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 March 31, 2003

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                         (I.R.S. Employer
  Of Incorporation Or Organization)                 Identification Number)

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

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

                                (831) 722 - 6794
              (Registrant's Facsimile Number, Including Area Code)

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

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

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

                                    YES X  NO
                                       ---    ---

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Exchange Act).

                                    YES    NO  X
                                       ---    ---

                      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:  3,460,974  shares of common
stock, par value $0.01 per share, were outstanding as of May 8, 2003.

                                       1
<PAGE>


                    MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

                                      INDEX

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

                 Item 1.   Financial Statements

                           Condensed Consolidated Statements Of Financial Condition (unaudited)
                           As Of March 31, 2003 And December 31, 2002                                       3 - 4

                           Condensed Consolidated Statements Of Income (unaudited) For The
                           Three Months Ended March 31, 2003 And March 31, 2002                             5 - 6

                           Condensed Consolidated Statement Of Stockholders' Equity (unaudited)
                           For The Three Months Ended March 31, 2003                                          7

                           Condensed Consolidated Statements Of Cash Flows (unaudited) For The
                           Three Months Ended March 31, 2003 And March 31, 2002                             8 - 9

                           Notes To Condensed Consolidated Financial Statements (unaudited)                10 - 17

                 Item 2.   Management's Discussion And Analysis Of Financial Condition
                           And Results Of Operations                                                       18 - 48

                 Item 3.   Quantitative And Qualitative Disclosure About Market Risk                         48

                 Item 4.   Controls And Procedures                                                           48


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                               49

                 Item 5.   Other Information                                                                 49

                 Item 6.   Exhibits And Reports On Form 8-K                                                  49

                           (a)  Exhibits

                           (b)  Reports On Form 8-K


Signature Page                                                                                               50

Certifications Pursuant To Section 302 Of The Sarbanes-Oxley Act Of 2002                                   51 - 52

</TABLE>
                                       2

<PAGE>

Item 1.  Financial Statements


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
MARCH 31, 2003 AND DECEMBER 31, 2002
(Dollars In Thousands)
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                           March 31,  December 31,
                                                                                2003          2002
                                                                            --------      --------
<S>                                                                            <C>               <C>
ASSETS

Cash and cash equivalents                                                     $9,828       $11,447
Securities available for sale, at estimated fair value:
     Investment securities (amortized cost of $7,721 and $7,719 at
          March 31, 2003 and December 31, 2002)                                7,070         7,030
     Mortgage backed securities (amortized cost of $40,057 and $37,198 at
          March 31, 2003 and December 31, 2002)                               40,278        37,466
Loans held for sale, at lower of cost or market                                  475         1,545
Loans receivable held for investment (net of allowances for loan losses of
     $8,436 at March 31, 2003 and $8,162 at December 31, 2002)               538,716       521,929
Investment in capital stock of the Federal Home Loan Bank, at cost             4,726         4,679
Accrued interest receivable                                                    3,095         2,867
Premises and equipment, net                                                    7,004         7,161
Core deposit intangibles, net                                                    663           833
Bank owned life insurance                                                      9,149         9,036
Real estate acquired via foreclosure, net                                         --           846
Other assets                                                                   4,799         4,857
                                                                            --------      --------
TOTAL ASSETS                                                                $625,803      $609,696
                                                                            ========      ========

</TABLE>



See Notes to Condensed Consolidated Financial Statements

                                       3
<PAGE>




MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) (Continued)
MARCH 31, 2003 AND DECEMBER 31, 2002
(Dollars In Thousands)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                            March 31,  December 31,
                                                                                 2003          2002
                                                                             --------      --------
<S>                                                                         <C>           <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Non-interest bearing demand deposits                                        $  27,116     $  23,549
Interest bearing NOW checking accounts                                         41,551        43,629
Savings deposits                                                               18,539        18,474
Money market deposits                                                         143,249       126,061
Certificates of deposit                                                       247,290       246,621
                                                                             --------      --------
   Total deposits                                                             477,745       458,334
                                                                             --------      --------
Advances from the Federal Home Loan Bank and other borrowings                  88,417        93,805
Accounts payable and other liabilities                                          1,399         1,454
                                                                             --------      --------
     Total liabilities                                                        567,561       553,593
                                                                             --------      --------

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 March 31, 2003 and December 31, 2002;
     3,460,974 outstanding at March 31, 2003 and
     3,454,315 outstanding at December 31, 2002                                    45            45
Additional paid-in capital                                                     29,448        29,281
Retained earnings, substantially restricted                                    43,948        42,111
Unallocated ESOP shares                                                          (403)         (460)
Treasury shares designated for compensation plans, at cost (9,803 shares
     at March 31, 2003 and 11,769 shares at December 31, 2002)                    (94)         (113)
Treasury stock, at cost (1,031,111 shares at March 31, 2003 and
     1,037,770 shares at December 31, 2002)                                   (14,449)      (14,513)
Accumulated other comprehensive loss, net of taxes                               (253)         (248)
                                                                             --------      --------
     Total stockholders' equity                                                58,242        56,103
                                                                             --------      --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                  $ 625,803     $ 609,696
                                                                            =========     =========
</TABLE>

See Notes to Condensed Consolidated Financial Statements

                                       4

<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
(Dollars In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------



<TABLE>
<CAPTION>
                                                                FOR THE THREE MONTHS
                                                                  ENDED MARCH 31,
                                                            ------------------------

                                                               2003             2002
                                                            -------          -------
<S>                                                         <C>              <C>
INTEREST AND DIVIDEND INCOME:
   Loans receivable                                         $ 8,660          $ 8,314
   Mortgage backed securities                                   216              312
   Investment securities and cash equivalents                   104              129
                                                            -------          -------
         Total interest and dividend income                   8,980            8,755
                                                            -------          -------
INTEREST EXPENSE:
   Deposit accounts                                           2,133            2,813
   Advances from the FHLB and other borrowings                  675              592
                                                            -------          -------
         Total interest expense                               2,808            3,405
                                                            -------          -------
NET INTEREST INCOME BEFORE PROVISION
     FOR LOAN LOSSES                                          6,172            5,350
PROVISION FOR LOAN LOSSES                                       325              325
                                                            -------          -------
NET INTEREST INCOME AFTER PROVISION
     FOR LOAN LOSSES                                          5,847            5,025
                                                            -------          -------
NON-INTEREST INCOME:
   Customer service charges                                     394              351
   Gain on sale of loans                                        123               27
   Gain on sale of real estate acquired via foreclosure         114               --
   Income from bank owned life insurance                        113               --
   Commissions from sales of noninsured products                 28               41
   Income from loan servicing                                    12               14
   Gain on sale of mortgage backed securities                     1               43
   Other income                                                  50               36
                                                            -------          -------
         Total non-interest income                              835              512
                                                            -------          -------
</TABLE>

See Notes to Condensed Consolidated Financial Statements

                                       5
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
(Dollars In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------


                                                         FOR THE THREE MONTHS
                                                            ENDED MARCH 31,
                                                       ------------------------

                                                          2003             2002
                                                       -------          -------
NON-INTEREST EXPENSE:
   Compensation and employee benefits                    2,217            1,905
   Occupancy and equipment                                 390              424
   Supplies, postage, telephone, and office expenses       171              168
   Amortization of intangible assets                       170              170
   Data and item processing                                157              136
   Legal and accounting                                    126              119
   Advertising and promotion                                37               81
   Deposit insurance premiums                               19               51
   Other expense                                           333              412
                                                       -------          -------
         Total non-interest expense                      3,620            3,466
                                                       -------          -------
INCOME BEFORE PROVISION FOR
     INCOME TAXES                                        3,062            2,071

PROVISION FOR INCOME TAXES                               1,225              866
                                                       -------          -------
NET INCOME                                             $ 1,837          $ 1,205
                                                       =======          =======

EARNINGS PER SHARE:

     BASIC EARNINGS PER SHARE                           $ 0.54           $ 0.36
                                                        ======           ======

     DILUTED EARNINGS PER SHARE                         $ 0.52           $ 0.35
                                                        ======           ======

See Notes to Condensed Consolidated Financial Statements

                                       6

<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003
(Dollars And Shares In Thousands)
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                   Treasury
                                                                                     Shares
                                                                                     Desig-
                                                                                      nated             Accum-
                                                                                        For             ulated
                                                         Addi-              Unal-      Com-              Other
                                      Common Stock      tional            located      pen-            Compre-
                                      ------------     Paid-In  Retained     ESOP    sation  Treasury  hensive
                                     Shares   Amount   Capital  Earnings   Shares     Plans     Stock     Loss     Total
                                     ------   ------   -------  --------   ------     -----     -----     ----     -----
<S>                                  <C>         <C>  <C>       <C>        <C>       <C>     <C>        <C>      <C>
Balance at January 1, 2003            3,454    $  45  $ 29,281  $ 42,111   $ (460)   $ (113) $(14,513)  $ (248)  $56,103

Exercise of stock options                 7                 32                                     64                 96

Amortization of stock compensation                         135                 57        19                          211

Comprehensive income:
     Net income                                                    1,837                                           1,837

     Other comprehensive income
          (loss):

          Change in net
               unrealized loss
               on securities
               available for
               sale, net of taxes
               of ($3)                                                                                      (4)       (4)

          Reclassification
               adjustment for
               gains on
               securities available
               for sale included
               in income,
               net of taxes of ($0)                                                                         (1)       (1)
                                                                                                                 -------
     Other comprehensive income
          (loss), net                                                                                                 (5)
                                                                                                                 -------

Total comprehensive income                                                                                         1,832
                                      -----    -----  --------  --------   ------    ------  --------   ------   -------
Balance at March 31, 2003             3,461    $  45  $ 29,448  $ 43,948   $ (403)   $  (94) $(14,449)  $ (253)  $58,242
                                      =====    =====  ========  ========   ======    ======  ========   ======   =======
</TABLE>

See Notes to Condensed Consolidated Financial Statements

                                       7

<PAGE>




MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
(Dollars In Thousands)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                     FOR THE THREE MONTHS
                                                                                        ENDED MARCH 31,
                                                                                    ---------------------

                                                                                       2003          2002
                                                                                    -------        ------
<S>                                                                                 <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                          $ 1,837       $ 1,205

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

Depreciation and amortization of premises and equipment                                 182           180
Amortization of intangible assets                                                       170           170
Amortization of purchase premiums, net of accretion of discounts                        512           205
Amortization of deferred loan fees and costs, net                                      (269)          (26)
Provision for loan losses                                                               325           325
Federal Home Loan Bank stock dividends                                                  (47)          (46)
ESOP expense                                                                            181           144
Compensation expense associated with stock compensation plans                            10            15
Director retainer fees paid in stock                                                     --            46
Gain on sale of mortgage backed securities                                               (1)          (43)
Gain on sale of loans held for sale                                                    (123)          (27)
Gain on sale of real estate acquired via foreclosure                                   (114)           --
Loss on sale of fixed assets                                                             --             8
Origination of loans held for sale                                                  (10,185)       (3,497)
Proceeds from sales of loans held for sale                                           11,378         3,576
(Increase) decrease in accrued interest receivable                                     (228)           23
Appreciation in bank owned life insurance                                              (113)           --
Decrease (increase) in other assets                                                      58           (46)
Decrease in accounts payable and other liabilities                                      (55)          (52)
Other, net                                                                              738          (203)
                                                                                    -------        ------
     Net cash provided by operating activities                                        4,256         1,957
                                                                                    -------        ------
CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans held for investment                                           (16,787)       (3,550)
Purchases of investment securities available for sale                                    --        (4,854)
Proceeds from maturities of investment securities available for sale                     --         4,850
Purchases of mortgage backed securities available for sale                          (15,156)      (14,456)
Principal repayments on mortgage backed securities available for sale                11,489         9,231
Proceeds from sales of mortgage backed securities available for sale                    513         2,732
Purchases of premises and equipment                                                     (25)          (60)
                                                                                    -------        ------

     Net cash used in investing activities                                          (19,966)       (6,107)
                                                                                    -------        ------
</TABLE>
See Notes to Condensed Consolidated Financial Statements

                                       8
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2003 AND MARCH 31, 2002
(Dollars In Thousands)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                                                                     FOR THE THREE MONTHS
                                                                       ENDED MARCH 31,
                                                                    ---------------------

                                                                       2003          2002
                                                                    -------       -------
<S>                                                                  <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits                                             19,411         3,475
Proceeds (repayments) of Federal Home Loan Bank advances, net        (5,250)           --
Proceeds (repayments) of other borrowings, net                         (138)         (200)
Purchases of treasury stock                                              --           (81)
Sales of treasury stock for exercise of stock options                    68           279
                                                                    -------       -------

     Net cash provided by financing activities                       14,091         3,473
                                                                    -------       -------

NET DECREASE IN CASH & CASH EQUIVALENTS                              (1,619)         (677)

CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD                       11,447        13,079
                                                                    -------       -------

CASH & CASH EQUIVALENTS AT END OF PERIOD                            $ 9,828       $12,402
                                                                    =======       =======

SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:
     Interest on deposits and borrowings                            $ 2,655       $ 3,196
     Income taxes                                                   $ 1,250       $   800

</TABLE>
See Notes to Condensed Consolidated Financial Statements

                                       9
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 1:  Basis Of Presentation

         The accompanying  condensed consolidated unaudited financial statements
have been prepared in accordance with accounting  principles  generally accepted
in the United States of America ("GAAP") for interim  financial  information and
with  the   instructions  to  Form  10-Q  and  Article  10  of  Regulation  S-X.
Accordingly,  they do not include all of the information and footnotes  required
by GAAP for annual  financial  statements.  In the  opinion of  Management,  all
necessary   adjustments,   consisting  only  of  normal  recurring  adjustments,
necessary for a fair presentation have been included.  The results of operations
for the three month period ended March 31, 2003 are not  necessarily  indicative
of the  results  that may be  expected  for the entire  fiscal year or any other
interim period.

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

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

         These unaudited  condensed  consolidated  financial  statements and the
information under the heading "Item 2.  Management's  Discussion And Analysis Of
Financial  Condition And Results Of Operations"  and the  information  under the
heading "Item 3. Quantitative And Qualitative Disclosure About Market Risk" have
been  prepared  with  the  presumption  that  users  of this  interim  financial
information  have read, or have access to, the most recent audited  consolidated
financial  statements  and notes  thereto of Monterey Bay Bancorp,  Inc. for the
fiscal year ended  December 31, 2002 included in the Company's  Annual Report on
Form 10-K for the fiscal year ended December 31, 2002.

         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.

Proposed Merger Of Monterey Bay Bancorp, Inc. With Union Bank of California

         On April 8, 2003,  Monterey Bay Bancorp (NASDAQ:  MBBC) and UnionBanCal
Corp.  (NYSE:  UB) jointly  announced the signing of a definitive  agreement and
plan of merger which,  if approved by the  stockholders of Monterey Bay Bancorp,
Inc. and by applicable  regulatory  authorities,  will result in the purchase of
the  Company  by  UnionBanCal's  subsidiary,   Union  Bank  of  California.  The
transaction  is expected to be completed  during the third quarter of 2003.  The
agreement  provides  for  the  MBBC  stockholders  to  receive  cash  and  stock
consideration  aggregating  $96.5  million,  subject  to  adjustment  based upon
various factors  including the average closing price of UB common stock during a
specified period of time prior to the closing of the merger.

                                       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 month  periods ended March 31, 2003 and 2002 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.


                                                  For The Three Months
                                                      Ended March 31,
                                               ---------------------------
(In Whole Dollars And Whole Shares)
                                                      2003            2002
                                               -----------     -----------

Net income                                     $ 1,837,000     $ 1,205,000
                                               ===========     ===========

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

Less weighted average:
   Uncommitted ESOP shares                         (67,383)       (103,320)
   Non-vested stock award shares                   (10,703)        (17,075)
   Treasury shares                              (1,033,051)     (1,023,303)
                                               -----------     -----------

Sub-total                                       (1,111,137)     (1,143,698)
                                               -----------     -----------

Weighted average BASIC shares outstanding        3,380,948       3,348,387

Add dilutive effect of:
   Stock options                                   141,839         115,534
   Stock awards                                      1,269           1,365
                                               -----------     -----------

Sub-total                                          143,108         116,899
                                               -----------     -----------

Weighted average DILUTED shares outstanding      3,524,056       3,465,286
                                               ===========     ===========

Earnings per share:

   BASIC                                       $      0.54     $      0.36
                                               ===========     ===========

   DILUTED                                     $      0.52     $      0.35
                                               ===========     ===========

                                       11
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 3:  Other Comprehensive Income

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

         Reclassification  adjustments  for realized net gains included in other
comprehensive income for investment and mortgage backed securities classified as
available for sale for the three month periods ended March 31, 2003 and 2002 are
summarized as follows:

                                                  Three Months Ended March 31,
                                                  -----------------------------
                                                        2003              2002
                                                       -----             -----
(Dollars In Thousands)

Gross reclassification adjustment                      $   1             $  43
Tax expense                                               --               (18)
                                                       -----             -----

Reclassification adjustment, net of tax                $   1             $  25
                                                       =====             =====


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

                                                         Three Months Ended
                                                              March 31,
                                                        --------------------
                                                         2003          2002
                                                       ------        ------
(Dollars In Thousands)

Holding loss arising during the period, net of tax     $   (4)       $  (59)
Reclassification adjustment, net of tax                    (1)          (25)
                                                       ------        ------

Net unrealized (loss) gain recognized in
     other comprehensive income                        $   (5)       $  (84)
                                                       =======       =======


                                       12
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 4:  Stock Based Compensation

         At March 31, 2003, the Company had two stock option plans and one stock
award plan (see Notes 5 and 6).

         The Company  accounts  for its stock option and stock award plans under
Statement of Financial  Accounting  Standards ("SFAS") No. 123,  "Accounting For
Stock-Based  Compensation".  This Statement establishes financial accounting and
reporting standards for stock-based  compensation plans. These standards include
the  recognition  of  compensation  expense over the vesting  period of the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No 123
also  permits  entities  to  continue  to apply  the  provisions  of  Accounting
Principles Board ("APB") No. 25, "Accounting For Stock Issued To Employees", and
provide  pro forma net  earnings  (loss) and pro forma net  earnings  (loss) per
share  disclosures as if the fair value based method defined in SFAS No. 123 had
been applied.

         Stock-based employee  compensation for the stock award plan is included
in net income. The Company recognizes  compensation expense for time-based stock
awards  based  upon the fair  market  value of the  common  stock on the date of
grant. The Company recognizes  compensation expense for performance-based  stock
awards  based upon the fair market  value of the common  stock at the earlier of
the reporting date or the performance measurement date.

         The Company has elected to continue to apply the  provisions of APB No.
25 and related  interpretations  in accounting for stock options and to continue
to provide the pro forma disclosure  requirements of SFAS No. 123, as amended by
SFAS  No.  148,  "Accounting  For  Stock-Based  Compensation  -  Transition  And
Disclosure",  in the table below. Under APB No. 25,  compensation cost for stock
options is  measured as the  excess,  if any,  of the fair  market  value of the
Company's  common  stock at the date of grant over the amount  the  employee  or
director must pay to acquire the stock. Because the Company's stock option plans
provide for the  issuance  of stock  options at a price of no less than the fair
market  value at the date of  grant,  no  compensation  cost is  required  to be
recognized for the Company's stock option plans.

                                       13
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


         Had  compensation  costs for the stock  options  plans been  determined
based upon the fair value at the date of grant consistent with SFAS No. 123, net
income and earnings  per share would have been reduced to the pro forma  amounts
indicated below. The pro forma amounts presented below were calculated utilizing
the  Black-Scholes  option pricing model,  with  forfeitures  recognized as they
occur, incorporating the assumptions detailed below.


<TABLE>
<CAPTION>
                                                                    Three Months Ended
(Dollars In Thousands, Except Share Data)                               March 31,
                                                                    --------------------
                                                                      2003         2002
                                                                    ------       ------
<S>                                                                <C>          <C>
Net income:
     Before recognized stock compensation expense, net of  taxes   $ 1,843      $ 1,214

     Deduct recognized stock compensation expense, net of  taxes        (6)          (9)
                                                                   -------      -------
     As reported                                                   $ 1,837      $ 1,205

     Deduct compensation expense from amortization of fair
          value of all stock options, net of taxes of $22 and $21,
          for the three months ending March 31, 2003 and 2002          (33)         (29)
                                                                   -------      -------

     Pro forma                                                     $ 1,804      $ 1,176
                                                                   =======      =======
Basic earnings per share:
     As reported                                                   $  0.54      $  0.36
                                                                   =======      =======
     Pro forma                                                     $  0.53      $  0.35
                                                                   =======      =======
Diluted earnings per share:
     As reported                                                   $  0.52      $  0.35
                                                                   =======      =======
     Pro forma                                                     $  0.51      $  0.34
                                                                   =======      =======

Shares utilized in Basic EPS calculations                        3,380,948    3,348,387
Shares utilized in Diluted EPS calculations                      3,524,056    3,465,286
</TABLE>

         Weighted  average  assumptions  utilized  in the  Black-Scholes  option
pricing model for all options granted in each period:

                                             Three Months Ended
                                                  March 31,
                                            ---------------------
                                              2003          2002
                                              ----          ----

Dividend Yield                               0.00%         0.00%
Expected stock price volatility             25.00%        25.00%
Average risk-free interest rate              3.54%         4.67%
Expected option lives                      8 years       8 years


                                       14

<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 5:  Stock Option Plans

         The Company  maintains the Amended 1995 Incentive Stock Option Plan and
the 1995 Stock  Option Plan For Outside  Directors.  Under  these  plans,  stock
options  typically  vest over a five year time period,  although  other  vesting
periods are  permitted  under the Amended 1995  Incentive  Stock Option Plan and
have been utilized by the Company in certain  instances.  All outstanding  stock
options  under both of these plans vest upon a change in control of the Company.
The following tables summarize the combined status of these plans:

<TABLE>
<CAPTION>
                                                                  Stock                            Stock       Average
                                                                Options            Stock         Options      Exercise
                                Stock           Stock      Cumulatively          Options       Available      Price Of
                              Options         Options        Vested And     Cumulatively      For Future        Vested
Date                       Authorized     Outstanding       Outstanding        Exercised          Grants       Options
----                       ----------     -----------       -----------        ---------          ------       -------
<S>                           <C>             <C>               <C>              <C>             <C>           <C>
December 31, 2002             757,929         369,892           246,610          244,224         143,813       $ 11.04
March 31, 2003                757,929         367,833           252,024          250,883         139,213       $ 11.07

</TABLE>


Activity during the three months ended March 31, 2003 included:

                                   Three Months Ended
                                       March 31, 2003
                                       --------------
Granted                                         6,500
Canceled                                        1,900
Exercised                                       6,659
Vested                                         12,073

         The exercise price of individual vested stock options ranged from a low
of $8.19 per share to a high of $17.81 per share as of March 31, 2003.

         Under the  definitive  agreement  among  Monterey  Bay  Bancorp,  Inc.,
Monterey Bay Bank, UnionBanCal  Corporation,  and Union Bank of California dated
April 7, 2003,  the  Company  may not issue any  additional  stock  options.  In
addition,  in the event the merger  contemplated by that agreement is completed,
holders of Company  stock  options that were  outstanding  at April 7, 2003 will
have the  opportunity to exchange their stock options for an amount equal to the
per share  merger value minus the exercise  price of each option  following  the
effective time of the merger.

                                       15
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 6:  Stock Award Plan

         The  Company  maintains  the  Performance  Equity  Program  ("PEP") for
officers and  employees.  Awards under the PEP  typically  vest over a five year
time period,  although in certain instances the Company has utilized unallocated
or  forfeited  PEP shares for  immediately  vested  stock grants in lieu of cash
compensation.  Awards under the PEP are both  time-based and  performance-based.
All  outstanding  stock  awards  under  the PEP vest in the event of a change in
control of the Company.  Compensation  expense  related to the PEP for the three
months  ended March 31, 2003 and 2002 was $10  thousand  and $15  thousand.  The
following table summarizes the status of this plan:


<TABLE>
<CAPTION>
                                                         Stock                              Stock
                                                        Awards             Stock           Awards
                                       Stock       Outstanding            Awards        Available
                                      Awards           And Not      Cumulatively       For Future
Date                              Authorized            Vested            Vested           Grants
----                              ----------            ------            ------           ------
<S>                                  <C>                <C>              <C>
December 31, 2002                    141,677            11,769           129,908               --
March 31, 2003                       141,677             9,803           131,874               --
</TABLE>


         Activity during the three months ended March 31, 2003 included:

                     Three Months Ended
                         March 31, 2003
                         --------------
Granted                              --
Canceled                             --
Vested                            1,966


                                       16
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 7:  Commitments & Contingencies

         At March 31, 2003,  commitments maintained by the Company included firm
commitments  to originate  $25.8  million in various types of loans and optional
commitments  to sell  $4.3  million  in  residential  mortgages  on a  servicing
released  basis.  The  Company   maintained  no  firm  commitments  to  purchase
securities, to assume borrowings, or to sell securities at March 31, 2003.


NOTE 8:  Recent Accounting Pronouncements

         Effective   January  1,  2003,  the  Company   adopted  SFAS  No.  146,
"Accounting  for Costs  Associated  with  Exit or  Disposal  Activities",  which
addresses   accounting  for  restructuring  and  similar  costs.  SFAS  No.  146
supersedes previous accounting guidance,  principally Emerging Issues Task Force
Issue No. 94-3.  SFAS No. 146 requires that the  liability for costs  associated
with an exit or disposal  activity be recognized when the liability is incurred.
Under Issue 94-3, a liability for an exit cost was recognized at the date of the
Company's  commitment to an exit plan.  SFAS No. 146 also  establishes  that the
liability  should initially be measured and recorded at fair value. The adoption
of SFAS No.  146 did not  have a  material  effect  on the  Company's  financial
position, results of operations, or cash flows.


NOTE 9:  Reclassifications

         Certain  amounts in the December 31, 2002 and March 31, 2002  financial
statements  have been  reclassified  to conform to the March 31, 2003  financial
statement presentation.

                                       17

<PAGE>

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


Introduction

         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,  the pending
regulatory  review of the  proposed  merger with Union Bank of  California,  the
planned  special  meeting of  stockholders  to vote on the proposed  merger with
Union Bank of California, opportunities and expectations regarding technologies,
anticipated  performance or contributions from employees,  projections of future
performance,  potential future credit  experience,  possible changes in laws and
regulations, potential risks and benefits arising from the implementation of the
Company's strategic and tactical plans,  perceived  opportunities in the market,
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,  retaining key  personnel,  performance of
employees,  regulatory actions, stockholder votes, changes in and utilization of
new  technologies,  consumer  and  business  response to news events or economic
trends,  and other  risks  detailed  in the  Company's  reports  filed  with the
Securities  and Exchange  Commission  ("SEC") from time to time,  including  the
Annual  Report on Form 10-K for the fiscal year ended  December 31, 2002.  These
factors should be considered in evaluating the forward-looking  statements,  and
undue  reliance  should not be placed on such  statements.  The Company does not
undertake,   and   specifically   disclaims  any   obligation,   to  update  any
forward-looking  statements to reflect  occurrences or  unanticipated  events or
circumstances after the date of such statements.


Availability Of Information

         Reports  filed with the  Securities  and  Exchange  Commission  ("SEC")
including proxy statements and other  information can be inspected and copied at
the Public Reference Section of the SEC at 450 Fifth Street,  N.W.,  Washington,
D.C.  20549,  at  prescribed  rates.  The SEC  maintains  an Internet  site that
contains reports,  proxy, and information statements and other information.  The
address of the site is www.sec.gov.

         Monterey Bay Bancorp,  Inc. makes  available free of charge through its
Internet  site its Annual Report on Form 10-K,  quarterly  reports on Form 10-Q,
current  reports on Form 8-K,  and all  amendments  to those  reports as soon as
reasonably  practicable  after such  material  is  electronically  filed with or
furnished to the SEC. The Internet  site address for Monterey Bay Bancorp,  Inc.
is www.montereybaybank.com.

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

                                       18
<PAGE>

General

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

         As  announced  on April 8, 2003,  the Company has executed a definitive
agreement  and plan of merger  with Union  Bank of  California  and  UnionBanCal
Corporation,  the  holding  company for Union Bank of  California,  to merge the
Company into Union Bank of California  subject to the terms of the agreement and
following  the receipt of regulatory  approvals  and the  requisite  vote by the
Company's  stockholders.  The Company filed an associated Current Report on Form
8-K on April 7, 2003 with the SEC.  This  document is available at  www.sec.gov.
This  document is also  available on the  Company's  Internet site at no charge.
Exhibits to the Form 8-K are a joint press release dated April 8, 2003 regarding
the proposed merger and the definitive  agreement and plan of merger executed on
April 7, 2003.

         At March 31,  2003,  the  Company had $625.8  million in total  assets,
$539.2 million in net loans  receivable,  and $477.7 million in total  deposits.
The Company is subject to regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC").  The principal executive
offices  of the  Company  and the Bank are  located  at 567 Auto  Center  Drive,
Watsonville,  California,  95076,  telephone number (831) 768 - 4800,  facsimile
number (831) 722 - 6794. The Company may also be contacted via  electronic  mail
at: INFO@MONTEREYBAYBANK.COM. The Bank is a member of the Federal Home Loan Bank
of San  Francisco  ("FHLB")  and its  deposits  are  insured  by the FDIC to the
maximum extent permitted by law.

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

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

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

                                       19
<PAGE>

Critical Accounting Policies And Significant Estimates

         The Company's  financial  statements  are prepared in  accordance  with
accounting  principles  generally  accepted  in the  United  States  of  America
("GAAP").  The Company's significant accounting policies are presented in Note 1
to the Consolidated  Financial Statements contained in the Company's 2002 Annual
Report on Form 10-K.  The Company  follows  accounting  policies  typical to the
community commercial banking industry and in compliance with various regulations
and  guidelines as  established  by the  Financial  Accounting  Standards  Board
("FASB") and the Bank's primary federal regulator, the OTS.

         Certain  of the  accounting  policies  as  well  as  estimates  made by
Management  are  considered  to be important to the  portrayal of the  Company's
financial condition,  since they require Management to make difficult,  complex,
or subjective judgments and estimates,  some of which may relate to matters that
are inherently  uncertain.  Management  has discussed each of these  significant
accounting  policies and the related  estimates with the Audit  Committee of the
Board of Directors.

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

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

         The Company  utilizes  estimates in its  accounting  for  non-qualified
retirement  benefits.  These estimates are based upon  assumptions for mortality
rates and interest  rates.  Because the scheduled  payment of these  benefits is
many years into the future and  because  the  benefits  are  limited to only two
individuals,  thereby  eliminating  statistical  averaging for life  expectancy,
there  is  inherent  uncertainty  regarding  the  precise  future  cost of these
benefits.

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

         Had compensation costs for the stock option plans been determined based
upon  the  fair  value  at the date of  grant  consistent  with  SFAS  No.  123,
"Accounting For Stock Based Compensation", the Company's net income and earnings
per share would have been  reduced.  The amount of the  reduction for the fiscal
years 2000 through 2002 is  disclosed  in Note 1 to the  Consolidated  Financial
Statements  contained  in the 2002  Annual  Report on Form 10-K,  based upon the
assumptions  listed  therein.  The amount of the  reduction for the three months
ended March 31, 2003 and 2002 is presented in Note 4 to this Quarterly Report on
Form 10-Q, based upon the assumptions listed herein.

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

                                       20
<PAGE>

Recent Developments

         Recent  regulatory,  financial  industry,  and other  developments that
could have an impact upon the Company have included the following:

o    Congress continues to draft legislation reforming the bankruptcy code, with
     the House of Representatives passing on March 19, 2003 the latest iteration
     of a bankruptcy  reform bill.  This  legislation,  depending upon its final
     form,  if any,  could  potentially  assist the Bank in  collecting  certain
     credits.

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

o    The House of Representatives  has held hearings regarding  legislation that
     could  materially  alter the way financial  institutions  clear checks with
     each other;  in  general,  permitting  greater  electronic,  versus  paper,
     interface.

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

o    The House of  Representatives  is considering a regulatory  relief bill for
     the financial services industry.

o    The  State of  California  is  facing a  significant  budget  deficit.  The
     potential  imposition of new fees or taxes or higher tax rates by the State
     of  California  could  impact the  Company's  business  and  earnings.  The
     possible suspension,  curtailment, or elimination of various State programs
     could also affect the Company.  The Company is unable to predict  what,  if
     any,  actions  might be taken by the State of  California  and the possible
     impact of those actions upon the Company's consolidated financial condition
     or results of operations.

o    During the first quarter of 2003,  the SEC  continued to implement  various
     new  rules as a result  of the  Sarbanes-Oxley  Act of  2002.  The  primary
     impacts  upon the  Company  from  the  Sarbanes-Oxley  Act of 2002  will be
     increased reporting requirements and higher professional fees for legal and
     accounting services. As a highly regulated savings and loan holding company
     and financial  institution,  MBBC and the Bank were already subject to many
     of the types of operating  restrictions and financial control  requirements
     implemented following the passage of the Sarbanes-Oxley Act of 2002.

o    Various  structural  reforms to the FHLB  System  continue to be debated by
     federal  regulators,  including  the Treasury  Department,  which  recently
     proposed that the FHLB System should register its stock with the SEC. There
     has  also  been  debate  about  allowing  the  FHLB  System  to have  asset
     securitization  authority.  The Federal Housing Finance Board is pursuing a
     plan to require enhanced disclosure for FHLB System debt offerings. Because
     of the wide range of proposals and possible  outcomes,  the Company  cannot
     predict what effect,  if any,  future reforms to the FHLB System might have
     upon its financial condition, results of operations, or cash flows.

o    MasterCard  International  recently  settled  a  significant  lawsuit  with
     Wal-Mart  Stores,   Inc.  This  lawsuit  involved   requirements  and  fees
     associated  with debit card  processing.  The terms of the  settlement  are
     currently  confidential.  The  Company's  debit  cards are  issued  through
     MasterCard.  At this time, the Company cannot predict what, if any,  impact
     the lawsuit  settlement  may have upon the Company's  financial  condition,
     results of operations, or cash flows.

                                       21
<PAGE>

Strategic Plan

         The Company's strategic plan envisions  transforming the Bank from a 78
year old savings & loan into a community  focused  commercial  bank  serving the
financial needs of individuals,  families,  organizations,  and businesses.  The
strategic plan  incorporates a greater amount of income property,  construction,
and business  lending  funded with a higher  percentage of  transaction  deposit
accounts.  The  strategic  plan  also  includes  improvements  in the  Company's
efficiency  ratio and return on  stockholders'  equity,  and the  provision of a
broader array of financial services, including additional fee-based services.

         The Company  intends to continue  pursuing  the  implementation  of its
strategic  plan while the  proposed  merger  with Union  Bank of  California  is
pending  regulatory  and  stockholder  approval,  subject to  certain  operating
restrictions contained within the agreement and plan of merger.


Overview Of Business Activity

         During  the  first   quarter  of  2003,   the  Company   continued  the
implementation of its strategic plan. The Bank focuses on building  longstanding
customer  relationships,  investing the time and energy to get to know customers
well and  understand  their  financial  objectives.  Another  key  aspect of the
transformation  strategy is a significant increase in the community  involvement
and  contributions  made by the Bank,  its Directors,  and its employees.  These
efforts are  facilitated  by the Bank's  Director of  Community  Relations.  The
Company  seeks to  differentiate  itself from its  competition  through  various
means, particularly by providing a superior level of customer service.

         Key accomplishments during the first quarter of 2003 included:

o    record quarterly net income of $1.84 million and diluted earnings per share
     of $0.52

o    improving  the  Company's  return on average  assets to 1.20% and return on
     average equity to 12.73%,  from 0.90% and 9.37%,  respectively,  during the
     same quarter the prior year

o    the  attainment  of record  levels of total assets,  loans,  deposits,  and
     stockholders' equity at March 31, 2003

o    significant  progress in shifting the  composition  of the loan and deposit
     portfolios

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

o    a further improvement in the Company's  efficiency ratio, to 51.67% for the
     three months ended March 31, 2003

o    continued  maintenance  of favorable  credit  quality,  with the  Company's
     selling it sole piece of real estate  acquired via  foreclosure at December
     31, 2002 at a gain during the first quarter of 2003

o    the Bank's visibility and relationships with community leaders and business
     associations  continued to strengthen,  as evidenced by the Bank's recently
     receiving the Pajaro Valley Chamber of Commerce Business Excellence Award

                                       22
<PAGE>




Changes In Financial Condition From December 31, 2002 To March 31, 2003

         Total assets  increased  $16.1  million  (2.6%) from $609.7  million at
December 31, 2002 to a record $625.8 million at March 31, 2003.

         Cash & cash  equivalents  decreased  from $11.4 million at December 31,
2002 to $9.8 million at March 31, 2003 due to the use of cash & cash equivalents
to fund expansions in the security and loan portfolios.


Securities

         Investment securities available for sale were little changed during the
first three months of 2003,  totaling $7.0 million at December 31, 2002 and $7.1
million  at March 31,  2003.  At both  these  dates,  the  Company's  investment
security portfolio was identically composed of two floating rate corporate trust
preferred bonds rated "A" and "A-" by Standard & Poors at March 31, 2003.  These
corporate  trust   preferred   securities  are  issued  by  large  US  financial
institutions.  The slight increase in balance during 2003 resulted from the mark
to market  adjustment for available for sale securities and, to a lesser extent,
from amortization of purchase discounts.

         Mortgage  backed  securities  available for sale  increased  from $37.5
million at December  31, 2002 to $40.3  million at March 31,  2003.  The Company
purchased Agency issued, AAA rated collateralized mortgage obligations ("CMO's")
and balloon mortgage backed securities during the first quarter of 2003 to serve
as  collateral  for  certain  deposits,  invest  available  liquidity,  and more
effectively  utilize the Company's capital position.  All of the Company's CMO's
at March 31, 2003 passed the Federal Financial Institutions  Examination Council
("FFIEC") test for volatility.  Mortgage backed  security  purchases  during the
first quarter of 2003 were of higher  duration than those  purchased  during the
prior several quarters,  as the Company pursued a slight increase in its average
asset duration in  conjunction  with its interest rate risk  management  program
(see "Interest Rate Risk Management And Exposure").


Loans

         Loans held for sale totaled $475 thousand at March 31, 2003,  down from
$1.5  million at December  31,  2002.  The Company  sells most of its long term,
fixed  rate  residential  mortgage  production  into the  secondary  market on a
servicing  released  basis,  and purchases more interest rate sensitive loans as
part of its interest rate risk  management  program.  All loans held for sale at
March 31, 2003 were matched with optional commitments to deliver such loans into
the secondary market.

         Loans  held for  investment,  net,  increased  from  $521.9  million at
December 31, 2002 to a record  $538.7  million at March 31,  2003.  The increase
resulted from a combination of internal loan  originations,  including  activity
from the Los Angeles loan  production  office,  and from purchases of individual
income property loans from  correspondent  banks. In addition,  during the first
quarter of 2003,  the  Company  purchased  a $15.5  million  pool of high credit
quality,  seasoned hybrid residential  mortgages secured by first deeds of trust
on California  homes in order to better utilize the Company's  capital,  support
the Bank's Qualified Thrift Lender ("QTL") ratio, and offset  historically  high
loan payoff volumes stemming from the low interest rate environment. These loans
were  also  purchased  in  conjunction  with the  Company's  interest  rate risk
management  program,  as the  Company  sought  to  slightly  increase  its asset
duration during a period of historically  high  prepayment  speeds.  The Company
follows its customary  underwriting  policies in evaluating  loan  purchases and
participations.

         Relatively high loan payoff volumes stemming from the low interest rate
environment  restrained  the rate of loan  portfolio  growth  during  the  first
quarter of 2003, with loan payoffs during the quarter exceeding $59 million.

                                       23
<PAGE>

         Total net loans as a percentage of total assets were 86.2% at March 31,
2003,  up slightly  from 85.9% at December  31,  2002.  The Company has targeted
increasing  this  ratio to  90.0%  as part of its  strategy  of  supporting  its
interest  margin,  fostering  economic  activity in its local  communities,  and
effectively utilizing the Bank's capital.

         The loan portfolio product mix shifted during the first quarter of 2003
in conformity with the Company's  strategic  plan.  Residential one to four unit
loans  declined  from 33.1% of gross loans held for  investment  at December 31,
2002 to 30.3% at March 31, 2003. In contrast,  multifamily loans rose from 20.8%
to 23.9% and  construction  loans increased from 12.3% to 14.1%.  This change in
loan mix was facilitated by the business relationship officers the Company hired
over the past  eighteen  months and by the Los Angeles loan  production  office,
which concentrates on income property and construction lending.

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

<TABLE>
<CAPTION>
(Dollars In Thousands)                                            March 31,  December 31,
                                                                       2003          2002
                                                                  ---------     ---------
<S>                                                               <C>                <C>
Held for investment:
   Loans secured by real estate:
      Residential one to four unit                                $ 175,942     $ 187,471
      Multifamily five or more units                                138,613       118,004
      Commercial and industrial                                     132,197       140,027
      Construction                                                   81,684        69,526
      Land                                                           23,598        24,801
                                                                  ---------     ---------

   Sub-total loans secured by real estate                           552,034       539,829

   Other loans:
      Home equity lines of credit                                     8,767         8,779
      Loans secured by deposits                                         205           265
      Consumer lines of credit, unsecured                               157           172
      Commercial term loans                                           6,515         5,231
      Commercial lines of credit                                     12,404        12,777
                                                                  ---------     ---------

   Sub-total other loans                                             28,048        27,224

   Sub-total gross loans held for investment                        580,082       567,053

   (Less) / Plus:
      Undisbursed construction loan funds                           (32,959)      (36,683)
      Unamortized purchase premiums, net of purchase discounts        1,142           848
      Deferred loan fees and costs, net                              (1,113)       (1,127)
      Allowance for loan losses                                      (8,436)       (8,162)
                                                                  ---------     ---------

Loans receivable held for investment, net                         $ 538,716     $ 521,929
                                                                  =========     =========

Held for sale:
   Residential one to four unit                                   $     475     $   1,545
                                                                  =========     =========
</TABLE>
                                       24
<PAGE>

FHLB Stock

         The Company's  investment in the capital stock of the FHLB-SF increased
from $4.68  million at December 31, 2002 to $4.73  million at March 31, 2003 due
to stock dividends received.


Premises and Equipment

         Premises and  equipment,  net,  decreased from $7.2 million at December
31,  2002 to $7.0  million  at March 31,  2003,  as  periodic  depreciation  and
amortization exceeded new purchases. The Company does not anticipate significant
premises and equipment  purchases during 2003 until investments  commence in the
planned de novo branch in Pacific Grove, in the Company's primary market area.


Core Deposit Intangibles

         Core deposit intangibles,  net, declined from $833 thousand at December
31,  2002 to $663  thousand  at March  31,  2003 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.


Bank Owned Life Insurance

         The cash  surrender  value of the Bank's  investment in bank owned life
insurance  increased  by  $113  thousand  during  the  first  quarter  of  2003,
representing  a 5.0%  annualized  rate of return  which is not subject to normal
Federal and State income taxes. The insurance was purchased to fund:

o    non-qualified  supplemental  executive  retirement  benefits  for the Chief
     Executive  Officer and Chief Financial Officer that were implemented by the
     Company in early 2003

o    the increasing  expense of the tax qualified Employee Stock Ownership Plan,
     with  associated  costs  rising  due  to the  higher  market  price  of the
     Company's common stock

In addition,  the Bank owned life insurance policies provide significant key man
insurance to the Company.


Deposits

         Deposits increased from $458.3 million at December 31, 2002 to a record
$477.7 million at March 31, 2003. This increase was primarily due to:

o    the Bank's issuance of $10.8 million in brokered certificates of deposit to
     assist in funding expansion in the security and loan portfolios

o    a $17.2  million rise in money  market  account  balances  during the first
     quarter of 2003

         The brokered certificates of deposit were issued for terms of 12 and 18
months to take advantage of relative  value in pricing and in  integration  with
the Company's interest rate risk management program.

                                       25
<PAGE>

         The rise in money market deposit balances resulted from a focused sales
calling  program that included  active  participation  by the Bank's  management
team,  certain customers  preferring to avoid committing to term certificates of
deposit in the current historically low interest rate environment, and customers
building  liquid  balances  in  preparation  for the  payment of real estate and
income taxes in April. In addition,  the Company introduced two new money market
accounts at the  beginning of 2003:  Investors  Money Market and Business  Money
Market.  Investors  Money Market is a highly tiered product  targeted to attract
funds from money market mutual funds and brokerage firms.  Business Money Market
is a product designed  specifically  for the Bank's local  commercial  customers
seeking  an  attractive  return on liquid  funds  while also  enjoying  the many
attractive  attributes provided by the Bank, including Internet banking,  global
ATM access, 24 hour bilingual  telephone banking,  remote deposit services,  and
superior  customer  service  provided  by  local  bankers  familiar  with  their
business.  Both new money market products are FDIC insured to the maximum extent
permitted under FDIC regulations.

         The  Company  continues  to pursue  increases  in  transaction  account
balances as a fundamental component of its strategic plan.  Transaction accounts
increased  from 46.2% of total  deposits at December  31, 2002 to 48.2% of total
deposits at March 31, 2003 despite the issuance of the $10.8 million in brokered
certificates of deposit. This shift in mix contributed to the Company's reducing
its weighted  average cost of deposits  from 2.05% during the fourth  quarter of
2002 to 1.82% during the first quarter of 2003. This 23 basis point reduction in
deposit cost was attained  despite the  historically low level of interest rates
and therefore the Company's  limited ability to decrease  interest rates on many
deposit products that are currently priced between zero and one percent.

         During 2003,  the Company  hired a new  Director of Retail  Banking and
several new branch  managers with  significant  commercial  banking  experience.
These new employees were  recruited to increase the pace of deposit  generation,
facilitate the change in mix of the deposit portfolio, and more effectively sell
and service a broader product line, including an expanded roster of products for
local businesses.

         The  Company's  ratio of net loans to deposits was 112.86% at March 31,
2003,  declining  from 114.21% at December  31, 2003.  This ratio is higher than
that normally targeted by the Company.  The Company intends to continue actively
managing this ratio by:

o    pursuing the opening of a de novo branch in Pacific Grove

o    directing a significant  percentage of the advertising and promotion budget
     to deposit generation

o    selling a greater  percentage of total residential loan production into the
     secondary market

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

         Early in the  second  quarter  of 2003,  the Bank  received  regulatory
approval from the Office of Thrift  Supervision,  its primary federal regulator,
to open the planned branch in Pacific  Grove,  and was nearing the completion of
lease negotiations for the site.


Borrowings

         Borrowings  decreased  from $93.8 million at December 31, 2002 to $88.4
million  at  March  31,  2003.  The  increase  in  deposits  and the sale of the
foreclosed property provided funding to repay certain short term borrowings. All
of the Company's FHLB advances at March 31, 2003 were fixed rate,  fixed term or
overnight borrowings without call or put option features.

                                       26
<PAGE>

Stockholders' Equity

         Total stockholders' equity increased from $56.1 million at December 31,
2002 to a record  $58.2  million at March 31, 2003 due to a  combination  of net
income,  continued  amortization  of  deferred  stock  compensation,  additional
paid-in  capital  generated  from  the  Employee  Stock  Ownership  Plan and the
Performance  Equity Plan, and the exercise of 6,659 vested stock options.  These
factors more than offset the impact of the  depreciation  in the aggregate  fair
value of  securities  classified  as  available  for sale.  The  Company did not
repurchase  any of its common stock during the first  quarter of 2003,  and will
not  repurchase  any of its common  stock prior to the  stockholder  vote on the
proposed merger.

         The Company  accrued its director fee expenses during the first quarter
of 2003, but did not pay its directors due to the occurrence of  negotiations in
conjunction with the proposed merger.  Since the directors have been paid in the
Company's  common stock for several  years,  the Company did not want to provide
stock to its directors in advance of a potential  significant  announcement that
would likely  influence the stock price.  In April 2003,  the Board of Directors
formally  canceled the payment of director  fees in common stock and  authorized
cash payments for all 2003 director fees.

         The Company did not declare or pay any cash dividends  during the first
quarter of 2003.  The  Company  will not  declare or pay any cash  dividends  to
stockholders while the proposed merger is pending.

         Tangible  book value per share  increased  from $16.00 at December  31,
2002 to $16.64 at March 31, 2003.  The amount of increase in tangible book value
per share  during  the first  quarter  of 2003 was  positively  impacted  by the
continued  amortization  of  core  deposit  intangibles  and the  generation  of
additional  paid-in capital resulting from the Employee Stock Ownership Plan and
Performance Equity Plan.


Interest Rate Risk Management And Exposure

         The table below  presents an overview of the interest rate  environment
during the 15 months ended March 31, 2003.  The 12 MTA and 11th District Cost Of
Funds Index  ("COFI") are by nature  lagging  indices that trail changes in more
responsive  interest rate indices such as those  associated with the Treasury or
LIBOR markets.
<TABLE>
<CAPTION>
Index / Rate (1)        12/31/01    3/31/02   6/30/02    9/30/02  12/31/02    3/31/03
----------------        --------    -------   -------    -------  --------    -------
<S>                        <C>        <C>       <C>        <C>       <C>        <C>
3 month Treasury bill      1.72%      1.78%     1.68%      1.55%     1.19%      1.11%
6 month Treasury bill      1.79%      2.10%     1.74%      1.50%     1.20%      1.11%
2 year Treasury note       3.02%      3.72%     2.81%      1.68%     1.60%      1.48%
5 year Treasury note       4.30%      4.84%     4.03%      2.56%     2.73%      2.71%
10 year Treasury note      5.05%      5.40%     4.80%      3.59%     3.81%      3.80%
Target federal funds       1.75%      1.75%     1.75%      1.75%     1.25%      1.25%
Prime rate                 4.75%      4.75%     4.75%      4.75%     4.25%      4.25%
3 month LIBOR              1.88%      2.03%     1.86%      1.79%     1.38%      1.28%
12 month LIBOR             2.44%      3.00%     2.29%      1.73%     1.45%      1.28%
1 Year CMT (2)             2.22%      2.57%     2.20%      1.72%     1.45%      1.24%
12 MTA (2)                 3.48%      2.91%     2.55%      2.18%     2.00%      1.75%
COFI (2)                   3.07%      2.65%     2.85%      2.76%     2.38%      2.21%
</TABLE>
----------------------------------------------------------------
(1) Indices / rates are spot values unless  otherwise noted.
(2) These indices / rates are monthly averages.

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

                                       27
<PAGE>

         In recent quarters, the Company has maintained a relatively balanced or
neutral  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  approximately  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.

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

         Most interest rates reversed course and declined during the final three
quarters of 2002.  This trend was amplified in the fourth quarter of 2002,  when
the Federal Reserve  decreased the target federal funds rate by 50 basis points.
This  rate cut was  generally  in  excess  of that  anticipated  by the  capital
markets,  as the Federal Reserve  aggressively  sought to reinvigorate  economic
growth.  Among the factors leading to the reduction in interest rates during the
final three quarters of 2002 were:

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

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

o    companies  being slow to rehire despite  growth in gross domestic  product,
     contributing to the term "jobless recovery"

o    ongoing international  tensions encouraging "flight to quality" investments
     by certain capital markets participants

o    a steadily rising US  unemployment  rate during the fourth quarter of 2002,
     with the rate peaking at 6.00% for December 2002

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

o    significant  weakness  across  certain  industries,   especially  airlines,
     technology, and telecommunications companies

         Most interest rates declined  further during the first quarter of 2003,
in many cases reaching  levels not seen in decades.  The US-led invasion of Iraq
and concerns over other  international  issues,  including North Korea's nuclear
program,  spurred additional "flight to quality"  investments by certain capital
markets  participants.  Continuing  jobless claims  remained high throughout the
first quarter of 2003,  highlighting the difficulty experienced by many laid-off
individuals in finding new work.

                                       28
<PAGE>

         At various  times during the first  quarter of 2003,  the federal funds
futures market  anticipated  additional rate cuts by the Federal Reserve.  Among
the topics evaluated by capital markets  participants was the potential  slowing
of the residential  mortgage  refinance boom, which had significantly  increased
consumer  disposable income over the past year and often provided  liquidity via
"cash-out"  loans.  If that source of economic  stimulus  were to diminish,  the
Federal  Reserve might  determine to cut its benchmark  interest rates again and
possibly  conduct open market  transactions to inject liquidity into the economy
and adjust the term structure of interest rates.

         The low nominal  level of  interest  rates in effect in 2002 and in the
first quarter of 2003  presented a particular  challenge to the Company,  as the
rates on its NOW and Savings deposit  accounts were already at low levels by the
end of 2001 and could not be  decreased  to the same  extent as declines in many
capital  markets  interest rates.  The Company  addressed this issue through its
asset / liability  management  program,  whereby  decisions  regarding  pricing,
promotion,  and incentives are integrated with tactical transactions to moderate
the Company's exposure to changes in interest rates.

         The Treasury  yield curve was  significantly  flatter at March 31, 2003
than one year earlier,  with the  differential  between the target federal funds
rate and the 2 year Treasury Note bond equivalent yield declining from 197 basis
points at March 31, 2002 to 23 basis  points at March 31, 2003.  Similarly,  the
differential  between  the bond  equivalent  yield on five year and three  month
Treasury  securities  decreased  from 306 basis  points at March 31, 2002 to 160
basis points at March 31, 2003. Thus, in general,  the interest rate environment
during the first  quarter of 2003 was less  favorable to the Company than during
the first quarter of 2002.

         Should the Federal Reserve determine to decrease interest rates further
during 2003,  Management is uncertain regarding potential impacts.  Behaviors by
borrowers,  depositors,  and the capital  markets in extremely low interest rate
environments  have not been tested in a modern  economy with great ease of funds
mobility  and  unparalleled  information  availability  through the Internet and
other  technological  means. During the first quarter of 2003, many money market
mutual  funds were paying  rates of less than 1.00%,  and the fixed rate annuity
market was being  adversely  impacted by the  presence  of interest  rate floors
established  at the  state  level,  with such  state  regulation  generally  not
anticipating that interest rates might fall to such low nominal levels.  Further
decreases  in  interest  rates  could  encourage  some  consumers  to adopt  new
behaviors and investment strategies,  including pursuing investment alternatives
other than federally insured deposit accounts, in search of higher yields.

         The  divergence  of the COFI index during much of 2002, as presented in
the above table, from other capital markets interest rates may have been in part
caused by the payment of deposit  rates  significantly  above market by two very
large thrifts with  operations in the 11th Federal Home Loan Bank District - the
largest component of which is California.

         The historically low interest rate environment during the first quarter
of 2003  contributed to a significant  rise in loan  prepayments,  which in turn
decreased  the  average  duration  of  certain  asset  portfolios,  particularly
residential  hybrid mortgages.  The surge in prepayment speeds also impacted the
security  portfolio,  with the  duration of the  Company's  CMO's in  particular
declining,  which  unfavorably  impacted  effective  yields due to the Company's
basis in these  securities  exceeding par. In response to the rise in prepayment
speeds,  the Company redirected its security and loan purchases during the first
quarter of 2003 to  slightly  higher  duration  assets  (e.g.  5 year fixed rate
residential  hybrid  loans and seven  year fixed rate  balloon  mortgage  backed
securities)  in order to avoid having the  aggregate  interest rate risk profile
shift to  materially  net asset  sensitive  during a period of soft to declining
interest rates.

         The weighted  average  remaining  term of the Company's  certificate of
deposit  portfolio  increased  from 228 days at December 31, 2001 to 293 days at
December 31, 2002 to 319 days at March 31,  2003.  This shift was due to certain
customers seeking longer term certificates of deposit in order to obtain a given
interest rate and because of the Company's marketing of longer term certificates
of deposit in order to provide an  extended  window in which to expand  customer
relationships.  In order to  avoid  having  this  trend in the  duration  of the
certificate of deposit  portfolio  contribute to a shift towards a significantly
net asset sensitive interest rate risk position,  the Company in recent quarters
has utilized  relatively short term borrowings versus the longer term borrowings
historically pursued by the Company.

                                       29
<PAGE>

         Despite  the need for an increase  in asset  duration  during the first
quarter of 2003,  the Company  continued  selling the vast  majority of its long
term, fixed rate residential  mortgage production into the secondary market on a
servicing  released  basis.  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.

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

         The  aforementioned  and other  tactical  and  strategic  actions  were
conducted as part of the Company's  interest rate risk  management  program.  At
this time,  the  Company is  targeting  a balanced  to  slightly  net  liability
sensitive  interest  rate  risk  profile.   Management  has,  however,  recently
discussed shifting the Company's interest rate risk profile to very slightly net
asset  sensitive at some point in the future in  preparation  for a return to an
increasing  interest  rate  environment.  Management  believes it unlikely  that
interest  rates will remain at  historically  low  levels,  with  negative  real
federal funds, for an extended period of time.

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


Liquidity

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

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

         At March  31,  2003,  the  Company  had $9.8  million  in cash and cash
equivalents,  available  borrowing  capacity in excess of $155.0  million at the
FHLB-SF,  $8.0  million in unpledged  securities,  and a  significant  volume of
residential  mortgages  that  could  be  securitized,  liquidated,  or  used  in
collateralized borrowings in order to meet future liquidity requirements.

         The State of California is the Bank's  largest single  depositor,  with
$28.0  million in  certificates  of  deposit  placed in the Bank as of March 31,
2003.  Should the State of California  not renew these  certificates  of deposit
upon  maturity,  replacement  funding would likely be more costly.  The maturity
dates for the State of California certificates of deposit are staggered to avoid
a  concentration  of  repricing  and funding  risk.  The Bank's  second  largest
depositor is a $20.0 million brokered CD that matures in May 2003.

         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 March 31,  2003,  the Bank
maintained  $39.5  million in unsecured  federal funds lines of credit from five
correspondent  financial  institutions.  However, there can be no assurance that
funds from these lines of credit  will be  available  at all times,  or that the
lines will be maintained in future periods.

                                       30
<PAGE>

         During April 2003, the Bank arranged for an $11.0 million  increase (to
$26.0 million) in a federal funds line of credit from a  correspondent  bank and
added term (in addition to overnight) federal fund borrowings as allowable under
this line. The Bank is able to issue  wholesale  "DTC"  certificates  of deposit
through five investment banking firms as an additional source of liquidity.

         At  March  31,  2003,  MBBC  on a stand  alone  basis  had  cash & cash
equivalents of $3.3 million.  In addition,  MBBC had no outstanding balance on a
$4.0 million  committed  revolving line of credit.  MBBC obtained a $1.0 million
increase in this committed  revolving line of credit (i.e.  from $3.0 million to
$4.0 million) during the first quarter of 2003. This line of credit is scheduled
to mature at the end of March 2004 and is  collateralized  by shares of Treasury
stock.

         At March 31, 2003, the Bank maintained  $25.8 million in commitments to
originate loans and lines of credit.  Management  anticipates that the Bank will
have sufficient funds available to meet these commitments, not all of which will
necessarily be originated or drawn upon.


Capital Resources And Regulatory Capital Compliance

         Federal banking  regulatory  agencies  maintain a system  providing for
regulatory  sanctions  against  financial  institutions  that are not adequately
capitalized.  The  severity of these  sanctions  increases to the extent that an
institution's capital falls further below the adequately capitalized thresholds.
OTS Prompt Corrective Action ("PCA") regulations require specific capital ratios
for five separate capital categories as set forth below:

<TABLE>
<CAPTION>
                                    Core Capital            Core Capital            Total Capital
                                    To Adjusted                  To                       To
                                    Total Assets            Risk-weighted           Risk-weighted
                                  (Leverage Ratio)             Assets                   Assets
                                  ----------------             ------                   ------
<S>                                 <C>                      <C>                     <C>
Well capitalized                    5% or above              6% or above             10% or above
Adequately capitalized              4% or above              4% or above             8% or above
Undercapitalized                      Under 4%                Under 4%                 Under 8%
Significantly undercapitalized        Under 3%                Under 3%                 Under 6%
Critically undercapitalized           Ratio of tangible equity to adjusted total assets of 2% or less
</TABLE>


         As of  March  31,  2003,  the  most  recent  notification  from the OTS
categorized  the Bank as "well  capitalized".  There are no conditions or events
since  that  notification  that  Management  believes  have  changed  the Bank's
category.  The following  table  summarizes the capital  ratios  required for an
institution  to be  considered  "well  capitalized"  and the  Bank's  regulatory
capital at March 31, 2003 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                 $ 54,468       8.71%        $ 54,468      11.75%        $ 60,289      13.00%
Well capitalized requirement              31,271       5.00%          27,816       6.00%          46,360      10.00%
                                        --------       -----        --------       -----        --------      ------

Excess                                  $ 23,197       3.71%        $ 26,652       5.75%        $ 13,929       3.00%
                                        ========       =====        ========       =====        ========      ======

Adjusted assets                         $625,418                    $463,600                    $463,600
                                        ========                    ========                    ========
</TABLE>

         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).

                                       31
<PAGE>

         The following table summarizes these  regulatory  capital  requirements
for the Bank. As indicated in the table,  the Bank's capital levels at March 31,
2003 exceeded all three of the currently  applicable  minimum regulatory capital
requirements.

                                                    Percent Of
                                                      Adjusted
(Dollars In Thousands)                                   Total
                                   Amount               Assets
                                   ------               ------
Tangible Capital

Regulatory capital                $54,468                8.71%
Minimum required                    9,381                1.50%
                                  -------                ----

Excess                            $45,087                7.21%
                                  =======                ====


Core Capital

Regulatory capital                $54,468                8.71%
Minimum required                   25,017                4.00%
                                  -------                ----

Excess                            $29,451                4.71%
                                  =======                ====


                                                    Percent Of
                                                         Risk-
                                                      Weighted
                                   Amount               Assets
                                   ------               ------
Risk-based Capital

Regulatory capital                $60,289               13.00%
Minimum required                   37,088                8.00%
                                  -------                ----

Excess                            $23,201                5.00%
                                  =======                ====


         At March 31, 2003, the Bank's  regulatory  capital levels  exceeded the
thresholds  required to be classified as a "well capitalized"  institution.  The
Bank's  regulatory  capital ratios  detailed above do not reflect the additional
capital (and assets) maintained by MBBC. Management believes that, under current
regulations,  the Bank will continue to meet its minimum  capital  requirements.
However,  events beyond the control of the Bank, such as changing interest rates
or a downturn in the economy or real estate  markets in the areas where the Bank
has most of its loans, could adversely affect future earnings and, consequently,
the  ability  of  the  Bank  to  meet  its  future  minimum  regulatory  capital
requirements.

                                       32

<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)                                                   March 31, 2003       December 31, 2002
                                                                         --------------       -----------------
<S>                                                                             <C>                     <C>
Outstanding Balances Before Valuation Reserves
Non-accrual loans                                                               $ 2,578                 $ 2,643
Loans 90 or more days delinquent and accruing interest                               --                      --
Restructured loans in compliance with modified terms                                342                      --
                                                                                -------                 -------

Total gross non-performing loans                                                  2,920                   2,643

Investment in foreclosed real estate before valuation reserves                       --                     846
Repossessed consumer assets                                                          --                      --
                                                                                -------                 -------

Total gross non-performing assets                                               $ 2,920                 $ 3,489
                                                                                =======                 =======

Gross non-accrual loans to total loans                                            0.47%                   0.50%
Gross non-performing loans to total loans                                         0.53%                   0.50%
Gross non-performing assets to total assets                                       0.47%                   0.57%
Allowance for loan losses                                                       $ 8,436                 $ 8,162
Allowance for loan losses to non-performing loans                               288.90%                 308.82%
Valuation allowances for foreclosed real estate                                 $    --                 $    --
</TABLE>

         Non-accrual  loans at March  31,  2003 are  detailed  in the  following
table:

<TABLE>
<CAPTION>
(Dollars In Thousands)                                       Number               Principal Balance
                                                                 Of                  Outstanding At
Category Of Loan                                              Loans                  March 31, 2003
----------------                                              -----                  --------------
<S>                                                               <C>                       <C>
Residential mortgage one to four units                            1                         $   199
Commercial & industrial real estate                               1                           2,250
Land                                                              1                             129
                                                                ---                         -------
Total                                                             3                         $ 2,578
                                                                ===                         =======
</TABLE>

         Non-accrual  loans decreased from $2.64 million at December 31, 2002 to
$2.58  million  at March  31,  2003  primarily  due to the  first  quarter  2003
charge-off  of a home  equity  line of credit  with a  principal  balance of $49
thousand. The Company is continuing to pursue collection of this credit, and has
filed formal legal action in this regard.

         Non-accrual loans at March 31, 2003 included a $2.25 million commercial
real estate mortgage.  This credit is a participation loan where the Bank is not
the lead financial institution.  The loan is secured by a first deed of trust on
a hotel / resort located within the Company's primary market area and by a first
deed of trust on a  residential  lot located in  California.  The  borrowers are
directly  personally  indebted.  The hotel / resort has experienced limited cash
flow,  having been adversely  impacted by the decline in tourism and travel over
the past two years, which in turn has been unfavorably affected by the slow pace
of  national  economic  growth  and by  concerns  regarding  possible  terrorist
actions.  Recent  concerns  regarding  the SARS virus could  further  negatively
impact travel and tourism,  and  therefore  unfavorably  affect the  hospitality
industry.

                                       33
<PAGE>


       At March 31,  2003,  the  Company  maintained  a $520  thousand  specific
reserve  for  this  hotel / resort  loan,  based  upon  estimated  net  proceeds
following  foreclosure  and sale.  This  specific  reserve  increased  from $462
thousand at  December  31,  2002 due to the  borrower's  failure to pay all real
estate  taxes  when due.  Real  estate  taxes  generate  a lien on the  property
superior  to the lien of the  Company.  Although  the loan  was  current  in its
payments at March 31,  2003,  the  Company  continues  to  maintain  the loan on
non-accrual  status due to concern about the future net cash flow of the hotel /
resort,  particularly  in  light  of the  status  of the  economy,  the  tourism
industry,  and the outlook for  business  travel  activity.  These  factors also
create particular volatility in the market value of the hotel / resort.

         Non-accrual loans at March 31, 2003 also included:

o    a residential mortgage with a principal balance of $199 thousand

o    a $129 thousand loan secured by a first deed of trust on residential land

       The $199 thousand  residential  mortgage was fully reinstated  during the
first quarter of 2003,  but was  maintained on  non-accrual  status at March 31,
2003 because of prior  chronic  delinquency.  The $129  thousand loan secured by
residential land was paid off in full early in the second quarter of 2003.

         At December 31, 2002,  the Company had one  foreclosed  property with a
book value of $846 thousand.  This property was a custom single family home that
was sold during the first  quarter of 2003,  with the  Company  realizing a $114
thousand gain on sale. The Company did not provide financing in conjunction with
the sale of the foreclosed  property.  The Company owned no real estate acquired
via foreclosure at March 31, 2003.

         Non-performing  loans at March 31, 2003 included $342 thousand in loans
to a commercial banking customer that were restructured during the first quarter
of 2003. This customer,  located in the Company's primary market area,  recently
made  significant  capital  investments  to support  the long term growth of the
business, and in so doing experienced reduced liquidity. In conjunction with the
restructure, the Company obtained additional real estate collateral.


Criticized And Classified Assets

         The  following  table  presents  information  concerning  the Company's
criticized  ("OAEM")  and  classified  ("substandard"  and  lower)  assets.  The
category "OAEM" refers to "Other Assets Especially  Mentioned",  or those assets
that present indications of potential future credit deterioration.


<TABLE>
<CAPTION>
(Dollars In Thousands)          OAEM     Substandard     Doubtful       Loss       Total
                             -------     -----------     --------      -----     -------
<S>                          <C>             <C>             <C>       <C>       <C>
December 31, 2002            $ 4,899         $ 3,771         $ --      $ 462     $ 9,132
March 31, 2003               $ 4,593         $ 2,874         $ --      $ 520     $ 7,987
</TABLE>


         Classified  assets as a percent of stockholders'  equity decreased from
7.55% at  December  31,  2002 to  5.83%  at March  31,  2003.  The  decrease  in
substandard assets from December 31, 2002 to March 31, 2003 was primarily due to
the sale of the Company's sole property acquired via foreclosure.

                                       34
<PAGE>




         The amounts classified as "Loss" in the prior table are associated with
the  specific  reserve for the $2.25  million  commercial  real estate  mortgage
secured by a hotel / resort  located in the  Company's  primary  market area, as
described  above under  "Non-performing  Assets".  The  remainder  of this $2.25
million loan is classified as  substandard.  Substandard  assets as of March 31,
2003, as presented in the table above, also include:

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

o    A total of $322  thousand in commercial  loans to a corporation  whose sole
     stockholder has recently emerged from personal bankruptcy. The borrower has
     recently  reaffirmed  his guarantee of the loans and provided an additional
     deed of trust to enhance the  Company's  collateral  position.  These loans
     were current in their payments as of early May 2003.

o    A total  of $120  thousand  in  commercial  loans to a  corporation  in the
     Company's  primary market area that has recently  experienced  losses.  The
     loans were current at March 31, 2003 and in early May 2003. The borrower is
     presently seeking alternative financing.  The loans are secured by business
     assets, including accounts receivable, inventory, and equipment.


         Criticized loans at March 31, 2003 included:

o    A $1.7 million  residential  mortgage in the Company's  primary market area
     where the borrowers have  repeatedly  failed to make timely  payments,  but
     have also repeatedly reinstated to avoid foreclosure. This loan was current
     in its payments as of early May 2003.

o    A $1.3 million mortgage, current in its payments at March 31, 2003, secured
     by a motel  located in the  Silicon  Valley area of the San  Francisco  Bay
     Area. The motel's cash flow has been  unfavorably  impacted by the economic
     difficulties  being  experienced  in  the  technology  industry  and  by  a
     reduction  in  business  travel  in  general.   Despite  the   difficulties
     experienced by the motel,  however,  the borrowers have  consistently  made
     timely loan payments.

o    A total of $256  thousand in  commercial  loans to a winery  located in the
     Company's  primary  market  area.  The winery  has  recently  continued  to
     experience financial difficulty,  resulting in sporadic late payments.  The
     loans were  delinquent  at March 31, 2003 and  continued  to be  delinquent
     through early May 2003. Historically,  the borrowers have been cooperative.
     The loans are well secured by real estate.

o    A total of $126 thousand in commercial loans to a business in the Company's
     primary  market  area.  The  President  of a  significant  customer of this
     business,  with  a  relatively  large  account  payable  to  the  Company's
     borrower,  recently  died,  resulting  in delayed  payment  and a potential
     collection loss. The loans were current in their payments at March 31, 2003
     and in early May 2003. The loans are secured by business assets,  including
     accounts receivable, inventory, and equipment.

                                       35

<PAGE>

Impaired Loans

         At March 31, 2003, the Company had total gross impaired  loans,  before
specific reserves, of $2.9 million,  constituting six credits. Specific reserves
on these $2.9 million in impaired loans totaled $520 thousand.  This compares to
total gross impaired loans of $2.6 million, with associated specific reserves of
$462 thousand,  at December 31, 2002. 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 three months
ended March 31,  2003,  accrued  interest on impaired  loans was $2 thousand and
interest of $43 thousand was received in cash.  The average  balance of impaired
loans  during the three  months  ended March 31, 2003 was $2.9  million.  If all
non-accrual  loans had been  performing in accordance  with their  original loan
terms,  the Company would have recorded  interest  income of $50 thousand during
the three  months  ended March 31,  2003,  instead of interest  income  actually
recognized, based on cash payments, of $34 thousand.


Allowance For Loan Losses

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

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

1.       Formula Allowance

Formula  allowances  are based upon loan loss factors that reflect  Management's
estimate of the inherent loss in various segments of, or pools within,  the loan
portfolio.  The  loss  factor  is  multiplied  by the  portfolio  segment  (e.g.
multifamily  permanent mortgages) balance (or credit commitment,  as applicable)
to  derive  the  formula  allowance   amount.   The  loss  factors  are  updated
periodically by the Company to reflect current information that has an effect on
the amount of loss inherent in each segment.  The formula allowance at March 31,
2003 was $7.2 million, compared to $7.0 million at December 31, 2002.

2.       Specific Allowance

Specific  allowances are  established  in cases where  Management has identified
significant  conditions or  circumstances  related to an  individually  impaired
credit. In other words,  these allowances are specific to the loss inherent in a
particular loan. The amount for a specific allowance is calculated in accordance
with SFAS No. 114,  "Accounting  By Creditors  For  Impairment  Of A Loan".  The
Company had $520 thousand in specific  allowance at March 31, 2003,  compared to
$462 thousand at December 31, 2002.

                                       36
<PAGE>

3.       Unallocated Allowance

The Company  maintains an  unallocated  loan loss  allowance  that is based upon
Management's  evaluation  of  conditions  that are not directly  measured in the
determination of the formula and specific allowances. The evaluation of inherent
loss  with  respect  to  these  conditions  is  subject  to a higher  degree  of
uncertainty  because they are not identified  with specific  problem  credits or
historical  performance of loan portfolio segments.  The conditions evaluated in
connection  with the  unallocated  allowance  at March  31,  2003  included  the
following, which existed at the balance sheet date:

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

o    real estate values in California

o    loan volumes and concentrations

o    seasoning of the loan portfolio

o    status of the current business cycle

o    specific industry or market conditions within portfolio segments


The unallocated allowance at March 31, 2003 was $716 thousand,  compared to $661
thousand at December 31, 2002.


         The following  table presents  activity in the Company's  allowance for
loan losses during the three months ended March 31, 2003 and March 31, 2002:


<TABLE>
<CAPTION>
                                                                           Three Months Ended March 31,
                                                                       ---------------------------------
                                                                              2003                 2002
                                                                           -------              -------
Allowance For Loan Losses                                                       (Dollars In Thousands)
<S>                                                                        <C>                  <C>
Balance at beginning of year                                               $ 8,162              $ 6,665

   Charge-offs:
      Home equity lines of credit                                              (49)                  --
      Consumer lines of credit, unsecured                                       (3)                  (8)
      Commercial term loans                                                     --                  (30)
                                                                           -------              -------
   Total charge-offs                                                           (52)                 (38)

   Recoveries:
      Consumer lines of credit, unsecured                                       --                    4
      Commercial term loans                                                      1                   --
      Commercial lines of credit                                                --                    2
                                                                           -------              -------
   Total recoveries                                                              1                    6

   Provision for loan losses                                                   325                  325
                                                                           -------              -------

Balance at March 31                                                        $ 8,436              $ 6,958
                                                                           =======              =======

Annualized ratio of net charge-offs during the period to average
   loans receivable, net, outstanding during the period                      0.04%                0.03%
</TABLE>
                                       37

<PAGE>

         Additional ratios applicable to the allowance for loan losses include:

<TABLE>
<CAPTION>
                                                                              March 31, 2003      December 31, 2002
                                                                              --------------      -----------------
<S>                                                                                  <C>                    <C>
Allowance for loan losses as a percent of non-performing loans                       288.90%                308.82%

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

Allowance for loan losses as a percent of classified assets                          248.56%                192.82%
</TABLE>

         The $716 thousand in unallocated  allowance at March 31, 2003 reflected
the consideration of the following factors,  as well as the more general factors
listed above in conjunction with the definition of the unallocated allowance:

o    The adverse effects of a decline in tourism and business  travel  impacting
     the local economies in Santa Cruz and Monterey counties, with a concomitant
     impact upon net cash flows for local commercial  enterprises and commercial
     real estate properties,  particularly those associated with the hospitality
     industry.  Recent reports indicate a national rise in delinquency rates for
     loans secured by hotels, with the hospitality industry in general suffering
     from higher vacancy rates and / or discounted room rates. This impact could
     be in the range of $100 thousand to $300 thousand.

o    The  adverse  impacts  of  the  weak   technology  and   telecommunications
     industries  upon  commercial  real estate  values.  The  Company's  primary
     lending area is near the Silicon Valley area of the San Francisco Bay Area,
     which  has  been  impacted  by the  slump  in  various  telecommunications,
     technology,  and technology related  businesses.  The unemployment rate for
     Santa Clara County,  at the heart of Silicon Valley,  was recently reported
     to be 8.4%.  Recent  reports  indicate a rise in office vacancy rates and a
     decline in rental  rates for office  space in multiple  markets  within the
     greater San Francisco  Bay Area.  This impact could be in the range of $100
     thousand to $1.2 million.

o    Recent  reports of selected areas of soft or declining  apartment  rents in
     Northern  California  resulting  from reduced  employment,  weakness in the
     technology and  telecommunications  industries,  and a strong home purchase
     market.  The soft or declining  rents could lead to  decreased  multifamily
     property values. This impact could be in the range of $100 thousand to $900
     thousand.

         As  subsequently  discussed  (see  "Provision  For Loan  Losses"),  the
Company  recorded the same level of provisions  for loan losses during the first
quarters of 2003 and 2002.  The primary factor leading to the provision for loan
losses  during  the  first  quarter  of 2002  was the need to  establish  a $754
thousand  specific  reserve  for the hotel / resort loan  described  above under
"Non-performing  Assets".  Key factors  leading to the provision for loan losses
during the first quarter of 2003 included loan portfolio growth,  change in loan
mix,  $51  thousand  in net  charge-offs,  and a $58  thousand  increase  in the
specific  reserve  for the  $2.25  million  hotel / resort  loan  caused  by the
borrower's non-payment of real estate taxes.

         Management  anticipates  that  should the Company  continue  its recent
trends and be successful in:

o    generating further growth in loans receivable held for investment

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

o    expanding the construction loan portfolio

o    continuing expansion of commercial business lending

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

                                       38
<PAGE>


Comparison Of Operating Results For The Three Months  Ended March 31,  2003  and
March 31, 2002

General

         During the first quarter of 2003, the Company reported net income $1.84
million,  equivalent to $0.52 diluted earnings per share, compared to net income
of $1.21 million,  or $0.35 diluted  earnings per share,  for the same period in
2002.  Net income  during the quarter ended  December 31, 2002 (the  immediately
preceding  quarter) was $1.62 million,  equivalent to $0.46 diluted earnings per
share.  The  earnings  for the first  quarter  of 2003 were the  highest  of any
quarter in the Company's history.  Diluted earnings per share have increased for
eight  consecutive  quarters.  The 52.4%  increase  in net  income for the first
quarter of 2003 compared to the same period in 2002 primarily resulted from:

o    the continued  implementation of the Company's  strategic plan to transform
     the Bank into a  community  commercial  bank  with a focus on  relationship
     banking and a strong commitment to community involvement

o    an $822 thousand rise in net interest  income  resulting from a combination
     of increased spreads and larger average balances of interest earning assets
     and liabilities

o    a $114 thousand gain on sale of the Company's one foreclosed  property held
     at December 31, 2002

o    increased mortgage banking income

o    the first full quarter of income from the  Company's  recent  investment in
     bank owned life insurance

         Annualized  return on average  assets  increased  from 0.90% during the
first  quarter  of 2002 to 1.20%  during the first  quarter of 2003.  Annualized
return on average  stockholders'  equity  improved  from 9.37%  during the first
quarter of 2002 to 12.73% during the first quarter of 2003.


Interest Rate Environment

         The table and  discussion  presented  above under  "Interest  Rate Risk
Management And Exposure"  furnishes an overview of the interest rate environment
since the end of 2001. Interest rates have generally declined over the past five
quarters,  with the  exception of an increase at the end of the first quarter of
2002.  The slope of the Treasury  curve has flattened over the past year (i.e. a
smaller  differential  between  short  term and  longer  term  interest  rates).
Financial institutions,  including the Bank, generally benefit from a positively
sloped term structure of interest  rates,  whereby higher duration assets may be
funded at a favorable  spread with shorter term  liabilities,  and whereby fixed
rate  assets  appreciate  in market  price as they move nearer to  maturity.  In
addition,  steep  yield  curves  often  lead to  increased  customer  demand for
adjustable rate mortgages due to the rate  differential to long term, fixed rate
mortgages.  Thus, as discussed above at greater length under "Interest Rate Risk
Management  And  Exposure",  the interest rate  environment  was generally  less
favorable for the Company during the first quarter of 2003 than during the first
quarter of 2002. In addition,  as a result of the interest rate environment over
the past 15  months,  yields  and rates for most  assets  and  liabilities  were
substantially  lower in the first quarter of 2003 compared to the same period in
2002.


Net Interest Income

         Net  interest  income  increased  from $5.4  million  during  the first
quarter of 2002 to $6.2 million during the first quarter of 2003.  This increase
resulted  from both  expanded  spreads  and growth in the  average  balances  of
interest  earning assets and  liabilities.  The Company's  ratio of net interest
income to average  total assets was 4.02% for the first quarter of 2003, up from
3.98% for the same period in 2002. The Company's net interest  margin  increased
more significantly,  rising from 4.19% during the first quarter of 2002 to 4.27%
during the first quarter of 2003. The Company's purchase of $9.0 million in bank
owned life insurance during the fourth quarter of 2002 moderated the improvement
in the ratio of net interest  income to average total assets.  The increased net
interest  income  during  the first  quarter  of 2003 in part  stemmed  from the
continued implementation of the Company's strategic plan.

                                       39
<PAGE>

         Factors  favorably  influencing  net interest  income  during the first
quarter of 2003 compared to the same period in 2002 included:

o    Average  cash  equivalents  decreased  from $5.8  million  during the first
     quarter of 2002 to $478 thousand during the first quarter of 2003. This was
     due to  the  Bank's  generally  being  in a net  daily  borrowing  position
     throughout  the first quarter of 2003,  primarily in response to its demand
     for loans.  Because cash  equivalents  typically  represent  the  Company's
     lowest yielding asset  alternative,  relative decreases in cash equivalents
     are favorable for the Company's spreads and net interest income.

o    Average  transaction  account  (NOW,  savings,  and  MMDA)  deposits  as  a
     percentage  of average total assets  increased  from 31.3% during the first
     quarter  of  2002  to  31.6%  during  the  same  period  in  2003.  Because
     transaction accounts represent relatively low cost funding,  this change in
     funding mix favorably impacted net interest income.

o    Average  certificates of deposit  ("CD's") as a percentage of average total
     assets  decreased  from  44.7%  during  the first  quarter of 2002 to 40.9%
     during the first quarter of 2003. Because CD's constitute relatively higher
     cost funding,  this change in funding mix  favorably  impacted net interest
     income.  The average  rate paid on CD's was 113 basis  points  lower in the
     first  quarter of 2003 than  during the first  quarter in 2002,  despite an
     increase in the weighted  average  number of days until  maturity  from 248
     days to 319 days.  The 113 basis  point  decline in average  rate  compared
     favorably  to the 65 basis  point  reduction  in  average  rate  earned  on
     interest  earning  assets,  thereby  contributing  to the  expansion in net
     interest income from the first quarter of 2002 to the same period in 2003.

o    The average rate paid on the Company's FHLB advances was a significant  127
     basis points lower in the first  quarter of 2003 versus the same period the
     prior year.  This  decrease in funding  costs was caused by the maturity of
     some higher cost advances and by the  Company's  utilizing  relatively  low
     cost short term borrowings  during the first quarter of 2003 in conjunction
     with its interest rate risk management program.

         Factors  unfavorably  impacting  net interest  income  during the first
quarter of 2003 compared to the same period in 2002 included:

o    The spread derived from investing the Company's demand deposit balances and
     capital was lower in the first quarter of 2003 than the same period in 2002
     due to the lower general interest rate environment.

o    Average net loans as a percentage  of average total assets  decreased  from
     86.1%  during the first  quarter of 2002 to 85.3% during the same period in
     2003.  This  decline was caused in part by the  Company's  purchase of $9.0
     million  in bank owned life  insurance  during the fourth  quarter of 2002.
     Because loans constitute the Company's highest yielding type of asset, this
     change in asset mix unfavorably affected net interest income.

o    Average demand  deposits as a percentage of average total assets  decreased
     from 4.0%  during the first  quarter of 2002 to 3.8% during the same period
     in 2003.  In addition,  average  stockholders'  equity as a  percentage  of
     average total assets  decreased  from 9.6% during the first quarter of 2002
     to 9.4% during the same period in 2003. Relative decreases in interest free
     funding sources unfavorably impact the Company's spreads.

o    The ratio of average  interest  earning assets to average  interest bearing
     liabilities  decreased  slightly from 1.10 during the first quarter of 2002
     to 1.09 during the same period in 2003,  primarily  due to the  purchase of
     bank owned life  insurance.  Decreases  in this  ratio  unfavorably  impact
     average  spreads,  as this indicates  that the Company is earning  interest
     income on a  relatively  smaller  base of assets  versus  the  quantity  of
     liabilities upon which it is paying interest.

         The Company's ratio of net interest income to average  interest earning
assets  rose from 4.24%  during the fourth  quarter of 2002 to 4.27%  during the
first  quarter of 2003,  primarily  due to the first  quarter of 2003 having two
fewer days than the fourth quarter of 2002.  Because a majority of the Company's
interest  earning  assets  accrue  interest  on a 30 / 360  day  basis,  while a
majority of the Company's  liabilities accrue interest on a 365 / 365 day basis,
the  Company  benefits  during  periods  of  fewer  days.  Interest  earned  but
uncollected  on  non-accrual  loans  decreased  slightly  from $18  thousand  at
December 31, 2002 to $16 thousand at March 31, 2003.

                                       40
<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 March 31, 2003 and 2002.

<TABLE>
<CAPTION>
                                      Three Months Ended March 31, 2003         Three Months Ended March 31, 2002
                                   ----------------------------------------  ----------------------------------------
(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)              $     478       $     1         0.84%     $   5,761       $    25         1.74%
   Investment securities                 7,070            42         2.38%         7,788            57         2.93%
   Mortgage backed securities (2)       41,744           216         2.07%        31,373           312         3.98%
   Loans receivable, net (3)           524,143         8,660         6.61%       462,480         8,314         7.19%
   FHLB stock                            4,680            61         5.21%         3,019            47         6.23%
                                     ---------         -----                   ----------        -----

Total interest earning assets          578,115         8,980         6.21%       510,421         8,755         6.86%
                                                       -----                                     -----
Non-interest earnings assets            36,206                                    26,952
                                     ---------                                 ---------

Total assets                         $ 614,321                                 $ 537,373
                                     =========                                 =========

Liabilities & Equity
Interest bearing liabilities:
   NOW accounts                      $  42,817            16         0.15%     $  41,682            41         0.39%
   Savings accounts                     18,498            15         0.32%        19,023            26         0.55%
   Money market accounts               132,888           566         1.70%       107,640           593         2.20%
   Certificates of deposit             251,081         1,536         2.45%       240,440         2,153         3.58%
                                     ---------         -----                   ----------        -----

   Total interest-bearing deposits     445,284         2,133         1.92%       408,785         2,813         2.75%
   FHLB advances                        85,519           666         3.12%        53,682           589         4.39%
   Other borrowings (4)                    428             9         8.41%           213             9         5.63%
                                     ---------         -----                   ----------        -----

Total interest-bearing liabilities     531,231         2,808         2.11%       462,680         3,405         2.94%
                                                       -----                                     -----
Demand deposit accounts                 23,441                                    21,260
Other non-interest bearing
   liabilities                           1,937                                     1,988
                                     ---------                                 ---------

Total liabilities                      556,609                                   485,928

Stockholders' equity                    57,712                                    51,445
                                     ---------                                 ---------

Total liabilities & equity           $ 614,321                                 $ 537,373
                                     =========                                 =========

Net interest income                                  $ 6,172                                   $ 5,350
                                                     =======                                   =======
Interest rate spread (5)                                             4.10%                                     3.92%
Net interest earning assets             46,884                                    47,741
Net interest margin (6)                                 4.27%                                     4.19%
Net interest income /
     Average total assets                               4.02%                                     3.98%
Interest earnings assets /
     Interest bearing liabilities         1.09                                      1.10
</TABLE>

Average balances in the above table were calculated using average daily figures.
--------------------------
(1)  Includes  federal  funds  sold,  money  market fund  investments,  banker's
     acceptances,  commercial  paper,  interest  earning deposit  accounts,  and
     securities purchased under agreements to resell.
(2)  Includes   mortgage   backed   securities   and   collateralized   mortgage
     obligations.
(3)  In computing the average balance of loans receivable, non-accrual loans and
     loans  held for sale have been  included.  Amount is net of  deferred  loan
     fees, premiums and discounts,  and undisbursed loan funds.  Interest income
     on loans  includes  amortized  loan fees and costs,  net, of  $269,000  and
     $26,000 in 2003 and 2002, respectively.
(4)  Includes  federal  funds  purchased,  securities  sold under  agreements to
     repurchase, and borrowings drawn on MBBC's line of credit.
(5)  Interest rate spread represents the difference  between the average rate on
     interest   earning  assets  and  the  average  rate  on  interest   bearing
     liabilities.
(6)  Net interest  margin equals net interest  income before  provision for loan
     losses divided by average interest earning assets.

                                       41
<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 March 31, 2003
                                                                    Compared To
                                                         Three Months Ended March 31, 2002
                                           ----------------------------------------------------------------

                                                     Increase (Decrease) Due To Change In
                                           ----------------------------------------------

                                                                                  Volume               Net
(Dollars In Thousands)                        Volume              Rate            / Rate            Change
                                              ------              ----            ------            ------
<S>                                           <C>               <C>               <C>               <C>
Interest-earning assets
Cash equivalents                              $  (23)           $  (13)           $   12            $  (24)
Investment securities                             (5)              (11)                1               (15)
Mortgage backed securities                       103              (150)              (49)              (96)
Loans receivable, net                          1,109              (673)              (90)              346
FHLB Stock                                        26                (8)               (4)               14
                                              ------            ------            ------            ------

     Total interest-earning assets             1,210              (855)             (130)              225
                                              ------            ------            ------            ------

Interest-bearing liabilities
NOW Accounts                                       1               (25)               (1)              (25)
Savings accounts                                  (1)              (11)                1               (11)
Money market accounts                            139              (135)              (31)              (27)
Certificates of deposit                           95              (682)              (30)             (617)
                                              ------            ------            ------            ------

Total interest-bearing deposits                  234              (853)              (61)             (680)
FHLB advances                                    349              (171)             (101)               77
Other borrowings                                   3                 1                 2                 6
                                              ------            ------            ------            ------

     Total interest-bearing liabilities          586            (1,023)             (160)             (597)
                                              ------            ------            ------            ------

Increase in net interest income               $  624            $  168            $   30            $  822
                                              ======            ======            ======            ======
</TABLE>

                                       42
<PAGE>

Interest Income

         Interest income increased from $8.8 million during the first quarter of
2002 to $9.0 million  during the same period in 2003 despite the lower  interest
rate environment in 2003 and lower prepayment penalties during the first quarter
of 2003 primarily due to a 13.3% rise in average  interest  earning  assets.  In
addition,  the average  yield on loans during the first quarter of 2003 was just
58 basis  points  below the  figure  for the first  quarter  of 2002,  comparing
favorably to an 83 basis point decline in the weighted  average cost of interest
bearing deposits. Loan yields during the first quarter of 2003 were supported by
lifetime rate floors on certain loans, accelerated amortization of deferred loan
fees in conjunction  with a historically  high rate of loan  prepayments,  and a
shift in mix toward generally higher yielding types of loans.

         Interest  income on loans  increased from $8.3 million during the first
quarter of 2002 to $8.7  million  during the same period in 2003.  The effect of
lower  interest  rates was more than  offset  by the  impact of a 13.3%  rise in
average net loan balances outstanding.  The greater loan volume stemmed from the
Company's  strategic  plan of  increasing  the  percentage  of the balance sheet
comprised  of  loans  through   internal   originations,   loan  purchases  from
correspondent banks, and loan participations;  with the latter primarily sourced
through other California community banks.  Management believes stockholder value
is maximized through the extension and effective management of credit.

         Interest income on cash equivalents  decreased from $25 thousand during
the first  quarter  of 2002 to $1  thousand  for the same  period in 2003.  This
decline was due to:

o    lower average  rates  resulting  from the 50 basis point  interest rate cut
     implemented by the Federal Reserve in November 2002

o    lower average volumes  stemming from the Company's  redeploying  funds from
     cash  equivalents  into loans as a result of the demand for credit and into
     securities in order to increase earnings

         Interest  income on  investment  securities  declined from $57 thousand
during the first quarter of 2002 to $42 thousand during the same period in 2003.
The reduced  interest income in part resulted from lower yields on variable rate
corporate trust preferred  securities that reprice  quarterly based upon 3 month
LIBOR,  which was lower in the first quarter of 2003 than during the same period
in 2002. In addition,  the Company purchased short term Agency debentures during
the  first  quarter  of  2002 as a  vehicle  for  investing  short  term  excess
liquidity. No such purchases were made during the first quarter of 2003.

         Interest income on mortgage  backed  securities fell from $312 thousand
during the first  quarter  of 2002 to $216  thousand  during the same  period in
2003, despite a 33.1% rise in average balance, due to a significant reduction in
average rate. The average rate on mortgage backed securities declined from 3.98%
during the first quarter of 2002 to 2.07% during the first quarter of 2003.  The
reduction in average rate stemmed from:

o    turnover in the  portfolio,  as  principal  repayments  on higher  yielding
     securities were reinvested at lower current market rates

o    adjustable rate mortgage backed securities repricing downwards

o    the impact of  historically  high  prepayment  speeds upon mortgage  backed
     securities, especially CMO's, owned at a premium to par, as the accelerated
     prepayment rates on these securities led to faster amortization of purchase
     premiums, which in turn depressed the Company's effective yield

         Dividend  income on FHLB stock  increased from $47 thousand  during the
first  quarter of 2002 to $61  thousand  during  the same  period in 2003 due to
greater average balances of FHLB stock stemming from the expansion in the Bank's
balance  sheet.  The average  dividend rate on FHLB stock  decreased  from 6.23%
during the first  quarter of 2002 to 5.21% during the first  quarter of 2003, or
nearly 400 basis points over the target  federal  funds rate.  The dividend rate
declared on FHLB stock  during  recent  periods has been  relatively  attractive
versus  historical  levels,  thereby  favorably  contributing  to the  Company's
increase in net interest income.

                                       43
<PAGE>

Interest Expense

         Interest  expense  decreased from $3.4 million during the first quarter
of 2002 to $2.8  million  during the same  period in 2003,  as the effect of the
lower  interest  rate  environment  more than offset the impact of  increases in
average interest bearing liabilities.

         Interest  expense on deposits  decreased  from $2.8 million  during the
first  quarter  of 2002 to $2.1  million  during the same  period in 2003.  This
decline was due to the effect of a significant decrease in average interest rate
more  than  offsetting  the  impact  of a rise in  average  balances.  The large
decrease in average rates resulted from the lower interest rate  environment and
a shift in the  composition  of the deposit  portfolio.  Relatively  higher cost
certificates  of deposit  decreased from 55.9% of average total deposits  during
the first  quarter of 2002 to 53.6% during the first quarter of 2003 despite the
Company's issuing $30.9 million (par value) in brokered  certificates of deposit
commencing  after the first quarter of 2002.  Relatively  lower cost transaction
deposit  accounts  experienced  a  complementary  increase,  with  money  market
deposits  experiencing  a  significant  rise.  This  change in deposit  mix is a
fundamental component of the Company's strategic plan.

         At March 31,  2003,  the  Company's  weighted  average  nominal cost of
deposits was 1.76%,  down from 1.94% at December  31, 2002.  The Company paid an
average rate of just 0.15% on its NOW deposits and 0.32% on its savings deposits
during  the first  quarter  of 2003,  highlighting  the  limited  ability of the
Company  to  further  reduce  the cost of this  funding  should  general  market
interest rates decline in future  periods.  At March 31, 2003,  $64.6 million in
certificates  of deposit  with a  weighted  average  nominal  rate of 2.24% were
scheduled to mature in the next  quarter.  This figure  included a $20.0 million
brokered  CD with an  effective  rate of  2.75%  and  $6.0  million  in State of
California deposits.  At March 31, 2003, the longest term permitted by the State
under its time deposit program was six months.

         The Company has worked to more uniformly  distribute its certificate of
deposit  maturities by month in order to facilitate  cash  management  and avoid
concentrated  exposure to capital  market events at any one point in time.  This
objective has been  accomplished  through the use of "odd term"  certificates of
deposit  such as 7, 8, and 19 months,  augmented  by ongoing  sales and periodic
print advertising of longer term certificates of deposit. At March 31, 2003, the
weighted  average cost of the certificate of deposit  portfolio was 2.36%,  down
from 2.63% at December 31, 2002.

         During the second  quarter of 2003,  the Company plans to promote money
market accounts in light of the  historically  low interest rate environment and
the resulting lack of interest by certain customers in committing funds to fixed
rate  certificates of deposit.  The Company's money market deposit  products are
highly  tiered,  encouraging  greater  account  balances in order to earn higher
rates of interest.  Customer  accounts are  accessible  via bilingual  telephone
banking,  Internet banking,  global ATM networks,  mail, and in-branch  service.
During the second quarter of 2003, the Company also intends to continue pursuing
compensating balances,  typically demand deposit balances, for commercial credit
facilities.

         Interest expense on FHLB advances and other  borrowings  increased from
$592 thousand  during the first quarter of 2002 to $675 thousand during the same
period in 2003 due to the effect of lower  average  rates more than being offset
by a significant increase in average balances.  The Company had higher levels of
borrowings outstanding in the first quarter of 2003 than the same period in 2002
due to  borrowings  being  utilized  to fund some of the  growth in the loan and
security portfolios. The Company's average interest rate on other borrowings was
inflated  during  2002 and 2003 as a result  of the  amortization  of loan  fees
(discount  on a  liability)  on MBBC's  $4.0  million  revolving  line of credit
combined with a lack of draws (outstanding balances) on the line.


Provision For Loan Losses

         The Company  recorded a $325 thousand  provision for loan losses during
both the first  quarter of 2003 and 2002.  The Company  determines  its periodic
provision for loan losses based upon its analysis of loan loss reserve adequacy.
Net charge-offs  during the first quarter of 2003 were $51 thousand,  versus $32
thousand  during the first  quarter of 2002.  The  Company's  ratio of loan loss
reserves to total loans was 1.54% at both March 31, 2003 and  December 31, 2002,
and was 1.46% at March 31,  2002.  The nominal  amount of the loan loss  reserve
rose from $8.16 million at December 31, 2002 to $8.44 million at March 31, 2003.

                                       44
<PAGE>

         Factors  contributing to the level of the Company's  provision for loan
losses during the first quarter of 2003 included:

o    a $13.0  million  increase  in gross loans held for  investment  during the
     quarter

o    the  continued  shift in the  Company's  loan mix  away  from its  historic
     concentration in residential mortgages

o    a $58  thousand  increase in the  specific  reserve for a loan secured by a
     hotel / resort within the Company's primary market area, as discussed above
     under "Non-performing assets"

o    the quarter's net charge-offs

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

o    the  origination  of  relatively  larger  loans  by the  Los  Angeles  loan
     production office and by the Company's real estate relationship officers

o    the stage of the economic and credit  cycles,  particularly  as they impact
     California,  which  tends to lag  national  economic  trends,  has a record
     budget  deficit,  and is facing a number of current issues which reduce the
     State's attractiveness to new businesses and business expansion

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

         Factors  moderating  the amount of the provision for loan losses during
the first  quarter of 2003  included  decreases  in the  aggregate  balances  of
criticized and classified  loans and a shift in income property loan mix towards
multifamily  loans.  The Company  utilizes a lower  formula  reserve  factor for
multifamily  loans than for  commercial  real estate  loans  secured by offices,
retail space,  and other types of commercial  property.  At March 31, 2003,  the
Company had no criticized or classified  multifamily  loans, and the Company has
not foreclosed on a multifamily  loan in many years.  No multifamily  loans were
delinquent at March 31, 2003.

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


Non-interest Income

         Non-interest  income totaled $835 thousand  during the first quarter of
2003, comparing favorably to $512 thousand for the same period in 2002.

         Customer  service charge income increased from $351 thousand during the
first quarter of 2002 to $394 thousand  during the same period in 2003. The rise
primarily  resulted from increased  charges on deposit accounts and higher debit
card income. The Company has conducted an ongoing debit card education and sales
campaign in recent  quarters to foster  increased  customer  utilization of this
convenient and flexible service.

                                       45
<PAGE>

         Gains on the sale of loans were $123 thousand  during the first quarter
of 2003, up from $27 thousand during the first quarter of 2002. Mortgage banking
income  during the first quarter of 2003  benefited  from the  historically  low
interest  rate  environment  and a high  general  level  of  mortgage  refinance
activity. Beginning in 2003, the Company commenced offering a greater variety of
residential  mortgages under an expanded  relationship  with a secondary  market
conduit. This expansion was pursued in light of the Company's desire to continue
reducing  the  percentage  of total  loans  held  for  investment  comprised  of
residential  mortgages  while  at the  same  time  continuing  to meet  the home
financing  needs of its local  communities.  The Company  anticipates  continued
favorable results from its mortgage banking operations during the second quarter
of 2003 based upon its pipeline at March 31, 2003 and the continued availability
of fifteen and thirty year fixed rate residential loans at rates below 6.00%.

         Income  from bank owned life  insurance  was $113  thousand  during the
first quarter of 2003, following the Bank's initial investment in December 2002.

       Commissions  from the sale of non-FDIC insured  investment  products were
$28 thousand during the first quarter of 2003, down from $41 thousand during the
first quarter of 2002. The capital markets  environment,  particularly  the weak
equity markets,  and the Company's  continuing vacancies for licensed investment
sales representatives constrained this source of income.

         Loan  servicing  income  totaled $12  thousand  during the three months
ended March 31, 2003, down from $14 thousand during the same period in 2002. The
Company  continues  to sell  the vast  majority  of its long  term,  fixed  rate
residential  loan production into the secondary  market on a servicing  released
basis,  and purchases more interest rate sensitive loans as part of its interest
rate risk management  program.  As a result, the portfolio of loans serviced for
others  continues  to  decline  as loans are paid off.  At March 31,  2003,  the
Company  serviced  $31.4 million in various types of loans for other  investors,
down from $35.3  million at  December  31,  2002 and $37.3  million at March 31,
2002. The Company  maintained loan servicing assets of $31 thousand at March 31,
2003,  and is thus  limited  in its  exposure  of loan  servicing  income to the
accelerated loan prepayment speeds now occurring as a result of the low interest
rate environment and high volume of residential mortgage refinance activity.

         Gain on sale of mortgage backed  securities  declined from $43 thousand
during the first  quarter  of 2002 to $1  thousand  during the first  quarter of
2003.  The Company sold one $494  thousand par value Agency CMO during the first
quarter of 2003, compared to one $2.7 million par value private label CMO during
the first quarter of 2002. The sale in first quarter of 2003 was associated with
the Bank's management of its collateral for certain deposits,  while the sale in
the first quarter of 2002 was in  conjunction  with the Company's  interest rate
risk  management  program.  Although the market  value of many of the  Company's
mortgage  backed  securities  exceeded  historic  carrying cost during the first
quarter of 2003,  the Company  retained the  securities as a means of generating
net interest income.

         Other income rose from $36 thousand during the first quarter of 2002 to
$50 thousand during the same period in 2003. Various factors contributed to this
increase, including:

o    higher  reconveyance fees resulting from the historically high rate of loan
     prepayments

o    letter of credit  fees  from  trade  finance  transactions  following  that
     product's introduction in the second half of 2002

o    the  Company's  recording an $8 thousand loss on the  disposition  of fixed
     assets during the first quarter of 2002

         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 the second  quarter  of 2003  through
further  increases  in  the  portfolio  of  deposit  transaction  accounts,  the
continued sale of consumer  Internet  banking with electronic bill payment,  and
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.

                                       46
<PAGE>

Non-interest Expense

         Non-interest  expense  rose from $3.5  million in the first  quarter of
2002 to $3.6  million in the first  quarter of 2003  primarily  due to increased
compensation  and employee  benefit costs.  Compensation  and employee  benefits
costs were higher due to:

o    one-time  costs  totaling  $152  thousand  associated  with the adoption of
     certain  non-qualified  benefits  for the Chief  Executive  Officer and the
     Chief Financial Officer

o    recurring   costs  of  $30   thousand   associated   with  the  accrual  of
     non-qualified  retirement benefits obligations that were created during the
     first quarter of 2003

o    higher  costs  for the  Bank's  Employee  Stock  Ownership  Plan due to the
     greater  average  market price of the Company's  common  stock;  associated
     expenses  were $181 thousand for the first quarter of 2003 compared to $144
     thousand for the first quarter of 2002

o    greater base salary costs  associated  with staff  additions and changes in
     support of the  Company's  strategic  plan,  particularly  in the Company's
     income property lending and retail banking functions

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

         The Bank's Board of Directors  approved special bonuses of $40 thousand
for the Chief Executive Officer during the first quarters of both 2002 and 2003.
These bonuses were in recognition of the Chief Executive Officer's contributions
to the Bank's  significant  progress in  implementing  the strategic plan and to
encourage the Chief Executive  Officer to continue  business  development in the
Bank's primary market area.

         Deposit insurance premiums decreased from $51 thousand during the first
quarter of 2002 to $19  thousand  during the same  period in 2003,  despite  the
expansion in the  Company's  deposit  portfolio.  The decline  resulted  from an
adjustment in the Company's insurance premium rate effective July 1, 2002.

         Advertising  and promotion  costs totaled $37 thousand during the first
quarter of 2003,  down from $81  thousand  during  the same  period in the prior
year. Advertising expenses during the first quarter of 2003 were concentrated in
print advertising for consumer deposits. Advertising expenses were higher in the
first  quarter of 2002 in  conjunction  with a radio  campaign that focused upon
communicating the Bank's expanded product line.

         In conjunction with the Company's  strategic plan and as an alternative
to print and broadcast media, the Company's employees and Directors continued to
enhance the Bank's visibility during 2003 by their extensive  participation in a
significant number of community events and  organizations.  As just one example,
the  Company  fielded  seven  four-person  teams to raise  money for a community
organization  committed to helping disadvantaged  children in Santa Cruz County.
In the second quarter of 2003,  the Company plans to extensively  participate in
the Human Race Walkathon in both Santa Cruz and Monterey Counties, raising funds
for local charities.

         Other  non-interest  expense  decreased  from $412 thousand  during the
first  quarter of 2002 to $333 thousand  during the first quarter of 2003.  Over
the past year,  the  Company  has  implemented  a number of expense  control and
efficiency  initiatives  that moderated  various  operating  costs. In addition,
costs were lower in the first  quarter of 2003 than during the first  quarter of
2002 for consulting, recruiting, and temporary labor expenses.

         The Company's  efficiency  ratio  improved from 59.13% during the first
quarter of 2002 to 51.67% during the first quarter of 2003.  The  improvement in
this ratio  primarily  stemmed from the  expansion in the Company's net interest
margin,  efficiency  improvements  implemented,  and by the historically  strong
level of non-interest income generated during the first quarter of 2003.

                                       47
<PAGE>

Income Taxes

         The Company's  provision for income taxes  increased from $866 thousand
for the first  quarter of 2002 to $1.2 million  during the first quarter of 2003
primarily due to the rise in pre-tax  income.  The Company's  effective book tax
rate during the first  quarter of 2003 was 40.0%,  compared to 41.8%  during the
same period the prior year. The Company's effective book tax rate is expected to
continue  to be  moderated  in 2003 by the  dividends  earned on bank owned life
insurance.  These  dividends are not subject to normal  Federal and State income
tax.


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,  2002.  There has been no  significant  change in these
disclosures since the filing of that document.


Item 4.  Controls And Procedures

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

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



PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 2.  Changes In Securities

         None.

Item 3.  Defaults Upon Senior Securities

         Not applicable.

                                       46
<PAGE>

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

         On April 11, 2003, the Company issued its 2003 Proxy Statement. Matters
         submitted  to a vote of  security  holders  via  that  Proxy  Statement
         included:

         1.)      The proposed  election of four individuals as Directors of the
                  Company:

                                                                 Proposed Term
                     Individual                                      To Expire
                     ---------------------------------      -------------------
                     McKenzie Moss                                        2004
                     Rita Alves                                           2006
                     Josiah T. Austin                                     2006
                     Diane Simpkins Bordoni                               2006

         2.)      The proposed  ratification  of the  appointment  of Deloitte &
                  Touche LLP as the independent  auditors of the Company for the
                  fiscal year ending December 31, 2003.

         The Company's Annual Meeting of Stockholders is scheduled for Thursday,
         May 22, 2003 at 9:00 AM Pacific Time at the  Watsonville  Woman's Club,
         12 Brennan Street, Watsonville, CA. 95076.

Item 5.  Other Information

         None.

Item 6.  Exhibits And Reports On Form 8-K

         A.  Exhibits

                  10.28    Employment  Agreement With C. Edward Holden Effective
                           May 1, 2003

                  10.29    Employment  Agreement  With Mark R. Andino  Effective
                           May 1, 2003

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

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

         B. Reports On Form 8-K

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

                     1.    Form 8-K dated January 29, 2003.  This Current Report
                           reported  the   Company's   financial  and  operating
                           results  for the fourth  quarter  and the fiscal year
                           2002,  the  date  for  the  2003  Annual  Meeting  of
                           Stockholders,  and the Record  Date for voting at the
                           2003 Annual Meeting of Stockholders.

                     2.    Form 8-K dated  April 7, 2003.  This  Current  Report
                           reported that the Company and the Bank had executed a
                           merger  agreement with  UnionBanCal  Corporation  and
                           Union Bank of  California,  N. A. whereby the Company
                           and  the  Bank  will be  merged  into  Union  Bank of
                           California  subject to the terms of the agreement and
                           following the receipt of regulatory  approvals and an
                           affirmative vote by the Company's stockholders.

                     3.    Form 8-K dated April 24, 2003.  This  Current  Report
                           reported  the   Company's   financial  and  operating
                           results for the first quarter of fiscal year 2003.

                                       49
<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:    May 12, 2003        By:      /s/ C. Edward Holden
                                      --------------------
                                      C. Edward Holden
                                      Chief Executive Officer
                                      President
                                      Vice Chairman Of The Board Of Directors



Date:    May 12, 2003        By:      /s/ Mark R. Andino
                                      ------------------
                                      Mark R. Andino
                                      Chief Financial Officer
                                      Treasurer
                                      (Principal Financial & Accounting Officer)



                                       50
<PAGE>


                Certification of the Principal Executive Officer
                 (Section 302 of the Sarbanes-Oxley Act of 2002)
                      For The Quarter Ended March 31, 2003


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

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

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

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

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

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

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

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

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

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

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

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

Date:  May 12, 2003

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

                                       51
<PAGE>


                Certification of the Principal Financial Officer
                 (Section 302 of the Sarbanes-Oxley Act of 2002)
                      For The Quarter Ended March 31, 2003


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

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

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

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

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

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

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

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

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

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

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

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


Date:  May 12, 2003

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


                                       52