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, 2001

OR

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

For the transition period from ___________ to _________

                         Commission File Number: 0-24802

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

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

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

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

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

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

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock,  as of the latest  practicable  date:  3,419,764  shares of common
stock, par value $0.01 per share, were outstanding as of May 10, 2001.


<PAGE>
                                     MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
                                      INDEX
<S>              <C>
                                                                                                            PAGE

PART I.          FINANCIAL INFORMATION

                 Item 1.   Financial Statements

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

                           Consolidated Statements Of Operations (unaudited) For The Three
                           Months Ended March 31, 2001                                                      5-6

                           Consolidated Statement Of Stockholders' Equity (unaudited) For The
                           Three Months Ended March 31, 2001                                                 7

                           Consolidated Statements Of Cash Flows (unaudited) For The Three
                           Months Ended March 31, 2001 And March 31, 2000                                   8-9

                           Notes To Consolidated Financial Statements (unaudited)                          10-15

                 Item 2.   Management's Discussion And Analysis Of Financial Condition
                           And Results Of Operations                                                       16-41

                 Item 3.   Quantitative And Qualitative Disclosure About Market Risk                        42

PART II.         OTHER INFORMATION

                 Item 1.   Legal Proceedings                                                                42

                 Item 2.   Changes In Securities                                                            42

                 Item 3.   Defaults Upon Senior Securities                                                  42

                 Item 4.   Submission Of Matters To A Vote Of Security Holders                              42

                 Item 5.   Other Information                                                                43

                 Item 6.   Exhibits And Reports On Form 8-K                                                 43

                           (a)  Exhibits

                                   (10.18)  Employment Agreement With C. Edward Holden
                                   (10.19)  Employment Agreement With Mark R. Andino

                           (b)  Reports On Form 8-K

Signature Page                                                                                              44
</TABLE>
                                                             2
<PAGE>
Item 1.  Financial Statements

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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

Cash and cash equivalents                                                               $ 15,781             $ 25,159
Securities available for sale, at estimated fair value:
     Investment securities (amortized cost of $7,699 and $7,696 at
          March 31, 2001 and December 31, 2000, respectively)                              7,300                7,360
     Mortgage backed securities (amortized cost of $47,564 and $43,675
          at March 31, 2001 and December 31, 2000, respectively)                          47,343               42,950
Loans held for sale                                                                          877                   --
Loans receivable held for investment (net of allowances for loan losses of
     $5,839 at March 31, 2001 and $5,364 at December 31, 2000)                           414,435              391,820
Investment in capital stock of the Federal Home Loan Bank, at cost                         2,932                2,884
Accrued interest receivable                                                                3,042                2,901
Premises and equipment, net                                                                8,043                7,375
Core deposit premiums, net                                                                 2,025                2,195
Real estate acquired via foreclosure, net                                                     --                   --
Other assets                                                                               3,801                3,546
                                                                                        --------             --------
TOTAL ASSETS                                                                            $505,579             $486,190
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>

                                                            3
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
MARCH 31, 2001 (UNAUDITED) AND DECEMBER 31, 2000
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Amounts)


                                                                                       March 31,         December 31,
                                                                                            2001                 2000
                                                                                        --------             --------
<S>                                                                                     <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Non-interest bearing demand deposits                                                    $ 17,814             $ 17,065
Interest bearing NOW checking accounts                                                    42,180               41,859
Savings deposits                                                                          21,173               16,503
Money market deposits                                                                     88,850               87,651
Certificates of deposit                                                                  245,495              244,710
                                                                                        --------             --------
   Total deposits                                                                        415,512              407,788
                                                                                        --------             --------
FHLB advances and other borrowings                                                        42,608               32,582
Accounts payable and other liabilities                                                     1,677                1,983
                                                                                        --------             --------
     Total liabilities                                                                   459,797              442,353
                                                                                        --------             --------

Commitments and contingencies

STOCKHOLDERS' EQUITY

Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued                    --                   --
Common stock, $0.01 par value, 9,000,000 shares authorized;
     4,492,085 issued at March 31, 2001 and December 31, 2000;
     3,419,764 outstanding at March 31, 2001 and
     3,321,210 outstanding at December 31, 2000                                               45                   45
Additional paid-in capital                                                                28,300               28,278
Retained earnings, substantially restricted                                               33,324               32,722
Unallocated ESOP shares                                                                     (863)                (920)
Treasury shares designated for compensation plans, at cost (31,082 shares
     at March 31, 2001 and 35,079 shares at December 31, 2000)                              (299)                (338)
Treasury stock, at cost (1,072,321 shares at March 31, 2001 and
     1,170,875 shares at December 31, 2000)                                              (14,360)             (15,326)
Accumulated other comprehensive loss, net of taxes                                          (365)                (624)
                                                                                        --------             --------
     Total stockholders' equity                                                           45,782               43,837
                                                                                        --------             --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $505,579             $486,190
                                                                                        ========             ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>

                                                             4
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(Dollars In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------

                                                          FOR THE THREE MONTHS
                                                              ENDED MARCH 31,
                                                         -----------------------
                                                            2001           2000
                                                         -------        -------
INTEREST AND DIVIDEND INCOME:
   Loans receivable                                      $ 8,890        $ 7,736
   Mortgage backed securities                                808            959
   Investment securities and cash equivalents                297            355
                                                         -------        -------
         Total interest income                             9,995          9,050
                                                         -------        -------
INTEREST EXPENSE:
   Deposit accounts                                        4,684          3,839
   FHLB advances and other borrowings                        559            718
                                                         -------        -------
         Total interest expense                            5,243          4,557
                                                         -------        -------
NET INTEREST INCOME BEFORE PROVISION
     FOR LOAN LOSSES                                       4,752          4,493

PROVISION FOR LOAN LOSSES                                    500            250
                                                         -------        -------
NET INTEREST INCOME AFTER PROVISION
     FOR LOAN LOSSES                                       4,252          4,243
                                                         -------        -------
NON-INTEREST INCOME:
   Gain (loss) on sale of mortgage backed securities
      and investment securities, net                          34            (79)
   Commissions from sales of noninsured products             117            207
   Customer service charges                                  408            280
   Income from loan servicing                                  2             37
   Other income                                               82             56
                                                         -------        -------
         Total non-interest income                           643            501
                                                         -------        -------

See Notes to Consolidated Financial Statements


                                       5
<PAGE>




MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
(Dollars In Thousands, Except Per Share Amounts)
--------------------------------------------------------------------------------


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

                                                           2001             2000
                                                         ------           ------
NON-INTEREST EXPENSE:
   Compensation and employee benefits                     1,658            1,460
   Occupancy and equipment                                  350              312
   Deposit insurance premiums                                49               47
   Data processing fees                                     442              289
   Legal and accounting expenses                            184              209
   Supplies, postage, telephone, and office expenses        190              189
   Advertising and promotion                                 31              101
   Amortization of intangible assets                        170              175
   Consulting                                               242              168
   Other expense                                            526              387
                                                         ------           ------
         Total non-interest expense                       3,842            3,337
                                                         ------           ------
INCOME BEFORE INCOME TAXES                                1,053            1,407

PROVISION FOR INCOME TAXES                                  451              608
                                                         ------           ------
NET INCOME                                               $  602           $  799
                                                         ------           ------

EARNINGS PER SHARE:

     BASIC EARNINGS PER SHARE                            $ 0.19           $ 0.25
                                                         ------           ------
     DILUTED EARNINGS PER SHARE                          $ 0.18           $ 0.25
                                                         ------           ------

See Notes to Consolidated Financial Statements


                                       6
<PAGE>



MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001
<TABLE>
<CAPTION>
(Dollars And Shares In Thousands)
-------------------------------------------------------------------------------------------------------------------------
                                                                                           Treasury
                                                                                             Shares
                                                                                             Desig-             Accum-
                                                                                              nated             ulated
                                                                                                For              Other
                                                                 Addi-              Unal-      Com-            Compre-
                                              Common Stock      tional       Re-  located      pen-            hensive
                                             --------------    Paid-In    tained     ESOP    sation  Treasury  Income
                                             Shares   Amount   Capital  Earnings   Shares     Plans     Stock   (Loss)     Total
                                             ------   ------   -------  --------   ------     -----     -----   ------     -----
<S>                                           <C>        <C>  <C>       <C>       <C>       <C>      <C>        <C>       <C>
Balance At December 31, 2000                  3,321      $45  $ 28,278  $ 32,722   $ (920)   $ (338) $(15,326)  $ (624) $ 43,837

Exercise of stock options                        92                (28)                                   897                869

Director fees paid using treasury stock           7                  8                                     69                 77

Amortization of stock
     compensation                                                   42                 57        39                          138

Comprehensive income:
     Net income                                                              602                                             602

     Other comprehensive income:
          Change in net unrealized loss
               on securities available for
               sale, net of taxes of $195                                                                          279       279

          Reclassification adjustment for
               gains on securities available
               for sale included in income,
               net of taxes of ($14)                                                                               (20)      (20)
                                                                                                                        --------

     Other comprehensive income, net                                                                                         259
                                                                                                                        --------

Total comprehensive income                                                                                                   861
                                                                                                                        --------

                                             ------    -----  --------  --------  -------- --------- --------- -------- --------
Balance at March 31, 2001                     3,420    $  45  $ 28,300  $ 33,324   $ (863)   $ (299) $(14,360)   $(365) $ 45,782
                                             ======    =====  ========  ========  ======== ========= ========= ======== ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>

                                                                    7
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
(Dollars In Thousands)
                                                                                            FOR THE THREE MONTHS
                                                                                               ENDED MARCH 31,
                                                                                           ----------------------

                                                                                             2001          2000
                                                                                           -------        ------
<S>                                                                                         <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                                  $  602        $  799
                                                                                           -------        ------
Adjustments  to reconcile net income to net cash provided by (used in) operating
activities:

Depreciation and amortization of premises and equipment                                        114           111
Amortization of intangible assets                                                              170           175
Accretion of purchase (discounts), net of amortization of purchase premiums                     (8)           13
Amortization of deferred loan fees and costs, net                                              (78)          (76)
Provision for loan losses                                                                      500           250
Federal Home Loan Bank stock dividends                                                         (48)          (44)
Gross ESOP expense before dividends received on unallocated shares                              57            86
Compensation expense associated with stock compensation plans                                   30            47
(Gain) loss on sale of mortgage-backed and investment securities                               (34)           79
Gain on sale of loans                                                                           (5)           --
Origination of loans held for sale                                                          (1,920)         (864)
Proceeds from sales of loans held for sale                                                   1,048           521
Increase in accrued interest receivable                                                       (141)          (77)
(Increase) decrease in other assets                                                           (255)          270
(Decrease) increase in accounts payable and other liabilities                                 (306)          742
Other, net                                                                                    (433)         (151)
                                                                                           -------        ------
     Net cash (used in) provided by operating activities                                      (707)        1,881
                                                                                           -------        ------

CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans held for investment                                                  (22,615)       (8,047)
Purchases of mortgage backed securities available for sale                                 (14,424)       (6,032)
Principal repayments on mortgage backed securities                                           7,660         1,463
Proceeds from sales of mortgage backed securities available for sale                         2,907         3,702
Purchases of premises and equipment                                                           (782)          (48)
                                                                                           -------        ------
     Net cash used in investing activities                                                 (27,254)       (8,962)
                                                                                           -------        ------
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>


                                                         8
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2001 AND MARCH 31, 2000
<TABLE>
<CAPTION>
(Dollars In Thousands)
---------------------------------------------------------------------------------------------------------
<S>                                                                               <C>
                                                                                   FOR THE THREE MONTHS
                                                                                      ENDED MARCH 31,
                                                                                  ----------------------

                                                                                      2001          2000
                                                                                   -------       -------
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase in deposits                                                             7,724        14,595
Proceeds (repayments) from FHLB advances, net                                       10,000            --
(Repayments) proceeds of securities sold under agreements to repurchase, net            --        (2,410)
Proceeds of other borrowings, net                                                       26            --
Cash dividends paid to stockholders                                                     --          (274)
Purchases of treasury stock                                                             --        (1,251)
Sales of treasury stock                                                                833            79
Sales of treasury stock for stock compensation plans                                    --           216
                                                                                   -------       -------
     Net cash provided by financing activities                                      18,583        10,955
                                                                                   -------       -------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS                                  (9,378)        3,874

CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD                                      25,159        12,833
                                                                                   -------       -------
CASH & CASH EQUIVALENTS AT END OF PERIOD                                           $15,781       $16,707
                                                                                   -------       -------


SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:

     Interest on deposits and borrowings                                           $ 5,204       $ 4,381
     Income taxes                                                                      200           550


SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES

Real estate acquired in settlement of loans                                             --            --
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>

                                                    9
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 1:  Basis Of Presentation

         The accompanying  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, 2001 are not  necessarily  indicative of the results that
may be expected for the entire fiscal year or any other interim period.

         Monterey Bay Bancorp, Inc. ("MBBC") is the holding company for Monterey
Bay  Bank  ("Bank").  The  Bank  maintains  a  subsidiary,   Portola  Investment
Corporation  ("Portola").  These  three  companies  are  referred to herein on a
consolidated  basis  as  the  "Company".   The  Company's  headquarters  are  in
Watsonville,  California. The Company offers a broad range of financial services
to  both  consumers  and  small   businesses.   All   significant   intercompany
transactions and balances have been eliminated.  Certain  reclassifications have
been made to prior year's  consolidated  financial  statements to conform to the
current presentation.

         These unaudited  consolidated  financial statements and the information
under the heading  "Item 2.  Management's  Discussion  And Analysis Of Financial
Condition And Results Of Operations" and the information under the heading "Item
3. Quantitative And Qualitative Disclosure About Market Risk" have been prepared
with presumption that users of this interim financial  information have read, or
have access to, the most recent audited  consolidated  financial  statements and
notes thereto of Monterey Bay Bancorp,  Inc. for the fiscal year ended  December
31, 2000  included in the  Company's  Annual  Report on Form 10-K for the fiscal
year ended December 31, 2000.

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


                                       10
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

NOTES TO 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, 2001 and 2000 is
reconciled  in the following  table.  The following  table also  reconciles  the
calculation  of the  Company's  Basic  EPS  and  Diluted  EPS  for  the  periods
indicated.

                                                 For The Three Months
                                                    Ended March 31,
                                              ---------------------------
(In Whole Dollars And Whole Shares)
                                                     2001           2000

Net income                                    $   602,000    $   799,000
                                              -----------    -----------
Average shares issued                           4,492,085      4,492,085

Less weighted average:
   Uncommitted ESOP shares                       (139,258)      (175,195)
   Non-vested stock award shares                  (33,615)       (72,007)
   Treasury shares                             (1,091,971)    (1,106,459)
                                              -----------    -----------
Sub-total                                      (1,264,844)    (1,353,661)
                                              -----------    -----------
Weighted average BASIC shares outstanding       3,227,241      3,138,424

Add dilutive effect of:
   Stock options                                   46,729         11,912
   Stock awards
                                                      589            489
                                              -----------    -----------
Sub-total                                          47,318         12,401
                                              -----------    -----------
Weighted average DILUTED shares outstanding     3,274,559      3,150,825

Earnings per share:

   BASIC EPS                                  $      0.19    $      0.25
                                              ===========    ===========
   DILUTED EPS                                $      0.18    $      0.25
                                              ===========    ===========


                                       11
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 3:  Other Comprehensive Income

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

         Reclassification  adjustments for realized net gains (losses)  included
in other  comprehensive  income for  investment and mortgage  backed  securities
classified  as available  for sale for the three months ended March 31, 2001 and
2000 are summarized as follows:

                                                  Three Months Ended March 31,
                                             ----------------------------------
                                                     2001              2000
                                                    -----            ------
(Dollars In Thousands)

Gross reclassification adjustment                   $  34            $  (79)
Tax (expense) benefit                                 (14)               33
                                                    -----            ------
Reclassification adjustment, net of tax             $  20            $  (46)
                                                    -----            ------

         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,
                                                    --------------------
                                                      2001         2000
                                                     -----       ------
(Dollars In Thousands)

Holding gain (loss) arising during the period, net   $ 279       $ (145)
of tax Reclassification adjustment, net of tax         (20)          46
                                                     -----       ------
Net unrealized gain (loss) recognized in
     other comprehensive income                      $ 259       $  (99)
                                                     -----       ------



                                       12
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 4:  Stock Option Plans

         The Company  maintains the Amended 1995 Incentive Stock Option Plan and
the 1995 Stock  Option Plan For Outside  Directors.  Under  these  plans,  stock
options  typically  vest over a five year time period,  although  other  vesting
periods are  permitted  under the Amended 1995  Incentive  Stock Option Plan and
have been  utilized  by the Company  from time to time.  All  outstanding  stock
options  under both of these plans vest upon a change in control of the Company.
The following tables summarize the combined status of these plans:
<TABLE>
<CAPTION>
                                                             Stock                            Stock       Average
                                                           Options            Stock         Options      Exercise
                           Stock           Stock      Cumulatively          Options       Available      Price Of
                         Options         Options        Vested And     Cumulatively      For Future        Vested
Date                  Authorized     Outstanding       Outstanding        Exercised          Grants       Options
----                  ----------     -----------       -----------        ---------          ------       -------
<S>                      <C>             <C>               <C>              <C>             <C>            <C>
December 31, 2000        757,929         550,236           325,502           80,150         127,543         $9.76
March 31, 2001           757,929         468,687           248,799          171,699         117,543        $10.05
</TABLE>


Activity during the three months ended March 31, 2001 included:

                                   Three Months Ended
                                       March 31, 2001
Granted                                        10,000
Canceled                                           --
Exercised                                      91,549
Vested                                         14,846


         An additional 500 incentive stock options were approved for issuance at
the April 26, 2001 meeting of the Board of Directors of MBBC. These options were
issued, consistent with the 1995 Incentive Stock Option Plan, as Amended, with a
strike price of 110% of the fair market value of the  Company's  common stock on
the date of grant.

         The exercise price of individual vested stock options ranged from a low
of $9.10 per share to a high of $16.60 per share as of March 31, 2001.


                                       13
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 5:  Stock Award Plans

         The  Company  maintains  the  Performance  Equity  Program  ("PEP") for
Officers and  employees.  Awards under the PEP  typically  vest over a five year
time period, although from time to time the Company has utilized unallocated PEP
shares  for   immediately   vested  stock  grants  in  lieu  of  cash  incentive
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. The following table summarizes the status of this plan:

                                                                         Stock
                                                           Stock        Awards
                            Stock           Stock         Awards     Available
                           Awards          Awards   Cumulatively    For Future
Date                   Authorized     Outstanding         Vested        Grants
----                   ----------     -----------         ------        ------
December 31, 2000         141,677          35,079        106,598            --
March 31, 2001            141,677          31,082        110,595            --


         Activity during the three months ended March 31, 2001 included:

                     Three Months Ended
                         March 31, 2001
                         --------------
Granted                           1,325
Canceled                          1,325
Vested                            3,997


         During the three  months  ended  March 31,  2001,  a total of 1,325 PEP
shares were  forfeited.  The Company used these shares in lieu of cash incentive
compensation  by issuing an  identical  number of  immediately  vested PEP stock
grants.

         A total of 1,350 PEP shares were  forfeited  in April  2001.  It is the
Company's  intention to utilize these shares in lieu of cash compensation during
2001.


                                       14
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 6:  Commitments & Contingencies

         At March 31, 2001,  commitments maintained by the Company included firm
commitments  to originate  $11.5  million in various types of loans and optional
commitments  to sell $877  thousand  in fixed rate  residential  mortgages  on a
servicing released basis. The Company maintained no firm commitments to purchase
loans or securities,  to assume  borrowings,  or to sell securities at March 31,
2001.

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

NOTE 7:  Recent Accounting Pronouncements

         Effective  January 1, 2001, the Company adopted  Statement of Financial
Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and
Hedging  Activities".  SFAS No.  133,  as amended,  established  accounting  and
reporting  standards for derivative  instruments,  including certain  derivative
instruments embedded in other contracts, and for hedging activities.  Under SFAS
No.  133,  as  amended,  certain  contracts  that were not  formerly  considered
derivatives  may now meet the  definition of a derivative.  The adoption of SFAS
No. 133,  as  amended,  did not have a  significant  impact  upon the  Company's
financial condition, results of operations, or cash flows.


NOTE 8:  Reclassifications

         Certain  amounts in the December 31, 2000 and March 31, 2000  financial
statements  have been  reclassified  to conform to the March 31, 2001  financial
statement presentation.


                                       15
<PAGE>
Item 2.  Management's Discussion And Analysis Of Financial Condition And Results
         Of Operations


Forward-looking Statements

         Discussions  of  certain  matters  in  this  Report  on Form  10-Q  may
constitute  forward-looking  statements within the meaning of the Section 27A of
the  Securities  Act of 1933, as amended,  and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange  Act"), and as such, may involve
risks and uncertainties.  Forward-looking statements, which are based on certain
assumptions  and  describe  future  plans,  strategies,  and  expectations,  are
generally  identifiable  by the use of  words  or  phrases  such  as  "believe",
"expect",  "intend",  "anticipate",   "estimate",  "project",  "forecast",  "may
increase",  "may fluctuate",  "may improve" and similar expressions or future or
conditional  verbs  such  as  "will",  "should",  "would",  and  "could".  These
forward-looking  statements  relate to, among other things,  expectations of the
business environment in which Monterey Bay Bancorp,  Inc. operates,  projections
of  future   performance,   potential   future  credit   experience,   perceived
opportunities in the market, and statements  regarding the Company's mission and
vision. The Company's actual results,  performance,  and achievements may differ
materially from the results,  performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of factors. These factors
include,  but are not limited to, changes in interest  rates,  general  economic
conditions,  the demand for the  Company's  products  and  services,  accounting
principles or  guidelines,  legislative  and  regulatory  changes,  monetary and
fiscal policies of the US Government,  US Treasury,  and Federal  Reserve,  real
estate markets,  competition in the financial services industry, and other risks
detailed  in the  Company's  reports  filed  with the  Securities  and  Exchange
Commission  ("SEC") from time to time,  including the Annual Report on Form 10-K
for the fiscal year ended December 31, 2000.  These factors should be considered
in evaluating the forward-looking  statements,  and undue reliance should not be
placed on such  statements.  The Company does not  undertake,  and  specifically
disclaims any obligation,  to update any  forward-looking  statements to reflect
occurrences  or  unanticipated  events or  circumstances  after the date of such
statements.

General

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

         At March 31,  2001,  the  Company had $505.6  million in total  assets,
$415.3 million in net loans  receivable,  and $415.5 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 branch offices,  11 automated
teller   machines   ("ATM's")   including  two   stand-alone   ATM's,   and  its
administrative  facilities.  In addition,  the Company  supports  its  customers
through  bilingual  (English  / Spanish)  24 hour  telephone  banking,  Internet
banking,  electronic  bill payment,  and ATM access through an array of networks
including STAR, CIRRUS,  and PLUS.  Through its network of banking offices,  the
Bank  emphasizes   personalized   service  focused  upon  two  primary  markets:
households and small  businesses.  The Bank offers a wide  complement of lending
and deposit  products.  The Bank also supports its customers by functioning as a
federal tax depository,  selling and purchasing foreign banknotes, issuing debit
cards,  providing domestic and international  collection services, and supplying
various forms of electronic funds transfer. Through its wholly-owned subsidiary,
Portola  Investment  Corporation  ("Portola"),  the Bank provides,  on an agency
basis,  mortgage  life  insurance,  fire  insurance,  and a large  selection  of
non-FDIC insured  investment  products  including fixed and variable  annuities,
mutual funds, and individual securities.


                                       16
<PAGE>
         The Company's  revenues are primarily derived from interest on its loan
and  mortgage  backed  securities  portfolios,  interest  and  dividends  on its
investment  securities,  and fee income associated with the provision of various
customer  services.  Interest paid on deposits and  borrowings  constitutes  the
Company's  largest type of expense.  The Company's  primary sources of funds are
deposits,  principal and interest payments on its asset portfolios,  and various
sources of wholesale  borrowings  including  FHLB advances and  securities  sold
under  agreements  to  repurchase.  The  Company's  most  significant  operating
expenditures are its staffing expenses and the costs associated with maintaining
its branch  network.  During the three months ended March 31, 2001,  the Company
incurred non-recurring operating costs associated with the March 2001 conversion
of its primary  data  processing  systems of  approximately  $408  thousand;  in
addition to the  approximately  $108 thousand of similar  costs  incurred in the
fourth quarter of 2000.

Recent Developments

         Recent regulatory and financial industry developments have included the
following:

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

o    The  potential  approval  for  interest  to be  paid on  business  checking
     accounts,  expanding the number of monthly transactions  permitted for FDIC
     insured money market accounts, and the payment of interest on reserves held
     at Federal Reserve Banks also remains stalled in Congress.

o    The OTS in March issued an interim final rule that  eliminated the previous
     mandated regulatory  liquidity  calculation with a general requirement that
     thrift  institutions  maintain  sufficient  liquidity.  This rule  provides
     greater  operational  flexibility  for the Bank, as certain cash equivalent
     and  investment  positions  no longer need be  maintained  solely to ensure
     conformity with the requirements under the prior rule.

o    The  possible  revised  regulation  of or reduced  government  support  for
     certain  government  sponsored  enterprises,  most notably the Federal Home
     Loan  Mortgage  Corporation  ("FHLMC")  and the Federal  National  Mortgage
     Association ("FNMA") continues to be debated in Congress,  led by Louisiana
     Congressman Richard Baker.

o    New  capital  and  membership  rules  for the FHLB  System  continue  to be
     drafted,  with  implementation  anticipated  during  2001.  The  FHLB-SF is
     currently developing its specific capital plan.

o    The  FHLB-SF   became  the  tenth  FHLB  to  participate  in  the  Mortgage
     Partnership Finance ("MPF") Program, whereby the FHLB-SF acquires interests
     in  conventional  conforming and government  program  qualified  fixed rate
     mortgages sold by member institutions such as the Bank.

o    Financial  services  firms,  including  the  Bank,  are in the  process  of
     implementing new federal regulations  governing customer privacy,  with the
     new  procedures  required  to take  effect no later than July 1, 2001.  The
     State of California legislature has been considering  potentially different
     and / or more restrictive privacy requirements.

o    A possible  increase in (e.g.  from $100,000 to $200,000 per  depositor) or
     broadening of (e.g. all public agency deposits)  federal deposit  insurance
     coverage,  perhaps combined with a new formula for FDIC insurance premiums,
     is  under  evaluation  at the  FDIC,  where  the  Bush  Administration  has
     nominated  Texas  banker Don Powell to succeed  Donna  Tanoue as  Chairman.
     Congress  also  continues to debate the merger of the Bank  Insurance  Fund
     ("BIF") and Savings Association Insurance Fund ("SAIF") of the FDIC.

o    The OTS has  proposed  changes  to capital  regulations  with the intent to
     eliminate  unnecessary  capital  burdens  and  to  align  the  OTS  capital
     regulations  more  closely  to those  of the  other  financial  institution
     regulators. Depending upon their final content, these new regulations could
     provide the Bank with added  flexibility  in its  management  of regulatory
     capital.


                                       17
<PAGE>
         At the Company's annual meeting of stockholders on May 24, 2001, Eugene
R. Friend and P. W. Bachan  will retire from the Board of  Directors  after many
decades of service. The intention of the Board is to reduce its size from twelve
to ten members following the two retirements.

         In April  2001,  the Bank  collected  in full on two loans that were on
non-accrual  status at March 31,  2001.  One loan was a  commercial  real estate
construction  loan with an outstanding  principal  balance of $2.85 million.  At
March 31, 2001, the Bank had a $600 thousand  specific  reserve  established for
this loan.  The second loan was a commercial  real estate  mortgage loan with an
outstanding  principal balance of $544 thousand.  Both loans were located in the
Bank's primary market area. In conjunction with both payoffs,  the Bank received
all principal, interest, fees, and expense reimbursements due.

State of California Energy Crisis

         The California  legislature  and Governor Gray Davis continue to debate
possible  solutions to the State's  energy  crisis.  The largest  utility in the
State, Pacific Gas & Electric Company ("PG&E"), has filed bankruptcy,  while the
State is attempting to purchase certain assets,  including  transmission  lines,
from Southern  California Edison.  Energy suppliers are owed billions of dollars
by PG & E alone,  while the State has been  losing  millions  of dollars per day
purchasing  wholesale  power and then  selling it to end users at lower  prices.
Standard & Poors  recently  decreased  the State's  credit  rating,  potentially
increasing the State's cost of borrowing in the capital markets.

         Officials  at the Federal  Energy  Regulatory  Commission  ("FERC") and
California's  federal  congressional  representatives  have  issued  a range  of
statements and positions,  including several regarding the potential  regulation
of wholesale  energy  prices.  At this time, the Company cannot predict what the
price and  availability of energy might be in California  during the traditional
summer peak demand period, and the impact of the energy crisis upon the pace and
nature of economic activity in the State.

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

         As subsequently  discussed in this Report,  the uncertain impact of the
California  energy crisis upon  consumers and  businesses  and the pace of State
economic  activity was one factor in the Company's  increasing its allowance for
loan  losses  during the first  quarter of 2001.  The Bank is now  including  an
analysis of borrowers' exposure to energy availability and prices as part of its
underwriting  process for new loans, and as part of its asset review process for
existing loans.  During the second and third quarters of 2001, the Company plans
to  conduct a loan  portfolio  review  with the intent to  identify  significant
credits that might be particularly  and materially  unfavorably  impacted by the
California  energy  crisis.  Depending  upon the  results  of the review and the
effects of the California energy crisis,  the Company might need to increase its
levels of  provision  for loan losses in future  periods  above those that would
have been required in the absence of the California energy crisis.

         The Company is also  exposed to the  California  energy  crisis via the
State's  maintenance of $14.0 million in time deposits with the Bank as of March
31, 2001. Should the State need to withdraw such deposits,  replacement  funding
for the Bank would likely be more expensive.


                                       18
<PAGE>
Overview Of Business Activity

         During the first  quarter  of 2001,  the  Company  achieved a number of
milestones in its strategic  plan of  transforming  a 75 year old savings & loan
into a community based financial services firm:

1.   In February 2001, a new senior executive with ties to and previous business
     experience  in the  Monterey  Bay Area was  recruited  to manage the Bank's
     Retail  Banking,   Professional   Banking,   and   alternative   investment
     activities.  This  executive  completed  the  Bank's new  management  team,
     comprised of seasoned commercial bankers with significant experience across
     a range of industry functions.

2.   Also in February  2001,  Larry A.  Daniels was  appointed a Director of the
     Company and the Bank. Mr. Daniels is President of long-established  Daniels
     & House Construction Company, headquartered in Monterey, California.

3.   During March 2001,  the Bank  completed the  conversion of its primary data
     processing  system from an external  service  bureau to an in-house  system
     built upon  client / server and  relational  database  technology.  The new
     system supports a broader range of financial products and services than the
     prior system while also  presenting  the potential  for enhancing  customer
     service  and  improving  operating  efficiency.  All of the Bank's loan and
     deposit accounts were being serviced on the new system by March 31, 2001.

4.   Revamped  financial  products and a revised fee and service charge schedule
     implemented  with the new  computer  system  provide a range of account and
     service  options for customers  while more closely  correlating the pricing
     for the products with the Company's costs of providing them.

5.   Capital  downstreamed  from MBBC to the Bank  during the fourth  quarter of
     2000 was leveraged  into increased  lending in  California,  resulting in a
     record balance for loans outstanding.  Among the new loans generated during
     the  first  quarter  of 2001  were a number  of lines  of  credit  to local
     businesses,  as the  Company  continued  to expand its  Commercial  Banking
     operations.  New business banking relationships contributed toward a record
     level of deposits at March 31, 2001.

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

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

A.   The Special Residential Loan Pool, originally $40.0 million at its purchase
     in 1998,  (see "Special  Residential  Loan Pool")  comprised of residential
     mortgages with a lower credit quality than typically  accepted by the Bank,
     paid down to $10.1  million by April 20, 2001,  compared with $16.5 million
     outstanding  at December 31, 2000,  with the seller / servicer for the pool
     continuing to meet its obligation to absorb all credit losses.

B.   The  Company  established  an  initial  arbitration  date in June,  2001 to
     address  claims  by  the  former  President  and  Chief  Operating  Officer
     regarding  payments  due under his  employment  contracts.  This  issue has
     required  significant  management time and generated additional legal costs
     over the past six months.


                                       19
<PAGE>
         Looking forward at the remainder of 2001, the Company plans to complete
the  installation  of the  technology and human  infrastructure  integral to the
Bank's conversion into a community focused  commercial bank. In conjunction with
its strategic plan, the Company also intends to accelerate the transformation of
its  balance  sheet  toward a greater  amount of income  property  and  business
lending funded with a higher  percentage of transaction  accounts.  In addition,
the Company has  targeted  improvements  in its  efficiency  ratio and return on
stockholders'  equity,  two key  measures  of  financial  performance  where the
Company has lagged  peer  institutions.  However,  the  Company  cannot  provide
assurance  regarding its future results in these regards,  with such uncertainty
magnified by the economic and energy issues facing California in 2001.

Changes In Financial Condition From December 31, 2000 To March 31, 2001

         Total assets  increased $19.4 million,  or 4.0%, from $486.2 million at
December 31, 2000 to a record  $505.6  million at March 31,  2001.  This rise in
assets was funded with a combination of greater deposits,  increased borrowings,
and an expansion in stockholders' equity.

         Cash & cash  equivalents  decreased  from $25.2 million at December 31,
2000 to $15.8  million at March 31, 2001.  The Company  maintained a higher than
usual balance of cash & cash  equivalents at the end of 2000 in part due to loan
prepayments  occurring late in the year and the Company's not reinvesting  those
proceeds into longer term assets before year end 2000.

         Investment  securities  available for sale decreased slightly from $7.4
million at December 31, 2000 to $7.3 million at March 31, 2001  primarily due to
the change in the fair market value of the securities. At both December 31, 2000
and March 31, 2001, the Company's  investment security portfolio was identically
composed of two floating  rate  corporate  trust  preferred  bonds rated "A-" or
better by Standards & Poors.

         Mortgage backed  securities  available for sale rose from $43.0 million
at December 31, 2000 to $47.3 million at March 31, 2001. The  Company  purchased
$14.4 million in primarily  Agency mortgage backed  securities  during the first
three months of 2001:

o        in anticipation of the lower interest rate  environment and a potential
         increase in future prepayments on mortgage related assets

o        to effectively utilize some of the $2.1 million in capital downstreamed
         from MBBC to the Bank during the fourth quarter of 2000

o        to add  assets to the  Bank's  balance  sheet  that  qualify  under the
         Qualified Thrift Lender Test

o        to provide  collateral for pledging under various  secured  deposit and
         borrowing programs

o        in  conjunction   with  the  Bank's   activities  under  the  Community
         Reinvestment Act ("CRA")

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

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


                                       20
<PAGE>
         During the first quarter of 2001, the Bank sold a $2.9 million position
in a long term,  fixed rate Agency mortgage backed security in conjunction  with
its asset / liability management program. The Company's management believed that
re-allocating the asset duration from the security to new loans would facilitate
better  community  support  and  derive a  higher  yield  for the same  level of
exposure to future increases in general market interest rates.

         Loans held for sale  increased  from none at December  31, 2000 to $877
thousand  at  March  31,  2001.  The  Company's  pace of  mortgage  banking  has
accelerated in 2001 in conjunction with the Federal Reserve's interest rate cuts
and  declines in mortgage  rates from their  levels of one year ago,  generating
borrower  impetus to refinance.  The Company sells most of its long term,  fixed
rate  residential  mortgage  production into the secondary market on a servicing
released  basis.  All loans held for sale at March 31,  2001 were  matched  with
optional commitments to deliver such loans into the secondary market.

         Net loans  receivable  held for investment  rose from $391.8 million at
December 31, 2000 to a record  $414.4  million at March 31,  2001.  The increase
resulted  from  a  combination  of  loan  originations  and  pool  purchases  of
residential, multifamily, and commercial real estate loans secured by properties
in  California.  The Bank  conducted  the pool  purchases  to leverage  the $2.1
million in capital downstreamed from MBBC during the fourth quarter of 2000. The
Company  followed its customary  underwriting  policies in evaluating these loan
pools.

         Net loans as a  percentage  of total  assets  increased  from  80.6% at
December 31, 2000 to 82.1% at March 31, 2001, in conjunction  with the Company's
strategy  supporting its interest  margin,  fostering  economic  activity in its
local  communities,  and effectively  utilizing the Bank's capital.  The Company
slowed  its long  term loan  portfolio  diversification  away  from  residential
mortgages during the first quarter of 2001 in part due to management's  concerns
about the future status of the California  economy.  Residential loans comprised
38.5% of gross loans at March 31, 2001,  up from 37.8% at December 31, 2000.  In
contrast,  construction and land loans, combined,  decreased from 17.8% of gross
loans at December 31, 2000 to 16.3% of gross loans at March 31, 2001.

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

         During the second  quarter of 2001,  the  Company  intends to  continue
pursuing its long term shift in loan mix toward income property lending,  with a
particular focus on mortgages secured by multifamily buildings and various types
of  commercial  real estate  that is other than  single-use.  Multifamily  loans
increased  from $76.7 million at December 31, 2000 to $84.4 million at March 31,
2001.  Cash flows for apartment  buildings in many parts of California have been
bolstered  in the past  year by a  combination  of  lower  debt  service  due to
declining  interest  rates and  greater  revenue due to a  combination  of lower
vacancy rates and higher rental rates.  Construction  of new  apartments in many
parts of California  has lagged demand,  resulting in more  favorable  financial
conditions for apartment building owners.

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


                                       21
<PAGE>
         Additional  information regarding the composition of the Company's loan
portfolio is presented in the following table:

                                                  March 31,       December 31,
                                                       2001               2000
(Dollars In Thousands)

Held for investment:
   Loans secured by real estate:
      Residential one to four unit                 $170,843           $160,155
      Multifamily five or more units                 84,358             76,727
      Commercial and industrial                     105,727            102,322
      Construction                                   57,857             59,052
      Land                                           14,668             16,310

   Sub-total loans secured by real estate           433,453            414,566
                                                   --------           --------
   Other loans:
      Home equity lines of credit                     5,770              5,631
      Loans secured by deposits                         464                494
      Consumer lines of credit, unsecured               190                175
      Business term loans                             1,694              1,641
      Business lines of credit                        3,602              1,438
                                                   --------           --------
   Sub-total other loans                             11,720              9,379

   Sub-total gross loans held for investment        445,173            423,945

   (Less) / Plus:
      Undisbursed construction loan funds           (24,757)           (26,580)
      Unamortized purchase premiums, net of
        purchase discounts                               49                 21
      Deferred loan fees and costs, net                (191)              (202)
      Allowance for estimated loan losses            (5,839)            (5,364)
                                                   --------           --------
Loans receivable held for investment, net          $414,435           $391,820
                                                   --------           --------
Held for sale:
   Residential one to four unit                     $   877            $    --
                                                   ========           ========

         Premises and  equipment,  net,  increased from $7.4 million at December
31,  2000 to $8.0  million  at March 31,  2001  primarily  due to  hardware  and
software  purchases  in support  of the new core  processing  system.  In future
periods,  third party data processing expenses are expected to decrease due to a
reduction  in  service  bureau  charges,  while  depreciation  and  amortization
expenses are expected to increase in conjunction with the new fixed assets.

         Core deposit premiums,  net, declined by $170 thousand during the first
three  months  of 2001 in  conjunction  with  periodic  amortization.  Under OTS
regulations,   intangible  assets,  including  core  deposit  premiums,   reduce
regulatory  capital,  resulting in lower  regulatory  capital  ratios than would
otherwise be the case.


                                       22
<PAGE>
         Total deposits  increased from $407.8 million at December 31, 2000 to a
record $415.5 million at March 31, 2001. Key trends within the deposit portfolio
included:

o    Non-interest  bearing  demand  deposits  increased  from  $17.1  million at
     December  31,  2000 to $17.8  million  at March  31,  2001.  This  rise was
     supported by balances maintained by new commercial  business customers,  as
     the Bank  often  requires  a certain  amount of  compensating  balances  in
     conjunction  with a  commercial  credit  facility.  This  increase was also
     supported by the Bank's  issuing  checks on its own account  following  the
     computer  systems  conversion.  Outstanding  checks drawn on the Bank's own
     account are accounted for as demand deposits.

o    Interest bearing NOW checking account balances increased from $41.9 million
     at  December  31,  2000 to $42.2  million at March 31,  2001.  The  Company
     revamped  its checking  products in  conjunction  with the core  processing
     system conversion,  expanding the use of tiered interest rates as a vehicle
     for encouraging  customers to increase their balances and concentrate their
     accounts with the Bank. In addition, the Bank introduced bilingual (English
     and Spanish) telephone banking and continued to market Internet banking and
     electronic bill payment.

o    Savings deposits increased from $16.5 million at December 31, 2000 to $21.2
     million  at  March  31,  2001.  This  increase  was  primarily  due  to the
     re-categorization  of  approximately  $4.2  million in balances  from money
     market  accounts  to savings  accounts  in  conjunction  with the  computer
     systems  conversion.  By the end of the first quarter of 2001,  the Company
     eliminated its passbook based deposit  accounts in favor of statement based
     accounts that integrate effectively with global ATM networks,  debit cards,
     Internet  banking,  and  telephone  access.  Management  also believes that
     statement based deposit  products  present a lower  likelihood of operating
     losses and provide a more regular  opportunity  for customer  communication
     and marketing.

o    Money market deposits rose from $87.7 million at December 31, 2000 to $88.9
     million at March 31, 2001,  with the amount of increase  constrained by the
     aforementioned  re-categorization  of certain  deposit  accounts  discussed
     above.  During the first  quarter of 2001,  the  Company  repositioned  its
     consumer  money  market  accounts  to better  serve three  distinct  market
     segments,  with the  accounts  designed for each market  segment  including
     tiered interest rates and comprehensive and flexible access.

o    Certificate of deposit balances  increased  slightly from $244.7 million at
     December  31, 2000 to $245.5  million at March 31,  2001.  The Company also
     redesigned its certificate of deposit  products during the first quarter of
     2001, providing the opportunity for customers to earn higher interest rates
     by increasing their balances,  expanding their  relationship with the Bank,
     and / or  incrementally  extending the term of their  accounts.  During the
     first  quarter  of  2001,  the  Company  experienced   particularly  active
     competition   for   certificates   of  deposit   from   several   financial
     institutions,  especially  one large thrift that  regularly  offered  above
     market interest rates on shorter term certificates of deposit.

o    The  Company's  sales and marketing  efforts for deposits  during the first
     three  months of 2001 were  focused on  attracting  additional  transaction
     accounts. Transaction accounts constituted 40.9% of total deposits at March
     31, 2001, up from 40.0% at December 31, 2000. Effecting a change in deposit
     mix is integral to the Company's  strategic  plan, as transaction  accounts
     provide  for a lower  cost of funds  versus  most  other  funding  sources,
     generate fee income, furnish opportunities for cross-selling other products
     and services to customers,  and are typically  less interest rate sensitive
     than many other funding sources.


                                       23
<PAGE>
o    During the first  quarter  of 2001,  the  Company  generally  targeted  its
     deposit rates at a higher  competitive  market percentile (i.e.  relatively
     higher than usual) due to concerns about potential customer impact stemming
     from the computer systems conversion. For example, while the Company worked
     to minimize the customer impact of branch staff being allocated to training
     on the  new  computer  system  in  advance  of its  implementation,  branch
     staffing was lighter than targeted levels during parts of the first quarter
     of 2001.

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

o    The new fee & service charge schedule implemented with the computer systems
     conversion  is designed to allow the  customer to select the  products  and
     services which best meet their  financial  needs while aligning the revenue
     from the various products with the Company's cost of providing them.

o    The Company  experienced a seasonal  increase in deposit  account  balances
     during  March 2001,  as  customers  built up  liquidity in advance of April
     income tax and property tax  payments.  Income tax refunds also  seasonally
     contribute to a rise in deposit  balances  during the first quarter of each
     year.

         The  Company's  ratio of loans to  deposits  increased  from  96.08% at
December  31,  2000 to 99.95% at March  31,  2001,  as the  strong  loan  growth
eclipsed  the  expansion  in  deposits.  In light of this ratio,  the Company is
exploring  various  strategic  alternatives  for  increasing  its funding  base,
including new sites for traditional  stand-alone branches and sites for branches
domiciled within larger retail outlets. Early in the second quarter of 2001, two
branch sales  managers with years of  experience in the Company's  local markets
were hired.  The  objectives  for these new branch  sales  managers  include the
identification  of new distribution and sales locations to enhance the Company's
presence in the  Greater  Monterey  Bay Area.  No  assurance  can,  however,  be
provided  that  the  Company  will  be   successful   in  obtaining   additional
distribution and sales locations.

         Borrowings  increased  from $32.6 million at December 31, 2000 to $42.6
million  at March 31,  2001,  primarily  due to the  Bank's  acquiring  two $5.0
million bullet (non-amortizing) FHLB advances with a term of one year during the
first  quarter of 2001.  These new advances  were acquired to fund the growth in
the loan portfolio and to commence layering in borrowing  maturities during 2002
as part of the Bank's cash management and asset / liability management programs.
The new  advances  are  collateralized  by assets  pledged  from the Bank's loan
portfolio.

         Total stockholders' equity increased from $43.8 million at December 31,
2000 to $45.8 million at March 31, 2001.  Factors  contributing  to the increase
included:

o    $602 thousand in 2001 year to date net income

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

o    the payment of Directors retainer fees with Company common stock

o    the  exercise  of  ninety-two  thousand  vested  stock  options  by  former
     employees, generating $869 thousand in additional stockholders' equity

o    $259  thousand  in  other  comprehensive  income,  net,  stemming  from the
     appreciation  in the  portfolios of securities  classified as available for
     sale,  which in turn resulted from the decline in general  market  interest
     rates during the first quarter of 2001


                                       24
<PAGE>
         The Company plans to continue  utilizing stock  compensation in lieu of
cash  compensation  for  certain  payments  during the  second  quarter of 2001.
Management believes that compensating employees in stock fosters an alignment of
employee interests with improvements in long term stockholder value. The Company
did not  conduct any share  repurchases  during the first  quarter of 2001.  The
Company's  tangible book value per share  increased  from $12.54 at December 31,
2000 to $12.80 at March 31, 2001.

Interest Rate Risk Management And Exposure

         The table below  presents an overview of the interest rate  environment
during the fifteen months ended March 31, 2001. The 12MAT and 11th District Cost
Of Funds Index ("COFI") are by nature lagging indices that trail changes in more
responsive  interest rate indices such as those  associated with the Treasury or
LIBOR markets.

Index/ Rate             12/31/99  3/31/00  6/30/00  9/30/00  12/31/00  3/31/01

3 month Treasury bill      5.31%    5.87%    5.85%    6.20%     5.89%    4.28%

6 month Treasury bill      5.73%    6.14%    6.22%    6.27%     5.70%    4.13%

1 year Treasury bill       5.96%    6.23%    6.05%    6.08%     5.36%    4.11%

2 year Treasury note       6.24%    6.47%    6.36%    5.97%     5.09%    4.18%

5 year Treasury note       6.34%    6.31%    6.18%    5.85%     4.97%    4.56%

10 year Treasury note      6.44%    6.00%    6.03%    5.80%     5.11%    4.92%

30 year Treasury bond      6.48%    5.83%    5.90%    5.88%     5.46%    5.44%

Target federal funds       5.50%    6.00%    6.50%    6.50%     6.50%    5.00%

Prime rate                 8.50%    9.00%    9.50%    9.50%     9.50%    8.00%

12MAT                      5.08%    5.46%    5.79%    6.04%     6.11%    5.71%

COFI                       4.85%    5.00%    5.36%    5.55%     5.62%    5.20%

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

         In recent  quarters,  the Company has maintained a relatively  balanced
exposure to changes in general  market  interest  rates as measured by potential
prospective  changes in net portfolio value, also referred to as market value of
portfolio equity. These potential prospective changes in net portfolio value are
calculated  based upon  immediate,  sustained,  and parallel  shifts in the term
structure of interest  rates,  often referred to as the "yield curve".  In other
words, these calculations  highlight that the fair value of the Company's assets
exhibits about the same volatility as does its liabilities. However, in addition
to the overall  direction of general market interest rates,  changes in relative
rates (i.e.  the slope of the term  structure  of interest  rates) and  relative
credit spreads also impact net portfolio value and the Company's profitability.

         As  highlighted  in the  above  table,  over the past  fifteen  months,
general market interest rates first increased  rapidly in early 2000,  reached a
plateau approximately during the third quarter of 2000, and then fell rapidly in
the first quarter of 2001.  Throughout this time period,  the impact of changing
rates on the Company's interest margin was moderate, providing empirical support
for the financial modeling previously described.


                                       25
<PAGE>
         During the first  quarter of 2001,  the Company  sought to maintain its
relatively  balanced  interest rate risk profile by avoiding adding  significant
volumes of long term,  fixed rate assets to the balance sheet.  Long term, fixed
rate assets are  relatively  more  challenging  to match fund, and therefore can
expose the Company to interest rate risk in rising  interest rate  environments.
During  the  first  three  months of 2001,  the  Company  continued  to sell the
majority  of its long term,  fixed rate  residential  loan  production  into the
secondary  market  on a  servicing  released  basis.  Mortgage  backed  security
purchases were primarily either short term,  fixed rate or longer maturity,  but
floating rate.

         The Company's  strategic plan of transforming the Bank into a community
focused  financial  services  provider by nature  presents a lower interest rate
risk profile than  historically  experienced  by the Bank when the balance sheet
was highly  concentrated in residential  mortgages  (including long term,  fixed
rate),  which  present  greater  embedded  optionality  than many other types of
loans.  However,  management  is  concerned  about  the  possible  impact  of  a
potentially  historically  low  interest  rate  environment  during  2001 if the
Federal  Reserve  determines  to drive  interest  rates to very low levels in an
effort to support the US economy.  If interest rates reach very low levels,  the
Company  could  experience  margin  compression  since rates on various types of
deposit  accounts  could  reach  either  zero or  near-zero,  and thus no longer
provide an  opportunity  to reduce the Company's  cost of funding.  In addition,
historically low interest rates could spur a sufficiently large refinancing wave
that could present the Company with excess liquidity at a time when reinvestment
options would be relatively unattractive.

Liquidity

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

         At March 31, 2001,  the Company  maintained  $15.8  million in cash and
cash equivalents,  untapped  borrowing capacity in excess of $140 million at the
FHLB-SF,  and  significant  excess  collateral  in both  loans  and  securities;
collateral  which is available for either  liquidation or secured  borrowings in
order to meet future liquidity requirements. MBBC and the Bank have each entered
into  several  Master  Repurchase  Agreements  to permit  securities  sold under
agreements  to  repurchase  transactions  with  number  of  counterparties.   In
addition,  at March 31, 2001,  the Bank  maintained  $25.5  million in unsecured
federal funds lines of credit from four  correspondent  financial  institutions.
However, there can be no assurance that funds from these lines of credit will be
available at all times,  or that the line will be maintained in future  periods.
The Bank is able to issue  wholesale  "DTC"  certificates of deposit through two
large, national investment banking firms as an additional source of liquidity.

         The OTS recently issued an interim final rule that repealed a statutory
liquidity requirement for the Bank. The prior requirement mandated that the Bank
maintain  an  average  daily  balance  of liquid  assets of at least 4.0% of its
liquidity base (as defined).  The Bank is, however, still required to maintain a
safe and sound level of liquidity at all times,  and will be examined by the OTS
in this regard. Management believes that having a surplus of available liquidity
at all  times is  prudent.  With  the  capabilities  of the new core  processing
system,  the Bank intends to pursue loan specific (versus blanket lien) pledging
to the FHLB-SF during 2001,  thereby allowing the pledging of a broader range of
collateral and fostering  increasing  borrowing capacity on all types of pledged
collateral.  Such loan specific pledging is forecast to materially  increase the
Bank's borrowing capacity with the FHLB-SF.

         At March 31, 2001, MBBC had cash & cash equivalents of $4.6 million. In
addition,  MBBC had no outstanding  balance on a $2.0 million  revolving line of
credit. The loan agreement for this line of credit contains certain restrictions
on the use of borrowed funds,  including a prohibition for such funds to be used
to repurchase  Company  common stock.  Due to  additional  capital  requirements
implemented  by the OTS for the  Bank,  the  Bank is  currently  limited  in its
ability to pay dividends to MBBC.


                                       26
<PAGE>
Capital Resources And Regulatory Capital Compliance

         Federal banking  regulatory  agencies  maintain a system  providing for
regulatory  sanctions  against  financial  institutions  that are not adequately
capitalized.  The  severity of these  sanctions  increases to the extent that an
institution's capital falls further below the adequately capitalized thresholds.
OTS Prompt Corrective Action ("PCA") regulations require specific capital ratios
for five separate capital categories as set forth below:
<TABLE>
<CAPTION>
                                      Core Capital        Core Capital      Total Capital
                                      To Adjusted              To                 To
                                      Total Assets        Risk-weighted     Risk-weighted
                                    (Leverage Ratio)         Assets             Assets
                                    ----------------         ------             ------
<S>                                  <C>                   <C>               <C>
Well capitalized                      5% or above          6% or above       10% or above
Adequately capitalized                4% or above          4% or above       8% or above
Undercapitalized                        Under 4%            Under 4%           Under 8%
Significantly undercapitalized          Under 3%            Under 3%           Under 6%
Critically undercapitalized          Ratio of tangible equity to adjusted total assets of 2% or less
</TABLE>

         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, 2001 as compared to such ratios.
<TABLE>
<CAPTION>
                                           Core Capital              Core Capital To             Total Capital To
                                           To Adjusted                Risk-weighted               Risk-weighted
                                           Total Assets                   Assets                      Assets
                                      -----------------------     -----------------------     -----------------------
                                         Balance     Percent         Balance     Percent         Balance     Percent
                                                                  (Dollars In Thousands)
<S>                                     <C>            <C>         <C>            <C>           <C>           <C>
Bank regulatory capital                 $ 39,619       7.93%        $ 39,619      10.98%        $ 44,140      12.23%
Well capitalized requirement              24,972       5.00%          21,657       6.00%          36,095      10.00%
                                        --------       ----         --------      -----         --------      ------
Excess                                  $ 14,647       2.93%        $ 17,962       4.98%        $  8,045       2.23%
                                        ========       ====         ========      =====         ========      ======
Adjusted assets (1)                     $499,437                    $360,947                    $360,947
                                        ========                    ========                    ========      ======
<FN>
------------------------------------- -----------
(1) The above line for  "adjusted  assets"  refers to the term  "adjusted  total
assets" as defined in 12 C.F.R.  Section  567.1(a)  for purposes of core capital
requirements, and refers to the term "risk-weighted assets" as defined in C.F.R.
Section 567.1(bb) for purposes of risk-based capital requirements.
</FN>
</TABLE>

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

                                           March 31, 2001      December 31, 1999
                                           --------------      -----------------
Core capital to adjusted total assets               7.93%                  7.11%
Core capital to risk-weighted assets               10.98%                  9.58%
Total capital to risk-weighted assets              12.23%                 10.56%


                                       27
<PAGE>
         Other  OTS  capital  regulations  require  the  Bank to  maintain:  (a)
tangible  capital of at least 1.5% of adjusted  total  assets (as defined in the
regulations),  (b) core  capital of at least 4.0% of adjusted  total  assets (as
defined in the  regulations)  (unless  the Bank has been  assigned  the  highest
composite  rating under the Uniform  Financial  Institutions  Rating System,  in
which case  3.00%),  and (c) total  capital  of at least  8.0% of  risk-weighted
assets (as defined in the regulations).

         The following table summarizes these  regulatory  capital  requirements
for the Bank. As indicated in the table,  the Bank's capital levels at March 31,
2001 exceeded all three of the currently  applicable  minimum regulatory capital
requirements.

                                                                  Percent Of
                                                                    Adjusted
(Dollars In Thousands)                                                 Total
                                                 Amount               Assets
                                                -------               ------
Tangible Capital
Regulatory capital                              $39,619                7.93%
Minimum required                                  7,492                1.50%
Excess                                          $32,127                6.43%
                                                -------               ------

Core Capital
Regulatory capital                              $39,619                7.93%
Minimum required                                 19,977                4.00%
                                                -------               ------
Excess                                          $19,642                3.93%
                                                =======               ======

                                                                  Percent Of
                                                                       Risk-
                                                                    weighted
                                                 Amount               Assets
                                                -------               ------
Risk-based Capital
Regulatory capital                              $44,140               12.23%
Minimum required                                 28,876                8.00%
                                                -------               ------
Excess                                          $15,264                4.23%
                                                =======               ======

         At March 31, 2001, the Bank's  regulatory  capital levels  exceeded the
thresholds  required to be classified as a "well capitalized"  institution.  The
Bank's  regulatory  capital ratios  detailed above do not reflect the additional
capital (and assets) maintained by MBBC. Management believes that, under current
regulations  and  institution-specific  requirements,  the Bank will continue to
meet its minimum capital requirements. However, events beyond the control of the
Bank,  such as  changing  interest  rates or a downturn  in the  economy or real
estate  markets  in the  areas  where  the  Bank has  most of its  loans,  could
adversely affect future earnings and,  consequently,  the ability of the Bank to
meet its future minimum regulatory capital requirements.


                                       28
<PAGE>
Asset Quality / Credit Profile

Non-performing Assets

         The following  table sets forth  information  regarding  non-performing
assets at the dates indicated.
<TABLE>
<CAPTION>
<S>                                                                      <C>                  <C>
(Dollars In Thousands)                                                   March 31, 2001       December 31, 2000
                                                                         --------------       -----------------
Outstanding Balances Before Valuation Reserves

Non-accrual loans                                                               $ 4,653                 $ 4,666
Loans 90 or more days delinquent and accruing interest                               --                      --
Restructured loans in compliance with modified terms                                 --                      75
                                                                                -------                 -------
Total gross non-performing loans                                                  4,653                   4,741

Investment in foreclosed real estate before valuation reserves                       --                      --
Repossessed consumer assets                                                          --                      --
                                                                                -------                 -------
Total gross non-performing assets                                               $ 4,653                 $ 4,741
                                                                                =======                 =======
Gross non-accrual loans to total loans                                            1.10%                   1.17%
Gross non-performing loans to total loans                                         1.10%                   1.19%
Gross non-performing assets to total assets                                       0.92%                   0.98%
Allowance for loan losses                                                       $ 5,839                 $ 5,364
Allowance for loan losses to non-performing loans                               125.49%                 113.14%
Valuation allowances for foreclosed real estate                                 $    --                 $    --
</TABLE>
         Non-accrual  loans at March  31,  2001 are  detailed  in the  following
table:

(Dollars In Thousands)                         Number      Principal Balance
                                                   Of         Outstanding At
Category Of Loan                                Loans         March 31, 2001

Residential mortgage                                6                $ 1,196
Commercial & industrial real estate loan            1                    544
Commercial real estate construction loan            1                  2,852
Business term loan                                  2                     61
Consumer line of credit                             1                     --

Total                                              11                $ 4,653

         In  April  2001,  the  Bank  collected  in  full on the  $544  thousand
commercial & industrial  real estate  mortgage and the $2.85 million  commercial
real estate construction loan listed in the above table. Both loans were located
in the Bank's primary market area. In  conjunction  with both payoffs,  the Bank
received all principal,  interest, fees, and expense reimbursements due. Both of
these loans were significantly  delinquent and were nearing foreclosure prior to
their payoff.

         Several of  Company's  non-accrual  loans at March 31, 2001 were either
fully  current in payments or exhibited  only minor  delinquency.  However,  the
Company  determined to retain these loans on non-accrual status primarily due to
past payment performance issues by the borrowers.


                                       29
<PAGE>
Criticized And Classified Assets

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

(Dollars In Thousands)          OAEM   Substandard    Doubtful    Loss    Total
                                ----   -----------    --------    ----    -----
December 31, 2000            $ 2,283       $ 6,323        $ --   $ 600   $9,206
March 31, 2001               $ 5,182       $ 4,897        $ --   $ 600  $10,679


         Classified  assets as a percent of stockholders'  equity decreased from
15.8% at December 31, 2000 to 12.0% at March 31, 2001.

         The March 31, 2001  Substandard  assets in the above table  include the
two  non-accrual  loans totaling $3.4 million that paid off in full during April
2001.  The $600 thousand  specific  reserve in the above table  presented  under
"Loss" is associated with the commercial real estate construction loan that paid
off in full during April 2001.

         The largest loan to become newly criticized during the first quarter of
2001 is a $2.3 million "mini-perm" mortgage loan participation  maturing in 2004
secured by a beach resort in the Company's primary business area. The resort has
experienced  lower occupancy than forecast,  contributing to a reduced cash flow
and  inadequate  debt service  coverage.  The borrowers have continued to timely
make all loan payments,  however,  and no delinquency  was  experienced  through
March 31,  2001.  The  Company  rated  this loan OAEM  because  of the cash flow
inadequacy  and  concerns  that  higher  prices  for  gasoline  and a  potential
additional  slowdown in economic  activity  might  further  reduce  occupancy or
realized average room rates. The Company intends to continue closely  monitoring
this loan.

         At March 31,  2001,  the  Company  was in the  process of working  with
borrowers to improve the credit profile of a number of criticized and classified
loans in addition to the two non-accrual loans which paid off in April 2001. The
Company's  efforts in this regard  have been  bolstered  by the  addition of two
senior executives with extensive credit experience over the past year.  However,
there can be no assurances that the Company will be successful in this regard.

Impaired Loans

         At March 31, 2001, the Company had total gross impaired  loans,  before
specific reserves,  of $4.7 million,  constituting 11 credits.  This compares to
gross impaired  loans of $5.3 million at December 31, 2000.  Interest is accrued
on impaired  loans on a monthly basis except for those loans that are 90 or more
days  delinquent or those loans which are less than 90 days delinquent but where
management has identified  concerns  regarding the collection of the credit. For
the three months ended March 31, 2001,  accrued  interest on impaired  loans was
zero and interest of $22 thousand was received in cash. If all non-accrual loans
had been  performing in accordance  with their original loan terms,  the Company
would have recorded  interest  income of $134  thousand  during the three months
ended March 31, 2001,  instead of interest  income  actually  recognized on cash
payments of $22 thousand.


                                       30

<PAGE>

Special Residential Loan Pool

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

         At March 31, 2001, the outstanding  principal  balance of this mortgage
loan pool was $10.9  million,  with $0.8 million  received  during  April,  2001
(normal monthly remittance cycle) based upon prepayments and scheduled principal
for March, 2001. At December 31, 2000, the outstanding principal balance of this
mortgage  loan pool was $16.5  million.  The  loans in this  mortgage  pool bear
interest rates  significantly  in excess of current market rates for similar new
loans extended to borrowers with moderate or better credit  profiles.  This rate
differential contributed to the prepayments realized on the portfolio during the
first quarter of 2001.

         Through the April 20, 2001  regularly  scheduled  remittance  date, the
seller performed per the loan servicing  agreement,  making scheduled  principal
and interest  payments to the Bank while also absorbing all credit losses on the
loan portfolio. At March 31, 2001, the Company categorized all loans within this
mortgage pool as performing based upon the continued payment  performance of the
seller.

         Despite  the  performance  of the  seller,  however,  the  Company  has
allocated  certain  reserves  to this  mortgage  pool at March  31,  2001 due to
concerns  regarding the potential losses by the seller in honoring the guaranty,
the present delinquency  profile of the pool, and the differential  between loan
principal  balances and current appraisals for foreclosed loans and loans in the
process of foreclosure.

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

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

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

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

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

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


                                       31

<PAGE>

Allowance For Loan Losses

         The  allowance for loan losses is  established  through a provision for
loan losses based on  management's  evaluation of the risks inherent in the loan
portfolio.  In  determining  levels of risk,  management  considers a variety of
factors, including, but not limited to, asset classifications,  economic trends,
industry experience and trends, geographic concentrations,  estimated collateral
values,  historical  loan  loss  experience,   and  the  Company's  underwriting
policies.  The allowance  for loan losses is maintained at an amount  management
considers adequate to cover losses in loans receivable which are deemed probable
and estimable.  While  management  uses the best  information  available to make
these  estimates,  future  adjustments  to  allowances  may be necessary  due to
economic,  operating,  regulatory,  and other  conditions that may be beyond the
Company's control. In addition, various regulatory agencies, as an integral part
of their examination process,  periodically review the Bank's allowance for loan
losses.  Such  agencies  may  require  the Bank to  recognize  additions  to the
allowance based on judgements different from those of management.
<TABLE>
         The following  table presents  activity in the Company's  allowance for
loan losses during the three months ended March 31, 2001 and March 31, 2000:
<CAPTION>
                                                                                 Three Months Ended March 31,
                                                                              -----------------------------------
                                                                                        2001                 2000
                                                                                        ----                 ----
Allowance For Loan Losses                                                                 (Dollars In Thousands)
<S>                                                                                  <C>                  <C>

Balance at beginning of year                                                         $ 5,364              $ 3,502

   Charge-offs:

      Business lines of credit                                                           (25)                  --

   Total charge-offs                                                                     (25)                  --

   Recoveries                                                                             --                   --

   Provision for loan losses                                                             500                  250

Balance at March 31                                                                  $ 5,839              $ 3,752

Annualized ratio of net charge-offs during the period to average
   loans receivable, net, outstanding during the period                                 0.02%                0.00%


         Additional ratios applicable to the allowance for loan losses include:

                                                                              March 31, 2001     December 31, 2000
                                                                              --------------     -----------------
Allowance for loan losses as a percent of non-performing loans                        125.49%              113.14%

Allowance for loan losses as a percent of gross loans receivable
     net of undisbursed loan funds                                                      1.39%                1.35%

Allowance for loan losses as a percent of classified assets                           106.22%               77.48%
</TABLE>

                                       32

<PAGE>

         As subsequently discussed (see "Provision For Loan Losses"), the higher
provision for loan losses  recorded during the first three months of 2001 versus
the same period in the prior year  resulted  from  multiple  factors,  including
factors specific to the Company and its loan portfolio and certain other factors
impacting the California economy in general.

         Management anticipates that further growth in loans receivable, ongoing
emphasis on the  origination  and purchase of income property real estate loans,
and the  continuing  expansion  of  commercial  business  lending will result in
future  provisions  and in an  increase in the ratio of the  allowance  for loan
losses to loans  outstanding.  Experience across the financial services industry
indicates that  commercial  business and income  property loans present  greater
risks than residential real estate loans, and therefore should be accompanied by
suitably higher levels of reserves.

Comparison  Of  Operating  Results For The Three Months Ended March 31, 2001 and
March 31, 2000

General

         During the first  quarter of 2001,  the Company  reported net income of
$602 thousand,  equivalent to $0.18 diluted earnings per share. This compares to
net income of $799 thousand,  or $0.25 diluted earnings per share, for the first
quarter of 2000.  Net income during the quarter ended December 31, 2000 was $709
thousand, equivalent to $0.22 diluted earnings per share.

         As  discussed  below,  earnings  for the  first  quarter  of 2001  were
unfavorably  impacted by $408  thousand in  operating  costs for the Bank's core
systems  conversion  and a higher  provision  for loan  losses  during the first
quarter of 2001 than during the first  quarter of 2000.  These factors more than
offset  greater net  interest  income  largely  stemming  from a bigger  average
balance sheet, more favorable results on the sales of securities,  a significant
expansion  in customer  service  charge  income,  and other  financial  benefits
arising from the Company's  transformation  into a community focused  commercial
bank.

Interest Rate Environment

         The table  presented  above under  "Interest  Rate Risk  Management And
Exposure" furnishes an overview of the interest rate environment during the most
recent five quarters. Market interest rates have varied considerably during this
time period. In early 2000, the Federal Reserve continued  increasing its target
federal funds rate (commenced in 1999),  expressing concern about the rapid pace
of economic expansion, the booming equity markets (particularly NASDAQ), and the
combination  of very low  unemployment,  spot  labor  shortages,  and  increased
compensation costs which presented the potential for a rise in inflation. During
the second half of 2000,  many capital  markets  interest rates (e.g.  LIBOR and
Treasuries)  began  declining in response to falling  equity markets and slowing
economic  growth.  The Federal  Reserve did not commence  cutting its  benchmark
interest  rates until the first week of 2001.  The Federal  Reserve then cut the
target federal funds rate 50 basis points on three separate occasions during the
first  quarter  of 2001,  taking  the  target  federal  funds rate from 6.50% on
January 2, 2001 to 5.00% on March 30,  2001.  A fourth 50 basis point cut in the
target  federal  funds rate was then  implemented  between  Federal  Open Market
Committee meetings in mid April, 2001.


                                       33

<PAGE>

         The year 2001 began with an inverted  Treasury  curve,  highlighting  a
traditionally  difficult  interest rate environment for financial  institutions,
including the Bank. Financial  institutions  generally benefit from a positively
sloped term structure of interest  rates,  whereby higher duration assets may be
funded at a favorable  spread with shorter term  liabilities,  and whereby fixed
rate assets  appreciate in market price as they move nearer to maturity.  By the
end of the  first  quarter,  the  Treasury  curve  out  through  two  years  was
relatively  flat,  with a defined  steepening  occurring  after  the April  2001
interest  rate cut. The Treasury  curve was generally  traditionally  positively
sloped during the first quarter of 2000.

Net Interest Income

         Net  interest  income  increased  from $4.5  million  during  the first
quarter of 2000 to $4.8 million  during the first quarter of 2001  primarily due
to greater  average  balances of interest  earning assets and  liabilities.  The
Company's  ratio of net interest income to average total assets during the first
quarter of 2001 was 3.83%. This figure  represented a decrease from 3.88% during
the first quarter of 2000,  but an increase from 3.76% during the fourth quarter
of 2000.

         Factors  influencing  net interest income during the first three months
of 2001 compared to the first three months of 2000 included:

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

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

o    Average net loans as a percentage  of average  total assets  improved  from
     79.2%  during  the first  quarter of 2000 to 81.2%  during the first  three
     months of 2001.  Because  loans  constitute  by far the  Company's  highest
     yielding  type of asset,  this change in asset mix  favorably  affected net
     interest income.

o    Average   non-interest   bearing  liabilities   (including  demand  deposit
     accounts)  declined  from 4.2% of  average  total  assets  during the first
     quarter  of 2000 to 3.7%  during  the  first  three  months  of 2001.  This
     reduction  in  average   interest-free   funding  negatively  impacted  the
     Company's net interest income.

o    The Company  maintained its deposit rates at relatively  higher levels than
     normal  during  the first  quarter  of 2001 in  conjunction  with  concerns
     regarding  potential  customer  issues  stemming from the computer  systems
     conversion, including a temporary reduction in branch staffing coverage and
     the elimination of passbook based deposit products.

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


                                       34

<PAGE>


         The following  table presents the average  annualized  rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing  liabilities,  and the resulting net
interest  spread,  net interest  margin,  and average  interest  margin on total
assets for the three months ended March 31, 2001 and 2000.
<TABLE>
<CAPTION>

                                      Three Months Ended March 31, 2001         Three Months Ended March 31, 2000
                                   ----------------------------------------  ----------------------------------------
(Dollars In Thousands)               Average                      Average        Average                      Average
                                     Balance       Interest          Rate        Balance       Interest          Rate
                                     --------      --------       -------        -------       --------       -------
<S>                                  <C>             <C>            <C>          <C>            <C>            <C>
Assets
Interest earning assets:

   Cash equivalents (1)              $  8,642        $  124         5.74%        $  6,959       $   99         5.75%
   Investment securities                7,363           133         7.23%          11,465          210         7.31%
   Mortgage backed securities (2)      48,956           808         6.60%          54,358          959         7.06%
   Loans receivable, net (3)          402,656         8,890         8.83%         366,511        7,736         8.44%
   FHLB stock                           2,922            40         5.48%           3,248           46         5.70%
                                     --------       --------       -------       --------       ------
Total interest earning assets         470,539         9,995         8.50%         442,541        9,050         8.18%
Non-interest earnings assets           25,551       --------                       20,150       ------
                                     --------                                    --------
Total assets                         $496,090                                    $462,691
                                     ========                                    ========
Liabilities & Equity
Interest bearing liabilities:
   NOW accounts                      $ 40,658           141         1.39%        $ 31,377          121         1.55%
   Savings accounts                    17,279            73         1.69%          15,205           68         1.80%
   Money market accounts               90,144         1,044         4.63%          82,220          873         4.27%
   Certificates of deposit            244,493         3,426         5.61%         224,585        2,777         4.97%
                                     --------       --------                     --------       ------
   Total interest-bearing deposits    392,574         4,684         4.77%         353,387        3,839         4.37%
   FHLB advances                       40,799           547         5.36%          49,614          708         5.74%
   Other borrowings (4)                   170            12        28.24%             622           10         6.47%
                                     --------       --------                     --------       ------
Total interest-bearing liabilities    433,543         5,243         4.84%         403,623        4,557         4.54%
Demand deposit accounts                16,341                                      16,304
Other non-interest bearing              2,226                                       3,090
liabilities                          --------                                    --------

Total liabilities                     452,110                                     423,017

Stockholders' equity                   43,980                                      39,674
                                     --------                                    --------
Total liabilities & equity           $496,090                                    $462,691

Net interest income                                  $4,752                                     $4,493
                                                    ========                                    =======
Interest rate spread (5)                                            3.66%                                      3.64%
Net interest earning assets            36,996                                      38,918
Net interest margin (6)                               4.04%                                      4.06%
Net interest income /
     average total assets                             3.83%                                      3.88%
Interest earnings assets /
     interest bearing liabilities        1.09                                        1.10

<FN>
Average balances in the above table were calculated using average daily figures.

-------------------------------------

(1)  Includes  federal  funds  sold,  money  market fund  investments,  banker's
     acceptances,  commercial  paper,  interest  earning deposit  accounts,  and
     securities purchased under agreements to resell.
(2)  Includes  mortgage backed  securities,  including CMO's, both available for
     sale and held to maturity.
(3)  In computing the average balance of loans receivable, non-accrual loans and
     loans  held for sale have been  included.  Amount is net of  deferred  loan
     fees, premiums and discounts,  and undisbursed loan funds.  Interest income
     on loans  includes  amortized  loan fees and costs,  net,  of  $78,000  and
     $76,000 in 2001 and 2000, respectively.
(4)  Includes  federal funds purchased and securities  sold under  agreements to
     repurchase.
(5)  Interest rate spread represents the difference  between the average rate on
     interest   earning  assets  and  the  average  rate  on  interest   bearing
     liabilities.
(6)  Net interest  margin equals net interest  income before  provision for loan
     losses divided by average interest earning assets.
</FN>
</TABLE>


                                       35

<PAGE>

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.

                                             Three Months Ended March 31, 2001
                                                        Compared To
                                             Three Months Ended March 31, 2000
                                           -------------------------------------
                                                               Volume
(Dollars In Thousands)                     Volume      Rate    / Rate       Net

Interest-earning assets

Cash equivalents                            $  24      $  0      $  1     $  25
Investment securities                         (75)       (2)        0       (77)
Mortgage backed securities                    (95)      (62)        6      (151)
Loans receivable, net                         763       356        35     1,154
FHLB Stock                                     (5)       (2)        1        (6)

     Total interest-earning assets            612       290        43       945

Interest-bearing liabilities

NOW Accounts                                   36       (13)       (3)       20
Savings accounts                                9        (4)       --         5
Money market accounts                          85        74        12       171
Certificates of deposit                       248       355        46       649

Total interest-bearing deposits               378       412        55       845
FHLB advances                                (127)      (47)       13      (161)
Other borrowings                               (7)       34       (25)        2

     Total interest-bearing liabilities       244       399        43       686

Increase in net interest income             $ 368    $ (109)    $   0    $  259


                                       36

<PAGE>

Interest Income

         Interest  income  increased  from $9.1 million  during the three months
ended March 31, 2000 to $10.0  million  during the three  months ended March 31,
2001. This increase was primarily due to:

o    a 6.3% increase in average interest earning assets

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

         Interest  income on loans rose from $7.7  million  during  the  quarter
ended  March 31,  2000 to $8.9  million  during the most  recent  quarter.  This
expansion in interest income was due to a combination of greater average volumes
and  higher  average  rates.  The  greater  volume  stemmed  from the  Company's
strategic plan of increasing  the  percentage of the balance sheet  comprised of
loans  through  internal  originations,  loan pool  purchases  on the  secondary
market,  and  loan  participations;  with the  latter  primarily  through  other
California  community banks. The higher rates on loans was favorably impacted by
a loan mix which has become  less  concentrated  in lower  yielding  residential
mortgages, in favor of higher yielding income property and other non-residential
loans.  Residential  loans  constituted  38.5% of gross  loans at March 31, 2001
versus 42.6% at March 31, 2000.

         Interest  income on cash  equivalents  rose from $99  thousand  for the
three months ended March 31, 2000 to $124  thousand for the same period in 2001.
This increase was due to higher  average  balances,  as the average rates during
the periods were almost  identical.  The increase in average balances  primarily
stemmed from MBBC's  maintaining a higher average balance of cash equivalents in
the first quarter of 2001 than during the similar period in the prior year.

         Interest  income on investment  securities  declined from $210 thousand
during the three  months ended March 31, 2000 to $133  thousand  during the same
period in 2001.  The  reduced  interest  income  primarily  resulted  from lower
average balances, as the Company maintained a smaller portfolio of variable rate
corporate  trust  preferred  securities  during  the first  quarter of 2001 than
during the similar period in 2000.

         Interest income on mortgage  backed  securities fell from $959 thousand
during the three  months ended March 31, 2000 to $808  thousand  during the same
period in 2001.  This decrease was caused by  reductions  in average  volume and
average rates. Over the past year, the Company has reduced the percentage of its
balance  sheet  allocated  to  securities  in favor  of  increased  lending.  In
addition,  the mix of the Company's  mortgage backed securities has changed over
the past year,  with an increase in lower duration,  high cash flow  instruments
and a  reduction  in higher  duration,  lower cash flow  securities  in order to
better  support  greater  funding  requirements   stemming  from  the  Company's
increased lending.

         Interest  income on FHLB stock  decreased from $46 thousand  during the
three months ended March 31, 2000 to $40 thousand during the quarter ended March
31, 2001.  This  reduction in interest  income  stemmed  from a  combination  of
reduced  average  balances  and lower  effective  earnings  rates.  The Bank was
required by the  FHLB-SF to sell some its capital  stock in the FHLB during 2000
under the FHLB's mandatory capital redemption program.

Interest Expense

         Interest  expense  increased  from $4.6 million during the three months
ended  March 31,  2000 to $5.2  million  during the most  recent  quarter.  This
increase was caused by a combination  of a greater  average  balance of interest
bearing liabilities and a higher average cost of interest bearing funding.


                                       37

<PAGE>

         Interest  expense on deposits  increased 22.0% from $3.8 million during
the three months ended March 31, 2000 to $4.7 million  during the first  quarter
of 2001.  Average  interest  bearing  deposits  were 11.1%  greater in the first
quarter  of 2001  versus  the  first  quarter  of 2000.  The  average  rate paid
increased  from 4.37% during the first quarter of 2000 to 4.77% during the first
quarter of 2001 despite a favorable shift in average  deposit mix.  Certificates
of deposit  declined from 63.6% of average  interest bearing deposits during the
first  quarter  of 2000 to 62.3%  during  the  first  quarter  of 2001,  with an
offsetting increase in average  transaction account balances.  While the Company
was able to achieve lower  average  costs for NOW checking  accounts and savings
accounts  during the first quarter of 2001 compared to the same period the prior
year,  higher  average  costs for money  market  accounts  and  certificates  of
deposits led to the rise in average interest bearing deposit cost.

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

         The  Company's  strategic  plan  incorporates  a greater  reliance upon
transaction  accounts,  including  those  maintained by business as compensating
balances  for their  credit  facilities,  and  therefore  anticipates  a reduced
sensitivity to marginal consumer  interest rates,  particularly for certificates
of deposit.

         During 2001,  the Company plans to continue  promoting its Money Market
Plus account,  Interest Checking Plus account,  "40+" NOW checking account,  and
business checking accounts. The consumer products present attractive benefits to
both  customers and the Company.  For example,  all three  consumer  transaction
accounts are highly tiered,  encouraging  greater  account  balances in order to
earn higher rates of interest.  These three  products  are also  accessible  via
bilingual telephone banking,  Internet banking,  global ATM networks,  mail, and
in-branch service.

         At March 31, 2001, the Bank's weighted average nominal cost of deposits
was  4.48%,  or 72 basis  points  below the COFI  Index for the same  date.  The
Company  utilizes a comparison of its cost of deposits and cost of funds to COFI
as one measure of relative  performance.  The Company's weighted average nominal
cost of deposits was 4.72% at December  31,  2000,  or 90 basis points below the
COFI Index for the same date.  Should short term Treasury rates remain stable or
continue  to decline,  the  Company's  weighted  average  cost of deposits  will
benefit from the significant  downward  repricing in June and July 2001 of $14.0
million in certificates of deposit maintained under the State of California time
deposit  program,  whereby the State places time deposits in banks as a means of
encouraging lending in support of local economic development.

         Interest  expense  on total  borrowings  decreased  from $718  thousand
during the three  months ended March 31, 2000 to $559  thousand  during the same
period in 2001. This decrease was caused by smaller  average  balances and lower
average  rates.  The Company  maintained a lower cost portfolio of FHLB advances
during the first quarter of 2001 than during the prior year,  as several  higher
cost advances  matured or were prepaid  during the final three quarters of 2000.
In addition,  the Company  borrowed  $10.0 million in new one year FHLB advances
during  the first  quarter of 2001 with a weighted  average  rate of 5.13%.  The
Company's  average  interest rate on other  borrowings  was inflated  during the
first  quarter  as a result  of the  amortization  of loan fees  (discount  on a
liability) on MBBC's $2.0 million  revolving line of credit combined with a lack
of draws (outstanding balances) on the line during the quarter.


                                       38

<PAGE>

Provision For Loan Losses

         The Company  recorded a $500 thousand  provision for loan losses during
the first  quarter of 2001,  up from $250  thousand  during the first quarter of
2000 and the same as the provision for the fourth quarter of 2000. No recoveries
were  realized  during the first  quarter of 2001,  and  charge-offs  during the
period  totaled  $25  thousand  - for a  single  business  line of  credit.  The
Company's  management  remains  concerned  about the  negative  impacts upon the
amount of loss inherent in the loan portfolio at March 31, 2001 arising from the
following factors:

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

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

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

o    the increasing number of layoffs announced during the first quarter of 2001
     by California  companies,  including  those in more mature  industries that
     have historically been profitable

o    the general reduction in national economic growth

         Other  factors  contributing  to the higher  provision  for loan losses
recorded during 2001 included:

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

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

o        the increase in the size of the loan portfolio

         Commercial & industrial  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.

         During the second and third  quarters of 2001,  the Company  intends to
conduct an expanded  credit review of its larger loans,  and  substantially  all
construction  loans,  with such review to be performed by both  internal  credit
management  staff and external credit  consultants.  The extent of this expanded
credit review exceeds the scope of the Company's  normal,  ongoing credit review
process and has been initiated by management in response to the issues described
above which present the potential to negatively  impact the California  economy,
rather than due to any specific deterioration in the Company's credit portfolio.

         The  Company's  ratio  of  loan  loss  reserves  to  loans  outstanding
increased  from  1.35% at  December  31,  2000 to 1.39% at March 31,  2001.  The
Company  anticipates that this ratio will continue to increase in future periods
to the extent that the Company is successful in its strategic plan of increasing
total loans while expanding the proportion of the loan portfolio  represented by
income property and commercial  business lending.  The Company's  strategic plan
also  incorporates  expanded  construction  lending,  although  the  Company has
tightened its credit  requirements  for such lending during 2001 in light of the
trends within the California economy.


                                       39

<PAGE>

Non-interest Income

         Non-interest  income totaled $643 thousand  during the first quarter of
2001, comparing favorably to $501 thousand during the first quarter of 2000.

         Service charge income rose from $280 thousand  during the first quarter
of 2000 to $408  thousand  during the first three months of 2001 in part because
of the revised fee and service charge schedule implemented with the new computer
system.  Following  the  computer  systems  conversion,  the  Company  commenced
charging for checks drawn against  uncollected  funds ("UCF Fees") and increased
its fee for checks drawn against insufficient funds ("NSF Fees") from $17 to $20
per check. The Company also stopped  providing  lifetime free checks for certain
deposit  accounts,  thereby not only  reducing  non-interest  expenses for check
printing  but also  increasing  fee income  from  "upcharges"  for check  orders
initiated  and paid for by customers.  In addition,  the revised fee and service
charge schedule  established  certain minimum balance  requirements  and maximum
free usage limits for certain deposit accounts. The Company anticipates improved
profitability  as a result of the revised fee and service charge  schedule,  but
also expects a short term decrease in the number of deposit  accounts as certain
customers (primarily lower balance, high volume accounts) respond to the changes
by taking their business elsewhere.

         Sales of mortgage backed and investment  securities generated a pre-tax
gain of $34 thousand during the first quarter of 2001,  versus a pre-tax loss of
$79 thousand  during the first quarter of 2000. The $34 thousand gain during the
first quarter of 2001 resulted from the sale of a single long term,  fixed rate,
Agency mortgage backed security.

         Loan  servicing  income  declined  from $37  thousand  during the first
quarter  of 2000 to $2  thousand  during  the first  quarter  of 2001 due to the
continued  reduction in the size of the  portfolio of loans  serviced for others
and greater  amortization  of originated  mortgage  servicing  rights during the
first  quarter of 2001  because of faster  prepayments.  Because the Company has
been conducting its mortgage banking on a servicing released basis,  income from
loan servicing is anticipated to constitute a progressively  smaller  percentage
of total revenue in the future.

         Less favorable  capital market  conditions  contributed to a decline in
commissions from sales of non-insured investment products,  which fell from $207
thousand  during  the first  quarter of 2000 to $117  thousand  during the first
quarter of 2001. A new non-insured  investment  program manager was hired by the
Bank  in  February   2001  with  the   objective  of  improving   the  program's
profitability.  The  Company is  currently  seeking  additional  licensed  sales
representatives  to augment the coverage of its customer  base and the Company's
outreach into its local communities.

         Other non-interest  income increased from $56 thousand during the first
quarter of 2000 to $82 thousand  during the most recent three months in part due
to increased  rental  income,  which in turn derived from the Bank's leasing the
second  floor  of one of its  branches  in  late  2000  following  an  extensive
remodeling.

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

o    seeking additional remote ATM sites

o    further increases in the portfolio of transaction accounts

o    the continued sale of Internet banking with electronic bill payment

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

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


                                       40

<PAGE>

Non-interest Expense

         Non-interest  expense  increased  from $3.3  million  during  the first
quarter of 2000 to $3.8 million  during the first quarter of 2001  primarily due
to $408 thousand in operating  costs during the first quarter of 2001 associated
with  the  computer   systems   conversion.   These   operating  costs  included
deconversion charges from the service bureau, travel and training costs for Bank
employees, printing and postage for additional customer mailings, and consultant
fees.  The  Company  anticipates  a lower level of similar  expenses  during the
second quarter of 2001, as the new primary computer system is complemented  with
other new technologies.

         The  Company's  efficiency  ratio during the first  quarter of 2001 was
71.22%,  comparing  unfavorably  to 66.82%  during  the first  quarter  of 2000.
Without the operating costs associated with the computer systems conversion, the
first quarter 2001 efficiency ratio would have been 63.65%.

         Compensation and employee  benefits expense increased from $1.5 million
during the quarter ended March 31, 2000 to $1.7 million  during the three months
ended  March 31,  2001.  During the past year,  the  Company  has  replaced  the
majority of its management  team,  with greater  compensation  costs,  including
relocation  expenses,  required  to attract  and retain the  veteran  commercial
bankers  viewed an integral  to the  Company's  transformation  into a community
commercial  bank.  The Company has also  attracted  additional  lending,  credit
management,  and financial  professionals  over the past year.  Compensation and
employee  benefits  expense  during  the first  quarter  of 2001  also  reflects
employee incentive  payments for accomplishing a timely and successful  computer
conversion and for additional overtime payments necessitated by the conversion.

         Legal and  accounting  expenses  during the first  quarter of 2001 were
impacted by significant  legal costs associated with the pending  arbitration of
claims by the former President & Chief Operating Officer regarding  payments due
under his employment  contracts.  The Company anticipates  incurring  additional
legal costs in this regard  during the second  quarter of 2001.  The Company has
unsuccessfully  attempted  to  settle  this  matter.   Accounting  expenses  are
projected to decline during the second half of 2001, as the Company has retained
a new, more cost effective, but also highly experienced firm to perform selected
internal audit services.

         The Company spent a historically small sum on advertising and promotion
during the first  quarter of 2001,  as  management  determined  to minimize such
expenses in light of the significant  changes in financial  products and pricing
implemented  with the new core  processing  system in March,  2001.  The Company
anticipates  higher  levels of  advertising  and promotion  expenses  during the
remainder of 2001.

         In  conjunction  with the  computer  systems  conversion,  the  Company
implemented  a  series  of  operational   changes  designed  to  improve  future
efficiency  ratios.  For example,  the  generation  of periodic  statements  for
certificates of deposit was curtailed after being  identified as an expense with
comparatively  little  value to  customers  in an age of instant  telephone  and
Internet access to account balances.  However,  consistent with its desire to be
regarded  as  a  high  service  community   financial   institution   supporting
relationship  banking,  the Company  continues to offer monthly  statements  for
certificates of deposit in conjunction  with its "combined  statement"  facility
for transaction account customers.

         Director  expenses are  projected to decline in the latter half of 2001
due to a smaller number of Board members and the final expense  recognition  for
the Directors Emeritus Plan during the second quarter.  During the first quarter
of 2001, the Company  commenced  Internet  based supplies  ordering with a lower
cost,  more efficient  vendor.  Despite these and other  initiatives in reducing
operating  costs,  no assurance can be provided  that the  Company's  efficiency
ratio  will  improve  in  future   quarters  or  that  the  Company's  level  of
non-interest expenses will decrease in the future on a nominal or relative basis
(e.g. as a percentage of average total assets).

Income Taxes

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


                                       41

<PAGE>

Item 3.  Quantitative And Qualitative Disclosures About Market Risk

         For a current  discussion of the nature of market risk  exposures,  see
"Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - Interest Rate Risk Management And Exposure". Readers should also
refer to the quantitative and qualitative  disclosures  (consisting primarily of
interest rate risk) in the  Company's  Annual Report on Form 10-K for the fiscal
year ended  December 31,  2000.  There has been no  significant  change in these
disclosures since the filing of that document.

PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

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

         The Company has an initial  arbitration  date established in June, 2001
         to address claims by the former  President and Chief Operating  Officer
         regarding  payments due under his  employment  contracts.  In the third
         quarter of 2000,  the Company  established a $250 thousand  reserve for
         the settlement of these claims.  At this time,  the Company,  following
         consultation  with  counsel,  believes  this  reserve to be adequate to
         cover its liabilities in this regard.

Item 2.  Changes In Securities

         None.

Item 3.  Defaults Upon Senior Securities

         Not applicable.

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

         On April 16, 2001, the Company issued its 2001 annual Proxy  Statement.
         Matters  submitted  to a  vote  of  security  holders  via  that  Proxy
         Statement included:

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

                                                          Proposed Term
                Individual                                To Expire
                ---------------------------------         ----------------------
                Josiah T. Austin                          2003
                Edward K. Banks                           2004
                Nicholas C. Biase                         2004
                Larry A. Daniels                          2002
                C. Edward Holden                          2004

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, 2001

         The Company's annual meeting is scheduled for Thursday, May 24, 2001 at
         9:00 AM  Pacific  Time at the  Watsonville  Women's  Club,  12  Brennan
         Street, Watsonville, CA. 95076.


                                       42

<PAGE>

Item 5.  Other Information

         None.


Item 6.  Exhibits And Reports On Form 8-K

         A.  Exhibits

             10.18    Employment Agreement With C. Edward Holden

             10.19    Employment Agreement With Mark R. Andino

         B.  Reports On Form 8-K

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

                  1.       Form 8-K dated February 8, 2001.  This Current Report
                           reported the Company's results for the fourth quarter
                           and the  fiscal  year  2000,  the  addition  of a new
                           member  of  the  senior   management   team  for  the
                           Company's   subsidiary,   Monterey   Bay  Bank,   the
                           appointment  of Larry  A.  Daniels  to the  Company's
                           Board of  Directors,  the  date  for the 2001  annual
                           meeting  of  stockholders,  and the  record  date for
                           voting at the 2001 annual meeting of stockholders.

                  2.       Form 8-K  dated  May 2,  2001.  This  Current  Report
                           reported the Company's  results for the first quarter
                           of fiscal  year 2001,  the  completion  of a computer
                           systems  conversion,  the collection in full in April
                           2001 of two significant  non-accrual  loans,  and the
                           pending arbitration of claims by a former executive.

                  3.       Form 8-K / A dated May 3, 2001.  This Current  Report
                           contained one minor  correction to the Form 8-K dated
                           May 2, 2001.


                                       43

<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 14, 2001               By:      /s/ C. Edward Holden
                                             C. Edward Holden
                                             Chief Executive Officer
                                             President
                                             Vice Chairman



Date:    May 14, 2001               By:      /s/ Mark R. Andino
                                             Mark R. Andino
                                             Chief Financial Officer
                                             (Principal Financial & Accounting
                                             Officer)


                                       44