ended  June 30,  1999 was  8.8%,  which  exceeded  the  then-applicable
requirements.  The Bank has never been subject to monetary penalties for failure
to meet its  liquidity  requirements.  The  Company's  strategy  generally is to
maintain  its  liquidity  ratio  at or near  the  required  minimum  in order to
maximize its yield on alternative investments.


                                       16

<PAGE>


Year 2000

         The "Year 2000 issue"  relates to the fact that many computer  programs
use only two digits to represent a year, such as "98" to represent "1998," which
means that in the Year 2000 such programs could  incorrectly treat the Year 2000
as the year 1900. This issue has grown in importance as the use of computers and
microchips   have  become   more   pervasive   throughout   the   economy,   and
interdependencies between systems have multiplied.  The issue must be recognized
as a business problem, rather than simply a computer problem, because of the way
its  effects  could  ripple  through  the  economy.  The Year 2000  issue  could
materially and adversely affect the Company either directly or indirectly.  This
could happen if any of its  critical  computer  systems or equipment  containing
embedded logic fail, if the local infrastructure  (electric power, phone system,
or water system) fails, if its significant vendors are adversely impacted, or if
its borrowers or depositors are adversely  impacted by their internal systems or
those of their  customers  or  suppliers.  Failure of the  Company  to  complete
testing and renovation of its critical  systems on a timely basis,  could have a
material  adverse  effect on the  Company's  financial  condition and results of
operations,  as could Year 2000  problems  faced by others with whom the Company
does business.

         Federal  banking  regulators  have  responsibility  for supervision and
examination of banks to determine whether each institution has an effective plan
for identifying,  renovating,  testing and implementing  solutions for Year 2000
processing  and  coordinating   Year  2000  processing   capabilities  with  its
customers, vendors and payment system partners. Bank examiners are also required
to assess the soundness of a bank's  internal  controls and to identify  whether
further  corrective  action may be necessary to assure an  appropriate  level of
attention to Year 2000 processing capabilities.

         The Company has a written  plan to mitigate the risks  associated  with
the impact of the Year 2000. The plan directs the Company's Year 2000 activities
under the framework of the Federal Financial  Institutions  Examination  Council
(FFIEC) five-step program.  The FFIEC's five-step program includes the following
phases: awareness, assessment,  renovation,  validation, and implementation. The
awareness  phase,  which the  Company  has  completed,  discusses  the Year 2000
problem and gains executive level support for the necessary resources to prepare
the Company for Year 2000 compliance.  The assessment  phase,  which the Company
has also completed,  assesses the size and complexity of the problem and details
the magnitude of the effort necessary to address the Year 2000 issues.  Although
the awareness and assessment phases are completed,  the Company will continue to
evaluate  any new  issues as they  arise.  In the  renovation  phase,  which the
Company  has  substantially  completed,  the  required  incremental  changes  to
hardware and software  components are tested. In the validation stage, which the
Company has also substantially  completed,  the hardware and software components
are tested. The implementation phase will be completed by September 30, 1999.

         The  Company  is  utilizing  both  internal  and  external  sources  to
identify,  correct or reprogram,  and test its systems for Year 2000 compliance.
The Company has identified fifteen  applications  which management  believes are
material to the Company's operations. Based on information received from testing
results,  the Company believes 100% of such applications are Year 2000 compliant
as of June 30,  1999.  The  testing of the  mission  critical  systems  for core
banking was completed May 31, 1999.

         The core banking  product  includes  software  solutions  for checking,
savings,  time  certificates  of  deposit,  general  ledger,  accounts  payable,
automated clearing house, individual retirement accounts,  commercial,  mortgage
and installment loans, proof of deposit and ancillary supporting products.

         The  Company  is also  making  efforts  to ensure  that its  customers,
particularly its significant customers,  are aware of the Year 2000 problem. The
Company has sent Year 2000  correspondence to


                                       17

<PAGE>

the Bank's  significant  deposit and loan  customers.  A customer of the bank is
deemed   significant   if  the   customer   possesses   any  of  the   following
characteristics:

o       Total indebtedness to the bank of $750,000 or more.
o       Credit risk rating of five (substandard) or higher.
o       The  customers  business  is  dependent  on  the use of high  technology
        and/or the electronic exchange of information.
o       The customer's  business is dependent on  third party  providers of data
        processing services or products.
o       An average ledger deposit balance greater than $100,000 and more than 12
        transactions during the month.

     The Company has amended its credit  authorization  documentation to include
consideration  regarding  the  Year  2000  problem.  The  Company  assesses  its
significant  customer's  Year 2000 readiness and assigns an assessment of "low",
"medium",  or "high" risks. Risk evaluation of the Bank's significant  customers
was  substantially  completed by December 31, 1998. Any depositor  determined to
have a high risk is scheduled  for an evaluation by the Bank every 90 days until
the customer can be assigned a low risk assessment.

     Additionally,  the Company has conducted employee education classes on Year
2000  preparedness  and  customer  education to attempt to minimize any customer
anxiety regarding Year 2000 issues. A customer and community education plan will
be  implemented in the fourth quarter of 1999 to further inform the community on
the safety of money in banks.

     Because  of the range of  possible  issues  and large  number of  variables
involved, it is impossible to quantify the total potential cost of the Year 2000
problems,  or to determine  the Company's  worst-case  scenario in the event the
Company's  Year 2000  remediation  efforts or the  efforts of those with whom it
does  business  are not  successful.  In  order  to deal  with  the  uncertainty
associated  with the Year 2000  problem,  the Company  has  developed a business
resumption  contingency plan to address the possibility that efforts to mitigate
the Year  2000 risk are not  successful  either  in whole or part.  These  plans
include manual and off-site  processing of information for critical  information
technology systems and increased cash on hand. The contingency plans,  including
employee training, will be tested by August 15, 1999.

         As of June 30, 1999, the Company had incurred approximately $250,000 in
total  cumulative  Year 2000 costs,  which have been expensed as incurred.  Year
2000-related  costs  have been  funded  from the  continuing  operations  of the
Company  and, as of March 31, 1999,  have  constituted  approximately  2% of the
Company's  information  systems  expenses for 1999.  The Company  estimates that
additional costs to complete Year 2000 compliance will be approximately $75,000.
This estimate includes the cost of purchasing hardware and licenses for software
programming  tools,  the  cost of the  time of  internal  staff  and the cost of
consultants.  The  estimate  does not  include the time that  internal  staff is
devoting to testing programming changes.  Certain information system projects at
the Company have been deferred as a result of the Company's Year 2000 compliance
efforts.  However, these deferrals are not expected to have a material effect on
the Company's business.

Item 3.  Quantitative and Qualitative Disclosure of Market Risk

         For the above-captioned  information,  see "Management's Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Interest  Rate
Sensitivity and Market Risk Analysis."


                                       18

<PAGE>

                           PART II. OTHER INFORMATION


Item 1.  Legal Proceedings.

         The Company is involved as  plaintiff  or  defendant  in various  legal
         actions  incident  to its  business,  none  of  which  is  believed  by
         management to be material to the financial condition of the Company.

Item 2.  Changes in Securities.

         None.

Item 3.  Defaults Upon Senior Securities.

         None.

Item 4.  Submission of Matters to a Vote of Security Holders.

        The Company held its Annual Meeting of Shareholders on June 11, 1999. At
        the Annual Meeting, the Shareholders elected directors Marshall G. Delk,
        Steven Franich,  Stephen Hoffmann,  and Gary Manfre to three year terms.
        The  following  directors  continued in office  (their  remaining  terms
        follow  their  names):  Eugene R. Friend (one  year);  P.W.  Bachan (two
        years);  Edward K. Banks (two  years);  Nicholas  C. Biase (two  years);
        Diane Bordoni (one year); Donald K. Henrichsen (one year); McKenzie Moss
        (one year); and Louis Resetar,  Jr. (two years).  The shareholders  also
        ratified  the  appointment  of Deloitte & Touche,  LLP,  as  independent
        auditors of the Company for the year ending December 31, 1999.
<TABLE>
                   The vote on each matter was as follows:
<CAPTION>
        1.         For Directors:
                                                                                                Broker
                                                      For                Withheld             Non-Votes
                                                  ------------         -------------         -------------
<S>                                                <C>                   <C>                      <C>
                   Marshall G. Delk                3,003,804             203,865                  -
                   Steven Franich                  3,017,014             190,655                  -
                   Stephen Hoffmann                2,999,670             207,999                  -
                   Gary L. Manfre                  3,017,563             190,106                  -


        2.         Ratification  of the appointment of Deloitte & Touche LLP, as
                   the independent auditors for the Company:

                                                                                                Broker
                                                      For                Withheld             Non-Votes
                                                  ------------         -------------         -------------
                                                   3,166,655              14,152                26,862

</TABLE>


                                       19

<PAGE>

Item 5.  Other Information.

         None.

Item 6.  Exhibits and Reports on Form 8-K.

         Exhibit 3(i) - Certificate  of  Incorporation  of Monterey Bay Bancorp,
         Inc.,  incorporated by reference to the Company's  Quarterly  Report on
         Form 10-Q for the quarter ended March 31, 1995.

         Exhibit 3(ii) - Bylaws of Monterey Bay Bancorp,  Inc.,  Incorporated by
         reference  to the  Company's  Annual  Report  on Form 10-K for the year
         ended December 31, 1998.

         Exhibit 11.0 - Computation of per share earnings (filed herewith).

         Exhibit 27.0 - Financial Data Schedule (filed herewith).


                                       20

<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.

Date:       August 6, 1999                    By /s/ Marshall G. Delk
      ----------------------------            ----------------------------------
                                              Marshall G. Delk
                                              President, Chief Operating Officer
                                                and Chief Financial Officer


                                       21