UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                    FORM 10-Q

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

For the quarterly period ended June 30, 2001

OR

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

For the transition period from ___________ to _________

                         Commission File Number: 0-24802

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

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

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

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

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

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

Indicate  by check mark  whether  the  registrant  (1) has filed all the reports
required to be filed by Section 13 or 15 (d) of the  Securities  Exchange Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

                    YES           X          NO
                               --------               --------

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock,  as of the latest  practicable  date:  3,438,098  shares of common
stock, par value $0.01 per share, were outstanding as of August 9, 2001.

                                       1
<PAGE>

                    MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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

                 Item 1.   Financial Statements

                           Condensed Consolidated Statements Of Financial Condition As Of
                           June 30, 2001 (unaudited) And December 31, 2000                                  3 - 4

                           Condensed Consolidated Statements Of Operations (unaudited) For The
                           Three And Six Months Ended June 30, 2001 And June 30, 2000                       5 - 6

                           Condensed Consolidated Statement Of Stockholders' Equity (unaudited) For
                           The Six Months Ended June 30, 2001                                                 7

                           Condensed Consolidated Statements Of Cash Flows (unaudited) For The
                           Six Months Ended June 30, 2001 And June 30, 2000                                 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 - 45

                 Item 3.   Quantitative And Qualitative Disclosure About Market Risk                         45

PART II.         OTHER INFORMATION

                 Item 1.   Legal Proceedings                                                                 46

                 Item 2.   Changes In Securities                                                             46

                 Item 3.   Defaults Upon Senior Securities                                                   46

                 Item 4.   Submission Of Matters To A Vote Of Security Holders                             46 - 47

                 Item 5.   Other Information                                                                 47

                 Item 6.   Exhibits And Reports On Form 8-K                                                  47

                           (a)  Exhibits

                           (b)  Reports On Form 8-K

Signature Page                                                                                               48
</TABLE>

                                       2
<PAGE>

Item 1.  Financial Statements

<TABLE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000
(Dollars In Thousands, Except Per Share Amounts)
---------------------------------------------------------------------------------------------------
<CAPTION>
                                                                             June 30,  December 31,
                                                                               2001       2000
                                                                             --------   --------
<S>                                                                          <C>        <C>
ASSETS

Cash and cash equivalents                                                    $ 11,150   $ 25,159
Securities available for sale, at estimated fair value:
     Investment securities (amortized cost of $7,702 and $7,696 at
          June 30, 2001 and December 31, 2000, respectively)                    7,403      7,360
     Mortgage backed securities (amortized cost of $38,491 and $43,675
          at June 30, 2001 and December 31, 2000, respectively)                38,486     42,950
Loans held for sale                                                               383       --
Loans receivable held for investment (net of allowances for loan losses of
     $6,138 at June 30, 2001 and $5,364 at December 31, 2000)                 441,128    391,820
Investment in capital stock of the Federal Home Loan Bank, at cost              2,981      2,884
Accrued interest receivable                                                     3,126      2,901
Premises and equipment, net                                                     7,870      7,375
Core deposit premiums, net                                                      1,854      2,195
Real estate acquired via foreclosure, net                                        --         --
Other assets                                                                    4,416      3,546
                                                                             --------   --------
TOTAL ASSETS                                                                 $518,797   $486,190
                                                                             ========   ========

<FN>

See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>

                                       3
<PAGE>

<TABLE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
JUNE 30, 2001 (UNAUDITED) AND DECEMBER 31, 2000
(Dollars In Thousands, Except Per Share Amounts)
-----------------------------------------------------------------------------------------------------
<CAPTION>
                                                                              June 30,   December 31,
                                                                                2001        2000
                                                                             ---------    ---------
<S>                                                                          <C>          <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Non-interest bearing demand deposits                                         $  20,248    $  17,065
Interest bearing NOW checking accounts                                          41,505       41,859
Savings deposits                                                                19,998       16,503
Money market deposits                                                           85,151       87,651
Certificates of deposit                                                        251,437      244,710
                                                                             ---------    ---------

   Total deposits                                                              418,339      407,788
                                                                             ---------    ---------

FHLB advances and other borrowings                                              51,766       32,582
Accounts payable and other liabilities                                           1,548        1,983
                                                                             ---------    ---------

     Total liabilities                                                         471,653      442,353
                                                                             ---------    ---------


Commitments and contingencies

STOCKHOLDERS' EQUITY

Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued        --           --
Common stock, $0.01 par value, 9,000,000 shares authorized;
     4,492,085 issued at June 30, 2001 and December 31, 2000;
     3,428,440 outstanding at June 30, 2001 and
     3,321,210 outstanding at December 31, 2000                                     45           45
Additional paid-in capital                                                      28,352       28,278
Retained earnings, substantially restricted                                     34,273       32,722
Unallocated ESOP shares                                                           (805)        (920)
Treasury shares designated for compensation plans, at cost (27,782 shares
     at June 30, 2001 and 35,079 shares at December 31, 2000)                     (267)        (338)
Treasury stock, at cost (1,063,645 shares at June 30, 2001 and
     1,170,875 shares at December 31, 2000)                                    (14,275)     (15,326)
Accumulated other comprehensive loss, net of taxes                                (179)        (624)
                                                                             ---------    ---------

     Total stockholders' equity                                                 47,144       43,837
                                                                             ---------    ---------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $ 518,797    $ 486,190
                                                                             =========    =========

<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>

                                       4
<PAGE>



<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Dollars In Thousands, Except Per Share Amounts)
-------------------------------------------------------------------------------------------------
<CAPTION>
                                                       FOR THE THREE MONTHS   FOR THE SIX MONTHS
                                                          ENDED JUNE 30,        ENDED JUNE 30,
                                                       -------------------   -------------------
                                                         2001       2000       2001       2000
                                                       --------   --------   --------   --------
<S>                                                    <C>        <C>        <C>        <C>
INTEREST AND DIVIDEND INCOME:
   Loans receivable                                    $  8,779   $  8,117   $ 17,667   $ 15,853
   Mortgage backed securities                               675        917      1,483      1,876
   Investment securities and cash equivalents               256        377        555        732
                                                       --------   --------   --------   --------

         Total interest income                            9,710      9,411     19,705     18,461
                                                       --------   --------   --------   --------

INTEREST EXPENSE:
   Deposit accounts                                       4,355      4,198      9,040      8,038
   FHLB advances and other borrowings                       582        661      1,140      1,379
                                                       --------   --------   --------   --------

         Total interest expense                           4,937      4,859     10,180      9,417
                                                       --------   --------   --------   --------

NET INTEREST INCOME BEFORE PROVISION
     FOR LOAN LOSSES                                      4,773      4,552      9,525      9,044

PROVISION FOR LOAN LOSSES                                   300        775        800      1,025
                                                       --------   --------   --------   --------

NET INTEREST INCOME AFTER PROVISION
     FOR LOAN LOSSES                                      4,473      3,777      8,725      8,019
                                                       --------   --------   --------   --------

NON-INTEREST INCOME:
   Gain (loss) on sale of mortgage backed securities
      and investment securities, net                       --            2         34        (77)
   Commissions from sales of noninsured products             71        183        188        390
   Customer service charges                                 473        312        882        592
   Income from loan servicing                                41         24         43         61
   Other income                                             110         62        192        118
                                                       --------   --------   --------   --------

         Total non-interest income                          695        583      1,339      1,084
                                                       --------   --------   --------   --------
<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>

                                       5
<PAGE>

<TABLE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Continued)
THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Dollars In Thousands, Except Per Share Amounts)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                 FOR THE THREE MONTHS             FOR THE SIX MONTHS
                                                                    ENDED JUNE 30,                   ENDED JUNE 30,
                                                               -----------------------           ---------------------
                                                                2001             2000            2001             2000
                                                                ----             ----            ----             ----
<S>                                                             <C>              <C>              <C>            <C>
NON-INTEREST EXPENSE:
   Compensation and employee benefits                           1,655            1,627            3,313          3,087
   Occupancy and equipment                                        432              319              782            631
   Deposit insurance premiums                                      49               46               98             93
   Data processing fees                                           170              278              612            566
   Legal and accounting expenses                                  267              132              451            342
   Supplies, postage, telephone, and office expenses              162              170              352            358
   Advertising and promotion                                       27               98               57            199
   Amortization of intangible assets                              170              175              341            349
   Consulting                                                      63               51              306            103
   Other expense                                                  525              473            1,051            978
                                                               ------           ------           ------         ------

         Total non-interest expense                             3,520            3,369            7,363          6,706
                                                               ------           ------           ------         ------

INCOME BEFORE INCOME TAXES                                      1,648              991            2,701          2,397

PROVISION FOR INCOME TAXES                                        699              437            1,150          1,044
                                                               ------           ------           ------         ------

NET INCOME                                                     $  949           $  554           $1,551         $1,353
                                                               ======           ======           ======         ======


EARNINGS PER SHARE:

     BASIC EARNINGS PER SHARE                                  $ 0.29           $ 0.18           $ 0.48         $ 0.44
                                                               ======           ======           ======         ======

     DILUTED EARNINGS PER SHARE                                $ 0.29           $ 0.18           $ 0.47         $ 0.43
                                                               ======           ======           ======         ======


<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>

                                                           6
<PAGE>

<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001
(Dollars And Shares In Thousands)
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                   Treasury
                                                                                     Shares
                                                                                     Desig-             Accum-
                                                                                      Nated             ulated
                                                                                        For              Other
                                                         Addi-              Unal-      Com-            Compre-
                                      Common Stock      Tional       Re-  Located      pen-            hensive
                                      ------------     Paid-In    Tained     ESOP    Sation  Treasury  Income/
                                     Shares   Amount   Capital  Earnings   Shares     Plans     Stock   (Loss)     Total
                                     ------   ------   -------  --------   ------     -----     -----   ------     -----
<S>                 <C> <C>           <C>        <C>  <C>       <C>        <C>       <C>     <C>        <C>     <C>
Balance At December 31, 2000          3,321      $45  $ 28,278  $ 32,722   $ (920)   $ (338) $(15,326)  $ (624) $ 43,837

Exercise of stock options                95                (28)                                   929                901

Director fees paid using treasury        12                 14                                    122                136
stock

Amortization of stock compensation                          88                115        71                          274

Comprehensive income:
     Net income                                                    1,551                                           1,551

     Other comprehensive income:
          Change in net unrealized
            loss on securities
            available for sale,
            net of taxes of $325                                                                            465      465

          Reclassification adjustment
            for gains on securities
            available for sale
            included in income,
            net of taxes of ($14)                                                                          (20)      (20)
                                                                                                                --------
     Other comprehensive income, net                                                                                 445
                                                                                                                --------
Total comprehensive income                                                                                         1,996
                                      -----    -----  --------  --------   ------    ------  --------    -----  --------
Balance at June 30, 2001              3,428    $  45  $ 28,352  $ 34,273   $ (805)   $ (267) $(14,275)   $(179) $ 47,144
                                      =====    =====  ========  ========   ======    ======  ========    =====  ========

<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>

                                                           7
<PAGE>

<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Dollars In Thousands)
-------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                    FOR THE SIX MONTHS
                                                                                      ENDED JUNE 30,
                                                                                   --------------------
                                                                                     2001        2000
                                                                                   --------    --------
<S>                                                                                <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                         $  1,551    $  1,353

Adjustments  to reconcile net income to net cash provided by (used in) operating
activities:

Depreciation and amortization of premises and equipment                                 291         218
Amortization of intangible assets                                                       341         349
Accretion of purchase premiums, net of amortization of purchase (discounts)               3          39
Amortization of deferred loan fees and costs, net                                      (113)       (142)
Provision for loan losses                                                               800       1,025
Federal Home Loan Bank stock dividends                                                  (97)       (111)
Gross ESOP expense before dividends received on unallocated shares                      194         163
Compensation expense associated with stock compensation plans                            60         151
(Gain) loss on sale of mortgage-backed and investment securities                        (34)         77
Gain on sale of loans                                                                   (29)        (11)
Gain on sale of fixed assets                                                             (9)       --
Origination of loans held for sale                                                   (4,388)     (1,097)
Proceeds from sales of loans held for sale                                            4,034       1,108
Increase in accrued interest receivable                                                (225)        (16)
Increase in other assets                                                               (870)       (546)
(Decrease) increase in accounts payable and other liabilities                          (435)        405
Other, net                                                                             (800)       (437)
                                                                                   --------    --------

     Net cash provided by operating activities                                          274       2,528
                                                                                   --------    --------


CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans held for investment                                           (49,308)    (15,557)
Proceeds from sales of investment securities available for sale                        --         3,730
Purchases of mortgage backed securities available for sale                          (14,424)     (6,032)
Principal repayments on mortgage backed securities                                   16,712       4,259
Proceeds from sales of mortgage backed securities available for sale                  2,907      12,572
Redemptions of FHLB stock                                                              --           406
Proceeds from the sale of fixed assets                                                    9        --
Purchases of premises and equipment                                                    (777)       (336)
                                                                                   --------    --------

     Net cash used in investing activities                                          (44,881)       (958)
                                                                                   --------    --------
<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>

                                                           8
<PAGE>
<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000
(Dollars In Thousands)
---------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                FOR THE SIX MONTHS
                                                                                  ENDED JUNE 30,
                                                                               --------------------
                                                                                 2001        2000
                                                                               --------    --------
<S>                                                                              <C>         <C>
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits                                                         10,551      20,053
Proceeds (repayments) from FHLB advances, net                                    19,000      (9,000)
(Repayments) proceeds of securities sold under agreements to repurchase, net       --        (2,410)
Proceeds of other borrowings, net                                                   184        --
Cash dividends paid to stockholders                                                --          (274)
Purchases of treasury stock                                                        --        (1,251)
Sales of treasury stock                                                             863         122
Sales of treasury stock for stock compensation plans                               --           216
                                                                               --------    --------

     Net cash provided by financing activities                                   30,598       7,456
                                                                               --------    --------

NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS                              (14,009)      9,026

CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   25,159      12,833
                                                                               --------    --------

CASH & CASH EQUIVALENTS AT END OF PERIOD                                       $ 11,150    $ 21,859
                                                                               ========    ========



SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:

     Interest on deposits and borrowings                                       $ 10,131    $  9,217
     Income taxes                                                                 2,000       2,050


SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES

Loans transferred to held for investment, at market value                            85         202

<FN>
See Notes to Condensed Consolidated Financial Statements
</FN>
</TABLE>

                                                           9
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 1:  Basis Of Presentation

         The accompanying  condensed consolidated unaudited financial statements
have been prepared in accordance with accounting  principles  generally accepted
in the United States of America ("GAAP") for interim  financial  information and
with  the   instructions  to  Form  10-Q  and  Article  10  of  Regulation  S-X.
Accordingly,  they do not include all of the information and footnotes  required
by GAAP for annual  financial  statements.  In the  opinion of  management,  all
necessary   adjustments,   consisting  only  of  normal  recurring  adjustments,
necessary for a fair presentation have been included.  The results of operations
for the three and six month  periods  ended  June 30,  2001 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 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  small   businesses.   All   significant   intercompany
transactions and balances have been eliminated.

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

         These unaudited  condensed  consolidated  financial  statements and the
information under the heading "Item 2.  Management's  Discussion And Analysis Of
Financial  Condition And Results Of Operations"  and the  information  under the
heading "Item 3. Quantitative And Qualitative Disclosure About Market Risk" have
been prepared with 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, 2000 included in the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.

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

                                       10
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 2.  Computation Of Earnings Per Share

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

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

         There was no  difference  in the  numerator,  net  income,  used in the
calculation  of basic  earnings per share and diluted  earnings  per share.  The
denominator  used in the  calculation  of basic  earnings  per share and diluted
earnings per share for the three and six month  periods  ended June 30, 2001 and
2000 is reconciled in the following  table.  The following table also reconciles
the  calculation  of the  Company's  Basic EPS and  Diluted  EPS for the periods
indicated.

<TABLE>
<CAPTION>
                                                 For The Three Months          For The Six Months
                                                     Ended June 30,               Ended June 30,
                                              ---------------------------   --------------------------
(In Whole Dollars And Whole Shares)
                                                 2001          2000              2001          2000
                                                 ----          ----              ----          ----
<S>                                           <C>            <C>            <C>            <C>
Net income                                    $   949,000    $   554,000    $ 1,551,000    $ 1,353,000
                                              ===========    ===========    ===========    ===========

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

Less weighted average:
   Uncommitted ESOP shares                       (130,273)      (166,211)      (134,766)      (170,703)
   Non-vested stock award shares                  (30,348)       (71,322)       (31,981)       (71,664)
   Treasury shares                             (1,069,461)    (1,179,399)    (1,080,716)    (1,142,929)
                                              -----------    -----------    -----------    -----------
Sub-total                                      (1,230,082)    (1,416,932)    (1,247,463)    (1,385,296)
                                              -----------    -----------    -----------    -----------

Weighted average BASIC shares outstanding       3,262,003      3,075,153      3,244,622      3,106,789

Add dilutive effect of:
   Stock options                                   38,175          1,250         42,452          6,581
   Stock awards                                       417           --              503            244
                                              -----------    -----------    -----------    -----------
Sub-total                                          38,592          1,250         42,955          6,825
                                              -----------    -----------    -----------    -----------

Weighted average DILUTED shares outstanding     3,300,595      3,076,403      3,287,577      3,113,614
                                              ===========    ===========    ===========    ===========

Earnings per share:

   BASIC EPS                                  $      0.29    $      0.18    $      0.48    $      0.44
                                              ===========    ===========    ===========    ===========

   DILUTED EPS                                $      0.29    $      0.18    $      0.47    $      0.43
                                              ===========    ===========    ===========    ===========
</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 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 (losses)  included
in other  comprehensive  income for  investment and mortgage  backed  securities
classified  as  available  for sale for the three and six months  ended June 30,
2001 and 2000 are summarized as follows:
<TABLE>
<CAPTION>
                                                      Three Months Ended June 30,           Six Months Ended June 30,
                                                      ---------------------------           -------------------------
                                                        2001              2000                 2001             2000
                                                        ----              ----                 ----             ----
(Dollars In Thousands)
<S>                                                   <C>                <C>                  <C>             <C>
Gross reclassification adjustment                     $   --             $   2                $  34           $  (77)
Tax (expense) benefit                                     --                (1)                 (14)              32
                                                      ------             -----                -----           -------

Reclassification adjustment, net of tax               $   --             $   1                $  20           $  (45)
                                                      ======             =====                =====           =======
</TABLE>

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

<TABLE>
<CAPTION>
                                                           Three Months Ended                  Six Months Ended
                                                                June 30,                            June 30,
                                                       ---------------------------        ---------------------------
                                                            2001          2000                 2001          2000
                                                            ----          ----                 ----          ----
(Dollars In Thousands)

<S>                                                        <C>          <C>                  <C>           <C>
Holding gain (loss) arising during the period,
  net of tax                                               $ 186        $ (162)              $  465        $ (307)
Reclassification adjustment, net of tax                       --            (1)                 (20)           45
                                                           -----        -------              ------        -------

Net unrealized gain (loss) recognized in
     other comprehensive income                            $ 186        $ (163)              $  445        $ (262)
                                                           =====        =======              ======        =======

</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  from time to time.  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, 2000             757,929         550,236           325,502           80,150         127,543         $9.76
March 31, 2001                757,929         468,687           248,799          171,699         117,543        $10.05
June 30, 2001                 757,929         418,384           249,655          174,992         164,553        $10.05

</TABLE>

Activity during the three and six months ended June 30, 2001 included:

                            Three Months Ended           Six Months Ended
                                 June 30, 2001              June 30, 2001
                                 -------------              -------------
Granted                                  8,500                     18,500
Canceled                                55,510                     55,510
Exercised                                3,293                     94,842
Vested                                  18,557                     33,403

         The exercise price of individual vested stock options ranged from a low
of $8.19 per share to a high of $16.60 per share as of June 30, 2001.

                                       13
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 5:  Stock Award Plans

         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 from time to time the Company has utilized unallocated or
forfeited  PEP  shares  for  immediately  vested  stock  grants  in lieu of cash
compensation.  It is the  Company's  intention to utilize some or all of the PEP
shares  available  at June  30,  2001 in lieu of cash  compensation  during  the
remainder   of   2001.   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. The following table summarizes the status
of this plan:

<TABLE>
<CAPTION>
                                                                                            Stock
                                                                           Stock           Awards
                                       Stock             Stock            Awards        Available
                                      Awards            Awards      Cumulatively       For Future
Date                              Authorized       Outstanding            Vested           Grants
----                              ----------       -----------            ------           ------
<S>                                  <C>                <C>              <C>                <C>
December 31, 2000                    141,677            35,079           106,598               --
March 31, 2001                       141,677            31,082           110,595               --
June 30, 2001                        141,677            23,782           113,895            4,000
</TABLE>


         Activity during the three and six months ended June 30, 2001 included:

                     Three Months Ended          Six Months Ended
                          June 30, 2001             June 30, 2001
                          -------------             -------------
Granted                           1,350                     2,675
Canceled                          5,350                     6,675
Vested                            3,300                     7,297




                                       14
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 6:  Commitments & Contingencies

         At June 30, 2001,  commitments  maintained by the Company included firm
commitments  to originate  $35.0  million in various types of loans and optional
commitments  to sell $1.7  million  in fixed  rate  residential  mortgages  on a
servicing released basis. The Company maintained no firm commitments to purchase
loans or securities,  to assume  borrowings,  or to sell  securities at June 30,
2001.

         At June 30,  2001,  the Company was  participating  in ongoing  binding
arbitration  to  address  claims by the  former  President  and Chief  Operating
Officer  regarding  payments due under his  employment  contracts.  In the third
quarter of 2000, the Company  established a $250 thousand reserve for settlement
of these  claims.  At this time,  the Company,  after  conferring  with counsel,
believes this reserve to be adequate to cover its liabilities in this regard.

NOTE 7:  Recent Accounting Pronouncements

         In  June  2001,  the  Financial  Accounting  Standards  Board  ("FASB")
approved for issuance Statement of Financial Accounting Standard (SFAS) No. 141,
"Business  Combinations",  and  SFAS  No.142,  "Goodwill  and  Other  Intangible
Assets".  SFAS No. 141 requires that all business  combinations  initiated after
June 30, 2001 be  accounted  for under the  purchase  method of  accounting  and
addresses  the  initial  recognition  and  measurement  of  goodwill  and  other
intangible assets acquired in a business combination. SFAS No. 142 addresses the
initial  recognition and measurement of intangibles assets acquired outside of a
business  combination  whether  acquired  individually  or with a group of other
assets.  SFAS No. 142 also addresses the recognition and measurement of goodwill
and other  intangibles  assets  subsequent  to their  acquisition.  SFAS No. 142
provides that  intangible  assets with finite useful lives will be amortized and
that goodwill and intangible assets with indefinite lives will not be amortized,
but will be required to be tested at least annually for impairment.  The Company
is required to adopt SFAS No. 142 beginning  January 1, 2002.  Early adoption is
not permitted.  The Company does not expect the adoption of SFAS No. 142 to have
a material  effect on its financial  position,  results of  operations,  or cash
flows,  as the  Company  had no  goodwill  as of June 30, 2001 and as all of the
Company's  intangible  assets at June 30, 2001 were  comprised  of core  deposit
intangibles that will continue to amortize.

NOTE 8:  Reclassifications

         Certain  amounts in the December  31, 2000 and June 30, 2000  financial
statements  have been  reclassified  to conform to the June 30,  2001  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,  projections
of  future   performance,   potential   future  credit   experience,   perceived
opportunities in the market, 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,  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,  2000.  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.

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 June 30,  2001,  the  Company  had $518.8  million in total  assets,
$441.5 million in net loans  receivable,  and $418.3 million in total  deposits.
The Company is subject to regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC").  The principal executive
offices  of the  Company  and the Bank are  located  at 567 Auto  Center  Drive,
Watsonville,  California,  95076,  telephone number (831) 768 - 4800,  facsimile
number (831) 722 - 6794. The Company may also be contacted via  electronic  mail
at: INFO@MONTEREYBAYBANK.COM. The Bank is a member of the Federal Home Loan Bank
of San  Francisco  ("FHLB")  and its  deposits  are  insured  by the FDIC to the
maximum extent permitted by law. Additional information regarding the Company is
available at the  www.montereybaybank.com  Internet site. The Company's Internet
site is not part of this Form 10-Q.

         The Company conducts  business from eight branch offices,  11 automated
teller   machines   ("ATM's")   including  two   stand-alone   ATM's,   and  its
administrative  facilities.  In addition,  the Company  supports  its  customers
through  bilingual  (English  / Spanish)  24 hour  telephone  banking,  Internet
banking,  electronic  bill payment,  and ATM access through an array of networks
including STAR, CIRRUS,  and PLUS.  Through its network of banking offices,  the
Bank  emphasizes   personalized   service  focused  upon  two  primary  markets:
households and small  businesses.  The Bank offers a wide  complement of lending
and deposit products.


                                       16
<PAGE>

         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  life  insurance,  fire  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  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.  During the six months  ended June 30,  2001,  the  Company
incurred non-recurring operating costs associated with the March 2001 conversion
of its primary  data  processing  systems of  approximately  $447  thousand;  in
addition to the  approximately  $108 thousand of similar  costs  incurred in the
fourth quarter of 2000.

Recent Developments

         Recent regulatory and financial industry developments have included the
following:

o    Federal  legislation  reforming  the  bankruptcy  code  remains  stalled in
     Congress.  This  legislation,  depending upon its final form, if any, could
     potentially assist the Bank in collecting on certain credits.

o    Congress, the California State Legislature,  and various other governmental
     or  municipal  entities  have  been  considering   legislation  to  address
     "predatory lending".  While the Company does not conduct the practices most
     often referred to in the media as being "predatory",  the passage of one or
     more pieces of  legislation in this regard could  potentially  increase the
     Company's cost of doing business, as the Company could possibly be required
     to comply with multiple and perhaps inconsistent laws and regulations.

o    Federal financial institution regulators on July 6, 2001 finalized a policy
     statement for the allowance  for loan and lease  losses.  In addition,  the
     Securities & Exchange Commission ("SEC") issued a parallel Staff Accounting
     Bulletin (No. 102). The policy  statement  clarifies that a bank's board of
     directors is responsible for maintaining  proper reserves;  states that the
     process  for  reserve  determination  must be  thorough,  disciplined,  and
     consistently  enforced;  and says reserves  should be supported by adequate
     and  suitable  documentation.  The Company  does not  believe  that the new
     policy statement will have a material impact on its financial  condition or
     results of operations.

o    New  capital  and  membership  rules  for the FHLB  System  continue  to be
     drafted, with implementation  anticipated during late 2001. The FHLB-SF has
     circulated  a draft  capital  plan.  The Company does not believe that this
     draft plan would materially impact the Bank's balance of FHLB capital stock
     owned.

o    Federal  regulators  of  insured  depository   institutions  have  recently
     requested   comments   regarding   potential   changes  in  the   Community
     Reinvestment  Act ("CRA").  Areas under  consideration  for change  include
     revamping the investment test and redefining  assessment  areas in light of
     the impact of changes  in  technology.  The  Bank's  most  recent  publicly
     disclosed CRA rating is "satisfactory".

o    The Bank  implemented new federal  regulations  ("Regulation  P") governing
     customer   privacy   effective  July  1,  2001.  The  State  of  California
     Legislature  has  been  considering  potentially  different  and / or  more
     restrictive privacy requirements.

o    A possible  increase in (e.g.  from $100,000 to $200,000 per  depositor) or
     broadening of (e.g. all public agency deposits)  federal deposit  insurance
     coverage,  perhaps 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.

                                       17
<PAGE>

State of California Energy Crisis

         Through the end of July,  the 2001 State of  California  energy  crisis
presented only limited disruptions in the availability of electricity.  Moderate
weather,  lower natural gas prices,  new power plant openings,  and conservation
were among the factors that prevented the recurring  rolling blackouts that were
threatened in the spring. The Federal Energy Regulatory  Commission ("FERC") has
imposed certain regional electricity price caps. The California  legislature and
Governor Gray Davis  continue to debate  possible  longer term  solutions to the
State's energy crisis. The largest utility in the State,  Pacific Gas & Electric
Company  ("PG&E"),  remains in bankruptcy.  California is pursuing the sale of a
record sized municipal bond issue to finance the State's  purchases of energy in
2001. The State is also pursuing the collection of substantial  sums from energy
generators  who sold  energy  during  the  spring at what the  State  government
believes to have been extraordinarily high prices.

         The Company  cannot predict what the price and  availability  of energy
might be in California during the coming months. The Company also cannot predict
the impact of the energy crisis upon the pace and nature of economic activity in
the State,  and upon the  financial  condition  and debt  rating of the State of
California.

         The Company's  management  remains concerned about the potential impact
of the energy crisis upon the Company's  operations and the financial  condition
of its borrowers and funds availability from its depositors.  The Company itself
is not a particularly  large user of energy, as it conducts no manufacturing and
operates in a moderate  climate.  The  Company has a natural gas powered  backup
generator  installed  at its  administrative  headquarters  designed to keep its
computer  network  operational  in the  event  of an  electricity  brown-out  or
black-out.  The Company is in the process of acquiring a larger backup generator
with  sufficient   capacity  to  supply  all  functions  at  its  administrative
headquarters.  The Bank's  branches at this time do not have backup  generators,
and hence would need to limit their  operations  in the event of an  electricity
brown-out or black-out.

         As subsequently  discussed in this Report,  the uncertain impact of the
California  energy crisis upon  consumers and  businesses  and the pace of State
economic  activity was one factor in the Company's  increasing its allowance for
loan losses during the first half of 2001.

         The Company commenced a special credit review during the second quarter
of  2001  with  the  intent  to  identify  significant  credits  that  might  be
particularly and materially  adversely impacted by the California energy crisis.
This special review was in addition to the ongoing credit  monitoring  processes
conducted  by the  Company.  To date,  no loans  have been  identified  as being
directly and materially  adversely affected by the California energy crisis. The
Company has  historically  focused on real estate loans and has  conducted  only
limited lending to manufacturers and other industries with a significant rate of
energy  utilization.  The Company intends to continue this special credit review
during the third  quarter of 2001.  In  addition,  the Company  now  includes an
analysis of borrowers' exposure to energy availability and prices as part of its
underwriting process for new loans.

         Depending upon the results of the special credit review and the effects
of the California  energy crisis,  the Company might need to increase its levels
of provision for loan losses in future  periods above those that would have been
required in the absence of the California energy crisis.

         The Company is also  exposed to the  California  energy  crisis via the
State's  maintenance  of $16.0 million in time deposits with the Bank as of June
30, 2001. Should the State need to withdraw such deposits,  replacement  funding
for the Bank would likely be more expensive.

                                       18
<PAGE>

Overview Of Business Activity

         During  the  second  quarter  of  2001,   the  Company   continued  the
implementation  of its strategic plan of transforming  the Bank into a community
focused  commercial bank serving the financial needs of consumers and businesses
throughout  the Greater  Monterey  Bay Area.  Major  accomplishments  during the
second  quarter of 2001 included the expanded  utilization  of the new core data
processing  system  implemented  in  March,  2001,  the  hiring of  several  key
employees,  and the  attainment  of record levels of total  assets,  loans,  and
deposits at June 30, 2001.

         Significant  events during the three and six months ended June 30, 2001
included:

1.   The Company's  ratio of net loans to total assets  increased  from 80.6% at
     December 31, 2000 to 85.1% at June 30, 2001,  consistent with the strategic
     objective of better supporting the credit needs of California communities.

2.   Several new professional  bankers were hired to augment the Company's sales
     to doctors,  accountants,  attorneys,  and other  professionals  while also
     providing improved service to the Bank's retail customers.

3.   The Company maintained favorable credit quality,  with just $1.1 million in
     non-accrual  loans at June 30,  2001 and $26  thousand  in net  charge-offs
     during 2001.

4.   The Board of Directors  reduced its size to ten following two  retirements,
     thereby reducing future non-interest expense.

5.   The Bank hired a new Chief Administrative Officer with over twenty years of
     banking experience.

6.   The Company continued to enhance its technology  utilization  following the
     March  2001  conversion  of its  primary  data  processing  system  from an
     external  service  bureau to an in-house  system built upon client / server
     and relational database technology.

7.   The Bank  initiated its first major  marketing  campaign of 2001,  centered
     about the theme "Monterey Bay Bank. Expect More. Get The Best."

8.   MBBC  downstreamed  $300  thousand in capital to the Bank during the second
     quarter of 2001 to support the expansion in the Bank's balance sheet.

         The Board of Directors and management have targeted this transformation
strategy  based on their  belief that this  approach  presents  the best current
opportunity to enhance long term  stockholder  value. As evidence of the Board's
personal and  professional  support for the Company and its strategic  plan, the
Directors have voted to continue receiving their retainer fees in Company common
stock.  In addition,  the Company has continued to pursue the use of stock based
compensation  in lieu of cash  compensation  as a  means  of  aligning  employee
interests with improvements in stockholder value.

         During  2001,  the Company also  achieved  progress in  addressing  two
historical issues that have consumed significant resources:

A.   The Special Residential Loan Pool, originally $40.0 million at its purchase
     in 1998,  (see "Special  Residential  Loan Pool")  comprised of residential
     mortgages with a lower credit quality than typically  accepted by the Bank,
     paid down to $7.3 million by July 20,  2001,  compared  with $16.5  million
     outstanding  at December 31, 2000,  with the seller / servicer for the pool
     continuing to meet its obligation to absorb all credit losses.

B.   The Company commenced binding arbitration during the second quarter of 2001
     to  address  claims by the former  President  and Chief  Operating  Officer
     regarding  payments  due under his  employment  contracts.  This  issue has
     required  significant  management  time and has generated  $161 thousand in
     legal costs over the past six months.


                                       19
<PAGE>

         Looking  forward  at the  remainder  of  2001,  the  Company  plans  to
substantially   complete  the   installation   of  the   technology   and  human
infrastructure  integral to the Bank's  conversion  from a savings & loan into a
community  focused  commercial bank. The Bank is under no immediate  pressure to
pursue a change in charter at this time, as its Qualified  Thrift Lender ("QTL")
ratio was 74.6% at June 30, 2001,  compared to a minimum requirement of 65.0% to
retain its federal thrift charter.

         In  conjunction  with its strategic  plan,  the Company also intends to
accelerate  the  transformation  of its balance sheet toward a greater amount of
income  property  and  business  lending  funded  with a  higher  percentage  of
transaction accounts. In addition,  the Company has targeted improvements in its
efficiency  ratio and  return  on  stockholders'  equity,  two key  measures  of
financial  performance where the Company has lagged peer institutions.  However,
the Company  cannot  provide  assurance  regarding  its future  results in these
regards,  with such  uncertainty  magnified by the  economic  and energy  issues
facing California in 2001.

Changes In Financial Condition From December 31, 2000 To June 30, 2001

         Total assets  increased $32.6 million,  or 6.7%, from $486.2 million at
December  31,  2000 to a record  $518.8  million at June 30,  2001.  The rise in
assets  was  centered  in loans and was  funded  with a  combination  of greater
deposits, increased borrowings, and an expansion in stockholders' equity.

         Cash & cash  equivalents  decreased  from $25.2 million at December 31,
2000 to $11.2  million at June 30,  2001.  The Company  maintained a higher than
usual balance of cash & cash  equivalents at the end of 2000 in part due to loan
prepayments  occurring late in the year and the Company's not reinvesting  those
proceeds into longer term assets before year end 2000. In addition,  strong loan
funding  demand at the end June 2001 led to the Company's  drawing down its cash
equivalents at the end of the second quarter.

         Investment securities available for sale were little changed during the
first six months of 2001,  totaling  $7.4 million at both  December 31, 2000 and
June 30,  2001.  At both  December  31, 2000 and June 30,  2001,  the  Company's
investment  security  portfolio  was  identically  composed of two floating rate
corporate trust preferred bonds rated "A-" or better by Standards & Poors.

         Mortgage  backed  securities  available for sale  decreased  from $43.0
million at December 31, 2000 to $38.5 million at June 30, 2001. After purchasing
$14.4 million in primarily  Agency mortgage backed  securities  during the first
quarter of 2001, the Company ceased  purchases during the second quarter of 2001
in favor of  redirecting  cash flows into the  expansion of the loan  portfolio.
Prepayments on mortgage backed securities were significant during the first half
of 2001 due to a  combination  of the lower  interest rate  environment  and the
payoff  and  / or  pay  down  of  various  collateralized  mortgage  obligations
("CMO's"),  particularly planned amortization classes ("PAC's") that the Company
had purchased over the past year in anticipation of the funding requirements for
expanded lending in 2001 in conjunction with the implementation of the strategic
plan.

         During the first  quarter of 2001,  the Bank  purchased a $1.0  million
fixed rate Agency mortgage backed security comprised of loans to low to moderate
income borrowers in the Bank's lending area. The Bank conducts such purchases in
support of its local  communities and as part of its proactive efforts under the
CRA.  The Bank  also  places  certificates  of  deposit  with  minority  focused
financial institutions as part of its CRA program.

         The mortgage backed  securities  purchased  during the first quarter of
2001 were a mix of fixed and variable rate Agency pass-through  securities,  and
Agency and non-Agency fixed rate, relatively low duration CMO's.

         During the first quarter of 2001, the Bank sold a $2.9 million position
in a long term,  fixed rate Agency mortgage backed security in conjunction  with
its asset / liability management program. The Company's management believed that
re-allocating the asset duration from the security to new loans would facilitate
better  community  support  and  derive a  higher  yield  for the same  level of
exposure to future increases in general market interest rates.


                                       20
<PAGE>

         Loans held for sale  increased  from none at December  31, 2000 to $383
thousand at June 30, 2001. The Company's pace of mortgage  banking  activity has
accelerated in 2001 in conjunction with the Federal  Reserve's six interest rate
cuts and  declines  in  mortgage  rates  from  their  levels  of one  year  ago,
generating  borrower  impetus to  refinance.  The Company sells most of its long
term, fixed rate residential  mortgage production into the secondary market on a
servicing  released basis. All loans held for sale at June 30, 2001 were matched
with optional  commitments to deliver such loans into the secondary market.  The
Company sells its long term, fixed rate residential mortgages and purchases more
interest  rate  sensitive  loans as part of its  interest  rate risk  management
program.

         Loans  held for  investment,  net,  increased  from  $391.8  million at
December  31, 2000 to a record  $441.1  million at June 30,  2001.  The increase
resulted from a combination of strong internal loan  originations  and from pool
purchases  of various  types of  California  real estate  loans.  Net loans as a
percentage of total assets increased from 80.6% at December 31, 2000 to 85.1% at
June 30, 2001,  in  conjunction  with the Company's  strategy of supporting  its
interest  margin,  fostering  economic  activity in its local  communities,  and
effectively utilizing the Bank's capital. However, because $21.4 million in loan
pool purchases were funded in June 2001, the Company  generated only limited net
interest  income from such during the second  quarter.  The Company  follows its
customary  underwriting  policies in evaluating loan pools. The expansion in the
Bank's loan portfolio during 2001 has been facilitated by the downstream of $2.1
million and $300 thousand in capital from MBBC during the fourth quarter of 2000
and the second quarter of 2001, respectively.

         Even with the strong second quarter 2001 loan production, the Company's
pipeline at June 30, 2001 remained at a historically high level, including $35.0
million in outstanding firm loan commitments by the Bank,  portending additional
loan portfolio  expansion during the third quarter of 2001. The pipeline at June
30, 2001 included a number of commercial  credits,  as the Company has continued
to  gradually  expand its lending to local  businesses  in  conformity  with its
strategic plan.  Commercial  loans  represented  1.3% of gross loans at June 30,
2001.

         The Company reversed its long term loan portfolio  diversification away
from  residential  mortgages  during  the  first  half of  2001,  in part due to
management's  concerns about the near term status of the  California  economy in
general and construction lending in particular.  Residential mortgages comprised
43.4% of gross loans at June 30, 2001,  up from 37.8% at December  31, 2000.  In
contrast,  construction loans declined from 13.9% of gross loans at December 31,
2000 to 10.0% of gross loans at June 30, 2001. In addition,  land loans declined
from 3.8% of gross loans at December  31, 2000 to 2.8% of gross loan at June 30,
2001. A total of 79.2% of the Company's  outstanding  construction loan balances
at June 30, 2001 were associated with housing.

         During the first  quarter of 2001,  the  Company  tightened  its credit
criteria for land and construction  loans,  with a particular focus on requiring
greater borrower equity  contribution and liquidity for new construction  loans.
This credit  tightening  did not occur in response  to any  specific  decline in
credit quality in the Company's loan  portfolio,  but rather as a proactive step
in light of the slowing national economy and the unique issues facing California
stemming  from an uncertain  supply and price of energy and the weakening of the
technology sector.

         During  the  second  half of 2001,  the  Company  intends  to  continue
pursuing its long term shift in loan mix toward income property lending,  with a
particular focus on mortgages secured by multifamily buildings and various types
of  commercial  real estate  that is other than  single-use.  Multifamily  loans
increased  from $76.7  million at December 31, 2000 to $88.4 million at June 30,
2001.  Cash flows for apartment  buildings in many parts of California have been
bolstered  in the past  year by a  combination  of  lower  debt  service  due to
declining  interest  rates and  greater  revenue due to a  combination  of lower
vacancy rates and higher rental rates.  Construction  of new  apartments in many
parts of California  has lagged demand,  resulting in more  favorable  financial
conditions for apartment building owners.

         The Company also intends to pursue increased lending to small to medium
sized businesses  during  subsequent  quarters in 2001, with an initial focus on
lending to local  companies,  many of which have been depositors at the Bank for
several years. The Company also intends to increase its lending to professionals
(e.g. accountants,  doctors,  attorneys) in the Greater Monterey Bay Area during
the second  half of 2001.  Early in the second  quarter of 2001,  the Bank hired
additional  professional  bankers and commercial  lenders,  consistent  with the
strategic transformation of the Bank into a community focused commercial bank.

                                       21
<PAGE>

         Additional  information regarding the composition of the Company's loan
portfolio is presented in the following table:

<TABLE>
<CAPTION>
                                                                  June 30,   December 31,
                                                                    2001         2000
                                                                 ---------    ---------
(Dollars In Thousands)
<S>                                                              <C>          <C>
Held for investment:
   Loans secured by real estate:
      Residential one to four unit                               $ 202,650    $ 160,155
      Multifamily five or more units                                88,442       76,727
      Commercial and industrial                                    103,890      102,322
      Construction                                                  46,613       59,052
      Land                                                          13,097       16,310
                                                                 ---------    ---------

   Sub-total loans secured by real estate                          454,692      414,566

   Other loans:
      Home equity lines of credit                                    5,950        5,631
      Loans secured by deposits                                        222          494
      Consumer lines of credit, unsecured                              192          175
      Business term loans                                            1,978        1,641
      Business lines of credit                                       4,113        1,438
                                                                 ---------    ---------

   Sub-total other loans                                            12,455        9,379

   Sub-total gross loans held for investment                       467,147      423,945

   (Less) / Plus:
      Undisbursed construction loan funds                          (19,928)     (26,580)
      Unamortized purchase premiums, net of purchase discounts         205           21
      Deferred loan fees and costs, net                               (158)        (202)
      Allowance for estimated loan losses                           (6,138)      (5,364)
                                                                 ---------    ---------

Loans receivable held for investment, net                        $ 441,128    $ 391,820
                                                                 =========    =========

Held for sale:
   Residential one to four unit                                  $     383    $    --
                                                                 =========    =========
</TABLE>

         Premises and  equipment,  net,  increased from $7.4 million at December
31, 2000 to $7.9 million at June 30, 2001 primarily due to hardware and software
purchases in support of the new core processing system.

         Core deposit premiums,  net, declined by $341 thousand during the first
six  months  of  2001 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.


                                       22
<PAGE>

         Total deposits  increased from $407.8 million at December 31, 2000 to a
record $418.3 million at June 30, 2001. Key trends within the deposit  portfolio
included:

o    Non-interest  bearing  demand  deposits  increased  from  $17.1  million at
     December  31,  2000 to  $20.2  million  at June  30,  2001.  This  rise was
     supported by balances maintained by new commercial  business customers,  as
     the Bank  often  requires  a certain  amount of  compensating  balances  in
     conjunction  with a  commercial  credit  facility.  The  Company  has  also
     targeted  attracting DDA balances as part of its sales management  program.
     This increase was also  supported by the Bank's  issuing  checks on its own
     account following the computer systems conversion. Outstanding checks drawn
     on the Bank's own account are accounted for as demand deposits.

o    Interest  bearing NOW checking  account  balances  decreased  slightly from
     $41.9 million at December 31, 2000 to $41.5  million at June 30, 2001.  The
     Company  revamped its checking  products in March 2001 in conjunction  with
     the core processing system conversion, expanding the use of tiered interest
     rates as a vehicle for encouraging customers to increase their balances and
     concentrate their accounts with the Bank. In addition,  the Bank introduced
     bilingual  (English and Spanish)  telephone banking and continued to market
     Internet banking and electronic bill payment.

o    Savings deposits increased from $16.5 million at December 31, 2000 to $20.0
     million  at  June  30,  2001.  This  increase  was  primarily  due  to  the
     re-categorization  of  approximately  $4.2  million in balances  from money
     market  accounts  to savings  accounts  in  conjunction  with the  computer
     systems  conversion.  By the end of the first quarter of 2001,  the Company
     eliminated its passbook based deposit  accounts in favor of statement based
     accounts that integrate effectively with global ATM networks,  debit cards,
     Internet  banking,  and  telephone  access.  Management  also believes that
     statement based deposit  products  present a lower  likelihood of operating
     losses and provide a more regular  opportunity  for customer  communication
     and marketing.

o    Money market  deposits  declined from $87.7 million at December 31, 2000 to
     $85.2 million at June 30, 2001,  resulting  from the  re-categorization  of
     certain deposit accounts discussed above. During the first quarter of 2001,
     the Company repositioned its consumer money market accounts to better serve
     three distinct market segments,  with the accounts designed for each market
     segment  including  tiered  interest rates and  comprehensive  and flexible
     access.

o    Certificate of deposit  balances  increased from $244.7 million at December
     31, 2000 to $251.4  million at June 30, 2001.  The Company  redesigned  its
     certificate of deposit products during the first quarter of 2001, providing
     the  opportunity  for customers to earn higher interest rates by increasing
     their  balances,  expanding  their  relationship  with the  Bank,  and / or
     incrementally  extending  the term of their  accounts.  During  the  second
     quarter of 2001, the Company  advertised certain relatively higher rate "CD
     Specials" with the objective of attracting  new retail  customers who might
     subsequently  expand their relationship with additional  financial products
     and services. In addition,  the Company received an additional  certificate
     of deposit of $2.0 million from the State of  California  during the second
     quarter of 2001. During most of 2001, the Company has priced it longer term
     (18 to 60 months) certificates of deposit attractively as part of its asset
     / liability  management  program and to encourage the development of longer
     term customer relationships.

         During the first quarter of 2001,  the Company  generally  targeted its
deposit rates at a higher competitive market percentile (i.e.  relatively higher
than usual) due to concerns about  potential  customer  impact stemming from the
computer systems conversion.  For example,  while the Company worked to minimize
the  customer  impact of branch  staff  being  allocated  to training on the new
computer  system in advance of its  implementation,  branch staffing was lighter
than  targeted  levels  during parts of the first quarter of 2001. By the end of
the second quarter of 2001, the Company had returned its deposit pricing to more
traditional levels.

         Through the first six months of 2001,  the Company  experienced  active
competition  for  certificates of deposit from several  financial  institutions,
particularly  two large thrifts that  frequently  offered above market  interest
rates on various types of deposit accounts.

                                       23
<PAGE>

         Following the computer systems  conversion,  the Company experienced an
increase in the rate of deposit  account  closures.  The account  closures  were
concentrated  in lower  balance  transaction  accounts  that  became  subject to
service charges  because of the new fee and service charge schedule  implemented
with the computer  systems  conversion.  Certain  operational  issues  affecting
customers arose following the conversion,  also  contributing to certain deposit
account  closures.   However,  the  majority  of  these  operating  issues  were
successfully addressed in the weeks following the computer systems conversion.

         While the  growth in total  deposits  during the first half of 2001 was
favorable,  the Company did not  achieve  the desired  progress in altering  the
deposit mix to contain a higher percentage of transaction accounts.  Transaction
accounts  constituted  39.9% of total deposits at June 30, 2001, almost constant
versus 40.0% at December 31, 2000. Effecting a change in deposit mix is integral
to the Company's  strategic  plan, as transaction  accounts  provide for a lower
cost of funds versus most other funding  sources,  generate fee income,  furnish
opportunities  for cross-selling  other products and services to customers,  and
are  typically  less interest rate  sensitive  than many other funding  sources.
During the second half of 2001, the Company intends to continue  emphasizing the
acquisition of transaction  accounts through  employee  incentives and via sales
calls by the recently hired commercial and professional bankers.

         The  Company's  ratio of loans to  deposits  increased  from  96.08% at
December  31,  2000 to  105.54% at June 30,  2001,  as the  strong  loan  growth
eclipsed  the  expansion  in  deposits.  In light of this ratio,  the Company is
exploring  various  strategic  alternatives  for  increasing  its funding  base,
including new sites for traditional  stand-alone branches and sites for branches
domiciled  within  larger  retail  outlets.  The Bank is currently  evaluating a
potential  site for a de novo stand alone branch in a market  adjacent to one of
its largest existing branches.  No assurance can, however,  be provided that the
Company  will be  successful  in  obtaining  additional  distribution  and sales
locations.

         Borrowings  increased  from $32.6 million at December 31, 2000 to $51.8
million at June 30, 2001.  The Company has  acquired  additional  FHLB  advances
during 2001 to provide  funding for the  expansion in the loan  portfolio and to
layer in borrowing  maturities during 2002 as part of the Bank's cash management
and asset / liability management programs. All of the Company's FHLB advances at
June 30,  2001  were  fixed  rate,  bullet  (non-amortizing),  without  embedded
options,  such as granting the FHLB the ability to call the  borrowing  prior to
maturity.  The new FHLB  advances  during  2001  were  collateralized  by assets
pledged from the Company's loan and securities portfolios.

         Total stockholders' equity increased from $43.8 million at December 31,
2000 to $47.1  million at June 30, 2001.  Factors  contributing  to the increase
included:

o    $1.6 million in 2001 year to date net income

o    continued  amortization  of  deferred  stock  compensation,  including  the
     issuance of certain compensation plan shares in lieu of cash compensation

o    the payment of Director retainer fees with Company common stock

o    the  exercise  of  ninety-five  thousand  vested  stock  options  by former
     employees   and   Directors,   generating   $901   thousand  in  additional
     stockholders' equity

o    $445  thousand  in  other  comprehensive  income,  net,  stemming  from the
     appreciation  in the  portfolios of securities  classified as available for
     sale,  which in turn resulted from the decline in general  market  interest
     rates during the first half of 2001

         The Company plans to continue  utilizing stock  compensation in lieu of
cash  compensation  for  certain  payments  during  the  second  half  of  2001.
Management believes that compensating employees in stock fosters an alignment of
employee interests with improvements in long term stockholder value. The Company
did not  conduct  any  share  repurchases  during  the first  half of 2001.  The
Company's  tangible book value per share  increased  from $12.54 at December 31,
2000 to $13.21 at June 30, 2001.

                                       24
<PAGE>

Interest Rate Risk Management And Exposure

         The table below  presents an overview of the interest rate  environment
during the eighteen months ended June 30, 2001. The 12MAT 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             12/31/99    3/31/00   6/30/00    9/30/00  12/31/00    3/31/01   6/30/01
-----------             --------    -------   -------    -------  --------    -------   -------
<S>                        <C>        <C>       <C>        <C>       <C>        <C>       <C>
3 month Treasury bill      5.31%      5.87%     5.85%      6.20%     5.89%      4.28%     3.65%
6 month Treasury bill      5.73%      6.14%     6.22%      6.27%     5.70%      4.13%     3.64%
1 year Treasury bill       5.96%      6.23%     6.05%      6.08%     5.36%      4.11%     3.63%
2 year Treasury note       6.24%      6.47%     6.36%      5.97%     5.09%      4.18%     4.24%
5 year Treasury note       6.34%      6.31%     6.18%      5.85%     4.97%      4.56%     4.95%
10 year Treasury note      6.44%      6.00%     6.03%      5.80%     5.11%      4.92%     5.41%
30 year Treasury bond      6.48%      5.83%     5.90%      5.88%     5.46%      5.44%     5.76%
Target federal funds       5.50%      6.00%     6.50%      6.50%     6.50%      5.00%     3.75%
Prime rate                 8.50%      9.00%     9.50%      9.50%     9.50%      8.00%     6.75%
12MAT                      5.08%      5.46%     5.79%      6.04%     6.11%      5.71%     5.10%
COFI                       4.85%      5.00%     5.36%      5.55%     5.62%      5.20%     4.50%
</TABLE>

         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.

         In recent  quarters,  the Company has maintained a relatively  balanced
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 about the same 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,  over the past  eighteen  months,
general market interest rates first increased  rapidly in early 2000,  reached a
plateau approximately during the third quarter of 2000, and then fell rapidly in
the first half of 2001. The Federal  Reserve cut its benchmark  interest rates a
total of six times  during the first half of 2001,  for a total  decrease of 275
basis points.  This decline  represented a historically rapid and aggressive set
of actions by the  Federal  Reserve,  as it sought to  reinvigorate  the pace of
national economic growth.

         Throughout  the  volatile  18 month  time  period  covered in the above
table,  the  impact of  changing  rates on the  Company's  interest  margin  was
moderate,  providing  empirical  support for the financial  modeling  previously
described.

         During the first  half of 2001,  the  Company  sought to  maintain  its
relatively  balanced  interest rate risk profile by avoiding adding  significant
volumes of long term,  fixed rate assets to the balance sheet.  Long term, fixed
rate assets are  relatively  more  challenging  to match fund, and therefore can
expose the Company to interest rate risk in rising  interest rate  environments.
During the first six months of 2001, the Company  continued to sell the majority
of its long term,  fixed rate  residential  loan  production  into the secondary
market on a servicing  released basis.  Mortgage backed security  purchases were
primarily either short term,  fixed rate or longer maturity,  but floating rate.
Loan pool purchases were generally  either  adjustable  rate or seasoned  hybrid
mortgages, as defined below.

                                       25
<PAGE>

         The  steeper  yield curve  present at the end of the second  quarter of
2001 combined with the lagging nature of the COFI and 12MAT indices to encourage
more  mortgage  borrowers  to select the  Company's  hybrid "3/1" and "5/1" loan
programs  versus  long term,  fixed rate loans or  traditional  adjustable  rate
mortgages.  The hybrid  programs  provide  initial fixed rates for three or five
years,  after which time the  mortgages  adjust their rates  semi-annually  at a
margin over the One Year Treasury Constant  Maturities Index.  Should this trend
continue  into the third  quarter of 2001,  the Company  could  become  somewhat
liability  sensitive in the absence of other actions to adjust its interest rate
risk profile.

         The Company's  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.  However,  management  is  concerned  about  the  possible  impact  of  a
potentially historically low interest rate environment during the second half of
2001 if the Federal Reserve determines to continue  decreasing interest rates in
an effort to support  the US economy.  If interest  rates reach very low levels,
the  Company  could  experience  additional  margin  compression  since rates on
various types of deposit accounts could reach either zero or near-zero, and thus
no longer provide an  opportunity  to reduce the Company's  cost of funding.  In
addition,  historically  low  interest  rates  could spur a  sufficiently  large
refinancing  wave that could present the Company with excess liquidity at a time
when reinvestment options would be relatively unattractive.

Liquidity

         Liquidity is actively managed to ensure  sufficient funds are available
to meet ongoing needs of both the Company in general and the Bank in particular.
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.

         At June 30,  2001,  the  Company  had  $11.2  million  in cash and cash
equivalents,  untapped  borrowing  capacity  in excess of $73.0  million  at the
FHLB-SF,  and a  significant  volume  of  residential  mortgages  that  could be
securitized,  liquidated,  or used in collateralized borrowings in order to meet
future  liquidity  requirements.  During  the third  quarter  of 2001,  the Bank
intends to pledge  additional  loan  collateral to the FHLB-SF and enroll in the
FHLB's  specific loan pledging  program in order to  significantly  increase its
borrowing capacity.

         MBBC and the Bank have each  entered  into  several  Master  Repurchase
Agreements to permit securities sold under agreements to repurchase transactions
with a  number  of  counterparties.  In  addition,  at June 30,  2001,  the Bank
maintained  $25.5  million in unsecured  federal funds lines of credit from four
correspondent  financial  institutions.  However, there can be no assurance that
funds from these lines of credit  will be  available  at all times,  or that the
lines will be maintained in future periods.  The Bank is able to issue wholesale
"DTC"  certificates of deposit through two large,  national  investment  banking
firms as an additional source of liquidity.

         At  June  30,  2001,  MBBC  on a  stand  alone  basis  had  cash & cash
equivalents of $4.2 million.  In addition,  MBBC had no outstanding balance on a
$2.0  million  revolving  line of credit.  The loan  agreement  for this line of
credit contains certain  restrictions on the use of borrowed funds,  including a
prohibition  for such funds to be used to repurchase  Company common stock.  The
Company  intends to seek an  increase  in this line of credit  before the end of
2001 in order to enhance MBBC's available liquidity.

         Due to additional capital  requirements  implemented by the OTS for the
Bank in  conjunction  with  the  Special  Residential  Loan  Pool,  the  Bank is
currently limited in its ability to pay dividends to MBBC.

                                       26
<PAGE>

         On June 19, 2001, the OTS issued Thrift  Bulletin 77, "Sound  Practices
for Liquidity Management at Savings Associations". This Thrift Bulletin provides
guidance  to  management  and  boards of  directors  of thrift  institutions  on
liquidity  management.  On March 15, 2001,  the OTS issued an interim final rule
that  repealed  a  statutory  liquidity  requirement  for the  Bank.  The  prior
requirement  mandated  that the Bank maintain an average daily balance of liquid
assets  of at  least  4.0% of its  liquidity  base  (as  defined).  The Bank is,
however,  still  required to maintain a safe and sound level of liquidity at all
times, and will be examined by the OTS in this regard.  Management believes that
having a surplus of available liquidity at all times is prudent. Management also
believes that the guidance contained within Thrift Bulletin 77 is fundamental to
effective financial management of the Bank.

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>


         The  following  table  summarizes  the capital  ratios  required for an
institution to be considered well capitalized and the Bank's regulatory  capital
at June 30, 2001 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                  $41,210       7.97%         $41,210      10.88%         $45,961      12.14%
Well capitalized requirement              25,847       5.00%          22,722       6.00%          37,871      10.00%
                                          ------       -----          ------       -----          ------      ------

Excess                                   $15,363       2.97%         $18,488       4.88%         $ 8,090       2.14%
                                         =======       =====         =======       =====         =======       =====

Adjusted assets (1)                     $516,939                    $378,707                    $378,707
                                        ========                    ========                    ========
<FN>

-------------------------------------
(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.
</FN>
</TABLE>

         The Bank  has  been  informed  by the OTS  that it is to  maintain  its
regulatory capital ratios at levels no less than those in effect at December 31,
1999 until further notice (see "Special  Residential Loan Pool").  The following
table   demonstrates  the  Bank's  compliance  with  this   institution-specific
regulatory capital requirement.

                                         June 30, 2001       December 31, 1999
                                         -------------       -----------------

Core capital to adjusted total assets            7.97%                   7.11%
Core capital to risk-weighted assets            10.88%                   9.58%
Total capital to risk-weighted assets           12.14%                  10.56%


                                       27
<PAGE>

         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).

         The following table summarizes these  regulatory  capital  requirements
for the Bank. As indicated in the table,  the Bank's  capital levels at June 30,
2001 exceeded all three of the currently  applicable  minimum regulatory capital
requirements.

                                                                     Percent Of
                                                                       Adjusted
(Dollars In Thousands)                                                    Total
                                                    Amount               Assets
                                                    ------               ------
Tangible Capital
----------------
Regulatory capital                                 $41,210                7.97%
Minimum required                                     7,754                1.50%
                                                     -----                -----

Excess                                             $33,456                6.47%
                                                   =======                =====

Core Capital
------------
Regulatory capital                                 $41,210                7.97%
Minimum required                                    20,678                4.00%
                                                    ------                -----

Excess                                             $20,532                3.97%
                                                   =======                =====

                                                                     Percent Of
                                                                          Risk-
                                                                       weighted
                                                    Amount               Assets
                                                    ------               ------
Risk-based Capital
------------------
Regulatory capital                                 $45,961               12.14%
Minimum required                                    30,297                8.00%
                                                    ------                -----

Excess                                             $15,664                4.14%
                                                   =======                =====

         At June 30, 2001, 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  and  institution-specific  requirements,  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.


                                       28
<PAGE>


Asset Quality / Credit Profile

Non-performing Assets

         The following  table sets forth  information  regarding  non-performing
assets at the dates indicated.

<TABLE>
<CAPTION>
(Dollars In Thousands)                                             June 30, 2001      December 31, 2000
                                                                   -------------      -----------------
<S>                                                                      <C>                    <C>
Outstanding Balances Before Valuation Reserves

Non-accrual loans                                                        $ 1,070                $ 4,666
Loans 90 or more days delinquent and accruing interest                        --                     --
Restructured loans in compliance with modified terms                          --                     75
                                                                         -------                -------

Total gross non-performing loans                                           1,070                  4,741

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

Total gross non-performing assets                                        $ 1,070                $ 4,741
                                                                         =======                =======

Gross non-accrual loans to total loans                                     0.24%                  1.17%
Gross non-performing loans to total loans                                  0.24%                  1.19%
Gross non-performing assets to total assets                                0.21%                  0.98%
Allowance for loan losses                                                 $6,138                 $5,364
Allowance for loan losses to non-performing loans                        573.64%                113.14%
Valuation allowances for foreclosed real estate                           $   --                 $   --

</TABLE>

         Non-accrual loans at June 30, 2001 are detailed in the following table:

(Dollars In Thousands)                          Number      Principal Balance
                                                    Of         Outstanding At
Category Of Loan                                 Loans          June 30, 2001
----------------                                 -----          -------------

Residential one to four unit mortgage                6                $ 1,039
Business line of credit                              1                     20
Business term loan                                   1                     11
Consumer line of credit                              1                     --
                                                 -----                -------

Total                                                9                $ 1,070
                                                 =====                =======


         In April 2001, the Bank collected in full on a $544 thousand commercial
& industrial real estate  mortgage and the $2.85 million  commercial real estate
construction loan that were on non-accrual  status and classified as substandard
at March 31, 2001.  Both loans were located in the Bank's  primary  market area.
The commercial  construction  loan had a $600 thousand specific reserve at March
31, 2001. In  conjunction  with both payoffs,  the Bank received all  principal,
interest,  fees, and expense reimbursements due. In addition,  during July 2001,
the Bank  collected in full on the $11 thousand  non-accrual  business term loan
included in the above table.

                                       29
<PAGE>

Criticized And Classified Assets

         The  following  table  presents  information  concerning  the Company's
inventory  of  criticized  ("OAEM")  and  classified  ("substandard"  and lower)
assets.  The category "OAEM" refers to "Other Assets Especially  Mentioned",  or
those assets which 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, 2000                           $ 2,283         $ 6,323            $ --           $ 600         $ 9,206
March 31, 2001                              $ 5,182         $ 4,897            $ --           $ 600         $10,679
June 30, 2001                               $ 5,100         $ 4,048            $ --           $  --         $ 9,148
</TABLE>

         Classified  assets as a percent of stockholders'  equity decreased from
15.8% at December 31, 2000 to 8.6% at June 30, 2001.

         The June 30, 2001 substandard  assets in the above table include a $2.3
million  "mini-perm"  mortgage loan participation  maturing in 2004 secured by a
beach resort in the Company's  primary business area. The resort has experienced
lower  occupancy  than  forecast,  contributing  to  a  reduced  cash  flow  and
inadequate  debt service  coverage.  The borrowers have continued to timely make
all loan payments,  however, and no delinquency was experienced through June 30,
2001.  The Company  downgraded  this loan from OAEM during the second quarter of
2001  because  of the  cash  flow  inadequacy  and  concerns  that  a  potential
additional  slowdown in economic  activity  might  further  reduce  occupancy or
realized average room rates. The Company intends to continue closely  monitoring
this loan.

         The Company's  total loans graded "OAEM" did not decline in conjunction
with the downgrade of the aforementioned  resort loan to substandard  because of
the  addition  of a $2.8  million  construction  loan to the list of  criticized
credits.  The construction loan is for the development of a residential  project
in the Coachella  Valley in southern  California.  The borrowers were current in
their payments at June 30, 2001. However, slower than anticipated sales of homes
and lots within the development led to the credit's being  identified as "OAEM".
In mid July 2001,  the borrowers  repaid over $500 thousand in principal on this
loan.

Impaired Loans

         At June 30, 2001,  the Company had total gross impaired  loans,  before
specific  reserves,  of $1.1 million,  constituting 9 credits.  This compares to
total gross  impaired  loans of $5.3 million at December  31, 2000.  Interest is
accrued on impaired  loans on a monthly basis except for those loans that are 90
or more days  delinquent  or those loans which are less than 90 days  delinquent
but where  management  has identified  concerns  regarding the collection of the
credit.  For the six months  ended June 30, 2001,  accrued  interest on impaired
loans  was zero and  interest  of $39  thousand  was  received  in cash.  If all
non-accrual  loans had been  performing in accordance  with their  original loan
terms,  the Company would have recorded  interest  income of $69 thousand during
the six  months  ended  June 30,  2001,  instead  of  interest  income  actually
recognized, based on cash payments, of $39 thousand.

Special Residential Loan Pool

         During 1998,  the Bank purchased a $40.0 million  residential  mortgage
pool  comprised  of loans  secured by homes  throughout  the nation  (but with a
concentration in California) that presented a borrower credit profile and / or a
loan to  value  ratio  outside  of  (less  favorable  than)  the  Bank's  normal
underwriting criteria. To mitigate its credit risk for this portfolio,  the Bank
obtained at purchase a scheduled  principal / scheduled  interest loan servicing
agreement from the seller.  Further,  this agreement also contains a guaranty by
the seller to absorb any  principal  losses on the portfolio in exchange for the
seller's retention of a portion of the loans' yield through loan servicing fees.
In obtaining these credit  enhancements,  the Bank  functionally  aggregated the
credit risk for this loan pool into a single  borrower credit risk to the seller
/ servicer  of the loans.  The Bank was  subsequently  informed  by the OTS that
structuring  the purchase in this manner made the  transaction  an "extension of
credit" by the Bank to the seller,  which,  by virtue of its size,  violated the
OTS' "Loans To One Borrower" regulation. The Bank continues to report to the OTS
in this regard on a monthly basis.

                                       30
<PAGE>

         At June 30, 2001, the  outstanding  principal  balance of this mortgage
loan pool was $8.1  million,  comprised  of 64  mortgages,  with  $721  thousand
received  during  July,  2001  (normal  monthly  remittance  cycle)  based  upon
prepayments  and scheduled  principal for June,  2001. At December 31, 2000, the
outstanding  principal balance of this mortgage loan pool was $16.5 million. The
loans in this  mortgage  pool bear  interest  rates  significantly  in excess of
current  market rates for similar new loans  extended to borrowers with moderate
or better credit profiles. This rate differential contributed to the prepayments
realized on the portfolio during the first half of 2001.

         Through the July 20, 2001  regularly  scheduled  remittance  date,  the
seller performed per the loan servicing  agreement,  making scheduled  principal
and interest  payments to the Bank while also absorbing all credit losses on the
loan portfolio.  At June 30, 2001, the Company categorized all loans within this
mortgage pool as performing based upon the continued payment  performance of the
seller.

         As of the July 20, 2001  remittance  and  reporting  date for  activity
through June 30, the mortgage pool included  three  foreclosed  properties.  The
seller  continued to advance  scheduled  interest and principal  payments to the
Company for these three  mortgages,  totaling  $503  thousand in loan  principal
balance.

         Despite  the  performance  of the  seller,  however,  the  Company  has
allocated  certain  reserves  to this  mortgage  pool at June  30,  2001  due to
concerns  regarding the potential losses by the seller in honoring the guaranty,
the present delinquency  profile of the pool, and the differential  between loan
principal  balances and current appraisals for foreclosed loans and loans in the
process of foreclosure.

         The  Company  continues  to  monitor  the  financial   performance  and
condition  of the seller on a monthly  basis.  The  earnings  and capital of the
seller  experienced  favorable  results during the first and second  quarters of
2001,  supported by the strong  mortgage  refinance  market.  In  addition,  the
Company  analyzes the payment  performance  and credit  profile of the remaining
outstanding loans on a monthly basis.

         During the first  quarter  of 2000,  the Bank was  informed  by the OTS
that:

1.   all loans  associated  with this loan pool would be required to be assigned
     to the 100% risk based capital category in calculating  regulatory  capital
     ratios that incorporate risk weighted assets

2.   the Bank's regulatory  capital position at December 31, 1999 and thereafter
     was mandated to reflect the above requirement

3.   until further notice, the Bank's regulatory capital ratios were required to
     be maintained at levels no lower than the levels at December 31, 1999

         Because  remaining  a  "well  capitalized"   financial  institution  is
integral to the Bank's  business  strategy and due to the planned  generation of
additional  regulatory  capital in 2001  through a  combination  of net  income,
amortization  of deferred stock  compensation,  and  amortization  of intangible
assets,  management does not foresee that the  aforementioned  requirements will
have a material adverse impact upon the Company in 2001. However, depending upon
the tenure of and any potential modification of the additional requirements,  as
determined by the OTS, such  requirements  could present an  unfavorable  impact
upon MBBC's  liquidity  and ability to pay cash  dividends to  stockholders  and
conduct share repurchases, as a result of potential restrictions upon the Bank's
ability to pay dividends to MBBC.

                                       31
<PAGE>

Allowance For Loan Losses

         The  allowance for loan losses is  established  through a provision for
loan losses based on  management's  evaluation of the risks inherent in the loan
portfolio.  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 which 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 following  table presents  activity in the Company's  allowance for
loan losses during the six months ended June 30, 2001 and June 30, 2000:
<TABLE>
<CAPTION>

                                                                                        Six Months Ended June 30,
                                                                         -----------------------------------------
                                                                                        2001                 2000
                                                                                        ----                 ----
Allowance For Loan Losses                                                               (Dollars In Thousands)
-------------------------

<S>                                                                                  <C>                  <C>
Balance at beginning of year                                                         $ 5,364              $ 3,502

   Charge-offs:
      Residential one to four unit real estate loans                                      --                 (371)
      Consumer lines of credit                                                            (1)                  --
      Business lines of credit                                                           (25)                  --
                                                                                     -------              -------
   Total charge-offs                                                                     (26)                (371)

   Recoveries                                                                             --                   --

   Provision for loan losses                                                             800                1,025
                                                                                     -------              -------

Balance at June 30                                                                   $ 6,138              $ 4,156
                                                                                     =======              =======

Annualized ratio of net charge-offs during the period to average
   loans receivable, net, outstanding during the period                                0.01%                0.20%


         Additional ratios applicable to the allowance for loan losses include:

                                                                               June 30, 2001      December 31, 2000
                                                                               -------------      -----------------

Allowance for loan losses as a percent of non-performing loans                       573.64%                113.14%

Allowance for loan losses as a percent of gross loans receivable
     net of undisbursed loan funds                                                     1.37%                  1.35%

Allowance for loan losses as a percent of classified assets                          151.63%                 77.48%
</TABLE>

                                       32
<PAGE>

         As subsequently  discussed (see "Provision For Loan Losses"), the lower
provision  for loan losses  recorded  during the first six months of 2001 versus
the same period in the prior year  resulted  from  multiple  factors,  including
lower net charge-offs,  the recapture of a $600 thousand specific reserve during
the  second  quarter  of 2001,  and  changes  in the  volume and mix of the loan
portfolio.

         Management anticipates that further growth in loans receivable, ongoing
emphasis on the  origination  and purchase of income property real estate loans,
and the  continuing  expansion  of  commercial  business  lending will result in
future  provisions  and in an  increase in the ratio of the  allowance  for loan
losses to loans  outstanding.  Experience across the financial services industry
indicates that  commercial  business 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 Six Months
Ended June 30, 2001 and June 30, 2000

General

         During the second quarter of 2001,  the Company  reported net income of
$949 thousand,  equivalent to $0.29 diluted earnings per share. This compares to
net income of $554 thousand, or $0.18 diluted earnings per share, for the second
quarter  of 2000.  Net income  during  the  quarter  ended  March 31,  2001 (the
immediately  preceding  quarter) was $602 thousand,  equivalent to $0.18 diluted
earnings per share.

         For the six months  ended June 30, 2001,  net income was $1.6  million,
equivalent to $0.47 diluted  earnings per share.  This compares to net income of
$1.4 million,  or $0.43 diluted  earnings per share, for the first six months of
2000.

         The  Company   realized  some  of  the  financial   benefits  from  its
transformation strategy during the first half of 2001. Net interest income rose,
primarily due to a larger average balance sheet fueled by increased deposits and
loans.  Customer  service  charge  income  expanded,  assisted  by the new fee &
service charge schedule and financial product revisions implemented with the new
core processing  system in March 2001. In addition,  the Company began realizing
certain operating  efficiencies from the new technology  environment  during the
second quarter of 2001. The Company  maintained high credit quality during 2001,
thus avoiding significant operating costs for collections and foreclosures.  Net
income during the first half of 2001 was impacted by (pre-tax)  operating  costs
for the conversion of the Company's core data processing  system ($447 thousand)
and  legal  expenses  associated  with the  arbitration  of  claims  by a former
executive ($161 thousand).

Interest Rate Environment

         The table  presented  above under  "Interest  Rate Risk  Management And
Exposure" furnishes an overview of the interest rate environment during the most
recent six quarters.  Market interest rates have varied considerably during this
time period. In early 2000, the Federal Reserve continued  increasing its target
federal funds rate (commenced in 1999),  expressing concern about the rapid pace
of economic expansion, the booming equity markets (particularly NASDAQ), and the
combination  of very low  unemployment,  spot  labor  shortages,  and  increased
compensation costs which presented the potential for a rise in inflation. During
the second half of 2000,  many capital  markets  interest rates (e.g.  LIBOR and
Treasuries)  began  declining in response to falling  equity markets and slowing
economic  growth.  The Federal  Reserve did not commence  cutting its  benchmark
interest  rates until the first week of 2001.  The Federal  Reserve then cut the
target  federal  funds  rate a total  of 275  basis  points  over  six  separate
occasions  during the first half of 2001,  taking the target  federal funds rate
from 6.50% on January 2, 2001 to 3.75% on June 30, 2001.

                                       33
<PAGE>

         The year 2001 began with an inverted  Treasury  curve,  highlighting  a
traditionally  difficult  interest rate environment for financial  institutions,
including the Bank. Financial  institutions  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.  By the
end of the first quarter of 2001,  the Treasury  curve out through two years was
relatively flat.  Following additional interest rate cuts by the Federal Reserve
during the second quarter of 2001, the Treasury curve became steeper, with short
term Treasury rates falling and long term Treasury rates rising between March 31
and June 30, 2001. In June 2001,  the Company took advantage of the steeper term
structure of interest rates by funding  certain hybrid  residential  loans (i.e.
fixed for 3 - 5 years, then floating) with lower duration liabilities.

Net Interest Income

         Net interest income increased from $4.6 million and $9.0 million during
the second  quarter and first half of 2000,  respectively,  to $4.8  million and
$9.5 million  during the same periods in 2001  primarily due to greater  average
balances of interest earning assets and liabilities.  The Company's ratio of net
interest  income to average  total  assets was 3.79% and 3.81% for the three and
six  months  ended  June 30,  2001,  down from  3.85% and 3.86%  during the same
periods in 2000. The Company's  margins were impacted in the most recent quarter
by a shift in loan mix toward residential mortgages.  Margins were also hampered
by the Company's  offering higher than normal relative retail deposit pricing to
facilitate  customer  retention  following  the  core  systems  conversion.   In
addition,  during the second quarter of 2001, the Company experienced difficulty
decreasing its NOW and Savings deposit rates at the same pace as the declines in
indices  utilized for adjustable  rate loans,  as the NOW and Savings rates were
already at low nominal levels.

         Other factors  influencing  net interest  income during the first three
and six months of 2001 compared to the same periods of 2000 included:

o    During the first half of 2000,  the  Company  benefited  from  locking in a
     significant  volume of funding  during the fourth quarter of 1999 and early
     2000 in a rising interest rate environment.

o    The FHLB-SF paid  particularly  high  dividend  rates on its capital  stock
     during the first half of 2000 in  conjunction  with its capital  management
     program.

o    The  Company  increased  the  size of its  balance  sheet  early in 2001 in
     anticipation of a declining interest rate environment, funding new short to
     intermediate  term  assets with low  duration  borrowings.  This  favorably
     impacted net interest income.

o    Average net loans as a percentage  of average  total assets  improved  from
     79.7% during the first half of 2000 to 81.6% during the first six months of
     2001.  Because loans constitute by far the Company's  highest yielding type
     of asset, this change in asset mix favorably affected net interest income.

o    The Company maintained higher levels of non-interest earning  correspondent
     bank account  balances than usual during March 2001 as a liquidity  cushion
     to address any potential operational or financial settlement issues arising
     following  the  implementation  of the new  computer  system.  This  excess
     liquidity,  which  unfavorably  impacted  the  Company's  margins,  was not
     required.

o    During  the  first  half of 2001,  the Bank  was not able to  decrease  its
     weighted  average  cost of deposits as rapidly as declines in indices  used
     for adjustable rate loans such as Prime,  CMT, 12MAT,  and COFI. The Bank's
     weighted average cost of deposits  declined from 4.72% at December 31, 2000
     to 4.00% at June 30, 2001.  In contrast,  the Prime Rate declined 275 basis
     points,  COFI decreased 112 basis points, and the 1 Year CMT Index fell 198
     basis points over the same time period.

During the second half of 2001,  the Company  plans to address the above  issues
that  unfavorably  impact net  interest  income by  continuing  to increase  the
average size of the balance sheet while also continuing the transformation  into
a community  commercial bank and  repositioning  the asset and liability  mixes.
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.

                                       34
<PAGE>

         The following  table presents the average  annualized  rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing  liabilities,  and the resulting net
interest  spread,  net interest  margin,  and average  interest  margin on total
assets for the three months ended June 30, 2001 and 2000.
<TABLE>
<CAPTION>
                                      Three Months Ended June 30, 2001          Three Months Ended June 30, 2000
                                   ----------------------------------------  ----------------------------------------
(Dollars In Thousands)                 Average                     Average       Average                     Average
                                       Balance      Interest          Rate       Balance      Interest          Rate
                                       -------      --------          ----       -------      --------          ----
<S>                 <C>                <C>            <C>            <C>         <C>            <C>            <C>
Assets
------
Interest earning assets:

   Cash equivalents (1)                $ 9,697        $  103         4.25%       $ 7,933        $  125         6.34%
   Investment securities                 7,302           111         6.08%         9,259           177         7.69%
   Mortgage backed securities (2)       43,312           675         6.23%        52,406           917         7.00%
   Loans receivable, net (3)           413,107         8,779         8.50%       379,860         8,117         8.55%
   FHLB stock                            2,967            42         5.66%         3,023            75         9.98%
                                     ---------        ------                   ---------        ------

Total interest earning assets          476,385         9,710         8.15%       452,481         9,411         8.32%
                                                      ------                                    ------
Non-interest earnings assets            27,281                                    20,980
                                     ---------                                 ---------

Total assets                         $ 503,666                                 $ 473,461
                                     =========                                 =========

Liabilities & Equity
--------------------
Interest bearing liabilities:
   NOW accounts                       $ 40,843           100         0.98%      $ 35,548           140         1.58%
   Savings accounts                     20,927            63         1.20%        15,429            68         1.77%
   Money market accounts                86,283           913         4.23%        89,272         1,025         4.62%
   Certificates of deposit             244,056         3,279         5.37%       227,228         2,965         5.25%
                                     ---------        ------                   ---------        ------

   Total interest-bearing deposits     392,109         4,355         4.44%       367,477         4,198         4.59%
   FHLB advances                        43,280           579         5.35%        45,885           660         5.79%
   Other borrowings (4)                    115             3        10.43%            44             1         6.38%
                                     ---------        ------                   ---------        ------

Total interest-bearing liabilities     435,504         4,937         4.53%       413,406         4,859         4.73%
                                                      ------                                    ------
Demand deposit accounts                 19,208                                    17,221
Other non-interest bearing               2,302                                     3,079
liabilities                          ---------                                 ---------


Total liabilities                      457,014                                   433,706

Stockholders' equity                    46,652                                    39,755
                                     ---------                                 ---------

Total liabilities & equity           $ 503,666                                 $ 473,461
                                     =========                                 =========

Net interest income                                   $4,773                                   $ 4,552
                                                      ======                                   =======
Interest rate spread (5)                                             3.62%                                     3.59%
Net interest earning assets             40,881                                    39,075
Net interest margin (6)                                4.01%                                     4.02%
Net interest income /
     average total assets                              3.79%                                     3.85%
Interest earnings assets /
     interest bearing liabilities         1.09                                      1.09

<FN>
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,  including CMO's, both available for
     sale and held to maturity.

(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  $35,000  and
     $66,000 in 2001 and 2000, respectively.

(4)  Includes  federal funds purchased and securities  sold under  agreements to
     repurchase.

(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.
</FN>
</TABLE>

                                       35
<PAGE>

         The following  table presents the average  annualized  rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing  liabilities,  and the resulting net
interest  spread,  net interest  margin,  and average  interest  margin on total
assets for the six months ended June 30, 2001 and 2000.
<TABLE>
<CAPTION>

                                       Six Months Ended June 30, 2001            Six Months Ended June 30, 2000
                                   ----------------------------------------  ----------------------------------------
(Dollars In Thousands)                 Average                     Average       Average                     Average
                                       Balance      Interest          Rate       Balance      Interest          Rate
                                       -------      --------          ----       -------      --------          ----
<S>                 <C>                <C>            <C>            <C>         <C>            <C>            <C>
Assets
------
Interest earning assets:
   Cash equivalents (1)                $ 9,184        $  227         4.94%       $ 7,448        $  225         6.08%
   Investment securities                 7,332           245         6.68%        10,360           386         7.49%
   Mortgage backed securities (2)       46,097         1,483         6.43%        53,382         1,876         7.03%
   Loans receivable, net (3)           407,924        17,667         8.66%       373,185        15,853         8.50%
   FHLB stock                            2,945            83         5.64%         3,136           121         7.76%
                                     ---------        ------                   ---------        ------
Total interest earning assets          473,482        19,705         8.33%       447,511        18,461         8.25%
                                                      ------                                    ------
Non-interest earnings assets            26,423                                    20,565
                                     ---------                                 ---------
Total assets                         $ 499,905                                 $ 468,076
                                     =========                                 =========

Liabilities & Equity
--------------------
Interest bearing liabilities:
   NOW accounts                       $ 40,746           240         1.18%      $ 33,462           261         1.57%
   Savings accounts                     19,126           136         1.42%        15,317           136         1.79%
   Money market accounts                88,185         1,957         4.44%        85,746         1,898         4.45%
   Certificates of deposit             244,264         6,707         5.49%       225,907         5,743         5.11%
                                     ---------        ------                   ---------        ------

   Total interest-bearing deposits     392,321         9,040         4.61%       360,432         8,038         4.48%
   FHLB advances                        42,052         1,126         5.36%        47,749         1,369         5.76%
   Other borrowings (4)                    142            14        19.72%           333            10         6.04%
                                     ---------        ------                   ---------        ------

Total interest-bearing liabilities     434,515        10,180         4.69%       408,514         9,417         4.64%
                                                      ------                                    ------
Demand deposit accounts                 17,795                                    16,763
Other non-interest bearing               2,262                                     3,085
liabilities                          ---------                                 ---------

Total liabilities                      454,572                                   428,362

Stockholders' equity                    45,333                                    39,714
                                     ---------                                 ---------
Total liabilities & equity           $ 499,905                                 $ 468,076
                                     =========                                 =========

Net interest income                                   $9,525                                    $9,044
                                                      ======                                    ======
Interest rate spread (5)                                             3.64%                                     3.61%
Net interest earning assets             38,967                                    38,997
Net interest margin (6)                                4.02%                                      4.04%
Net interest income /
     average total assets                              3.81%                                      3.86%
Interest earnings assets /
     interest bearing liabilities         1.09                                      1.10
<FN>

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,  including CMO's, both available for
     sale and held to maturity.

(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  $113,000  and
     $142,000 in 2001 and 2000, respectively.

(4)  Includes  federal funds purchased and securities  sold under  agreements to
     repurchase.

(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.
</FN>
</TABLE>

                                       36
<PAGE>

Rate / Volume Analysis

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

                                                               Three Months Ended June 30, 2001
                                                                          Compared To
                                                               Three Months Ended June 30, 2000
                                             ----------------------------------------------------------------------
                                                                                          Volume
(Dollars In Thousands)                                Volume              Rate            / Rate               Net
                                                      ------              ----            ------               ---
<S>                                                    <C>              <C>               <C>               <C>
Interest-earning assets
-----------------------
Cash equivalents                                       $  28            $  (41)           $   (9)           $  (22)
Investment securities                                    (38)              (37)                9               (66)
Mortgage backed securities                              (159)             (100)               17              (242)
Loans receivable, net                                    710               (45)               (3)              662
FHLB Stock                                                (1)              (33)                1               (33)
                                                       -----            -------            ------           ------

     Total interest-earning assets                       540              (256)               15               299
                                                       -----            -------            ------           ------

Interest-bearing liabilities
----------------------------
NOW Accounts                                              21               (53)               (8)              (40)
Savings accounts                                          24               (22)               (7)               (5)
Money market accounts                                    (35)              (86)                9              (112)
Certificates of deposit                                  221                72                21               314
                                                       -----            -------            ------           ------

Total interest-bearing deposits                          231               (89)               15               157
FHLB advances                                            (38)              (50)                7               (81)
Other borrowings                                           1                --                 1                 2
                                                       -----            -------            ------           ------

     Total interest-bearing liabilities                  194              (139)               23                78
                                                       -----            -------            ------           ------

Increase in net interest income                        $ 346            $ (117)            $  (8)           $  221
                                                       =====            =======            ======           ======
</TABLE>

                                       37
<PAGE>

<TABLE>
<CAPTION>
                                                                Six Months Ended June 30, 2001
                                                                          Compared To
                                                                Six Months Ended June 30, 2000
                                             ----------------------------------------------------------------------
                                                                                          Volume
(Dollars In Thousands)                                Volume              Rate            / Rate               Net
                                                      ------              ----            ------               ---
<S>                                                    <C>              <C>               <C>               <C>
Interest-earning assets
-----------------------
Cash equivalents                                       $  53            $  (42)           $   (9)           $    2
Investment securities                                   (113)              (42)               14              (141)
Mortgage backed securities                              (256)             (159)               22              (393)
Loans receivable, net                                  1,476               309                29             1,814
FHLB Stock                                                (7)              (33)                2               (38)
                                                       -----            -------            ------            ------

     Total interest-earning assets                     1,153                33                58             1,244
                                                       -----            -------            ------            ------

Interest-bearing liabilities
----------------------------
NOW Accounts                                              57               (65)              (13)              (21)
Savings accounts                                          34               (28)               (6)               --
Money market accounts                                     54                (6)               11                59
Certificates of deposit                                  469               428                67               964
                                                       -----            -------            ------            ------

Total interest-bearing deposits                          614               329                59             1,002
FHLB advances                                           (164)              (98)               19              (243)
Other borrowings                                          (6)               23               (13)                4
                                                       -----            -------            ------            ------

     Total interest-bearing liabilities                  444               254                65               763
                                                       -----            -------            ------            ------

Increase in net interest income                        $ 709            $ (221)            $  (7)            $ 481
                                                       =====            =======            ======            ======
</TABLE>

                                       38
<PAGE>

Interest Income

         Interest  income  increased  from $9.4 million and $18.5 million during
the three and six months ended June 30, 2000 to $9.7  million and $19.7  million
during the same periods in 2001. These increases were primarily due to:

o    higher  interest  earning assets in 2001: 5.3% greater for the three months
     ended June 30,  2001,  and 5.8%  greater for the six months  ended June 30,
     2001 versus the same periods in 2000

o    a shift in asset  mix  towards  relatively  higher  yielding  loans  versus
     securities,   coincident  with  the  Company's  strategic  plan  of  better
     supporting its local communities with the delivery of credit

The  above  factors  more  than  offset  the  impact  of a lower  interest  rate
environment during the first six months of 2001 versus the same period in 2000.

         Interest  income  on loans  rose from $8.1  million  and $15.9  million
during the three and six months  ended June 30,  2000 to $8.8  million and $17.7
during the same periods in 2001. This expansion in interest income was primarily
due to greater  average  volumes.  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 pool  purchases  on the  secondary
market,  and  loan  participations;  with the  latter  primarily  through  other
California  community  banks.  The  Company  plans to  increase  total  loans to
approximately  90.0%  of total  assets  by the end of  2001,  market  conditions
permitting.  Management  believes  stockholder  value is  maximized  through the
extension and  effective  management of credit,  versus  leveraging  the balance
sheet through securities  transactions where the Company provides  comparatively
little economic value added.

         Interest  income on cash  equivalents  decreased from $125 thousand for
the three  months  ended June 30, 2000 to $103  thousand  for the same period in
2001.  This decline was due to lower  average  rates  stemming from the interest
rate cuts  implemented by the Federal  Reserve in 2001.  Interest income on cash
equivalents  rose slightly  from $225 thousand  during the six months ended June
30, 2000 to $227 thousand for the same period in 2001, as an increase in average
volume more than offset a decline in average rate.

         Interest  income on investment  securities  declined from $177 thousand
and $386  thousand  during the three and six months  ended June 30, 2000 to $111
thousand and $245 thousand during the same periods in 2001. The reduced interest
income resulted from lower average balances and lower average rates. The Company
maintained  a smaller  portfolio  of variable  rate  corporate  trust  preferred
securities  during 2001 versus 2000. In addition,  the variable  rate  corporate
trust preferred securities reprice quarterly based upon 3 month LIBOR, which was
significantly  lower in the first  half of 2001 than  during  the first  half of
2001.

         Interest income on mortgage  backed  securities fell from $917 thousand
and $1.9  million  during the three and six months  ended June 30,  2000 to $675
thousand and $1.5 million  during the same  periods in 2001.  This  decrease was
caused by reductions in average  volume and average  rates.  Over the past year,
the Company  has  reduced the  percentage  of its  balance  sheet  allocated  to
securities in favor of increased lending. In addition,  the mix of the Company's
mortgage  backed  securities has changed over the past year, 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 the first
quarter of 2001, which adjusted downward in rate in conjunction with the decline
in general capital market interest rates.

         Interest  income on FHLB stock  decreased  from $75  thousand  and $121
thousand during the three and six months ended June 30, 2000 to $42 thousand and
$83 thousand  during the same periods in 2001. This reduction in interest income
stemmed from a  combination  of reduced  average  balances  and lower  effective
earnings  rates.  The Bank was  required by the FHLB-SF to sell some its capital
stock in the FHLB  during  2000 under the FHLB's  mandatory  capital  redemption
program. The Company anticipates  increasing its investment in the capital stock
of the  FHLB  during  the  second  half of 2001 in  conjunction  with  increased
utilization  of FHLB  advances to fund the  expansion  in the balance  sheet and
contribute to the Company's asset / liability management program.

                                       39
<PAGE>

Interest Expense

         Interest  expense was $4.9 million for both the quarter  ended June 30,
2001 and the quarter ended June 30, 2000.  Interest expense  increased from $9.4
million  during the six months ended June 30, 2000 to $10.2  million  during the
first half of 2001.  Comparing the second  quarter of 2001 to the same period in
2000,  the  impact of greater  average  balances  during  2001 was offset by the
effect of lower average rates. Greater average balances and higher average rates
led to the  increase in interest  expense  during the six months  ended June 30,
2001 versus the same period the prior year.

         Interest  expense on  deposits  increased  from $4.2  million  and $8.0
million  during the three and six months ended June 30, 2000 to $4.4 million and
$9.0 million during the same periods in 2001.  Average interest bearing deposits
were 6.7%  greater in the second  quarter of 2001  versus the second  quarter of
2000 and 8.8%  greater in the first half of 2001  versus the first six months of
2000. The Company's  weighted  average cost of interest  bearing deposits was 15
basis  points  lower in the second  quarter of 2001  versus the same  period the
prior year,  but 13 basis  points  higher for the six months ended June 30, 2001
versus the same period in 2000.

         Average  deposit  transaction  account rates were  significantly  lower
during the second  quarter of 2001  compared to the second  quarter of 2000,  in
conjunction  with the lower  interest  rate  environment.  The  Company  paid an
average rate of just 0.98% on its NOW deposits and 1.20% on its savings deposits
during  the second  quarter of 2001,  highlighting  the  limited  ability of the
Company  to  further  reduce  the cost of this  funding  should  general  market
interest rates continue to decline.

         Certificates  of  deposit  comprised  59.3% of average  total  deposits
during the second  quarter of 2001,  up  slightly  from 59.1%  during the second
quarter of 2000.  The  Company's  progress in  restructuring  its deposit mix to
include a greater percentage of transaction accounts was slowed during the first
half of 2001 because of the resources  committed to the core systems conversion,
certain account closures  stemming from the revised fee schedule and product mix
implemented with the new data processing system,  and by aggressive  competition
for checking  and money market  accounts  during 2001,  particularly  from large
thrifts,  including one financial institution that extensively advertised annual
percentage  yields of 4.00% or more on one of its NOW checking  products  during
the first half of 2001.

         The rapidly declining interest rate environment  experienced during the
first half of 2001  contributed  to "sticker  shock" for  certificate of deposit
account holders with maturing deposits. With interest rates down from 100 to 200
(or more) basis  points  below  their  levels of just six months  earlier,  many
maturing CD holders, particularly those dependent upon their interest income for
day to day living expenses, aggressively shopped for interest rates, causing the
Bank to selectively  match high rate  competitors in order to maintain  customer
relationships and continue growing the deposit  portfolio.  In contrast,  during
the first half of 2000,  interest  rates were generally  increasing,  presenting
less impetus for maturing certificate of deposit holders to extensively shop for
peak interest rates.

         Over the past year, 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 and 8 months, augmented by ongoing sales
of longer term certificates of deposit.  The Company's new professional  bankers
have  incorporated  calling on maturing  certificate  of deposit  customers as a
fundamental component of their sales management and customer service program.

         During the second half of 2001, the Company plans to continue promoting
its Money  Market  Plus  account,  Interest  Checking  Plus  account,  "40+" NOW
checking account, and business checking accounts.  The consumer products present
attractive  benefits to both customers and the Company.  For example,  all three
consumer  transaction  accounts are highly tiered,  encouraging  greater account
balances in order to earn higher  rates of  interest.  These three  products are
also 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 business
credit facilities.

                                       40
<PAGE>

         At June 30, 2001, the Bank's weighted  average nominal cost of deposits
was  4.00%,  or 50 basis  points  below the COFI  Index for the same  date.  The
Company  utilizes a comparison of its cost of deposits and cost of funds to COFI
as one measure of relative  performance.  The Company's weighted average nominal
cost of deposits was 4.72% at December  31,  2000,  or 90 basis points below the
COFI Index for the same date.  Should capital markets  interest rates stabilize,
the Company  will benefit from the  significant  downward  repricing of maturing
certificates of deposit over the next several months.

         Interest expense on total  borrowings  decreased from $661 thousand and
$1.4  million  during  the  three and six  months  ended  June 30,  2000 to $582
thousand and $1.1 million  during the same  periods in 2001.  This  decrease was
caused  by  smaller  average  balances  and lower  average  rates.  The  Company
maintained a lower cost portfolio of FHLB advances during the first half of 2001
than during the prior year,  as several  higher  cost  advances  matured or were
prepaid during 2000. In addition,  the Company borrowed $10.0 million in new one
year FHLB advances during the first quarter of 2001 with a weighted average rate
of 5.13%; and utilized low cost overnight FHLB advances for incremental  funding
requirements  during June 2001.  The  Company's  average  interest rate on other
borrowings was inflated during 2001 as a result of the amortization of loan fees
(discount  on a  liability)  on MBBC's  $2.0  million  revolving  line of credit
combined with a lack of draws (outstanding balances) on the line.

Provision For Loan Losses

         The Company  recorded a $300 thousand  provision for loan losses during
the second quarter of 2001, down from $775 thousand during the second quarter of
2000.  For the first  half of 2001,  provisions  for loan  losses  totaled  $800
thousand,  down from $1.0  million  during  the  first  six  months of 2000.  No
recoveries were realized  during the first half of 2001, and charge-offs  during
the period totaled $26 thousand.  Net charge-offs during the first six months of
2000 were $371 thousand,  associated  with a residential  mortgage  secured by a
real property that suffered  substantial earth movement.  The Company's ratio of
loan  loss  reserves  to loans  outstanding  increased  slightly  from  1.35% at
December  31, 2000 to 1.37% at June 30,  2001,  while the nominal  amount of the
loan loss reserve rose from $5.4 million at December 31, 2000 to $6.1 million at
June 30,  2001.  In  comparison,  at June 30, 2000 the Company  maintained  $4.2
million in loan loss reserves, equivalent to 1.09% of loans outstanding.

         The Company's  management  remains concerned about the negative impacts
upon the amount of loss inherent in the loan  portfolio at June 30, 2001 arising
from the following factors:

o    the California energy crisis,  with effects upon the availability and price
     of electricity,  business costs,  consumer spending and disposable  income,
     and the pace of economic activity in the State

o    the financial difficulties experienced by many technology related companies
     in the Silicon Valley area adjacent to the Bank's primary market areas

o    the impact of lower  stock  prices on  consumer  spending,  liquidity,  and
     investment,  with a particular  concern regarding the effects on the demand
     and pricing for real estate in the Bank's primary market areas

o    the significant  number of layoffs  announced during the first half of 2001
     by California companies, with a related rise in the rate of unemployment in
     California

o    the general reduction in national economic growth

                                       41
<PAGE>

         Other  factors  contributing  to the  increased  nominal  and  relative
reserves in 2001 versus 2000 included:

o    the increasing  concentration  of the portfolio in relatively less seasoned
     credits, because of the Company's growth rate in recent periods

o    higher  concentrations  of credit exposure as a result of increased  income
     property  lending,  as these loans  generally  are larger than  residential
     mortgages

o    the allocation of increased  reserves during the second quarter of 2001 for
     the Special  Residential  Loan Pool (see "Special  Residential  Loan Pool")
     based upon  recent loss rates by the seller / servicer  on  disposition  of
     foreclosed collateral

o    the increase in the size of the loan portfolio

         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.

         The Company commenced a special credit review during the second quarter
of  2001  with  the  intent  to  identify  significant  credits  that  might  be
particularly and materially  adversely impacted by the California energy crisis.
This special review was in addition to the ongoing credit  monitoring  processes
conducted  by the  Company.  To date,  no loans  have been  identified  as being
directly and materially  adversely affected by the California energy crisis. The
Company has  historically  focused on real estate loans and has  conducted  only
limited lending to manufacturers and other industries with a significant rate of
energy  utilization.  The Company intends to continue this special credit review
during the third  quarter of 2001.  In  addition,  the Company  now  includes an
analysis of borrowers' exposure to energy availability and prices as part of its
underwriting process for new loans.

         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
and commercial business lending.  The Company's strategic plan also incorporates
expanded  construction  lending,  although the Company has  tightened its credit
requirements  for such  lending  during  2001 in light of the trends  within the
California economy.

Non-interest Income

         Non-interest  income  totaled $695 thousand and $1.3 million during the
three and six months ended June 30, 2001,  comparing  favorably to $583 thousand
and $1.1 million during the same periods in 2000.

         Service charge income rose from $312 thousand and $592 thousand  during
the three and six months ended June 30, 2000 to $473  thousand and $882 thousand
during the same periods in 2001. This increase in part resulted from the revised
fee and service charge schedule  implemented with the new core processing system
in March, 2001. Following the computer systems conversion, the Company increased
its fee for checks drawn against insufficient funds ("NSF Fees") from $17 to $20
per check. The Company also stopped  providing  lifetime free checks for certain
deposit  accounts,  thereby not only  reducing  non-interest  expenses for check
printing  but also  increasing  fee income  from  "upcharges"  for check  orders
initiated  and paid for by customers.  In addition,  the revised fee and service
charge schedule  established  certain minimum balance  requirements  and maximum
free usage limits for certain deposit accounts.

         The Bank has also  benefited  from fees  generated  from an  additional
remote  ATM  during  the first  six  months of 2001 that was not in place in the
first  half of the  prior  year.  In  addition,  selected  higher  ATM  fees and
increased debit card transaction  volume  contributed to a $44 thousand increase
in combined ATM and debit card fee income in the first six months of 2001 versus
the same period in 2000.

                                       42
<PAGE>

         There were no sales of mortgage backed and investment securities during
the second quarter of 2001.  During the second  quarter of 2000,  security sales
generated a pre-tax gain of $2 thousand. For the six months ended June 30, 2001,
security sales produced a pre-tax gain of $34 thousand, versus a pre-tax loss of
$77  thousand  during the first  half of 2000.  Although  many of the  Company's
securities  appreciated  during the second quarter of 2001 in  conjunction  with
interest rate cuts  implemented by the Federal  Reserve,  management  decided to
retain the securities as a means of generating net interest income.

         Loan servicing  income totaled $41 thousand and $43 thousand during the
three and six months  ended June 30,  2001,  compared  to $24  thousand  and $61
thousand during the same periods in 2000. 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. As a result,  the portfolio of
loans  serviced for others is declining as loans pay off. At June 30, 2001,  the
Company  serviced  $51.0 million in various types of loans for other  investors,
compared to $62.0 million at December 31, 2000.

         During the second quarter of 2001, the Company  continued the revamping
of its non-FDIC insured  investment sales program to improve franchise value and
better  integrate  this  operation  with the overall  strategic  plan.  Staffing
changes  contributed  to commissions  from the sale of annuities,  mutual funds,
insurance,  and  individual  securities  declining  from $183  thousand and $390
thousand during the three and six months ended June 30, 2000 to $71 thousand and
$188 thousand  during the same periods in 2001.  Commission  revenue  during the
third  quarter of 2001 is  anticipated  to be below the similar  period in 2000.
Revenue from the sale of non-FDIC  insured  investments  has also been  hampered
during the first half of 2001  versus the same  period in the prior year by less
favorable capital market conditions.

         Other non-interest income increased from $62 thousand and $118 thousand
during the three and six months  ended June 30, 2000 to $110  thousand  and $192
thousand  during  the same  periods  in 2001.  This  rise was  partially  due to
increased  rental  income,  which in turn  derived  from the Bank's  leasing the
second  floor  of one of its  branches  in  late  2000  following  an  extensive
remodeling.

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

o    seeking additional remote ATM sites

o    further increases in the portfolio of deposit transaction accounts

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

o    the planned  introduction of Internet banking and cash management  services
     for businesses

o    the  continued  marketing of debit cards and the possible  introduction  of
     corporate credit cards for the Company's commercial customers

o    the hiring of additional  licensed  investment  counselors to sell non-FDIC
     insured  products  including  mutual  funds,   annuities,   and  individual
     securities

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


                                       43
<PAGE>

Non-interest Expense

         Non-interest  expense  totaled  $3.5  million and $7.4  million for the
three and six months  ended June 30,  2001,  compared  to $3.4  million and $6.7
million for the same  periods in 2000.  Total  non-interest  expense in 2001 has
been increased by costs for the data processing  conversion  ($447 thousand) and
legal expenses  associated with the arbitration of claims by a former  executive
($161 thousand).  Costs for the data processing conversion included deconversion
fees to the prior  service  bureau,  printing and postage  costs for  additional
customer communications, employee training and travel costs, and consulting fees
for   technology   professionals   retained   to  assist   with  and  speed  the
implementation of the new system.

         The Company's  efficiency  ratio during the second  quarter of 2001 was
64.37%,  comparing  favorably to 65.61% during the second  quarter of 2000,  but
still  above high  performing  peer  financial  institutions.  The  Company  has
identified  reducing the  efficiency  ratio as a key  objective of its strategic
plan and an important component of executive incentive compensation.

         During the first half of 2001, the Company has adjusted its staffing to
advance  the  strategic  plan.  During  2001,  the Bank has added an  additional
commercial loan officer and hired three new professional  bankers, with a fourth
scheduled to join the Company in early August  2001.  Staffing has  increased in
the data processing  function,  coincident  with the Company's  shifting from an
external service bureau to in-house data processing. The change in the Company's
systems  environment  also  impacted  various  other  operating  expenses.  Data
processing  fees were much  lower in the  second  quarter  of 2001 than the same
period in 2000, while equipment expense was higher due to the added depreciation
from the new  hardware  and  software  installed  in 2001.  In  addition  to the
aforementioned  increase in non-interest income, the Company's new client-server
technology platform, combined with the associated product redesign, has fostered
various operating efficiencies, including reduced costs for customer statements,
certificate of deposit  maturity  notices,  and certain  electronic  transaction
processing.

         Supplies,  postage,  telephone, and office expenses were slightly lower
in the three and six months ended June 30, 2001 than during the same periods the
prior year despite the non-recurring  expenses for the core systems  conversion.
In 2001, the Company is utilizing a lower cost supplies vendor, accessed through
the  Internet,  with  next day  delivery  avoiding  the need to  maintain  local
supplies  inventories.  In  addition,  most  forms are now  dynamically  created
through the new core processing system,  avoiding forms  obsolescence,  shipping
costs,  and local  inventory  requirements.  During the second half of 2001, the
Company  plans to  further  leverage  its new  systems  environment  to  improve
efficiencies,  potentially  shifting its internal LATA  (in-State long distance)
telephone  traffic to its wide area network through voice over Internet protocol
technology.  Despite these and other initiatives in reducing operating costs, no
assurance can be provided that the  Company's  efficiency  ratio will improve in
future  quarters  or that the  Company's  level of  non-interest  expenses  will
decrease in the future on a nominal or relative  basis (e.g.  as a percentage of
average total assets).

         Advertising  and promotion costs were lower in the three and six months
ended June 30, 2001 than during the same  periods the prior year.  This  stemmed
from the Company's awaiting the completion of the systems conversion and product
redesign prior to conducting extensive  advertising.  By mid-2001,  however, the
Bank had commenced a significant  local radio  advertising  campaign  focused on
building customer relationships and centered about the theme "Monterey Bay Bank.
Expect  More.  Get The  Best."  In  addition,  the Bank  recently  expanded  the
responsibilities of Ms. Mary Anne Carson,  Corporate  Secretary,  to include the
title of "Director of Community  Relations".  Ms.  Carson will  orchestrate  the
Bank's expanded community  involvement in a wide range of functions,  a role she
successfully  played  in the  local  area for  another  community  bank that was
acquired  by a large  financial  institution.  In June  2001,  the Bank made its
second of five pledged $15 thousand annual contributions to support the Cabrillo
College Foundation,  representing a major sponsorship for the organization.  The
Company  anticipates  spending  more on  advertising,  promotion,  and community
outreach  during the second half of 2001 than the amounts spent during the first
half of this year.

                                       44
<PAGE>

         Legal and  accounting  expenses  during the first  quarter of 2001 were
impacted by significant  legal costs associated with the pending  arbitration of
claims by the former President & Chief Operating Officer regarding  payments due
under his employment contracts.  The Company anticipates incurring at least $150
thousand in  additional  legal costs in this regard  during the third quarter of
2001 should the binding  arbitration  proceeding  continue along its full course
without  settlement.  The Company has  previously  unsuccessfully  attempted  to
settle this  matter.  Accounting  expenses are  projected to decline  during the
second half of 2001, as the Company has retained a new, more cost effective, but
also highly experienced firm to perform selected internal audit services.

         Consulting expenses rose from $51 thousand and $103 thousand during the
three and six  months  ended June 30,  2000 to $63  thousand  and $306  thousand
during the same periods in 2001 primarily due to consultant  services associated
with the core  systems  conversion.  The  Company  anticipates  a lower level of
consulting  expense in the second half of 2001 than during the first half due to
the completion of the core systems conversion and due to the hiring of Ms. Susan
M. Carlson as Chief Administrative Officer for the Bank at the end of the second
quarter.  Ms. Carlson had previously  provided  certain more limited services to
the Bank on a consulting basis.

         Director  expenses are  projected to decline in the latter half of 2001
due to the smaller number of Board members and the final expense recognition for
the Directors Emeritus Plan during the second quarter.

Income Taxes

         Income tax  expense  increased  in 2001 versus  2000  primarily  due to
greater pre-tax income.  The Company's  effective book tax rate during the first
six months of 2001 was slightly lower than for the comparable period in 2000.

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,  2000.  There has been no  significant  change in these
disclosures since the filing of that document.


                                       45
<PAGE>

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,  with the possible  exception of the
         legal proceeding discussed in the subsequent paragraph.

         The Company commenced binding arbitration proceedings during the second
         quarter of 2001 to address  claims by the  former  President  and Chief
         Operating   Officer   regarding   payments  due  under  his  employment
         contracts. These proceedings are scheduled to continue during the third
         quarter of 2001. In the third quarter of 2000, the Company  established
         a $250 thousand  reserve for the  settlement  of these claims.  At this
         time, the Company,  following consultation with counsel,  believes this
         reserve to be adequate to cover its  liabilities  in this  regard.  The
         Company is recognizing legal expenses in this regard as incurred.

Item 2.  Changes In Securities

         None.

Item 3.  Defaults Upon Senior Securities

         Not applicable.

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

         a)       The  Company's  Annual Meeting of Stockholders was held on May
                  24, 2001.

         b)       Not applicable.

         c)       At the Company's  Annual Meeting of  Stockholders  held on May
                  24, 2001, the Company's stockholders approved the following:

                  1.)      The  election  of  the   following   individuals   as
                           Directors for the terms indicated:

<TABLE>
<CAPTION>
                                                                    Votes            Votes          Term
                               Individual                             For         Withheld       Expires
                               --------------------------    -------------    -------------     ---------
<S>                                                             <C>                <C>              <C>
                               Mr. Josiah T. Austin             2,404,403          184,435          2003
                               Mr. Edward K. Banks              2,400,761          188,077          2004
                               Mr. Nicholas C. Biase            2,425,544          163,294          2004
                               Mr. Larry A. Daniels             2,400,361          188,477          2002
                               Mr. C. Edward Holden             2,382,346          206,492          2004
</TABLE>

                  In  addition  to the above  five  individuals,  the  following
                  Directors were in office as of July 26, 2001:

                                Ms. Diane S. Bordoni
                                Mr. Steven Franich
                                Mr. Stephen G. Hoffmann
                                Mr. Gary L. Manfre
                                Mr. McKenzie Moss, Chairman Of The Board

                  Mr.  Eugene R. Friend and Mr. P. W.  Bachan  retired as active
                  Directors at the Company's  Annual Meeting of  Stockholders on
                  May 24, 2001 and became Directors Emeritus.

                                       46
<PAGE>

PART II - OTHER INFORMATION (Continued)

                  2.)      The  ratification  of the  appointment  of Deloitte &
                           Touche LLP as the independent auditors of the Company
                           for the fiscal  year  ending  December  31,  2001 was
                           approved as follows:

                                     For          Against         Abstain
                            -------------    -------------    ------------
                               2,580,507            7,473              77


         d)       Not applicable.


Item 5.  Other Information

         None.


Item 6.  Exhibits And Reports On Form 8-K

         A.  Exhibits

                  None.


         B.  Reports On Form 8-K

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

                           1.       Form 8-K dated July 20,  2001.  This Current
                                    Report  reported the  Company's  results for
                                    the  three  and six  months  ended  June 30,
                                    2001,  the  addition  of a new member of the
                                    senior  management  team  for the  Company's
                                    subsidiary,   Monterey  Bay  Bank,  and  the
                                    continued  binding  arbitration   proceeding
                                    with  the   former   President   and   Chief
                                    Operating  Officer in regards to amounts due
                                    under his employment contracts.

                                       47
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of the Securities  Exchange Act Of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                                      MONTEREY BAY BANCORP, INC.
                                                                    (Registrant)



Date:    August 13, 2001        By:   /s/ C. Edward Holden
                                      --------------------
                                      C. Edward Holden
                                      Chief Executive Officer
                                      President
                                      Vice Chairman Of The Board Of Directors

Date:    August 13, 2001        By:   /s/ Mark R. Andino
                                      ------------------
                                      Mark R. Andino
                                      Chief Financial Officer
                                      Treasurer
                                      (Principal Financial & Accounting Officer)


                                       48