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

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

               For the quarterly period ended September 30, 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:  3,452,764  shares of common
stock, par value $0.01 per share, were outstanding as of November 9, 2001.

                                       1

<PAGE>


<TABLE>
                                  MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

                                                    INDEX
<CAPTION>


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

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

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

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

                      Condensed Consolidated Statements Of Cash Flows (unaudited) For The
                      Nine Months Ended September 30, 2001 And September 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 - 47

            Item 3.   Quantitative And Qualitative Disclosure About Market Risk                         47

PART II.    OTHER INFORMATION

            Item 1.   Legal Proceedings                                                                 48

            Item 2.   Changes In Securities                                                             48

            Item 3.   Defaults Upon Senior Securities                                                   48

            Item 4.   Submission Of Matters To A Vote Of Security Holders                               48

            Item 5.   Other Information                                                                 48

            Item 6.   Exhibits And Reports On Form 8-K                                                  48

                      (a)  Exhibits

                      (b)  Reports On Form 8-K

Signature Page                                                                                          49
</TABLE>

                                                      2

<PAGE>


<TABLE>
Item 1.  Financial Statements


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(Dollars In Thousands)
---------------------------------------------------------------------------------------------------------------------
<CAPTION>

                                                                                   September 30,        December 31,
                                                                                      2001                 2000
                                                                                      ----                 ----
ASSETS
<S>                                                                                 <C>                  <C>
Cash and cash equivalents                                                           $ 13,380             $ 25,159
Securities available for sale, at estimated fair value:
     Investment securities (amortized cost of $7,704 and $7,696 at
          September 30, 2001 and December 31, 2000, respectively)                      7,204                7,360
     Mortgage backed securities (amortized cost of $30,578 and $43,675
          at September 30, 2001 and December 31, 2000, respectively)                  30,971               42,950
Loans held for sale                                                                      407                   --
Loans receivable held for investment (net of allowances for loan losses of
     $6,387 at September 30, 2001 and $5,364 at December 31, 2000)                   454,492              391,820
Investment in capital stock of the Federal Home Loan Bank, at cost                     3,323                2,884
Accrued interest receivable                                                            3,151                2,901
Premises and equipment, net                                                            7,732                7,375
Core deposit intangibles, net                                                          1,684                2,195
Real estate acquired via foreclosure, net                                                 --                   --
Other assets                                                                           4,754                3,546
                                                                                    --------             --------
TOTAL ASSETS                                                                        $527,098             $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 (UNAUDITED) (Continued)
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(Dollars In Thousands)
<CAPTION>
---------------------------------------------------------------------------------------------------------------------

                                                                                       September 30,      December 31,
                                                                                           2001                2000
                                                                                           ----                ----
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

<S>                                                                                     <C>                  <C>
Non-interest bearing demand deposits                                                    $ 20,016             $ 17,065
Interest bearing NOW checking accounts                                                    41,073               41,859
Savings deposits                                                                          19,472               16,503
Money market deposits                                                                     97,114               87,651
Certificates of deposit                                                                  250,942              244,710
                                                                                        --------             --------
   Total deposits                                                                        428,617              407,788
                                                                                        --------             --------

FHLB advances and other borrowings                                                        47,943               32,582
Accounts payable and other liabilities                                                     1,826                1,983
                                                                                        --------             --------
     Total liabilities                                                                   478,386              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 September 30, 2001 and December 31, 2000;
     3,449,379 outstanding at September 30, 2001 and
     3,321,210 outstanding at December 31, 2000                                               45                   45
Additional paid-in capital                                                                28,462               28,278
Retained earnings, substantially restricted                                               35,330               32,722
Unallocated ESOP shares                                                                     (748)                (920)
Treasury shares designated for compensation plans, at cost (25,283 shares
     at September 30, 2001 and 35,079 shares at December 31, 2000)                          (243)                (338)
Treasury stock, at cost (1,042,706 shares at September 30, 2001 and
     1,170,875 shares at December 31, 2000)                                              (14,071)             (15,326)
Accumulated other comprehensive loss, net of taxes                                           (63)                (624)
                                                                                        --------             --------
     Total stockholders' equity                                                           48,712               43,837
                                                                                        --------             --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $527,098             $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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Dollars In Thousands, Except Per Share Amounts)
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                 FOR THE THREE MONTHS       FOR THE NINE MONTHS
                                                                  ENDED SEPTEMBER 30,        ENDED SEPTEMBER 30,
                                                                ----------------------     ----------------------
                                                                   2001       2000            2001       2000
                                                                   ----       ----            ----       ----
<S>                                                             <C>        <C>             <C>        <C>
INTEREST AND DIVIDEND INCOME:
   Loans receivable                                             $  9,084   $  8,118        $ 26,753   $ 23,972
   Mortgage backed securities                                        488      1,011           1,970      2,888
   Investment securities and cash equivalents                        186        385             741      1,116
                                                                 --------   --------        --------   --------
         Total interest income                                     9,758      9,514          29,464     27,976
                                                                 --------   --------        --------   --------
INTEREST EXPENSE:
   Deposit accounts                                                4,032      4,532          13,072     12,569
   FHLB advances and other borrowings                                711        583           1,852      1,961
                                                                 --------   --------        --------   --------
         Total interest expense                                    4,743      5,115          14,924     14,530
                                                                 --------   --------        --------   --------
NET INTEREST INCOME BEFORE PROVISION
     FOR LOAN LOSSES                                               5,015      4,399          14,540     13,446

PROVISION FOR LOAN LOSSES                                            275        650           1,075      1,675
                                                                 --------   --------        --------   --------
NET INTEREST INCOME AFTER PROVISION
     FOR LOAN LOSSES                                               4,740      3,749          13,465     11,771
                                                                 --------   --------        --------   --------

NON-INTEREST INCOME:
   Gain (loss) on sale of mortgage backed securities
      and investment securities, net                                 156         --             190        (77)
   Commissions from sales of noninsured products                      35        145             223        534
   Customer service charges                                          401        356           1,282        949
   Income from loan servicing                                         33         30              77         90
   Gain on sale of loans                                              18          4              47         15
   Other income                                                       47         95             209        203
                                                                 --------   --------        --------   --------
         Total non-interest income                                   690        630           2,028      1,714
                                                                 --------   --------        --------   --------


<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 NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Dollars In Thousands, Except Per Share Amounts)
<CAPTION>
-------------------------------------------------------------------------------------------------------------------

                                                                 FOR THE THREE MONTHS       FOR THE NINE MONTHS
                                                                  ENDED SEPTEMBER 30,        ENDED SEPTEMBER 30,
                                                                ----------------------     ----------------------
                                                                   2001       2000            2001       2000
                                                                   ----       ----            ----       ----
<S>                                                           <C>              <C>             <C>              <C>
NON-INTEREST EXPENSE:
   Compensation and employee benefits                              1,739      1,904           5,052      4,991
   Occupancy and equipment                                           440        329           1,222        960
   Deposit insurance premiums                                         50         48             148        140
   Data processing fees                                              133        271             746        837
   Legal and accounting expenses                                     274        148             724        489
   Supplies, postage, telephone, and office expenses                 158        163             510        522
   Advertising and promotion                                          84         84             141        283
   Amortization of intangible assets                                 170        175             511        524
   Consulting                                                         31         15             336        118
   Other expense                                                     507        415           1,558      1,396
                                                                 --------   --------        --------   --------
         Total non-interest expense                                3,586      3,552          10,948     10,260
                                                                 --------   --------        --------   --------

INCOME BEFORE INCOME TAXES                                         1,844        827           4,545      3,225

PROVISION FOR INCOME TAXES                                           787        366           1,937      1,411
                                                                 --------   --------        --------   --------

NET INCOME                                                       $ 1,057    $   461         $ 2,608    $ 1,814
                                                                 ========   ========        ========   ========
EARNINGS PER SHARE:

     BASIC EARNINGS PER SHARE                                    $  0.32    $  0.15         $  0.80    $  0.58
                                                                 ========   ========        ========   ========
     DILUTED EARNINGS PER SHARE                                  $  0.31    $  0.15         $  0.79    $  0.58
                                                                 ========   ========        ========   ========


<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)
NINE MONTHS ENDED SEPTEMBER 30, 2001
(Dollars And Shares In Thousands)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------

                                                                                   Treasury
                                                                                     Shares
                                                                                     Desig-             Accum-
                                                                                      nated             ulated
                                                                                        For              Other
                                                         Addi-              Unal-      Com-            Compre-
                                      Common Stock      tional            located      pen-            hensive
                                      ------------     Paid-In  Retained     ESOP    sation  Treasury  Income /
                                     Shares   Amount   Capital  Earnings   Shares     Plans     Stock   (Loss)     Total
                                     ------   ------   -------  --------   ------     -----     -----   ------     -----
<S>                                  <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               112                (10)                                 1,099              1,089

Director fees paid using treasury        16                 31                                    156                187
stock

Amortization of stock compensation                         163                172        95                          430

Comprehensive income:
  Net income                                                       2,608                                           2,608

  Other comprehensive income:
       Change in net unrealized loss
            on securities available for
            sale, net of taxes of $471                                                                     673       673

       Reclassification adjustment for
            gains on securities available
            for sale included in income,
            net of taxes of ($78)                                                                         (112)     (112)
                                                                                                                  ------
  Other comprehensive income,                                                                                        561
                                                                                                                  ------
Total comprehensive income
                                                                                                                   3,169
                                                                                                                  ------

                                     ------   ------   -------  --------   ------    ------  --------   ------  --------
Balance at September 30, 2001         3,449   $   45   $28,462  $ 35,330   $ (748)   $ (243) $(14,071)  $  (63) $ 48,712
                                     ======   ======   =======  ========   ======    ======  ========   ======  ========


<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)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Dollars In Thousands)
--------------------------------------------------------------------------------------------------------------------------
                                                                                                     FOR THE NINE MONTHS
                                                                                                      ENDED SEPTEMBER 30,
                                                                                                    ----------------------
                                                                                                      2001          2000
                                                                                                      ----          ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                                <C>           <C>
Net income                                                                                         $ 2,608       $ 1,814

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

Depreciation and amortization of premises and equipment                                                481           327
Amortization of intangible assets                                                                      511           524
Amortization of purchase premiums, net of accretion of purchase discounts                               93            55
Amortization of deferred loan fees and costs, net                                                     (159)         (211)
Provision for loan losses                                                                            1,075         1,675
Federal Home Loan Bank stock dividends                                                                (141)         (166)
Gross ESOP expense before dividends received on unallocated shares                                     314           243
Compensation expense associated with stock compensation plans                                          110           215
(Gain) loss on sale of mortgage-backed and investment securities                                      (190)           77
Gain on sale of loans                                                                                  (47)          (15)
Gain on sale of fixed assets                                                                            (8)           --
Loss on sale of real estate acquired via foreclosure                                                    --             5
Origination of loans held for sale                                                                  (6,966)       (1,927)
Proceeds from sales of loans held for sale                                                           6,559         1,768
Increase in accrued interest receivable                                                               (250)         (234)
(Increase) decrease in other assets                                                                 (1,208)           51
(Decrease) increase in accounts payable and other liabilities                                         (157)        1,295
Other, net                                                                                            (568)       (1,031)
                                                                                                   -------       -------
     Net cash provided by operating activities                                                       2,057         4,465
                                                                                                   -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans held for investment                                                          (62,672)      (21,482)
Proceeds from sales of investment securities available for sale                                         --         3,730
Purchases of mortgage backed securities available for sale                                         (20,493)      (23,482)
Principal repayments on mortgage backed securities                                                  21,368        11,254
Proceeds from sales of mortgage backed securities available for sale                                12,097        12,571
(Purchases) redemptions of FHLB stock, net                                                            (298)          543
Proceeds from the sale of fixed assets                                                                  13            --
Purchases of premises and equipment                                                                 (1,062)         (423)
                                                                                                   -------       -------
     Net cash used in investing activities                                                         (51,047)      (17,289)
                                                                                                   -------       -------


<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)
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND SEPTEMBER 30, 2000
(Dollars In Thousands)
<CAPTION>
---------------------------------------------------------------------------------------------------------------
                                                                                          FOR THE NINE MONTHS
                                                                                           ENDED SEPTEMBER 30,
                                                                                         ----------------------
                                                                                           2001          2000
                                                                                           ----          ----

CASH FLOWS FROM FINANCING ACTIVITIES:
<S>                                                                                      <C>           <C>
Net increase in deposits                                                                 20,829        30,649
Proceeds (repayments) from FHLB advances, net                                            15,000        (9,000)
(Repayments) proceeds of securities sold under agreements to repurchase, net                 --        (2,410)
Proceeds (repayments) of other borrowings, net                                              361            --
Cash dividends paid to stockholders                                                          --          (274)
Purchases of treasury stock                                                                  --        (1,251)
Sales of treasury stock                                                                   1,021           150
Sales of treasury stock for stock compensation plans                                         --           216
                                                                                        -------       -------
     Net cash provided by financing activities                                           37,211        18,080
                                                                                        -------       -------

NET (DECREASE) INCREASE IN CASH & CASH EQUIVALENTS                                      (11,779)        5,256

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

CASH & CASH EQUIVALENTS AT END OF PERIOD                                                $13,380       $18,089
                                                                                        =======       =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:
     Interest on deposits and borrowings                                               $ 14,872       $14,309
     Income taxes                                                                      $  2,850       $ 2,410

SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES

Loans transferred from held for sale 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  nine  month  periods  ended  September  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 nine month periods ended September 30, 2001
and 2000 is reconciled in the following table. The following table also presents
the  calculation  of the  Company's  Basic EPS and  Diluted  EPS for the periods
indicated.
<TABLE>
<CAPTION>
                                                            For The Three Months           For The Nine Months
                                                             Ended September 30,           Ended September 30,
                                                       ---------------------------     ---------------------------
(In Whole Dollars And Whole Shares)
                                                               2001          2000              2001          2000
                                                               ----          ----              ----          ----
<S>                                                      <C>             <C>             <C>           <C>
Net income                                               $1,057,000      $461,000        $2,608,000    $1,814,000
                                                         ==========      ========        ==========    ==========

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

Less weighted average:
   Uncommitted ESOP shares                                 (121,289)     (157,227)         (130,273)     (166,211)
   Non-vested stock award shares                            (26,903)      (58,378)          (30,289)      (67,236)
   Treasury shares                                       (1,050,040)   (1,176,316)       (1,070,491)   (1,154,058)
                                                         -----------   -----------       -----------   -----------

Sub-total                                                (1,198,232)   (1,391,921)       (1,231,053)   (1,387,505)
                                                         -----------   -----------       -----------   -----------

Weighted average BASIC shares outstanding                 3,293,853     3,100,164         3,261,032     3,104,580

Add dilutive effect of:
   Stock options                                             90,591         3,635            58,499         5,599
   Stock awards                                               1,112           ---               706           163
                                                         -----------   -----------       -----------   -----------

Sub-total                                                    91,703         3,635            59,205         5,762
                                                         -----------   -----------       -----------   -----------

Weighted average DILUTED shares outstanding               3,385,556     3,103,799         3,320,237     3,110,342
                                                          =========     =========         =========     =========

Earnings per share:

   BASIC                                                     $ 0.32        $ 0.15            $ 0.80        $ 0.58
                                                          =========     =========         =========     =========

   DILUTED                                                   $ 0.31        $ 0.15            $ 0.79        $ 0.58
                                                          =========     =========         =========     =========
</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 September 30,       Nine Months Ended September 30,
                                             ----------------------------------    ----------------------------------
                                                        2001              2000                 2001             2000
                                                        ----              ----                 ----             ----
(Dollars In Thousands)
<S>                                                   <C>               <C>                  <C>              <C>
Gross reclassification adjustment                     $  156            $   --               $  190           $  (77)
Tax (expense) benefit                                    (64)               --                  (78)              32
                                                       -----            ------               ------           ------

Reclassification adjustment, net of tax                $  92            $   --               $  112           $  (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                  Nine Months Ended
                                                               September 30,                      September 30,
                                                       ---------------------------        ---------------------------
                                                               2001          2000                 2001          2000
                                                               ----          ----                 ----          ----
(Dollars In Thousands)
<S>                                                           <C>           <C>                 <C>            <C>
Holding gain arising during the period, net of tax            $ 208         $ 334               $  673         $  27
Reclassification adjustment, net of tax                         (92)           --                 (112)           45
                                                              -----         -----               ------         -----

Net unrealized gain recognized in
     other comprehensive income                               $ 116         $ 334               $  561         $  72
                                                              =====         =====               ======         =====
</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
September 30, 2001            757,929         384,006           222,840          192,376         181,547         $9.92
</TABLE>

Activity during the three and nine months ended September 30, 2001 included:

                              Three Months Ended           Nine Months Ended
                              September 30, 2001           September 30, 2001
                              ------------------           ------------------
Granted                               3,000                     21,500
Canceled                             19,994                     75,504
Exercised                            17,384                    112,226
Vested                                   --                     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 September 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 September 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>              <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
September 30, 2001                   141,677            21,301           116,394            3,982
</TABLE>



         Activity  during the three and nine  months  ended  September  30, 2001
included:

                     Three Months Ended         Nine Months Ended
                     September 30, 2001        September 30, 2001
                     ------------------        ------------------
Granted                           2,314                     4,989
Canceled                          2,296                     8,971
Vested                            2,499                     9,796


                                       14
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 6:  Commitments & Contingencies

         At September 30, 2001,  commitments  maintained by the Company included
firm  commitments  to  originate  $9.5  million in various  types of loans,  and
optional commitments to sell $0.6 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
September 30, 2001.


NOTE 7:  Recent Accounting Pronouncements

         In June 2001, the Financial  Accounting Standards Board ("FASB") issued
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 intangible  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  September  30,  2001 and as all of the
Company's intangible assets at September 30, 2001 were comprised of core deposit
intangibles that will continue to amortize.

         In August 2001,  the  Financial  Accounting  Standards  Board  ("FASB")
approved for issuance Statement of Financial Accounting Standard (SFAS) No. 144,
"Accounting  For The  Impairment Or Disposal Of Long-Lived  Assets" SFAS No. 144
supersedes SFAS No. 121, "Accounting For The Impairment Of Long-Lived Assets And
For  Long-Lived  Assets To Be  Disposed  Of" and the  accounting  and  reporting
provisions of Accounting Principles Board ("APB") Opinion No. 30, "Reporting The
Results Of  Operations  -  Reporting  The  Effects Of Disposal Of A Segment Of A
Business,  And  Extraordinary,  Unusual and  Infrequently  Occurring  Events And
Transactions".  SFAS No. 144 unifies the accounting  treatment for various types
of  long-lived  assets to be disposed  of, and  resolves  implementation  issues
related to SFAS No. 121.  SFAS No. 144 is  effective  for  financial  statements
issued for fiscal years  beginning  after December 15, 2001, and interim periods
within those fiscal years. The Company will adopt SFAS No. 144 beginning January
1, 2002.  The  Company  does not expect the  adoption  of SFAS No. 144 to have a
material effect on its financial position, results of operations, or cash flows,
as the Company had no  long-lived  assets that were  impaired or that were to be
disposed of as of September 30, 2001.


NOTE 8:  Reclassifications

         Certain  amounts  in the  December  31,  2000 and  September  30,  2000
financial statements have been reclassified to conform to the September 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,  consumer and business response
to terrorist  actions,  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 September 30, 2001,  the Company had $527.1 million in total assets,
$454.9 million in net loans  receivable,  and $428.6 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 nine months ended September 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    California  Governor Davis signed two "predatory  lending" bills in October
     2001.  These bills are intended to curb certain  practices  associated with
     home mortgage loans where the rates and fees exceed  specified  thresholds.
     The new law  applies to loans  applied  for on or after  July 1, 2002.  The
     Company  does not  anticipate a material  impact from these  bills,  as the
     Company's  lending  practices  are  within  the safe  harbor  limits of the
     legislation.  In  addition,  it is  still  uncertain  whether  federal  law
     applicable to the Bank preempts these new California laws.

o    Congress has continued debating various federal "predatory  lending" bills.
     These bills contain a wide variety of content,  including  restrictions  on
     loan points and fees,  prepayment  penalties,  credit life  insurance,  and
     balloon  payments.  The Company is unable to predict what  legislation,  if
     any, may eventually be passed and what impact such  legislation  might have
     upon the Company.  The Company is currently  subject to the Home  Ownership
     and Equity  Protection  Act and  Regulation Z that govern  certain  lending
     practices and in general do not  adversely  impact or restrain the Company,
     as the Company does not conduct "sub-prime" lending.

o    Both  Congress and the  California  State  Legislature  are  continuing  to
     discuss  various  pieces  of  "privacy"  related  legislation,   with  some
     consideration  that new  federal  laws  might be  specifically  drafted  to
     preempt  state  privacy  laws.  Among  topics  under  consideration  is the
     potential requirement for explicit "opt-in" documentation from customers to
     permit  information  sharing.  Depending  upon the content of any final new
     privacy  laws,  if any, the Company could  experience  increased  operating
     costs.

o    New capital and  membership  rules for the Federal Home Loan Bank  ("FHLB")
     System continue to be drafted, with implementation  anticipated during late
     2001.  The FHLB-San  Francisco 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.  The Federal  Housing  Finance
     Board is analyzing the potential to ease restrictions on membership in more
     than one Federal Home Loan Bank. The easing of these restrictions,  if any,
     depending  upon their  nature,  could  present a range of impacts  upon the
     individual Federal Home Loan Banks, including the FHLB-San Francisco.

o    A possible  increase in (e.g.  from $100,000 to $200,000 per depositor,  or
     special limits for  retirement  accounts) 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

         Various  factors  including the opening of new power  plants,  moderate
weather, the national economic slowdown, and energy conservation  contributed to
the State of  California's  being  able to meet  electricity  demand  during the
summer of 2001 with only minimal disruption. While the peak summer demand season
is now over,  longer  term  aspects  of the  California  energy  crisis  remain,
including   uncertainty  regarding  the  settlement  of  the  various  financial
components of the crisis. These financial components include a potential adverse
impact on the State of  California's  general fund, the  determination  of which
energy  customers  will  bear  what  cost  burdens,  and the  resolution  of the
financial status of the two largest utilities in the State.

         The  Company  includes an  analysis  of  borrowers'  exposure to energy
availability  and prices as part of its  underwriting  process for new loans and
its periodic credit review procedures for existing loans.  Through September 30,
2001, the Company  experienced  no credit losses  directly  associated  with 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
September 30, 2001. Should the State need to withdraw such deposits, replacement
funding for the Bank would likely be more expensive.

         The Company  recently  completed the  installation  of a new and larger
natural gas powered  electricity  generator at its  administrative  headquarters
building.  The new generator produces sufficient electricity to power the entire
building and all  associated  equipment,  including the  Company's  primary data
processing servers.  This new generator replaces a smaller unit that the Company
plans to relocate to its backup data  processing "hot site",  thereby  providing
additional disaster recovery capability.


Events Of September 11, 2001

         The  Company  experienced  only  limited and  indirect  impact from the
events of September 11, 2001. Sales of non-FDIC insured investment products were
suspended for a week  following the actions,  and then remained slow through the
end  of  the  third  quarter.  A  significant  market  maker  in  the  Company's
NASDAQ-traded  common  stock that also  provided  equity  analyst  coverage  was
headquartered in the World Trade Center and was more directly impacted.  To help
maintain the liquidity in its stock,  the Company is seeking other market makers
and intends to work with the impacted market maker as that firm rebuilds.

         During the third quarter of 2001, the Company had conversations with an
investment  banking  firm aimed at having  the firm  commence  providing  equity
analyst coverage on the Company. This investment banking firm, however, was also
headquartered in the World Trade Center and was directly  impacted by the events
of September 11, 2001.

         In light of the above,  the Company is uncertain  when it will again be
covered by one or more equity  analysts.  The market  liquidity in the Company's
common  stock  may also be  impacted  for a period  of time due to more  limited
market making by investment banking firms.

                                       18
<PAGE>


Overview Of Business Activity

         During  the  third   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. Key  accomplishments  during the third
quarter  of 2001  included  the  hiring of two  experienced  commercial  banking
relationship   managers,   the   continued    implementation   of   technologies
complementary to the new core processing system installed in March 2001, and the
attainment of record levels of total assets, loans,  deposits, and stockholders'
equity at September 30, 2001. In addition,  the $1.1 million in earnings  during
the third  quarter  of 2001 was the  highest  of any  quarter  in the  Company's
history.

         Significant events during the three and nine months ended September 30,
2001 also included:

1.   The Company's  ratio of net loans to total assets  increased  from 80.6% at
     December 31, 2000 to 86.3% at September 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.

2.   The Company has  enhanced its employee mix during 2001 through the addition
     of experienced  professional  and commercial  bankers.  These new employees
     were  hired  to  advance  the  Company's  sales  to  doctors,  accountants,
     attorneys,  and other  professionals,  and  local  businesses,  while  also
     providing improved service to the Bank's retail customers.

3.   The Company continues to maintain favorable credit quality,  with just $957
     thousand in non-accrual loans at September 30, 2001 and $52 thousand in net
     charge-offs during 2001. The Company views this favorable credit profile as
     particularly  important heading into a period of economic slowdown,  likely
     recession,  and  increasing  unemployment  - factors that are  historically
     associated with an increase in loan delinquencies.

4.   The Board of Directors  reduced its size to ten following two  retirements,
     thereby decreasing ongoing non-interest expense. In addition, the Directors
     have  actively  purchased  the  Company's  shares  on the open  market  and
     continue to receive  their  retainer  fees  exclusively  in Company  common
     stock.

5.   The  Company's  ratio of net  interest  income to average  total assets was
     constant  for the first nine  months of 2001  versus the same period in the
     prior year  despite  significant  fluctuation  in capital  market  interest
     rates,  highlighting  the  effect  of  the  Company's  interest  rate  risk
     management program.

6.   The Bank  supplemented  its primary  marketing  campaign of 2001,  centered
     about the theme "Monterey Bay Bank. Expect More. Get The Best.", with local
     radio ads that focused on attracting business customers interested in being
     served by local  professionals using a relationship  banking approach.  The
     Bank also continued its significant increase in employee involvement in and
     contributions to community  development  groups,  coordinated by the Bank's
     Director of Community Relations.

7.   The  Company  continued  its focus on  stockholder  value,  increasing  its
     tangible book value per share from $12.54 at December 31, 2000 to $13.63 at
     September 30, 2001. In addition,  during the third quarter of 2001, several
     members of the Bank's senior  management  team elected to receive shares of
     Company  common stock in lieu of cash in conjunction  with pay raises.  The
     Company intends to continue  pursuing  opportunities to utilize stock based
     compensation in lieu of cash  compensation as a means of aligning  employee
     interests with improvements in stockholder value.

         The Board of Directors and management have targeted the  transformation
strategy  into a community  focused  commercial  bank based on their belief that
this  approach  presents  the best  current  opportunity  to  enhance  long term
stockholder value.

                                       19
<PAGE>

         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 $6.3 million by October 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 concluded binding arbitration during the fourth 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  $284 thousand in
     legal costs over the past nine  months.  The  arbitrator's  final  decision
     required the Company to make total payments of  approximately  $40 thousand
     less than the Company  accrued  for  settlement  of the former  executive's
     claims in the third quarter of 2000, when the matter commenced. The Company
     will record the recapture of the $40 thousand  excess accrual in the fourth
     quarter of 2001. This recapture will, however, be offset by the final legal
     costs for the  arbitration,  resulting in no material  impact upon earnings
     for the fourth quarter of 2001.

         The  Company's  strategic  plan  envisions  a greater  amount of income
property and business  lending  funded with a higher  percentage of  transaction
deposit accounts. The strategic plan also includes improvements in the Company's
efficiency  ratio and  return  on  stockholders'  equity,  two key  measures  of
financial  performance where the Company has lagged peer institutions.  However,
the pace of the  Company's  conversion  from a  savings  & loan  into a  locally
focused  community  bank will be  impacted in coming  quarters  by the  national
economic slowdown, levels of consumer and business confidence, the interest rate
environment,  the levels of unemployment and loan delinquencies,  and the impact
of  additional,  if any,  terrorist  actions  upon the local and state  business
environment,  including real estate values.  The combination of historically low
interest  rates  and a  weak  economic  environment  may  adversely  impact  the
Company's  ability to  maintain  the size of its loan  portfolio,  as  customers
refinance  their  mortgages into products not retained on the Company's  balance
sheet and if the demand for new loans decreases.  The Bank is under no immediate
pressure  to pursue a change in charter at this time,  as its  Qualified  Thrift
Lender  ("QTL")  ratio was 74.1% at September  30,  2001,  compared to a minimum
requirement of 65.0% to retain its federal thrift charter.


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

         Total assets  increased $40.9 million,  or 8.4%, from $486.2 million at
December 31, 2000 to a record $527.1  million at September 30, 2001. The rise in
assets was centered in loans and was funded with:

o        reductions in cash & cash equivalents and mortgage backed securities
o        increased deposits and borrowings
o        an expansion in stockholders' equity

         Cash & cash  equivalents  decreased  from $25.2 million at December 31,
2000 to $13.4  million at September  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.

         Investment securities available for sale were little changed during the
first nine months of 2001,  totaling  $7.4 million at December 31, 2000 and $7.2
million at September 30, 2001. At both December 31, 2000 and September 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.  The decrease in balance  during 2001  resulted from the mark to market
adjustment for available for sale  securities,  which reflects  increased credit
spreads and reduced demand for long term corporate  bonds  repricing  based upon
three month LIBOR through the year.

                                       20
<PAGE>

         Mortgage  backed  securities  available for sale  decreased  from $43.0
million at December  31, 2000 to $31.0  million at September  30,  2001,  as the
Company  redirected cash flows from sales,  prepayments,  and scheduled payments
into the  expansion  of the  loan  portfolio.  Prepayments  on  mortgage  backed
securities  have  been  significant  during  2001  due to a  combination  of the
historically  low 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 third quarter of 2001, the Company sold two higher duration,
non-accelerated  security  ("NAS")  class,  private  label CMO's  totaling  $9.3
million  in par value in  conjunction  with its  interest  rate risk  management
program and to generate additional funds for lending. At September 30, 2001, all
but $5.4  million  of the  Company's  mortgage  backed  security  portfolio  was
comprised  of  Agency  securities.   The  Bank  utilizes  Agency  securities  as
collateral for various deposit programs. The $5.4 million in non-Agency mortgage
backed securities at September 30, 2001 were all rated AAA.

         The vast  majority  of the  Company's  mortgage  backed  securities  at
September 30, 2001 were relatively low duration bonds. The Company's  management
believes  that  allocating  asset  duration  to  new  loans  versus   securities
facilitates  better  community  support and derives a higher  yield for the same
level of exposure to future increases in general market interest rates.

         Loans held for sale  increased  from none at December  31, 2000 to $407
thousand at September 30, 2001. The Company's pace of mortgage  banking activity
has accelerated in 2001 in conjunction with the Federal  Reserve's nine interest
rate cuts through  October 2001 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
September 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 $454.5 million at September 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.  The Company follows
its customary underwriting policies in evaluating loan pools.

         The  Company's  total loan  pipeline  was lower at  September  30, 2001
versus June 30, 2001. This stemmed from multiple factors, including:

o    the Company's  decision not to aggressively price intermediate term (e.g. 5
     years  fixed,   then  adjustable)   hybrid   residential   mortgages  in  a
     historically low interest rate environment

o    the Company's  determining not to match broker rebate  payments  offered by
     certain  large,   national   residential  loan  originators  for  wholesale
     mortgages

o    the Company's having open positions for  non-residential  loan relationship
     managers

o    the national slowdown in economic activity

The commercial lending pipeline,  however, was larger at September 30, 2001 than
at  June  30,  2001,  reflecting  the  impact  of  the  new  commercial  banking
relationship  managers.  Commercial  business  loans  totaled  $6.9  million  at
September  30, 2001,  or 1.3% of total  assets,  up from $6.1 million or 1.2% of
total  assets at June 30, 2001 and up from $3.1  million or 0.6% of total assets
at December 31, 2000.

                                       21
<PAGE>

         The Company reversed its long term loan portfolio  diversification away
from residential  mortgages during the first nine months 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
44.6% of gross loans at September  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 9.1% of gross loans at September 30, 2001.  In addition,  land loans
declined from 3.8% of gross loans at December 31, 2000 to 2.3% of gross loans at
September 30, 2001.

         During the fourth  quarter 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
$86.0 million at September 30, 2001. Cash flows for apartment  buildings in many
parts of California  have been somewhat  insulated from the slowing economy by a
combination of lower debt service due to declining  interest rates and stable to
greater revenue stemming from limited unit construction compared to increases in
population. The Company initiated a direct mail program soliciting the refinance
of other lenders'  multifamily  loans early in the fourth quarter and intends to
pursue the purchase of  multifamily  loans on the  secondary  market  during the
remainder of 2001.

         The Company also plans to pursue increased lending to businesses,  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 in coming quarters.

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

<TABLE>
<CAPTION>
(Dollars In Thousands)                                                       September 30,  December 31,
                                                                                      2001         2000
                                                                                 ---------    ---------
<S>                                                                              <C>          <C>
Held for investment:
   Loans secured by real estate:
      Residential one to four unit                                               $ 212,309    $ 160,155
      Multifamily five or more units                                                85,960       76,727
      Commercial and industrial                                                    110,735      102,322
      Construction                                                                  43,199       59,052
      Land                                                                          11,039       16,310
                                                                                 ---------    ---------
   Sub-total loans secured by real estate                                          463,242      414,566

   Other loans:
      Home equity lines of credit                                                    6,208        5,631
      Loans secured by deposits                                                        212          494
      Consumer lines of credit, unsecured                                              169          175
      Business term loans                                                            2,279        1,641
      Business lines of credit                                                       4,599        1,438
                                                                                 ---------    ---------
   Sub-total other loans                                                            13,467        9,379

   Sub-total gross loans held for investment                                       476,709      423,945

   (Less) / Plus:
      Undisbursed construction loan funds                                          (15,955)     (26,580)
      Unamortized purchase premiums, net of purchase discounts                         230           21
      Deferred loan fees and costs, net                                               (105)        (202)
      Allowance for estimated loan losses                                           (6,387)      (5,364)
                                                                                 ---------    ---------
Loans receivable held for investment, net                                        $ 454,492    $ 391,820
                                                                                 =========    =========
Held for sale:
   Residential one to four unit                                                  $     407    $    --
                                                                                 =========    =========
</TABLE>

                                       22
<PAGE>

         The Company's  investment in the capital stock of the FHLB-SF increased
from $2.9 million at December 31, 2000 to $3.3 million at September 30,  2001due
to a combination of stock dividends  received and stock purchases in conjunction
with expanded borrowing.  A mandatory October stock redemption by the FHLB-SF is
anticipated to result in a decline in the Company's  investment  position during
the fourth quarter of 2001.

         Premises and  equipment,  net,  increased from $7.4 million at December
31, 2000 to $7.7 million at  September  30, 2001  primarily  due to hardware and
software purchases in support of the new core processing system.

         Core deposit  intangibles,  net,  declined by $511 thousand  during the
first nine 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.

         Total deposits  increased from $407.8 million at December 31, 2000 to a
record  $428.6  million at  September  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 $20.0  million at September  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 from $41.9 million
     at December 31, 2000 to $41.1 million at September  30, 2001.  During 2001,
     the Company has experienced  particularly  aggressive advertising and price
     competition  for NOW  deposits  from two  large  thrifts.  These  two large
     thrifts have at times paid, and  extensively  marketed,  interest rates 100
     basis points or more in excess of federal  funds on consumer NOW  accounts,
     particularly  on  accounts  with  higher  balances.  The  Company  has been
     reluctant to match these prices, and has instead focused on competing based
     upon  service,  convenience,  flexible  access  (e.g.  bilingual  telephone
     banking,  Internet banking, ATM access, debit card, and in-branch service),
     and overall business relationships.

o    Savings deposits increased from $16.5 million at December 31, 2000 to $19.5
     million at September  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  increased from $87.7 million at December 31, 2000 to
     $97.1 million at September 30, 2001,  with most of the growth  occurring in
     the third quarter when the Company  advertised its tiered Money Market Plus
     account and  conducted an internal  sales  campaign.  The Money Market Plus
     product pays interest rates  competitive with money market mutual funds for
     higher balance  accounts,  plus provides  flexible access through  Internet
     banking,  telephone  banking,  ATM's, and in-branch  service.  Money market
     deposit  balances during the third quarter of 2001 were also bolstered by a
     $5.0 million deposit from a single customer.

o    Certificate of deposit  balances  increased from $244.7 million at December
     31, 2000 to $250.9 million at September 30, 2001, with a slight decrease in
     balances  during the third  quarter of 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 most of 2001,
     the Company has priced its longer  term (18 to 60 months)  certificates  of
     deposit  attractively as part of its asset / liability  management  program
     and to encourage the development of longer term customer relationships.

                                       23
<PAGE>

         Transaction accounts increased from 40.0% of total deposits at December
31, 2000 to 41.5% of total  deposits at  September  30,  2001.  Continuing  this
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.  The Company  continues to focus its
advertising, marketing, product development, and sales efforts on attracting new
deposit transaction  accounts,  including those from businesses.  The Company is
currently  testing Internet banking for commercial  business  customers,  with a
planned  introduction  early in 2002. The Company is also developing an internal
sweep product for  businesses,  whereby  checking  balances in excess of certain
thresholds can be transferred into a higher yielding money market account.

         With the aforementioned focus on transaction accounts, the Company does
not anticipate  significantly  expanding the certificate of deposit portfolio in
coming  quarters.  This expectation is reinforced by the offering of certificate
of deposit interest rates significantly in excess of wholesale funding costs for
similar  terms by several large thrift  institutions  during the third and early
fourth  quarters of 2001.  The Company has been reluctant to match such pricing,
with a willingness to substitute an increase in FHLB advances or other wholesale
funding in lieu of retaining relatively high cost retail certificates of deposit
should additional funding be required.

         The  Company's  ratio of loans to  deposits  increased  from  96.08% at
December  31, 2000 to 106.13% at September  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:

o    new sites for traditional stand-alone branches

o    expanded provision of courier services to businesses

o    increased  business lending with associated  compensating  customer deposit
     balances

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

         Borrowings  increased  from $32.6 million at December 31, 2000 to $47.9
million at September 30, 2001. The Company has acquired additional FHLB advances
during 2001 to provide funding for the expansion in the loan  portfolio.  All of
the  Company's  FHLB  advances at  September  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.  Should  cash  inflows  from
mortgage  prepayments  or other sources during the fourth quarter of 2001 exceed
the Company's  requirements,  $10.0 million in FHLB advances maturing during the
first  quarter of 2001 may be prepaid.  The Company  prepaid a $5.0 million FHLB
advance during the third quarter of 2001.

         Total stockholders' equity increased from $43.8 million at December 31,
2000 to $48.7  million  at  September  30,  2001.  Factors  contributing  to the
increase included:

o    $2.6 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 112 thousand  vested stock options by former  employees and
     Directors, generating $1.1 million in additional stockholders' equity

o    $561  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 2001

         The Company plans to continue  utilizing  stock based  compensation  in
lieu of cash compensation for certain payments during the remainder of 2001. The
Company has not  conducted  any share  repurchases  during 2001.  The  Company's
tangible  book value per share  increased  from $12.54 at  December  31, 2000 to
$13.63 at September 30, 2001.

                                       24
<PAGE>

Interest Rate Risk Management And Exposure

         The table below  presents an overview of the interest rate  environment
during the 21 months ended  September 30, 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    9/30/01
-----------             --------    -------   -------    -------  --------    -------   -------    -------
<S>                        <C>        <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%      2.37%
6 month Treasury bill      5.73%      6.14%     6.22%      6.27%     5.70%      4.13%     3.64%      2.35%
2 year Treasury note       6.24%      6.47%     6.36%      5.97%     5.09%      4.18%     4.24%      2.85%
5 year Treasury note       6.34%      6.31%     6.18%      5.85%     4.97%      4.56%     4.95%      3.80%
10 year Treasury note      6.44%      6.00%     6.03%      5.80%     5.11%      4.92%     5.41%      4.59%
30 year Treasury bond      6.48%      5.83%     5.90%      5.88%     5.46%      5.44%     5.76%      5.42%
1 year LIBOR               6.50%      6.94%     7.18%      6.80%     6.00%      4.67%     4.18%      2.64%
Target federal funds       5.50%      6.00%     6.50%      6.50%     6.50%      5.00%     3.75%      3.00%
Prime rate                 8.50%      9.00%     9.50%      9.50%     9.50%      8.00%     6.75%      6.00%
12MAT                      5.08%      5.46%     5.79%      6.04%     6.11%      5.71%     5.10%      4.40%
COFI                       4.85%      5.00%     5.36%      5.55%     5.62%      5.20%     4.50%      3.97%
</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 the past year,  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 21 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 throughout
the first nine months of 2001.  The Federal  Reserve cut its benchmark  interest
rates a total  of nine  times  in 2001  through  October  2,  2001,  for a total
decrease of 400 basis points.  This decline represented a historically rapid and
aggressive set of actions by the Federal  Reserve,  as it sought to reinvigorate
the national economy.

         Throughout  the  volatile  21 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 2001, the Company has 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
nine 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 in mid-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.  The Company has thus added a significant
volume of hybrid loans to its balance sheet in 2001.  However, by the end of the
third quarter of 2001, the  historically low level of interest rates led most of
the  Company's  residential  loan  borrowers  to pursue  long  term,  fixed rate
mortgages,  with diminished  interest in hybrid loans and negligible interest in
traditional adjustable rate mortgages.

         The Company's assets thus became, in aggregate,  slightly less interest
rate sensitive than its liabilities in mid 2001,  which  favorably  impacted net
interest  income as market  interest  rates  continued  to decline.  Anticipated
increases in asset  prepayment  speeds and the continued  implementation  of the
Company's  strategic plan, as discussed below, is expected to return the Company
to a more nearly  balanced  interest  rate risk  profile  over the next  several
quarters.

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

         The Company is concerned about the possible impacts of the historically
low interest rate  environment  present in early  November,  2001. With interest
rates  at  such  low  nominal  levels,   the  Company  could  experience  margin
compression  since rates on various types of deposit accounts are 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.

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

         At September  30, 2001,  the Company had $13.4 million in cash and cash
equivalents,  untapped  borrowing  capacity  in excess of $115.0  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
pledged  additional  loan  collateral  to the FHLB-SF and enrolled in the FHLB's
specific loan pledging program in order to 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 September 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.

                                       26
<PAGE>

         At  September  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, but not prohibited, in its ability to pay dividends to MBBC.


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 September 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                  $42,629       8.12%         $42,629      11.44%         $47,307      12.70%
Well capitalized requirement              26,253       5.00%          22,353       6.00%          37,255      10.00%
                                          ------       -----          ------       -----          ------      ------

Excess                                   $16,376       3.12%         $20,276       5.44%         $10,052       2.70%
                                         =======       =====         =======       =====         =======       =====

Adjusted assets (1)                     $525,060                    $372,552                    $372,552
                                        ========                    ========                    ========
<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.

<TABLE>
<CAPTION>
                                                                      September 30, 2001          December 31, 1999
                                                                      ------------------          -----------------
<S>                                                                                <C>                        <C>
Core capital to adjusted total assets                                              8.12%                      7.11%
Core capital to risk-weighted assets                                              11.44%                      9.58%
Total capital to risk-weighted assets                                             12.70%                     10.56%

</TABLE>

                                       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 September
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                           $42,629                8.12%
Minimum required                               7,876                1.50%
                                             -------                -----

Excess                                       $34,753                6.62%
                                             =======                =====


Core Capital
Regulatory capital                           $42,629                8.12%
Minimum required                              21,002                4.00%
                                             -------                -----

Excess                                       $21,627                4.12%
                                             =======                =====


                                                               Percent Of
                                                                    Risk-
                                                                 weighted
                                              Amount               Assets
                                              ------               ------
Risk-based Capital
Regulatory capital                           $47,307               12.70%
Minimum required                              29,804                8.00%
                                             -------                -----

Excess                                       $17,503                4.70%
                                             =======                =====


         At September 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)                                               September 30, 2001       December 31, 2000
                                                                     ------------------       -----------------
<S>                                                                              <C>                    <C>
Outstanding Balances Before Valuation Reserves
Non-accrual loans                                                                $  957                 $ 4,666
Loans 90 or more days delinquent and accruing interest                               --                      --
Restructured loans in compliance with modified terms                                 --                      75
                                                                                 ------                 -------

Total gross non-performing loans                                                    957                   4,741

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

Total gross non-performing assets                                                $  957                 $ 4,741
                                                                                 ======                 =======

Gross non-accrual loans to total loans                                            0.21%                   1.17%
Gross non-performing loans to total loans                                         0.21%                   1.19%
Gross non-performing assets to total assets                                       0.18%                   0.98%
Allowance for loan losses                                                        $6,387                  $5,364
Allowance for loan losses to non-performing loans                               667.40%                 113.14%
Valuation allowances for foreclosed real estate                                  $   --                  $   --
</TABLE>


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

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

Residential one to four unit mortgage            4                    $  875
Business line of credit                          2                        43
Business term loan                               2                        38
Consumer line of credit                          1                         1
                                                 -                    ------

Total                                            9                    $  957
                                                 =                    ======


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

                                       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
September 30, 2001                          $ 5,369         $ 3,539            $ --           $  --         $ 8,908
</TABLE>

         Classified  assets as a percent of stockholders'  equity decreased from
15.8% at December 31, 2000 to 7.3% at September 30, 2001.

         The September 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, and no delinquency was experienced through September 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  September  30, 2001 OAEM assets in the above table  include a $2.4
million  construction  loan  participation  for the development of a residential
project in the  Coachella  Valley in southern  California.  The  borrowers  were
current  in  their  payments  at  September  30,  2001.  However,   slower  than
anticipated  sales of homes and lots within the  development led to the credit's
being  identified  as "OAEM".  This loan matures  late in the fourth  quarter of
2001, and the Company has requested payoff in full at that time.


Impaired Loans

         At September  30,  2001,  the Company had total gross  impaired  loans,
before  specific  reserves,  of $957  thousand,  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 nine months ended September 30, 2001, accrued interest on
impaired  loans was zero and interest of $61  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 $83 thousand during
the nine months ended  September 30, 2001,  instead of interest  income actually
recognized, based on cash payments, of $61 thousand.


Hotel / Motel Loans

         At September 30, 2001, the Company had 21 real estate loans outstanding
that are secured by hotel / motel properties.  The aggregate outstanding balance
for these loans at September 30, 2001 was $32.7  million.  Various  reports have
indicated  that  travel  industry  businesses  such as hotels / motels have been
particularly  adversely  impacted  since the events of September  11, 2001.  The
Company  intends to augment its normal  credit  monitoring  for these loans.  In
addition,   depending  upon  the  information   resulting  from  such  increased
monitoring, the Company may alter its loan loss reserve factor for these credits
in the fourth  quarter of 2001 to more  accurately  reflect the inherent loss in
this  portfolio.  The potential  credit  deterioration  of this portfolio  could
therefore impact the levels of future provisions for loan losses.

                                       30
<PAGE>

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.

         At  September  30,  2001,  the  outstanding  principal  balance of this
mortgage  loan  pool was $6.8  million,  comprised  of 59  mortgages,  with $554
thousand received during October,  2001 (normal monthly  remittance cycle) based
upon  prepayments and scheduled  principal for September,  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
level of prepayments realized on the portfolio during 2001.

         Through the October 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 September 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 October 20, 2001  remittance  and reporting date for activity
through  September 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 September 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 have experienced  favorable results during 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
     must 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  Bank's  current
regulatory capital position, management does not foresee that the aforementioned
requirements will have a material adverse impact upon the Company in 2001.

                                       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,  including unused  commitments to provide  financing.  In determining
levels of risk,  management considers a variety of factors,  including,  but not
limited to, asset  classifications,  economic  trends,  industry  experience and
trends, geographic concentrations,  estimated collateral values, historical loan
loss experience, and the Company's underwriting policies. The allowance for loan
losses is maintained at an amount management  considers adequate to cover losses
in loans  receivable  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  allowance  for loan losses is comprised of three  primary types of
allowances:

              1.  Formula Allowance

              Formula  allowances  are based upon loan loss factors that reflect
              management's  estimate of the inherent loss in various segments of
              or pools within the loan portfolio.  The loss factor is multiplied
              by the portfolio segment (e.g.  multifamily  permanent  mortgages)
              balance  (or  credit  commitment,  as  applicable)  to derive  the
              formula   allowance   amount.   The  loss   factors   are  updated
              periodically  by the Company to reflect current  information  that
              has an effect on the amount of loss inherent in each segment.

              2.  Specific Allowance

              Specific  allowances are established in cases where management has
              identified  significant  conditions or circumstances related to an
              individually impaired credit. In other words, these allowances are
              specific to the loss inherent in a particular loan. The amount for
              a specific  allowance is calculated  in  accordance  with SFAS No.
              114, "Accounting By Creditors For Impairment Of A Loan".

              3.  Unallocated Allowance

              The Company  maintains an unallocated  loan loss allowance that is
              based upon  management's  evaluation  of  conditions  that are not
              directly measured in the determination of the formula and specific
              allowances.  The evaluation of inherent loss with respect to these
              conditions  is subject to a higher degree of  uncertainty  because
              they  are  not  identified   with  specific   problem  credits  or
              historical  performance of loan portfolio segments. The conditions
              evaluated  in  connection  with  the   unallocated   allowance  at
              September  30, 2001 included the  following,  which existed at the
              balance sheet date:

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

              o   Real estate values in California

              o   Loan volumes and concentrations

              o   Seasoning of the loan portfolio

              o   Status of the current business cycle

              o   Specific   industry  or  market  conditions  within  portfolio
                  segments

                                       32
<PAGE>

         The following  table presents  activity in the Company's  allowance for
loan losses  during the nine months ended  September  30, 2001 and September 30,
2000:


<TABLE>
<CAPTION>
                                                                                  Nine Months Ended September 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                                                            (2)                  --
      Business lines of credit                                                           (50)                  --
                                                                                     -------              -------
   Total charge-offs                                                                     (52)                (371)

   Recoveries                                                                             --                   --

   Provision for loan losses                                                           1,075                1,675
                                                                                     -------              -------

Balance at September 30                                                              $ 6,387              $ 4,806
                                                                                     =======              =======

Annualized ratio of net charge-offs during the period to average
   loans receivable, net, outstanding during the period                                0.02%                0.13%

</TABLE>
         Additional ratios applicable to the allowance for loan losses include:

<TABLE>
<CAPTION>
                                                                          September 30, 2001      December 31, 2000
                                                                          ------------------      -----------------
<S>                                                                                  <C>                    <C>
Allowance for loan losses as a percent of non-performing loans                       667.40%                113.14%

Allowance  for  loan  losses  as a  percent  of gross  loans  receivable  net of
     undisbursed loan funds and unamortized yield
     Adjustments                                                                       1.38%                  1.35%

Allowance for loan losses as a percent of classified assets                          180.47%                 77.48%
</TABLE>

                                       33
<PAGE>

         At September  30, 2001,  the allowance for loan losses was comprised of
$5.2 million in formula allowance,  zero specific allowance, and $1.2 million in
unallocated  allowance.  The $5.2 million in formula allowance  included amounts
for the Special Residential Loan Pool as described elsewhere in this report. The
$1.2 million in unallocated  allowance reflected the Company's  consideration of
the following  factors,  as well as more general factors including the shrinking
economy, increased layoffs and unemployment, and consumer and business reactions
to the events of September 11, 2001:

o    The  recent  adverse  effects  of  a  decline  in  tourism   impacting  the
     hospitality  industry that is a  significant  component of the economies in
     Santa  Cruz and  Monterey  counties,  which  could be in the  range of $100
     thousand to $500 thousand.

o    The adverse  impacts of the weakening  technology  industry upon commercial
     real estate values.  The Company's primary lending area is near the Silicon
     Valley area of the San Francisco  Bay Area,  which has been impacted by the
     slump in various technology and technology related businesses.  This impact
     could be in the range of $275 thousand to $550 thousand.

o    Slowing  housing  activity could lead to increased  losses  associated with
     construction  lending,  particularly for homes being built on a speculative
     or non-pre-sold  basis. At September 30, 2001, the Company had gross credit
     commitments of $18.3 million for speculative  construction  of homes.  This
     impact could be in the range of $100 thousand to $400 thousand.

o    The  charge-off  in  2001 of $50  thousand  in  loans  from  the  Company's
     portfolio of "Business Express" loans may indicate the need to increase the
     Company's  loss  factors  for this  portfolio.  These  loans have a maximum
     credit  limit  of $25  thousand  and  were  targeted  to very  small  local
     businesses.  These borrowers may be particularly  impacted by the shrinking
     economy due to their often more limited financial  resources.  At September
     30,  2001,  the  Company  had  $536  thousand  in  Business  Express  loans
     outstanding.  The inherent loss in this portfolio  could exceed the formula
     allowance by a range of $25 thousand to $100 thousand.

         As subsequently  discussed (see "Provision For Loan Losses"), the lower
provision for loan losses  recorded  during the first nine 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 should the Company accomplish its strategic
plan and be successful in:

o    generating further growth in loans receivable held for investment

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

o    continuing expansion of commercial business lending

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



                                       34
<PAGE>

Comparison Of Operating Results For The Three Months And Nine Months
Ended September 30, 2001 and September 30, 2000


General

         During the third  quarter of 2001,  the Company  reported net income of
$1.1 million,  equivalent to $0.31 diluted earnings per share.  This compares to
net income of $461 thousand,  or $0.15 diluted  earnings per share, for the same
period  in 2000.  Net  income  during  the  quarter  ended  June 30,  2001  (the
immediately  preceding  quarter) was $949 thousand,  equivalent to $0.29 diluted
earnings per share.

         For the nine  months  ended  September  30,  2001,  net income was $2.6
million,  equivalent to $0.79 diluted  earnings per share.  This compares to net
income of $1.8 million,  or $0.58 diluted earnings per share, for the first nine
months of 2000.

         The  Company   realized  some  of  the  financial   benefits  from  its
transformation  strategy  during the first  nine  months 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
following  the systems  conversion.  The  Company  maintained  favorable  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 ($284 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 seven  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 400 basis points over
nine separate  occasions through early October,  2001, taking the target federal
funds rate from  6.50% on January 2, 2001 to 2.50% on October 2, 2001.  By early
November,  2001,  various Wall Street firms were  forecasting  the federal funds
rate as low as 1.50%  over the  coming  months.  The  Company  cannot,  however,
forecast the future direction, levels, or term structures of interest rates.

         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 from three months 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.  During the third  quarter of 2001,
additional  interest  rate cuts led to the steepest  yield curve in the past two
years. During the summer of 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.

                                       35
<PAGE>

Net Interest Income

         Net  interest  income  increased  from $4.4  million and $13.4  million
during the third  quarter and first nine months of 2000,  respectively,  to $5.0
million  and $14.5  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
3.80% for the three and nine months ended June 30,  2001,  compared to 3.67% and
3.80% during the same periods in 2000.  The  Company's  margins were impacted in
2001 by a shift in loan mix  toward  residential  mortgages.  Margins  were also
hampered  during the early part of 2001 by the  Company's  offering  higher than
normal  relative  retail  deposit  pricing  to  facilitate   customer  retention
following the core systems conversion.  In addition, during the second and third
quarters 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 nine 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
     79.5%  during the first nine months of 2000 to 83.0%  during the first nine
     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.  The  Company
     repeated  this  positioning  following the events of September 11, 2001. At
     both times, this excess liquidity, which unfavorably impacted the Company's
     margins, was not required.

o    During 2001,  the Bank has not been 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 3.46% at September
     30, 2001.  In contrast,  the Prime Rate  declined  350 basis  points,  COFI
     decreased 165 basis  points,  12MAT  decreased 171 basis points,  and the 1
     Year CMT Index fell 283 basis points over the same time period.

During the fourth quarter of 2001, the Company plans to address the above issues
that unfavorably  impact net interest income by continuing to 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.

                                       36
<PAGE>

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

<TABLE>
<CAPTION>
                                    Three Months Ended September 30, 2001     Three Months Ended September 30, 2000
                                   ----------------------------------------  ----------------------------------------
(Dollars In Thousands)                 Average                     Average       Average                     Average
                                       Balance      Interest          Rate       Balance      Interest          Rate
                                       -------      --------          ----       -------      --------          ----
<S>                                  <C>              <C>            <C>        <C>             <C>            <C>
Assets
------
Interest earning assets:
   Cash equivalents (1)              $   6,035        $   50         3.31%      $ 11,303        $  187         6.58%
   Investment securities                 7,404            93         5.02%         7,471           150         8.03%
   Mortgage backed securities (2)       32,883           488         5.94%        58,392         1,011         6.93%
   Loans receivable, net (3)           453,030         9,084         8.02%       379,048         8,118         8.57%
   FHLB stock                            3,259            43         5.28%         2,869            48         6.66%
                                     ---------        ------                    --------        ------
Total interest earning assets          502,611         9,758         7.77%       459,083         9,514         8.29%
                                                      ------                                    ------
Non-interest earnings assets            27,353                                    20,344
                                     ---------                                 ---------
Total assets                         $ 529,964                                 $ 479,427
                                     =========                                 =========

Liabilities & Equity
--------------------
Interest bearing liabilities:
   NOW accounts                      $  40,907            77         0.75%      $ 37,419           137         1.46%
   Savings accounts                     19,694            51         1.04%        15,885            64         1.60%
   Money market accounts                90,186           807         3.58%        91,749         1,088         4.72%
   Certificates of deposit             252,369         3,097         4.91%       233,497         3,243         5.53%
                                     ---------        ------                    --------        ------
   Total interest-bearing deposits     403,156         4,032         4.00%       378,550         4,532         4.76%
   FHLB advances                        55,365           708         5.12%        40,675           583         5.70%
   Other borrowings (4)                    356             3         3.37%            11            --         6.73%
                                     ---------        ------                    --------        ------
Total interest-bearing liabilities     458,877         4,743         4.13%       419,236         5,115         4.85%
                                                      ------                                    ------
Demand deposit accounts                 20,067                                    16,642
Other non-interest bearing liabilities   2,752                                     3,001
                                      --------                                 ---------
Total liabilities                      481,696                                   438,879

Stockholders' equity                    48,268                                    40,548
                                     ---------                                 ---------
Total liabilities & equity           $ 529,964                                 $ 479,427
                                     =========                                 =========
Net interest income                                   $5,015                                   $ 4,339
                                                      ======                                   =======
Interest rate spread (5)                                             3.64%                                     3.44%
Net interest earning assets             43,734                                    39,847
Net interest margin (6)                                3.99%                                     3.83%
Net interest income /
     average total assets                              3.79%                                     3.67%
Interest earnings assets /
     interest bearing liabilities         1.10                                      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  $45,000  and
     $69,000 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>

                                       37
<PAGE>

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

<TABLE>
<CAPTION>
                                    Nine Months Ended September 30, 2001      Nine Months Ended September 30, 2000
                                   ----------------------------------------  ----------------------------------------
(Dollars In Thousands)                 Average                     Average       Average                     Average
                                       Balance      Interest          Rate       Balance      Interest          Rate
                                       -------      --------          ----       -------      --------          ----
<S>                                  <C>              <C>            <C>         <C>            <C>            <C>
Assets
------
Interest earning assets:
   Cash equivalents (1)              $   8,123        $  277         4.55%       $ 8,733        $  411         6.29%
   Investment securities                 7,356           338         6.13%         9,397           536         7.62%
   Mortgage backed securities (2)       41,644         1,970         6.31%        55,052         2,888         6.99%
   Loans receivable, net (3)           423,124        26,753         8.43%       375,140        23,972         8.52%
   FHLB stock                            3,051           126         5.51%         3,047           169         7.41%
                                     ---------        ------                     -------        ------
Total interest earning assets          483,298        29,464         8.13%       451,369        27,976         8.26%
                                                      ------                                    ------
Non-interest earnings assets            26,748                                    20,491
                                     ---------                                 ---------
Total assets                         $ 510,046                                 $ 471,860
                                     =========                                 =========

Liabilities & Equity
--------------------
Interest bearing liabilities:
   NOW accounts                       $ 40,811           317         1.04%      $ 34,781           399         1.53%
   Savings accounts                     19,318           187         1.29%        15,506           199         1.71%
   Money market accounts                88,859         2,764         4.15%        87,747         2,986         4.55%
   Certificates of deposit             246,996         9,804         5.29%       228,437         8,985         5.25%
                                     ---------        ------                     -------        ------
   Total interest-bearing deposits     395,984        13,072         4.40%       366,471        12,569         4.58%
   FHLB advances                        46,538         1,834         5.25%        45,392         1,950         5.74%
   Other borrowings (4)                    214            18        11.21%           225            11         6.53%
                                     ---------        ------                     -------        ------
Total interest-bearing liabilities     442,736        14,924         4.49%       412,088        14,530         4.71%
                                                      ------                                    ------
Demand deposit accounts                 18,561                                    16,722
Other non-interest bearing liabilities   2,427                                     3,058
                                      --------                                 ---------
Total liabilities                      463,724                                   431,868

Stockholders' equity                    46,322                                    39,992
                                     ---------                                 ---------
Total liabilities & equity           $ 510,046                                 $ 471,860
                                     =========                                 =========
Net interest income                                  $14,540                                   $13,446
                                                     =======                                   =======
Interest rate spread (5)                                             3.64%                                     3.55%
Net interest earning assets             40,562                                    39,281
Net interest margin (6)                                4.01%                                     3.97%
Net interest income /
     average total assets                              3.80%                                     3.80%
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  $159,000  and
     $211,000 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>

                                       38
<PAGE>

Rate / Volume Analysis

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


<TABLE>
<CAPTION>
                                                             Three Months Ended September 30, 2001
                                                                          Compared To
                                                             Three Months Ended September 30, 2000
                                             ----------------------------------------------------------------------
                                                                                          Volume
(Dollars In Thousands)                                Volume              Rate            / Rate               Net
                                                      ------              ----            ------               ---
<S>                                                   <C>               <C>               <C>              <C>
Interest-earning assets
Cash equivalents                                      $  (87)           $  (92)           $   42           $  (137)
Investment securities                                     (1)              (56)               --               (57)
Mortgage backed securities                              (442)             (144)               63              (523)
Loans receivable, net                                  1,584              (517)             (101)              966
FHLB Stock                                                 6               (10)               (1)               (5)
                                                      ------            ------            ------           -------

     Total interest-earning assets                     1,060              (819)                3               244
                                                      ------            ------            ------           -------

Interest-bearing liabilities
NOW Accounts                                              13               (67)               (6)              (60)
Savings accounts                                          15               (23)               (5)              (13)
Money market accounts                                    (18)             (261)               (2)             (281)
Certificates of deposit                                  261              (360)              (47)             (146)
                                                      ------            ------            ------           -------

Total interest-bearing deposits                          271              (711)              (60)             (500)
FHLB advances                                            211               (60)              (26)              125
Other borrowings                                           6                --                (3)                3
                                                      ------            ------            ------           -------

     Total interest-bearing liabilities                  488              (771)              (89)             (372)
                                                      ------            ------            ------           -------

Increase in net interest income                       $  572            $  (48)           $   92           $   616
                                                      ======            ======            ======           =======
</TABLE>

                                       39
<PAGE>
<TABLE>
<CAPTION>
                                                             Nine Months Ended September 30, 2001
                                                                          Compared To
                                                             Nine Months Ended September 30, 2000
                                             ----------------------------------------------------------------------
                                                                                          Volume
(Dollars In Thousands)                                Volume              Rate            / Rate               Net
                                                      ------              ----            ------               ---
<S>                                                   <C>              <C>                 <C>             <C>
Interest-earning assets
Cash equivalents                                      $  (29)          $  (114)            $   9           $  (134)
Investment securities                                   (117)             (105)               24              (198)
Mortgage backed securities                              (703)             (284)               69              (918)
Loans receivable, net                                  3,066              (253)              (32)            2,781
FHLB Stock                                                --               (43)               --               (43)
                                                      ------            ------            ------           -------

     Total interest-earning assets                     2,217              (799)               70             1,488
                                                      ------            ------            ------           -------

Interest-bearing liabilities
NOW Accounts                                              69              (129)              (22)              (82)
Savings accounts                                          49               (49)              (12)              (12)
Money market accounts                                     38              (257)               (3)             (222)
Certificates of deposit                                  731                66                22               819
                                                      ------            ------            ------           -------

Total interest-bearing deposits                          887              (369)              (15)              503
FHLB advances                                             49              (165)               --              (116)
Other borrowings                                          (1)                8                --                 7
                                                      ------            ------            ------           -------

     Total interest-bearing liabilities                  935              (526)              (15)              394
                                                      ------            ------            ------           -------

Increase in net interest income                      $ 1,282            $ (273)            $  85           $ 1,094
                                                      ======            ======            ======           =======
</TABLE>



                                       40
<PAGE>

Interest Income

         Interest  income  increased  from $9.5 million and $28.0 million during
the three and nine months  ended  September  30, 2000 to $9.8  million and $29.5
million during the same periods in 2001. These increases were primarily due to:

o    higher  interest  earning assets in 2001: 9.5% greater for the three months
     ended  September  30,  2001,  and 7.1%  greater for the nine  months  ended
     September 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 nine months of 2001 versus the same period in 2000.

         Interest  income  on loans  rose from $8.1  million  and $24.0  million
during the three and nine months  ended  September  30, 2000 to $9.1 million and
$26.8 million during the same periods in 2001. This expansion in interest income
was due to greater  average  volumes,  as average  loan rates were lower in 2001
versus 2000 due to the lower  interest  rate  environment.  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  over  time.
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 added
economic value.  Interest  income on loans was supported  during 2001 by various
loans  (generally  income  property and  construction)  reaching  lifetime  rate
floors. In certain instances, however, the Company has negotiated a reduction in
lifetime   rate  floors  with   borrowers  in  order  to  maintain  the  lending
relationship.

         Interest  income on cash  equivalents  decreased from $187 thousand for
the three months ended September 30, 2000 to $50 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, and due to lower average
volumes stemming from the Company's redeploying funds from cash equivalents into
loans as a result of the demand for credit.  Interest income on cash equivalents
declined from $411 thousand  during the nine months ended  September 30, 2000 to
$277 thousand for the same period in 2001,  primarily due to the lower  interest
rate  environment.  The Company has recently been  investing  excess daily funds
balances in a money market mutual fund to take advantage of its lagging  decline
in yield as the Federal Reserve has repeatedly cut short term interest rates.

         Interest  income on investment  securities  declined from $150 thousand
and $536 thousand  during the three and nine months ended  September 30, 2000 to
$93 thousand  and $338  thousand  during the same  periods in 2001.  The reduced
interest  income  resulted from lower average  balances and lower average rates.
The Company maintained on average 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  nine  months of 2001 than
during the same period in 2000.

         Interest  income on mortgage  backed  securities fell from $1.0 million
and $2.9 million  during the three and nine months ended  September  30, 2000 to
$488  thousand and $2.0 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 two years, with an increase
in lower  duration,  high  cash  flow  instruments  and a  reduction  in  higher
duration,  lower cash flow securities in order to better support greater funding
requirements  stemming from the Company's  increased  lending.  The Company also
purchased additional adjustable rate mortgage backed securities during the first
quarter of 2001, which adjusted downward in rate in conjunction with the decline
in general capital market interest rates during 2001.

                                       41
<PAGE>

         Interest  income on FHLB stock  decreased  from $48  thousand  and $169
thousand  during  the three and nine  months  ended  September  30,  2000 to $43
thousand and $126 thousand  during the same periods in 2001.  This  reduction in
interest  income stemmed from lower effective  earnings rates.  The FHLB-SF paid
particularly  high dividend  rates during the first half of 2000 in  conjunction
with their capital management program,  and recent quarterly dividend rates have
tracked the decrease in short term market interest rates.


Interest Expense

         Interest  expense  decreased from $5.1 million during the quarter ended
September 30, 2000 to $4.7 million during the quarter ended  September 30, 2001,
as the effect of the lower interest rate environment more than offset the impact
of a rise in average interest bearing  liabilities.  Interest expense  increased
from $14.5  million  during the nine months  ended  September  30, 2000 to $14.9
million  during the first nine months of 2001, as the impact of greater  average
balances of interest  bearing  liabilities  more than offset the effect of lower
average rates.

         By the end of the third quarter of 2001,  wholesale borrowing costs had
declined  more  rapidly  than  competitive  pricing for retail  certificates  of
deposit,  rendering  FHLB  advances  and other  wholesale  funding  alternatives
comparatively   price  attractive  to  the  Company.   However,   the  Company's
stockholder  value is increased  over the longer term by expanding  its customer
relationships,  leading to  increased  sales of fee based  services  and greater
local lending.  Management  anticipates a continuation of this situation  during
the  fourth  quarter of 2001,  where  trade-offs  between  savings in short term
funding  costs and  investments  in longer term customer  relationships  will be
considered.

         Interest expense on deposits decreased from $4.5 million in the quarter
ended  September 30, 2000 to $4.0 million during the quarter ended September 30,
2001.  This decline was due to the effect of a  significant  decrease in average
interest rate more than offsetting the impact of a rise in average balances. The
large   decrease  in  average  rates  resulted  from  the  lower  interest  rate
environment  in general,  and the Company's  ability to timely reprice its three
money market deposit  products as interest rates declined in 2001 in particular.
While  certain  large banks and thrifts only adjust their deposit rates on a set
schedule (e.g.  weekly),  the Company often adjusts its deposit  pricing several
times per week in  response  to  changes  in the  capital  markets,  competitive
conditions,  and / or the  Company's  need for  funds.  In a  rapidly  declining
interest rate environment such as has occurred in 2001, this timeliness provides
a financial benefit.

         Interest  expense on deposits rose from $12.6  million  during the nine
months ended September 30, 2000 to $13.1 million during the same period in 2001.
This increase was due to the effect of greater average  interest bearing deposit
balances more than  offsetting the impact of lower average rates.  The Company's
average  cost of  deposits  did not  benefit  from a change in deposit  mix when
comparing  the first nine months of 2001 versus the same period in 2000,  as the
Company's   deposit  mix  between   transaction   accounts  (in  aggregate)  and
certificates of deposit was relatively  constant.  The Company's  strategic plan
envisions a shift in deposit mix toward transactions accounts. Factors impacting
the  Company's  progress  in this  regard  during 2001  included  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 two large  thrifts  that  extensively
advertised  above market annual  percentage  yields on selected NOW checking and
money market deposit accounts.

         The Company  paid an average rate of just 0.75% on its NOW deposits and
1.04% on its savings deposits during the third 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.


                                       42
<PAGE>

         The rapidly declining interest rate environment experienced during 2001
contributed to "sticker  shock" for  certificate of deposit account holders with
maturing deposits.  With renewal certificate of deposit interest rates down from
100  to  400  basis  points  below  prior  levels,  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
most of the first nine months 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.  At September 30, 2001,  the Company's
weighted average cost of its certificates of deposit  portfolio was 4.59%,  with
26.5% of the  portfolio  (by  balance)  scheduled  to reprice  during the fourth
quarter of 2001.

         During  the fourth  quarter  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.

         At September  30, 2001,  the Bank's  weighted  average  nominal cost of
deposits  was 3.46%,  or 51 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.

         Interest  expense  on total  borrowings  increased  from $583  thousand
during the three months ended  September  30, 2000 to $711  thousand  during the
three  months  ended  September  30,  2001 due to the effect of greater  average
balances more than  offsetting  the impact of lower average  rates.  The Company
utilized short term wholesale  borrowings  early in the third quarter of 2001 to
fund a  surge  in  loan  demand  at the  end of the  summer.  These  short  term
borrowings were repaid by the end of the third quarter of 2001, but affected the
average balance for the quarter.

         Interest expense on total borrowings decreased from $2.0 million during
the first nine months of 2000 to $1.9 million during the same period in 2001 due
to the  effect of lower  average  rates  more than  offsetting  slightly  higher
average  balances.  The Company has no FHLB advances  scheduled to mature in the
fourth  quarter of 2001,  and $10.0MM in FHLB advances  with a weighted  average
rate of 5.13%  scheduled to mature in the first  quarter of 2002.  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.


                                       43
<PAGE>

Provision For Loan Losses

         The Company  recorded a $275 thousand  provision for loan losses during
the third quarter of 2001,  down from $650 thousand  during the third quarter of
2000. For the first nine months of 2001, provisions for loan losses totaled $1.1
million,  down from  $1.7  million  during  the first  nine  months of 2000.  No
recoveries  were realized  during the first nine months of 2001, and charge-offs
during the period totaled $52 thousand.  Net  charge-offs  during the first nine
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 1.38% at  September  30,  2001,  while the
nominal  amount of the loan loss  reserve rose from $5.4 million at December 31,
2000 to $6.4 million at September 30, 2001. The Company remains  concerned about
the negative  impacts upon the amount of loss inherent in the loan  portfolio at
September 30, 2001 arising from:

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  2001 by  California
     companies, with a related rise in the rate of unemployment in California

o    the general decline in national economic output

         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  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  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.


                                       44
<PAGE>

Non-interest Income

         Non-interest  income  totaled $690 thousand and $2.0 million during the
three and nine months  ended  September  30, 2001,  comparing  favorably to $630
thousand and $1.7 million during the same periods in 2000.

         Service charge income rose from $356 thousand and $949 thousand  during
the three and nine months  ended  September  30, 2000 to $401  thousand and $1.3
million during the same periods in 2001. This increase  primarily  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.  In  addition,  the  revised  fee and service
charge schedule  established  certain minimum balance  requirements  and maximum
free usage limits for certain deposit accounts.

         The Company sold two  non-Agency  collateralized  mortgage  obligations
during the third quarter of 2001 for a pre-tax gain of $156  thousand.  The sale
was made in  conjunction  with its asset / liability  management  program and to
provide  additional  liquidity for lending.  No securities  were sold during the
third quarter of 2000.  For the first nine months of 2001,  gains on the sale of
securities totaled $190 thousand,  compared to a loss of $77 thousand during the
same period in 2000.

         Loan servicing  income totaled $33 thousand and $77 thousand during the
three and nine months ended September 30, 2001, compared to $30 thousand and $90
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 September 30, 2001,
the  Company  serviced  $47.0  million  in  various  types  of loans  for  other
investors, compared to $62.0 million at December 31, 2000.

         Commissions  from sale of  non-FDIC  insured  investments  totaled  $35
thousand and $223 thousand  during the three and nine months ended September 30,
2001,  compared to $145  thousand and $534  thousand  during the same periods in
2000. Less favorable general capital market conditions,  the events of September
11, 2001,  and investment  staff  turnover  contributed to the lower revenues in
2001 versus  2000.  The Company  anticipates  unfavorable  comparisons  for such
commissions  during the fourth  quarter of 2001,  as capital  market  conditions
remain  challenging and the Company seeks to fill its remaining  vacant licensed
investment representative positions.

         Gains on the sale of loans  increased from $4 thousand and $15 thousand
during the three and nine months  ended  September  30, 2000 to $18 thousand and
$47  thousand  during  the  same  periods  in  2001.  The  lower  interest  rate
environment  in 2001  resulting  from the rate cuts  implemented  by the Federal
Reserve has led to a strong residential loan refinance market, which in turn has
bolstered the Company's mortgage banking activity.

         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

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

                                       45
<PAGE>

Non-interest Expense

         Non-interest  expense  totaled $3.6  million and $10.9  million for the
three and nine months ended  September  30,  2001,  compared to $3.6 million and
$10.3 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 ($284  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 third  quarter of 2001 was
62.86%,  comparing  favorably to 66.08%  during the third  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 nine months of 2001, the Company adjusted its staffing
to advance  the  strategic  plan.  During  2001,  the Bank has added  additional
commercial business  relationship  managers and hired new professional  bankers.
Staffing has also increased in the data processing function, coincident with the
Company's  shifting from an external service bureau to in-house data processing.
Compensation  and employee  benefits  expense  during the third  quarter of 2000
included a $250 thousand accrual for negotiation of a settlement with the former
President  &  Chief  Operating   Officer  in  conjunction  with  his  employment
contracts.  Compensation  and employee  benefits  expense  during the first nine
months of 2001 was inflated versus the same period in the prior year due to:

o    $70 thousand in greater ESOP benefit expenses,  which in turn resulted from
     the  Company's  higher  average stock price in 2001 versus 2000, as a fixed
     number of shares are expensed each year

o    $80  thousand  in greater  incentive  bonus  accrual  due to the  Company's
     improved financial performance

         The change in the Company's  systems  environment also impacted various
other  operating  expenses.  Data  processing  fees were much lower in the third
quarter of 2001 than the same period in 2000, while equipment expense was higher
due to the  added  depreciation  and  amortization  from  the new  hardware  and
software installed in 2001. 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 nine  months  ended  September  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.

         Advertising and promotion costs were constant  between the three months
ended  September 30, 2001 and 2000, but  significantly  lower for the first nine
months of 2001  versus the same  period the prior year.  This  stemmed  from the
Company's awaiting the completion of the systems conversion and product redesign
prior to conducting  extensive  advertising  in 2001. By mid-2001,  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." During the third quarter of 2001,  the Bank  augmented its
radio  advertising with commercials aimed at encouraging local businesses to try
Monterey  Bay Bank.  In addition,  the Bank  throughout  2001 has  significantly
expanded the community involvement of its employees,  under the direction of the
Director  of  Community  Relations - a new  position  in 2001.  During the third
quarter of 2001, the Company also ran multiple print advertisements  focusing on
the benefits of its Money Market Plus account.  The Company anticipates spending
more on advertising,  promotion,  and community outreach in coming quarters than
has been spent in prior periods.

                                       46
<PAGE>

         Consulting expenses rose from $15 thousand and $118 thousand during the
three and nine months ended September 30, 2000 to $31 thousand and $336 thousand
during the same periods in 2001 primarily due to consultant  services associated
with the core systems  conversion and complementary  software and hardware being
implemented post conversion.

         The Company  continues to  restructure  its  operations  both to better
utilize new  technology  and improve  efficiency.  The Company also continues to
evaluate  new vendors for  various  products  and  services,  seeking  more cost
effective  business  relationships.  By the end of 2001, the Company will change
the manner in which its facilities management is conducted to provide for better
expense control. The Company is also redesigning its incentive programs for 2002
to better integrate  contributions to the achievement of the strategic plan with
incentive payments.  Through these and other initiatives,  the Company continues
to target progress in improving its efficiency ratio.


Income Taxes

         Income tax  expense  increased  in 2001 versus  2000  primarily  due to
greater pre-tax income.



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.



                                       47
<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.

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

         No matters  were  submitted  to a vote of security  holders  during the
quarter ended September 30, 2001.

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 October 22, 2001.  This Current Report
                           reported the  Company's  results for the three months
                           and nine months ended  September  30,  2001,  and the
                           continued  binding  arbitration  proceeding  with the
                           former  President  and  Chief  Operating  Officer  in
                           regards   to   amounts   due  under  his   employment
                           contracts.

                      2.   Form 8-K dated November 7, 2001.  This Current Report
                           reported  the  conclusion  and results of the binding
                           arbitration  process  conducted to address  claims by
                           the  former  President  and Chief  Operating  Officer
                           regarding   payments   due   under   his   employment
                           contracts.  This matter will have no future  material
                           impact  on  the   Company's   earnings  or  financial
                           condition.




                                       48
<PAGE>

                                   SIGNATURES


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



                                           MONTEREY BAY BANCORP, INC.
                                                         (Registrant)



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



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


                                       49