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

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

For the quarterly period ended September 30, 2000

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:  3,317,913  shares of common
stock, par value $0.01 per share, were outstanding as of November 9, 2000.

                                       1
<PAGE>

<TABLE>

                    MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

                                      INDEX
<CAPTION>
                                                                                                            PAGE

<S>              <C>                                                                                        <C>
PART I.          FINANCIAL INFORMATION

                 Item 1.   Financial Statements

                           Consolidated Statements Of Financial Condition As Of
                           September 30, 2000 (unaudited) And December 31, 1999                             3 - 4

                           Consolidated Statements Of Operations (unaudited) For The Three
                           And Nine Months Ended September 30, 2000 And September 30, 1999                  5 - 6

                           Consolidated Statement Of Stockholders' Equity (unaudited) For The
                           Nine Months Ended September 30, 2000                                               7

                           Consolidated Statements Of Cash Flows (unaudited) For The Nine
                           Months Ended September 30, 2000 And September 30, 1999                           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 - 45

                 Item 3.   Quantitative And Qualitative Disclosure About Market Risk                         45

PART II.         OTHER INFORMATION

                 Item 1.   Legal Proceedings                                                                 46

                 Item 2.   Changes In Securities                                                             46

                 Item 3.   Defaults Upon Senior Securities                                                   46

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

                 Item 5.   Other Information                                                                 46

                 Item 6.   Exhibits And Reports On Form 8-K                                                  46

                           (a)  Exhibits

                                   (27)  Financial Data Schedule

                           (b)  Reports On Form 8-K
Signature Page                                                                                               47

</TABLE>

                                       2
<PAGE>

Item 1.  Financial Statements

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                   September 30,         December 31,
                                                                                            2000                 1999
                                                                                            ----                 ----
<S>                                                                                     <C>                  <C>
ASSETS

Cash and cash equivalents                                                               $ 18,089             $ 12,833
Securities available for sale, at estimated fair value:
     Investment securities (amortized cost of $7,693 and $11,456 at
          September 30, 2000 and December 31, 1999, respectively)                          7,470               11,463
     Mortgage backed securities (amortized cost of $59,391 and $59,710
          at September 30, 2000 and December 31, 1999, respectively)                      57,749               57,716
Securities held to maturity, at amortized cost:
     Mortgage backed securities (estimated fair value of $60
          at December 31, 1999)                                                               --                   60
Loans held for sale                                                                          174                   --
Loans receivable held for investment (net of allowances for loan losses of
     $4,806 at September 30, 2000 and $3,502 at December 31, 1999)                       382,168              360,686
Investment in capital stock of the Federal Home Loan Bank, at cost                         2,836                3,213
Accrued interest receivable                                                                2,922                2,688
Premises and equipment, net                                                                7,138                7,042
Core deposit premiums and other intangible assets, net                                     2,394                2,918
Real estate acquired via foreclosure, net                                                     --                   96
Other assets                                                                               4,061                4,112
                                                                                        --------             --------
TOTAL ASSETS                                                                            $485,001             $462,827
                                                                                        ========             ========

<FN>

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

                                       3
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                   September 30,         December 31,
                                                                                            2000                 1999
                                                                                            ----                 ----
<S>                                                                                     <C>                  <C>
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES

Non-interest bearing demand deposits                                                    $ 16,078             $ 17,316
Interest bearing NOW checking accounts                                                    40,402               31,385
Savings deposits                                                                          16,472               15,312
Money market deposits                                                                     91,381               81,245
Certificates of deposit                                                                  233,718              222,144
                                                                                        --------             --------
   Total deposits                                                                        398,051              367,402
                                                                                        --------             --------
Advances from the Federal Home Loan Bank                                                  40,582               49,582
Securities sold under agreements to repurchase                                                --                2,410
Accounts payable and other liabilities                                                     3,925                2,630
                                                                                        --------             --------
     Total liabilities                                                                   442,558              422,024
                                                                                        --------             --------

Commitments and contingencies

STOCKHOLDERS' EQUITY

Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued                    --                   --
Common stock, $0.01 par value, 9,000,000 shares authorized;
     4,492,085 issued at September 30, 2000 and December 31, 1999;
     3,317,913 outstanding at September 30, 2000 and
     3,422,637 outstanding at December 31, 1999                                               45                   45
Additional paid-in capital                                                                28,239               28,237
Retained earnings, substantially restricted                                               32,013               30,473
Unallocated ESOP shares                                                                     (978)              (1,150)
Treasury shares designated for compensation plans, at cost (43,762 shares
     at September 30, 2000 and 126,330 shares at December 31, 1999)                         (421)              (1,376)
Treasury stock, at cost (1,174,172 shares at September 30, 2000 and
     1,069,448 shares at December 31, 1999)                                              (15,358)             (14,257)
Accumulated other comprehensive loss, net of taxes                                        (1,097)              (1,169)
                                                                                        --------             --------
     Total stockholders' equity                                                           42,443               40,803
                                                                                        --------             --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                              $485,001             $462,827
                                                                                        ========             ========

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

                                       4
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Amounts)
<CAPTION>
                                                             FOR THE THREE MONTHS               FOR THE NINE MONTHS
                                                               ENDED SEPTEMBER 30,              ENDED SEPTEMBER 30,
                                                         -----------------------------    -----------------------------
                                                                2000             1999            2000             1999
                                                                ----             ----            ----             ----
<S>                                                         <C>              <C>            <C>              <C>
INTEREST AND DIVIDEND INCOME:
   Loans receivable                                         $ 8,118          $ 7,211        $ 23,972         $ 20,103
   Mortgage backed securities                                 1,011            1,085           2,888            3,842
   Investment securities and cash equivalents                   385              282           1,116            1,031
                                                            -------          -------        --------         --------
         Total interest income                                9,514            8,578          27,976           24,976
                                                            -------          -------        --------         --------

INTEREST EXPENSE:
   Deposit accounts                                           4,532            3,675          12,569           11,347
   FHLB advances and other borrowings                           583              543           1,961            1,589
                                                            -------          -------        --------         --------
         Total interest expense                               5,115            4,218          14,530           12,936
                                                            -------          -------        --------         --------

NET INTEREST INCOME BEFORE PROVISION
     FOR LOAN LOSSES                                          4,399            4,360          13,446           12,040

PROVISION FOR LOAN LOSSES                                       650              265           1,675              685
                                                            -------          -------        --------         --------

NET INTEREST INCOME AFTER PROVISION
     FOR LOAN LOSSES                                          3,749            4,095          11,771           11,355
                                                            -------          -------        --------         --------
NON-INTEREST INCOME:
   Gain (loss) on sale of mortgage backed securities
      and investment securities, net                             --               --             (77)             503
   Commissions from sales of noninsured products                145              194             534              465
   Customer service charges                                     356              270             949              747
   Income from loan servicing                                    30               46              90              111
   Other income                                                  99               54             218              200
                                                            -------          -------        --------         --------

         Total non-interest income                              630              564           1,714            2,026
                                                            -------          -------        --------         --------

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

                                       5
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Continued)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(Dollars In Thousands, Except Per Share Amounts)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                               FOR THE THREE MONTHS              FOR THE NINE MONTHS
                                                                ENDED SEPTEMBER 30,              ENDED SEPTEMBER 30,
                                                         -----------------------------    -----------------------------
                                                                2000             1999            2000             1999
                                                                ----             ----            ----             ----
<S>                                                           <C>              <C>             <C>              <C>
GENERAL & ADMINISTRATIVE EXPENSE:
   Compensation and employee benefits                         1,904            1,361           4,991            4,082
   Occupancy and equipment                                      329              285             960              856
   Deposit insurance premiums                                    48               40             140              123
   Data processing fees                                         271              269             837              757
   Legal and accounting expenses                                148               94             489              322
   Supplies, postage, telephone, and office expenses            163              156             522              443
   Advertising and promotion                                     84               69             283              234
   Amortization of intangible assets                            175              174             524              523
   Other expense                                                430              523           1,514            1,344
                                                             ------           ------          ------           ------
         Total general & administrative expense               3,552            2,971          10,260            8,684
                                                             ------           ------          ------           ------

INCOME BEFORE INCOME TAX EXPENSE                                827            1,688           3,225            4,697

INCOME TAX EXPENSE                                              366              738           1,411            2,041
                                                             ------           ------          ------           ------
NET INCOME                                                   $  461           $  950         $ 1,814          $ 2,656
                                                             ======           ======          ======           ======

EARNINGS PER SHARE:

     BASIC EARNINGS PER SHARE                                $ 0.15           $ 0.29          $ 0.58           $ 0.82
                                                             ======           ======          ======           ======
     DILUTED EARNINGS PER SHARE                              $ 0.15           $ 0.28          $ 0.58           $ 0.80
                                                             ======           ======          ======           ======
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>

                                       6
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000
(Dollars And Shares In Thousands)
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                    Treasury
                                                                                     Shares
                                                                                     Desig-             Accum-
                                                                                      nated             ulated
                                                                                        For              Other
                                                         Addi-              Unal-      Com-            Compre-
                                                        tional       Re-  located      pen-            hensive
                                      Common Stock     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, 1999          3,423      $45  $ 28,237  $ 30,473  $(1,150)  $(1,376) $(14,257) $(1,169) $ 40,803

Purchase of treasury stock             (120)                                                   (1,251)            (1,251)

Director fees paid using treasury        15                  8                                    150                158
stock

Dividends paid ($0.08 per share)                                    (274)                                           (274)

Amortization of stock

     compensation                                           (6)               172       955                        1,121

Comprehensive income:
     Net income                                                    1,814                                           1,814

     Other comprehensive income:
       Change in net unrealized
         loss on securities
         available for sale, net
         of taxes of $19                                                                                    27        27


       Reclassification adjustment
         for losses on securities
         available for sale
         included in income, net
         of taxes of $32                                                                                    45
                                                                                                                      45
                                                                                                                ========
     Other comprehensive income,
       net                                                                                                            72
                                                                                                                ========
Total comprehensive income                                                                                         1,886
                                                                                                                ========

                                      -----    -----  --------  --------   ------    ------  --------  -------  --------
Balance at September 30, 2000         3,318    $  45  $ 28,239  $ 32,013   $ (978)   $ (421) $(15,358) $(1,097) $ 42,443
                                      =====    =====  ========  ========   ======    ======  ========  =======  ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>

                                       7
<PAGE>

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(Dollars In Thousands)
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                                   FOR THE NINE MONTHS
                                                                                                   ENDED SEPTEMBER 30,
                                                                                              ---------------------------
                                                                                                      2000          1999
                                                                                                      ----          ----
<S>                                                                                                <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income                                                                                         $ 1,814       $ 2,656

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

Depreciation and amortization of premises and equipment                                                327           355
Amortization of intangible assets                                                                      524           523
Amortization of purchase premiums, net of accretion of discounts                                        55           136
Amortization of deferred loan fees                                                                    (211)         (252)
Provision for loan losses                                                                            1,675           685
Provision for losses on real estate acquired via foreclosure                                            --            12
Federal Home Loan Bank stock dividends                                                                (166)         (131)
Gross ESOP expense before dividends received on unallocated shares                                     243           374
Compensation expense associated with stock compensation plans                                          215           222
Loss (gain) on sale of mortgage-backed and investment securities                                        77          (503)
Gain on sale of loans                                                                                  (15)          (54)
Loss (gain) on sale of real estate acquired via foreclosure                                              5           (11)
Origination of loans held for sale                                                                  (1,927)       (5,884)
Proceeds from sales of loans held for sale                                                           1,768         8,115
Increase in accrued interest receivable                                                               (234)         (141)
Decrease in other assets                                                                                51           896
Increase (decrease) in accounts payable and other liabilities                                        1,295          (447)
Other, net                                                                                          (1,031)         (665)
                                                                                                   -------       -------
     Net cash provided by operating activities                                                       4,465         5,886
                                                                                                   -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:

Net increase in loans held for investment                                                          (21,482)      (60,006)
Purchases of investment securities available for sale                                                   --            (7)
Proceeds from sales of investment securities available for sale                                      3,730         8,005
Purchases of mortgage backed securities available for sale                                         (23,482)           --
Principal repayments on mortgage backed securities                                                  11,254        17,400
Proceeds from sales of mortgage backed securities available for sale                                12,571        16,920
Redemptions of FHLB stock                                                                              543            --
Purchases of premises and equipment                                                                   (423)       (1,092)
                                                                                                   -------       -------
     Net cash used in investing activities                                                         (17,289)      (18,780)
                                                                                                   -------       -------
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
                                       8

<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(Dollars In Thousands)
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                                   FOR THE NINE MONTHS
                                                                                                   ENDED SEPTEMBER 30,
                                                                                              ---------------------------
                                                                                                      2000          1999
                                                                                                      ----          ----
<S>                                                                                                 <C>             <C>
CASH FLOWS FROM FINANCING ACTIVITIES:

Net increase (decrease) in deposits                                                                 30,649          (745)
(Repayments) proceeds of FHLB advances, net                                                         (9,000)       11,400
(Repayments) proceeds of securities sold under agreements to repurchase, net                        (2,410)       (1,960)
Cash dividends paid to stockholders                                                                   (274)         (530)
Purchases of treasury stock                                                                         (1,251)           --
Sales of treasury stock                                                                                150           346
Sales of treasury stock for stock compensation plans                                                   216            --
                                                                                                  --------      --------
     Net cash provided by financing activities                                                      18,080         8,511
                                                                                                  --------      --------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS                                                   5,256        (4,383)

CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD                                                      12,833        16,951
                                                                                                  --------      --------
CASH & CASH EQUIVALENTS AT END OF PERIOD                                                           $18,089       $12,568
                                                                                                  ========      ========

SUPPLEMENTAL CASH FLOW DISCLOSURES:

Cash paid during the period for:
     Interest on deposits and borrowings                                                          $ 14,309      $ 12,930
     Income taxes                                                                                    2,410         2,259


SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES

Loans transferred to held for investment, at fair value                                                202           171

Real estate acquired in settlement of loans                                                             --           280

<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 generally accepted accounting principles 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  generally  accepted  accounting  principles  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 nine month
period ended  September 30, 2000 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, 1999  included in the  Company's  Annual  Report on Form 10-K for the fiscal
year ended December 31, 1999.

         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.
<TABLE>

         There was no  difference  in the  numerator,  net  income,  used in the
calculation  of basic  earnings per share and diluted  earnings  per share.  The
denominator  used in the  calculation  of basic  earnings  per share and diluted
earnings per share for the three and nine month periods ended September 30, 2000
and  1999 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.
<CAPTION>
                                                            For The Three Months             For The Nine Months
                                                             Ended September 30,             Ended September 30,
                                                       ---------------------------     ---------------------------
(In Whole Dollars And Whole Shares)
                                                               2000          1999              2000          1999
                                                               ----          ----              ----          ----
<S>                                                        <C>           <C>             <C>           <C>
Net income                                                 $461,000      $950,000        $1,814,000    $2,656,000
                                                          =========     =========         =========     =========

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

Less weighted average:
   Uncommitted ESOP shares                                 (157,227)     (193,164)         (166,211)     (202,149)
   Non-vested stock award shares                            (58,378)      (85,802)          (67,236)      (94,192)
   Treasury shares                                       (1,176,316)     (956,700)       (1,154,058)     (960,561)
                                                          ---------     ---------         ---------     ---------
Sub-total                                                (1,391,921)   (1,235,666)       (1,387,505)   (1,256,902)
                                                          ---------     ---------         ---------     ---------

Weighted average BASIC shares outstanding                 3,100,164     3,256,419         3,104,580     3,235,183

Add dilutive effect of:
   Stock options                                              3,635        96,882             5,599        89,033
   Stock awards                                                  --         5,823               163         6,168
                                                          ---------     ---------         ---------     ---------

Sub-total                                                     3,635       102,705             5,762        95,201
                                                          ---------     ---------         ---------     ---------

Weighted average DILUTED shares outstanding               3,103,799     3,359,124         3,110,342     3,330,384
                                                          =========     =========         =========     =========

Earnings per share:

   BASIC EPS                                                 $ 0.15        $ 0.29            $ 0.58        $ 0.82
                                                          =========     =========         =========     =========

   DILUTED EPS                                               $ 0.15        $ 0.28            $ 0.58        $ 0.80
                                                          =========     =========         =========     =========
</TABLE>

                                       11


<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 3:  Other Comprehensive Income

         Currently,  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.

<TABLE>
         Reclassification  adjustments for realized net gains (losses)  included
in other  comprehensive  income for  investment and mortgage  backed  securities
classified as available  for sale for the three and nine months ended  September
30, 2000 and 1999 are summarized as follows:
<CAPTION>
                                              Three Months Ended September 30,       Nine Months Ended September 30,
                                             ----------------------------------    ----------------------------------
                                                        2000              1999                 2000             1999
                                                        ----              ----                 ----             ----
(Dollars In Thousands)
<S>                                                    <C>               <C>                 <C>              <C>
Gross reclassification adjustment                      $  --             $  --               $  (77)          $  503
Tax benefit (expense)                                     --                --                   32             (207)
                                                       ------            ------               -----           ------

Reclassification adjustment, net of tax                $  --             $  --                $ (45)          $  296
                                                       ======            ======               =====           ======
</TABLE>

<TABLE>
         A  reconciliation  of the net unrealized  gain or loss on available for
sale securities recognized in other comprehensive income is as follows:
<CAPTION>
                                                            Three Months                     Nine Months
                                                               Ended                           Ended
                                                             September 30,                  September 30,
                                                       ---------------------------     ---------------------------
                                                          2000          1999              2000          1999
                                                          ----          ----              ----          ----
(Dollars In Thousands)
<S>                                                      <C>          <C>                <C>        <C>
Holding gain (loss) arising during the period, net       $ 334        $ (464)            $  27      $ (1,346)
of tax
Reclassification adjustment, net of tax                     --            --                45          (296)
                                                         -----        ------             -----      --------

Net unrealized gain (loss) recognized in
     other comprehensive income                          $ 334        $ (464)            $  72      $ (1,642)
                                                         =====        ======             =====      ========
</TABLE>

                                       12


<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 4:  Stock Option Plans

<TABLE>
         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.  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:
<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, 1999             512,036         362,597           239,853           80,150          69,289         $9.51
March 31, 2000                512,036         419,236           231,100           80,150          12,650         $9.51
June 30, 2000                 757,929         474,236           245,282           80,150         203,543         $9.79
September 30, 2000            757,929         486,736           308,262           80,150         191,043         $9.65
</TABLE>


Activity during the three and nine months ended September 30, 2000 included:

                                   Three Months Ended          Nine Months Ended
                                   September 30, 2000         September 30, 2000
                                   ------------------         ------------------
Granted                                        12,500                    134,365
Canceled                                           --                     10,226
Exercised                                          --                         --
Vested                                         62,980                     78,635

         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 September 30, 2000.

         The 1995  Incentive  Stock  Option  Plan was  amended in May 2000.  The
amendments included an increase in the number of shares reserved for issuance to
660,000 shares  (exclusive of 97,929 shares reserved under the 1995 Stock Option
Plan For Outside  Directors)  and a change in the minimum  exercise price of all
new option grants to 110% of the fair market value of the Company's common stock
on the date of grant.

                                       13
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 5:  Stock Award Plans
<TABLE>

         The Company  maintains  two stock award  plans:  a  Performance  Equity
Program  ("PEP") for Officers and a Recognition  and Retention  Plan ("RRP") for
Outside Directors. Awards under these plans typically vest over a five year time
period. Awards under the RRP are time-based, while awards under the PEP are both
time-based and  performance-based.  All outstanding stock awards under the plans
vest in the event of a change in control of the Company.  The  following  tables
summarize the status of these plans:
<CAPTION>
PEP:                                                                                        Stock
                                                                           Stock           Awards
                                       Stock             Stock            Awards        Available
                                      Awards            Awards      Cumulatively       For Future
Date                              Authorized       Outstanding            Vested           Grants
----                              ----------       -----------            ------           ------
<S>                                  <C>                <C>               <C>              <C>
December 31, 1999                    141,677            30,864            79,038           31,775
March 31, 2000                       141,677            59,212            79,038            3,427
June 30, 2000                        141,677            57,263            81,737            2,677
September 30, 2000                   141,677            38,594           100,406            2,677
</TABLE>


         Activity  during the three and nine  months  ended  September  30, 2000
included:

                     Three Months Ended         Nine Months Ended
                     September 30, 2000        September 30, 2000
                     ------------------        ------------------
Granted                              --                    29,744
Canceled                             --                       646
Vested                           18,669                    21,368


<TABLE>
<CAPTION>

RRP:                                                                                        Stock
                                                                           Stock           Awards
                                       Stock             Stock            Awards        Available
                                      Awards            Awards      Cumulatively       For Future
Date                              Authorized       Outstanding            Vested           Grants
----                              ----------       -----------            ------           ------
<S>                                   <C>                <C>              <C>                 <C>
December 31, 1999                     38,010             9,541            28,469               --
March 31, 2000                        38,010             8,713            29,297               --
June 30, 2000                         38,010             8,713            29,297               --
September 30, 2000                    38,010             2,491            35,519               --
</TABLE>


         Activity  during the three and nine  months  ended  September  30, 2000
included:

                     Three Months Ended         Nine Months Ended
                     September 30, 2000        September 30, 2000
                     ------------------        ------------------
Granted                              --                        --
Canceled                             --                        --
Vested                            6,222                     7,050


                                       14
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

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


NOTE 6:  Commitments

         At September 30, 2000,  commitments  maintained by the Company included
commitments  to originate  $13.1  million in various  types of loans and to sell
$174 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 September 30, 2000.

NOTE 7:  Recent Accounting Pronouncements

         Statement  of   Financial   Accounting   Standards   ("SFAS")  No.  133
"Accounting for Derivative  Instruments and Hedging  Activities",  was issued in
June 1998 and amended by SFAS No. 138, issued in June 2000. The standard defines
derivatives,  requires  that all  derivatives  be  carried  at fair  value,  and
provides for hedge accounting when certain  conditions are met. The requirements
of SFAS No. 133 as amended by SFAS No. 138 will be effective  for the Company in
the first quarter of the fiscal year beginning January 1, 2001.  Management does
not  expect  the  adoption  of SFAS No. 133 as amended by SFAS No. 138 to have a
significant impact upon the Company's financial statements.

         SFAS No. 140,  "Accounting  for  Transfers  and  Servicing of Financial
Assets and  Extinguishments  of Liabilities"  was issued in September 2000. SFAS
No.  140 is a  replacement  of SFAS  No.  125,  "Accounting  for  Transfers  and
Servicing of Financial Assets and  Extinguishments of Liabilities".  Most of the
provisions  of SFAS No.  125  were  carried  forward  to SFAS  No.  140  without
reconsideration  by the FASB,  and some were  changed  in only  minor  ways.  In
issuing  SFAS No. 140,  the FASB  included  issues and  decisions  that had been
addressed and  determined  since the original  publication of SFAS No. 125. SFAS
No. 140 is effective  for  transfers  after March 31, 2001.  It is effective for
disclosures  about  securitizations  and  collateral  and  for  recognition  and
reclassification  of collateral for fiscal years ending after December 15, 2000.
Management  does not expect the  adoption of SFAS No. 140 to have a  significant
impact upon the Company's financial statements.


                                       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, 1999.  These factors should be considered
in evaluating the forward-looking  statements,  and undue reliance should not be
placed on such  statements.  The Company does not  undertake,  and  specifically
disclaims any obligation,  to update any  forward-looking  statements to reflect
occurrences  or  unanticipated  events or  circumstances  after the date of such
statements.

General

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

         At September 30, 2000,  the Company had $485.0 million in total assets,
$382.3 million in net loans  receivable,  and $398.1 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  and its
administrative  facilities.  In addition,  the Company  supports  its  customers
through 24 hour telephone banking,  Internet banking,  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.

Recent Developments

         Congress,  the SEC,  the  Federal  Financial  Institutions  Examination
Council ("FFIEC"),  the OTS, and the Federal Administration continue to consider
a series of issues that may impact the financial  services  industry,  including
the Company. Recent developments in this regard include:

o    the  potential  reform of  bankruptcy  legislation  (S 625, HR 833) remains
     stalled in  Congress,  with  disagreements  between  Congress and the White
     House on various provisions

o    the  potential  approval  for  interest  to be  paid on  business  checking
     accounts and possibly on reserves held at Federal  Reserve Banks (S 576, HR
     4067, HR 5341) also remains stalled in Congress

o    the possible  privatization  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

o    new  capital  and  membership  rules  for the FHLB  System  continue  to be
     drafted, with implementation anticipated during 2001

o    the OTS is  considering  possible new rules for thrift  holding  companies,
     including debt and capital restrictions

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

o    potential   changes  in  the   methodology   used  by  insured   depository
     institutions  to account for loan loss  reserves  continue to be debated by
     the SEC, the American  Institute of Certified Public  Accountants,  and the
     FFIEC

         Safeway, Inc. a major supermarket chain in the Company's primary market
area,  has announced the creation of Safeway  SELECT bank. The bank will operate
branches  inside Safeway stores and open an online bank.  This  represents a new
source of competition for the Company.

         During October, 2000, the Company announced the resignation of Marshall
G. Delk from the Board of  Directors.  Mr. Delk  resigned as President and Chief
Operating Officer of the Company during September 2000. The Company is currently
negotiating a separation  package with Mr. Delk.  This package will  incorporate
the disposition of Mr. Delk's vested stock options.

         During  October,  2000, the Company  announced that McKenzie Moss would
become  Chairman of the Board effective  January 1, 2001.  Eugene R. Friend will
retire as Chairman  of the Board at that time and  continue to serve the Company
as Vice Chairman until his planned retirement from the Board of Directors at the
2001 annual meeting of shareholders. This change was conducted to facilitate the
Company's  preparation for Mr. Friend's  upcoming  retirement  following over 40
years of  service.  Mr. Moss has a enjoyed a long and  successful  career in the
financial  services  industry,  including being the Chief Executive Officer of a
California commercial bank.

         Mr. P.W. Bachan has announced his intention to retire from the Board of
Directors at the 2001 annual meeting of shareholders.  Mr. Bachan has served the
Company as a Director for 46 years.

                                       17
<PAGE>




Overview Of Business Activity

         Throughout  2000,  the Company  continued in its  business  strategy of
diversifying  away from its traditional  savings & loan roots toward a community
commercial bank profile. The Board of Directors and Management has targeted this
strategy  because of the belief that it presents the opportunity to better serve
the Greater Monterey Bay Area while enhancing shareholder value.

         During the first nine  months of 2000,  progress  was  realized in loan
volume and mix,  deposit  volume  and  composition,  and fee income  generation,
particularly from customer service charges. This progress was accelerated at mid
year  following  the hiring of a new Chief  Executive  Officer with  substantial
commercial  banking  experience.  The Company  recently  signed an  agreement to
convert to a new core  processing  system.  Internet  banking was  introduced in
October,   2000,   along   with   a   significantly   enhanced   Internet   site
(www.montereybaybank.com).  A new remote ATM at the  Monterey  Bay  Aquarium was
recently  activated.  David  E.  Porter,  with 26 years  of  commercial  banking
experience,  started  working for the Bank as Director of Commercial  and Retail
Banking  at the  end of  October,  2000.  Jack  Evans,  with  over 25  years  of
commercial banking experience,  recently joined the Bank as a commercial lending
relationship  manager and business loan officer.  In accomplishing  these steps,
the Company is working to establish the human and  technological  infrastructure
that is integral to its transformation  into an effective  community  commercial
bank.

         In its  October  31,  2000  Form 8-K,  the  Company  reported  that its
Directors and Management are disappointed  with the level of earnings  generated
in recent quarters.  This document further presented the Company's  appreciation
of the  importance  of building  shareholder  value and  producing a competitive
return on  shareholders'  equity.  However,  many of the  initiatives key to the
strategic  transformation  of the Company  require up front  operating costs and
initial  capital  investments  before  associated  revenues may be realized.  In
addition, the Company has had to allocate significant resources toward resolving
several historical issues,  including a $4.85 million non-accrual  business term
loan originated by MBBC, certain classified assets, the Special Residential Loan
Pool  (see  "Special  Residential  Loan  Pool"),  and  the  need  to  recruit  a
significant portion of the Bank's management team during 2000.

         The Company  exceeded  29,500 deposit  accounts at the end of the third
quarter of 2000, representing a new high.

         Thus far in 2000,  the Company's  primary  market areas have  generally
continued  to see good  demand for  housing,  real  estate  price  appreciation,
population increases, and economic expansion. The Company's primary market areas
have also  benefited  from the  ongoing  growth in  employment,  geography,  and
financial capacity of the adjacent,  technology  oriented Silicon Valley area of
the San  Francisco Bay Area. A significant  proposal is under  development  that
would lead to the addition of approximately  20,000 new technology  related jobs
in the Coyote Valley area in the Highway 101 corridor  stretching south from San
Jose toward Morgan Hill.  This proposal is primarily  being advanced by a single
large technology firm.

         The  Company  intends to  continue  pursuing  this  business  strategy,
explained  in greater  detail in the  Company's  Annual  Report on Form 10-K for
1999,  while  seeking  avenues  for further  growth in market  share and product
diversification.  Management believes that the continued consolidation occurring
in  the  financial  services  industry  may  present  opportunities  to  acquire
personnel,  branches,  and customers from  institutions  being sold or that have
recently been sold.

                                       18
<PAGE>




Changes In Financial Condition From December 31, 1999 To September 30, 2000

         Total assets  increased $22.2 million,  or 4.8%, from $462.8 million at
December 31, 1999 to $485.0  million at September 30, 2000.  This rise in assets
was primarily fueled by a strong deposit performance.

         Cash & cash equivalents rose from $12.8 million at December 31, 1999 to
$18.1  million  at  September  30,  2000.  This rise in cash & cash  equivalents
primarily  stemmed from lower than targeted  internal loan production during the
third quarter of 2000. The Company  intends to reinvest some of these funds into
pools of primarily  multifamily whole loans,  generally  acquired on a servicing
released  basis,  during the  fourth  quarter of 2000.  These  secondary  market
purchases  are  projected  to  increase  asset  yield  while  at the  same  time
supporting the Bank's Qualified Thrift Lender test ratio.

         Investment and mortgage backed securities  available for sale decreased
from $69.2  million at December 31, 1999 to $65.2 million at September 30, 2000.
The Company sold $12.6 million in mortgage backed securities and $3.7 million in
investment  securities  in 2000.  These sales,  which were  concentrated  in the
second quarter, were conducted to:

o    reduce the  Company's  sensitivity  to changes in general  market  interest
     rates, via the sale of higher duration securities

o    shift  the  Bank's  asset  allocation   towards  those  assets,   including
     securities, which qualify under the Qualified Thrift Lender test

         During the third quarter of 2000, the Company  purchased  $17.5 million
of mortgage backed  securities,  primarily low duration,  high cash flow, Agency
collateralized mortgage obligations ("CMO's").  The third quarter purchases were
designed to:

o    quickly  deploy $8.0 million in new funding  received  through the State of
     California time deposit program (see below)

o    reallocate  excess  liquidity to higher  yielding assets during a period of
     comparatively slower (versus earlier in 2000) internal loan production

         Security  purchases  throughout  2000  have  been  concentrated  in low
duration,  high cash flow, primarily Agency collateralized  mortgage obligations
in order to avoid adding long term,  fixed rate assets to the balance  sheet and
in order to furnish a recurring  source of cash in future periods for lending or
loan purchases.  Management anticipates continuing the above pattern of security
purchases  and sales during the final  quarter of 2000,  subject to business and
market conditions.

         Net loans  receivable  held for investment  rose from $360.7 million at
December  31,  1999 to  $382.2  million  at  September  30,  2000.  The total at
September  30, 2000 was  increased  by the  acquisition  of two whole loan pools
totaling  $11.2  million  during  September,  2000.  These pools were  primarily
comprised of  adjustable  rate  multifamily  mortgages  secured by real property
throughout California.  The Company followed its normal underwriting policies in
evaluating  these loan pools.  Because these whole loan pools were acquired near
the end of the third quarter,  there was no significant  effect on September 30,
2000 year to date interest income.

         Third  quarter  credit  originations  (excluding  loan pool  purchases)
totaled $28.4 million.  This figure was  constrained  by the Company's  having a
number of unfilled loan sales positions during the quarter.

                                       19
<PAGE>




         The 2000 year to date increase in loans was  concentrated in the income
property loan portfolios,  as the Company continued the  diversification  of its
balance sheet away from the historical  concentration  in  residential  mortgage
related assets.  Residential  loans as a percentage of gross loans declined from
43.4%  to 41.6%  during  the  first  nine  months  of  2000.  At the same  time,
commercial & industrial real estate loans increased from 18.6% to 24.1% of gross
loans.

         Gross  construction  loans  declined from $79.0 million at December 31,
1999 to $58.9 million at September 30, 2000, as completed projects were paid off
and the  pipeline  of new  construction  loans was  insufficient  to offset  the
payoffs.  The Company will seek to increase its  construction  loan portfolio in
future  quarters   through  a  combination  of  increased   marketing   efforts,
establishing  ongoing  relationships  with local  developers,  and  purchases of
participations  in construction  loans on California  real estate  originated by
other financial institutions.

         The Company's  strategy of continuing the  diversification  of its loan
portfolio  away  from  residential  mortgages  creates  pressure  on the  Bank's
compliance  with the Qualified  Thrift Lender ("QTL") test,  which requires that
the Bank  maintain  at least  65.0% of its  portfolio  assets  (as  defined)  in
qualified thrift  investments (as defined).  The increasing volume of commercial
and industrial real estate loans maintained by the Company has at times resulted
in the Bank's QTL ratio falling below 70.0%.  However,  in conjunction  with the
aforementioned  acquisition  of two whole  loan  pools  comprised  of  primarily
multifamily (QTL qualifying) mortgages,  the Bank's QTL ratio increased to 71.0%
at September 30, 2000.

         As the Company continues its strategic  transformation into a community
commercial  bank,  however,  additional  pressure  upon the  Bank's QTL ratio is
expected.  As a result,  the Company is  considering  a number of  alternatives,
including:

o    sales of non-qualified assets, including securities

o    altering loan pricing and marketing to encourage  increased  origination of
     qualified credits

o    moderately  leveraging  the balance  sheet  through the  addition of assets
     which qualify under the QTL test

o    applying for a commercial bank charter

         The Company  continues to originate  fixed rate  residential  loans for
sale into the  secondary  market on a servicing  released  basis.  This practice
allows the Company to provide a full range of  residential  loan products to its
customers without adding to the Company's  sensitivity to rising interest rates.
The Company's  strategic  plan  incorporates  expanding the types of residential
mortgages  sold into the  secondary  market in future  periods  (e.g. to include
adjustable rate  mortgages)  should such sales be consistent with objectives for
asset / liability management, cash flow, and regulatory capital management.

                                       20
<PAGE>


<TABLE>
         Additional  information regarding the composition of the Company's loan
portfolio is presented in the following table:
<CAPTION>
                                                                             September 30,       December 31,
                                                                                      2000               1999
                                                                                      ----               ----
<S>                                                                               <C>                <C>
(Dollars In Thousands)

Held for investment:
   Loans secured by real estate:
      Residential one to four unit                                                $170,815           $168,465
      Multifamily five or more units                                                53,994             42,173
      Commercial and industrial                                                     99,212             72,344
      Construction                                                                  58,931             79,034
      Land                                                                          14,773             13,930
                                                                                  --------           --------
   Sub-total loans secured by real estate                                          397,725            375,946

   Other loans:
      Home equity lines of credit                                                    5,014              3,968
      Loans secured by deposits                                                        567                385
      Consumer lines of credit, unsecured                                              152                202
      Business term loans                                                            6,511              6,670
      Business lines of credit                                                       1,075              1,027
                                                                                  --------           --------
   Sub-total other loans                                                            13,319             12,252

   Sub-total gross loans held for investment                                       411,044            388,198

   (Less) / Plus:
      Undisbursed construction loan funds                                          (23,952)           (23,863)
      Unamortized purchase premiums, net of purchase discounts                          82                134
      Deferred loan fees and costs, net                                               (200)              (281)
      Allowance for estimated loan losses                                           (4,806)            (3,502)
                                                                                  --------           --------

Loans receivable held for investment, net                                         $382,168           $360,686
                                                                                  ========           ========

Held for sale:
   Residential one to four unit                                                   $    174           $     --
                                                                                  ========           ======

 </TABLE>

         Premises and equipment  increased slightly in 2000 primarily due to the
installation  of a remote ATM at the Monterey Bay Aquarium and the remodeling of
one branch in order to sub-lease  space to a tenant.  The Company  anticipates a
higher  level of  premises  and  equipment  later  in 2000 and into  2001 as new
computer  hardware,  telecommunications  equipment,  and software is acquired in
conjunction with the Company's  scheduled  conversion to a new and significantly
more advanced core processing platform.

         Intangible  assets  declined  by $524  thousand  during  the first nine
months of 2000 in conjunction with periodic amortization. Under OTS regulations,
intangible assets net of associated  deferred tax liabilities  reduce regulatory
capital,  resulting in lower  regulatory  capital ratios than would otherwise be
the case.

                                       21
<PAGE>



         Total deposits  increased from $367.4 million at December 31, 1999 to a
record  $398.1  million at  September  30, 2000.  Key trends  within the deposit
portfolio included:

o    Checking  account  balances  continued to rise during the third  quarter of
     2000,  and have now  increased  $7.8 million year to date.  The Company has
     targeted  increases  in checking  account  balances as a source of low cost
     funds and  non-interest  income.  Initiatives  employed  by the  Company in
     expanding  the checking  account base have included the  introduction  of a
     new,  highly  tiered  SuperNOW  product,  an  internal  employee  incentive
     campaign to generate new checking accounts,  ongoing  advertising  support,
     and checking  account  options  viewed as desirable by consumers  including
     imaged  statements,  debit card  access,  24 hour  telephone  banking,  and
     Internet Banking including electronic bill payment.

o    Savings deposits increased from $15.3 million at December 31, 1999 to $16.5
     million at September 30, 2000.  The Company has been  actively  encouraging
     its  customers  to migrate to statement  (versus  passbook)  based  savings
     accounts in preparation for the new core processing platform, which will be
     implemented   without  passbooks.   The  Company  believes  that  passbooks
     constitute a less desirable form of account to both customers and financial
     institution in an age of debit cards, Internet banking,  telephone banking,
     and global ATM networks.  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    Early in 2000, the Bank introduced its "Money Market Plus" deposit account,
     which provides  competitive,  tiered rates for liquid funds. In conjunction
     with this product,  total money market  deposits rose from $81.2 million at
     December 31, 1999 to $91.4 million nine months later.

o    Certificate  of deposit  balances rose $11.6 million  during the first nine
     months of 2000.  Premium CD rates are made  available to customers for whom
     the Bank is their primary  financial  services  provider.  The Company also
     promotes "CD  Specials" of various terms and with various  minimum  balance
     requirements  in  response to  competitive  actions and in order to attract
     funds consistent with its asset / liability management program.

o    During the third quarter of 2000,  the Bank commenced  participation  ($8.0
     million)  in the State of  California  time  deposit  program.  Under  this
     program,  the  State  places  time  deposits  with  banks  as  a  means  of
     encouraging the lending of funds back into  California's  communities.  The
     State prices  these funds to be  competitive  with the capital  markets and
     FHLB advances to enhance participation in the program.

o    During 2000, the Bank commenced directly soliciting certificates of deposit
     from targeted potential customer segments identified as having a propensity
     to invest in that product  line.  At September  30, 2000,  this program had
     attracted $896 thousand in funds.

o    Transaction  accounts  constituted 41.3% of total deposits at September 30,
     2000,  up from 39.5% nine  months  earlier.  This  change in deposit mix is
     integral to the Company's  strategic plan, as transaction  accounts provide
     for a lower cost of funds versus most other funding  sources,  generate fee
     income, furnish opportunities for cross-selling other products and services
     to customers,  and are typically  less  interest rate  sensitive  than many
     other funding sources.

         The  Company's  ratio of  loans  to  deposits  declined  from  98.2% at
December 31, 1999 to 96.1% at September 30, 2000, as the strong  deposit  growth
eclipsed  the  expansion  in  loans.  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.  No assurance can, however,  be provided
that the Company will be successful  in obtaining  additional  distribution  and
sales locations.

         Borrowings  declined  from $52.0  million at December 31, 1999 to $40.6
million  at  September  30,  2000,  all of which  were  then  comprised  of FHLB
advances.  Over the past nine months,  the Company has used deposit  inflows and
cash flows from the amortization and sale of securities to repay $9.0 million in
FHLB  advances  and  $2.4  million  in  securities  sold  under   agreements  to
repurchase.  The next  scheduled  maturity  of the  Company's  borrowings  is in
January, 2001.

                                       22
<PAGE>




         Total stockholders' equity increased from $40.8 million at December 31,
1999 to $42.4  million  at  September  30,  2000.  Factors  contributing  to the
increase included:

o    $1.8 million in 2000 year to date net income

o    continued  amortization of deferred stock  compensation,  including but not
     limited to:

     o   accelerated amortization of certain shares during the second quarter in
         conjunction  with the  settlement  of  certain  non-qualified  benefits
         obligations payable in Company common stock

     o   the vesting of a  significant  volume of stock award shares  during the
         third quarter

o    the election by certain  Directors to have their  Directors  fees paid with
     common  stock,  with all Directors to be paid  exclusively  in common stock
     beginning November 1, 2000

o    $72 thousand in other comprehensive  income, net, during 2000 stemming from
     a  slight  appreciation  in the  portfolios  of  securities  classified  as
     available for sale

The above factors more than offset:

o    the repurchase of 120,000 of the Company's common shares on the open market
     for $1.25 million during the first quarter of 2000

o    the payment of $274  thousand in cash  dividends  (equivalent  to $0.08 per
     share) during the first quarter of 2000


         As  previously   announced,   the  Company's  Board  of  Directors  has
determined  to  indefinitely   suspend  the  declaration  and  payment  of  cash
dividends.  The decision by the Board of Directors  to receive  their  Directors
fees exclusively in common stock effective November 1, 2000 was made to:

o    augment MBBC's cash flow

o    communicate  the  Directors  support  of the  Company  and  alignment  with
     shareholder value


         The Company's tangible book value per share was $12.07 at September 30,
2000. This compares to a tangible book value per share of $11.07 at December 31,
1999.

                                       23
<PAGE>


Interest Rate Risk Management And Exposure

         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  net  liability
sensitivity in regards to net portfolio value,  also referred to as market value
of portfolio  equity.  This means that the fair value of the Company's assets is
more  volatile  than that of its  liabilities.  This net  liability  sensitivity
primarily arises from the longer term, fixed rate real estate loans and mortgage
related  securities  maintained on the Company's  balance  sheet,  for which the
Company's only current match funding  sources are demand deposit  accounts,  non
interest bearing  liabilities,  a segment of core deposit transaction  accounts,
certain  borrowings,  and capital. A net liability  sensitive position typically
translates to improved net  portfolio  value during  periods of falling  general
market  interest  rates.  Conversely,  this position  presents the likelihood of
reductions in net portfolio value during increasing rate environments.  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.

         Factors  impacting the Company's net liability  sensitivity  during the
first nine months of 2000 and  forecast to affect the  Company's  interest  rate
exposure for the remainder of the year include:

         Factors reducing net liability sensitivity:

            o     The $19.1 million rise in transaction  account balances during
                  the first nine months of 2000, as transaction deposit accounts
                  are typically  less interest  rate  sensitive  than many other
                  sources of funding.  The Company intends to continue  pursuing
                  growth in  transaction  deposits  as an  integral  part of its
                  business strategy.

            o     The sale of $10.5  million in high  duration  mortgage  backed
                  securities  during the first nine  months of 2000.  Additional
                  such sales may be made  during  the fourth  quarter of 2000 in
                  conjunction   with  plans  to  further  reduce  net  liability
                  sensitivity and provide funding for  reinvestment  into higher
                  yielding pools of purchased income property loans.

            o     The continued  amortization and prepayment of long term, fixed
                  rate loans and mortgage  backed  securities  combined with the
                  sale of most  new,  long  term,  fixed  rate  loans  into  the
                  secondary  market and the focus of new  security  purchases in
                  lower  duration  instruments.  As interest  rates on new fixed
                  rate mortgages declined over the past several months,  certain
                  refinance   activity   accelerated,   shortening  the  average
                  remaining lives of certain  mortgage related  securities.  The
                  Mortgage Bankers Association Volume Refinance Index, a measure
                  of mortgage refinance  activity,  increased from approximately
                  339 at June 30,  2000 to almost  471 by the end of  September,
                  2000.

            o     The  pending  conversion  during  the last  quarter of 2000 of
                  approximately  $26.5 million in previously  purchased "hybrid"
                  residential loans from fixed rate to floating rate.

            o     The  Company's  pricing  for new  loan  originations  has been
                  designed  to  encourage  adjustable  rate  lending  and hybrid
                  lending with shorter  initial fixed rate periods (e.g. 3 years
                  versus 5 to 7 years).

            o     The introduction of a new, Prime-based owner construction loan
                  product during 2000 that  continues to effectively  serve that
                  target  market  while  also  generating   relatively  interest
                  sensitive assets.

         Factors increasing net liability sensitivity:

            o     The reduced duration of the Company's  borrowings,  as few new
                  borrowings have been added and the existing  portfolio  moves,
                  over time,  towards the maturity dates of the individual  FHLB
                  advances.

                                       24
<PAGE>

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 September 30, 2000, the Company maintained $18.1 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. During 2000, MBBC and the Bank each
entered into several  Master  Repurchase  Agreements to permit  securities  sold
under   agreements  to  repurchase   transactions   with  a  greater  number  of
counterparties.  In addition,  at September 30, 2000, 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.

         Federal  regulations  currently require thrift institutions to maintain
an  average  daily  balance  of liquid  assets  (including  cash,  certain  cash
equivalents,  certain mortgage-related  securities,  certain mortgage loans with
the  security  of a  first  lien  on  residential  property,  and  specified  US
Government,  state,  and federal agency  obligations)  equal to at least 4.0% of
either (i) the average daily balance of its net withdrawable accounts plus short
term borrowings (the "liquidity base") during the preceding calendar quarter, or
(ii) the  amount  of the  liquidity  base at the end of the  preceding  calendar
quarter.  This liquidity requirement may be changed from time to time by the OTS
to an amount  within a range of 4.0% to 10.0% of such  accounts  and  borrowings
depending upon economic conditions and the deposit flows of thrift institutions.
In addition, the Bank must comply with a general non-quantitative requirement to
maintain a safe and sound level of liquidity.

         Throughout  the first nine  months of 2000,  the  regulatory  liquidity
ratio of the Bank exceeded regulatory  requirements,  with the average ratio for
the third  quarter  equaling  7.53%.  The  Company's  strategy  generally  is to
maintain its regulatory  liquidity  ratio near the required  minimum in order to
maximize  borrowing  capacity by pledging  loans and  securities and in order to
maximize its yield through alternative investments.

         At  September  30,  2000,  MBBC  had  cash & cash  equivalents  of $717
thousand.  Following the sale of its security portfolio during the first quarter
of 2000 and the use of those  proceeds  largely  to  repurchase  shares,  MBBC's
primary  sources of funds are annual  (December)  payments of $230 thousand from
the  Bank in  conjunction  with  the  ESOP,  the  sale  of  Treasury  shares  in
conjunction  with stock  compensation  plans,  and payments on the $4.85 million
commercial  business  term  loan  primarily  secured  by  stock  in  an  insured
depository  institution  and maintained on  non-accrual  status at September 30,
2000.  As this  non-accrual  loan nears its  December  2000  maturity,  MBBC may
encounter higher  operating  costs,  and cash outflows,  in conjunction with its
collection  efforts  for  the  debt.  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.  As a result of the  foregoing,  MBBC may be
constrained in its ability to pay stockholder cash dividends and / or repurchase
additional shares of common stock in future periods.

         MBBC  intends to pursue  obtaining  a line of credit  from a  financial
institution  (other than the Bank) during the fourth  quarter of 2000 to provide
an additional source of liquidity.  In order to obtain this line of credit, MBBC
may need to pledge or encumber a portion of its treasury shares.

                                       25
<PAGE>




Capital Resources And Regulatory Capital Compliance
<TABLE>
         The Federal Deposit  Insurance Act of 1991 ("FDICIA")  required the OTS
to implement a system providing for regulatory  sanctions  against  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.  Under  FDICIA,  the OTS issued  the Prompt  Corrective
Action ("PCA")  regulations which  established  specific capital ratios for five
separate capital categories as set forth below:
<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>

<TABLE>

         The following  table  summarizes the capital ratios  required by FDICIA
for an institution to be considered well  capitalized and the Bank's  regulatory
capital at September 30, 2000 as compared to such ratios.
<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                 $ 35,597       7.43%        $ 35,597      10.53%        $ 39,825      11.79%
Well capitalized requirement              23,944       5.00%          20,276       6.00%          33,793      10.00%
                                        --------       ----         --------       ----         --------       ----
Excess                                  $ 11,653       2.43%        $ 15,321       4.53%        $  6,032       1.79%
                                        ========       ====         ========       ====         ========       ====

Adjusted assets (1)                     $478,875                    $337,928                    $337,928
                                        ========                    ========                    ========
<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.

                                        September 30, 2000    December 31, 1999
                                        ------------------    -----------------

Core capital to adjusted total assets                7.43%                7.11%
Core capital to risk-weighted assets                10.53%                9.58%
Total capital to risk-weighted assets               11.79%               10.56%


                                       26
<PAGE>

         The Bank is also subject to OTS capital regulations under the Financial
Institutions  Reform,  Recovery,  and  Enforcement  Act of 1989  ("FIRREA")  and
amendments thereto. These 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),  and  (c)  total  capital  of at  least  8.0%  of
risk-weighted assets (as defined in the regulations).

         The following  table  summarizes  the regulatory  capital  requirements
under FIRREA for the Bank. As indicated in the table,  the Bank's capital levels
at September  30, 2000 exceeded all three of the  currently  applicable  minimum
FIRREA capital requirements.

                                                                 Percent Of
                                                                   Adjusted
(Dollars In Thousands)                                                Total
                                                Amount               Assets
                                                ------               ------
Tangible Capital
----------------
Regulatory capital                             $35,597                7.43%
Minimum required                                 7,183                1.50%
                                               -------                ----
Excess                                         $28,414                5.93%
                                               =======                ====


Core Capital
------------
Regulatory capital                             $35,597                7.43%
Minimum required                                19,155                4.00%
                                               -------                ----
Excess                                         $16,442                3.43%
                                               =======                ====


                                                                 Percent Of
                                                                      Risk-
                                                                   weighted
                                                Amount               Assets
                                                ------               ------
Risk-based Capital
------------------
Regulatory capital                             $39,825               11.79%
Minimum required                                27,034                8.00%
                                               -------                ----
Excess                                         $12,791                3.79%
                                               =======                ====


         At September 30, 2000, 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.

                                       27
<PAGE>


Asset Quality / Credit Profile

Non-performing Assets

<TABLE>
         The following  table sets forth  information  regarding  non-performing
assets at the dates indicated.
<CAPTION>
(Dollars In Thousands)                                               September 30, 2000       December 31, 1999

<S>                                                                             <C>                     <C>
Outstanding Balances Before Valuation Reserves

Non-accrual loans                                                               $ 6,756                 $ 6,888
Loans 90 or more days delinquent and accruing interest                               --                      --
Restructured loans in compliance with modified terms                                 75                   1,294
                                                                                -------                 -------

Total gross non-performing loans                                                  6,831                   8,182

Investment in foreclosed real estate before valuation reserves                       --                      96
Repossessed consumer assets                                                          --                      --

Total gross non-performing assets                                               $ 6,831                 $ 8,278
                                                                                =======                 =======

Gross non-accrual loans to total loans                                            1.75%                   1.89%
Gross non-performing loans to total loans                                         1.76%                   2.25%
Gross non-performing assets to total assets                                       1.41%                   1.79%
Allowance for loan losses                                                       $ 4,806                 $ 3,502
Valuation allowances for foreclosed real estate                                 $    --                 $    --
</TABLE>

         Non-accrual  loans at September  30, 2000 are detailed in the following
table:

(Dollars In Thousands)                       Number        Principal Balance
                                                 Of           Outstanding At
Category Of Loan                              Loans       September 30, 2000
----------------                              -----       ------------------
Residential mortgage                              4                   $  695
Commercial & industrial real estate loan          2                    1,129
Business term loan                                1                    4,850
Business line of credit                           3                       82
                                                 --                  -------
Total                                            10                  $ 6,756
                                                 ==                  =======

         The $4.85 million  business term loan in the above table was originated
by MBBC and is primarily secured by the common stock of a depository institution
conducting business outside the State of California. The common stock collateral
is not  publicly  traded.  However,  the reported  book value of the  associated
depository  institution  is  approximately  $8.2 million at September  30, 2000.
During the third quarter of 2000,  the MBBC obtained  additional  collateral for
this credit,  including a third deed of trust on a commercial  building, a third
party  promissory  note, and common stock in two closely held,  privately  owned
corporations.  MBBC also has a personal  guarantee signed by a large stockholder
of the borrower.

         The  outstanding  balance of this $4.85 million  business term loan was
reduced by $150  thousand  during the most recent  quarter in  conjunction  with
principal  payments  received  from the  borrower.  An  additional  $25 thousand
principal repayment was received in early October,  2000, reducing the principal
balance to  $4,825,000.  The borrower for this  business term loan is current in
its payments. However, the loan has been maintained on non-accrual status due to
concern regarding the borrower's potential sources of funds to repay the loan at
maturity in December,  2000.  The Company  maintained a $200  thousand  specific
reserve for this loan as of September 30, 2000.  While the Company's  management
has been working with the borrower and legal  counsel for both parties to secure
timely  repayment,  the Company is presently  unable to verify that the borrower
has  access to  sufficient  liquidity  to repay  this loan at  maturity.  If the
borrower does not repay the loan by its maturity  date,  the Company will pursue
one or more of various  alternatives  including,  but not limited to,  acquiring
ownership of the associated collateral and seeking payment from the guarantor.

                                       28
<PAGE>


         The two  commercial  and  industrial  real estate loans on  non-accrual
status at  September  30,  2000 are  secured  by real  property  located  in the
Company's primary market area.  Periodic payments have recently been received on
both these loans.

Criticized And Classified Assets
<TABLE>

         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.
<CAPTION>

(Dollars In Thousands)                         OAEM     Substandard        Doubtful            Loss           Total
                                               ----     -----------        --------            ----           -----
<S>                                         <C>            <C>                 <C>            <C>           <C>
December 31, 1999                           $ 7,940        $  8,574            $ --           $ 200         $16,714
March 31, 2000                              $ 5,116        $  7,815            $ --           $ 200         $13,131
June 30, 2000                               $ 3,048        $  9,925            $ --           $ 200         $13,173
September 30, 2000                          $ 2,875        $ 13,249            $ --           $ 200         $16,324
</TABLE>

         Classified  assets as a percent of stockholders'  equity increased from
21.5% at December  31, 1999 to 31.7% at  September  30,  2000.  The  increase in
substandard  loans during the third quarter of 2000  primarily  stemmed from the
internal credit downgrade of a commercial  construction loan with an outstanding
balance of $2.8 million and a total commitment amount of $3.1 million.  The real
property  associated  with this loan is located in the Company's  primary market
area.  This loan was  negatively  impacted by the inability of the principals to
obtain an  occupancy  permit from local  governmental  agencies.  The project is
nearing  completion and the Company  believes there is reasonable  market demand
for the  project.  The Company is  currently  negotiating  and working  with the
principals to:

o    have them  complete the final  stages of  construction  without  additional
     Company  funds

o    have them  place  additional  funds on  deposit  with the  Company

o    timely pursue the  acquisition  of at least a partial  occupancy  permit in
     order to generate cash flow from the project

However,  there can be no assurance  that the Company will be  successful in the
above pursuits. There is a second deed of trust holder on the real property that
is subordinate to the Company. Based upon the value of the real property and the
financial strength and liquidity of the principals, no specific reserve has been
allocated  to this  loan at  September  30,  2000.  The loan is  current  in its
payments as of September 30, 2000.

         At September  30, 2000,  the Company was in the process of working with
borrowers to improve the credit profile of a number of criticized and classified
loans. The Company's efforts in this regard are projected to be bolstered by the
recent  addition  of  two  veteran  commercial  bankers  with  extensive  credit
experience.  Although  there  can  be  no  assurances,  should  the  Company  be
successful in these efforts,  a reduction in criticized  and  classified  assets
could be realized  before the  conclusion of 2000, as a number of the loans with
OAEM or substandard  grades at September 30, 2000 presented the potential for an
improvement in credit profile.

Impaired Loans

         At September  30,  2000,  the Company had total gross  impaired  loans,
before  specific  reserves,  of $10.5  million,  constituting  17 credits.  This
compares to gross  impaired  loans of $8.2 million at December 31, 1999.  Of the
total impaired loans at September 30, 2000,  $3.8 million were either current or
exhibited  only  minor  delinquency  and were  therefore  maintained  on accrual
status.  Interest is accrued on  impaired  loans on a monthly  basis  except for
those  loans that are 90 or more days  delinquent  or those loans which are less
than 90 days delinquent but where management has identified  concerns  regarding
the  collection  of the credit.  For the nine months ended  September  30, 2000,
accrued  interest  on  impaired  loans was $61  thousand  and  interest  of $849
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 $564  thousand  during the nine months ended  September  30,
2000,  instead of interest income  actually  recognized on cash payments of $537
thousand.

                                       29
<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 a scheduled  principal / scheduled  interest loan  servicing  agreement
from the seller. Further, this agreement also contained a warranty 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 favorable loan servicing terms, 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 / servicer,  which,  by virtue of its size,
violated the OTS' "Loans To One Borrower" regulation.

         At September 30, 2000,  the  outstanding  balance of this mortgage loan
pool was $29.3 million, with $2.83 million received during October, 2000 (normal
monthly  remittance  cycle) based upon  prepayments and scheduled  principal for
September, 2000. At December 31, 1999, the outstanding principal balance of this
mortgage loan pool was $35.0  million.  By the end of 2000,  all of the loans in
the pool  will  have  converted  from  fixed  rate to  adjustable  rate,  with a
substantial increase in interest rate at the time of such conversion. Because of
this upward rate reset feature, the Bank anticipates that the pool will continue
experiencing significant prepayments,  particularly during the fourth quarter of
2000 when there is a high  concentration  of initial  interest rate reset dates.
Following their initial  interest rate  adjustment,  the loans will reprice on a
semi-annual  basis.  The Bank continues to report to the OTS in this regard on a
monthly basis.

         Through the October 20, 2000 regularly  scheduled  remittance date, the
seller / servicer 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.  However,  during 2000, the Company  determined to
allocate additional reserves for this loan pool due to:

o    concerns  regarding  the future  capacity of the seller / servicer to honor
     the credit guaranty

o    the  present  delinquency  and  credit  profile  of  the  loan  pool

o    the differential between loan principal balances and current appraisals for
     certain loans in the process of foreclosure or already foreclosed upon

         The  Company  continues  to  monitor  the  financial   performance  and
condition of the seller / servicer on a monthly basis. In addition,  the Company
regularly  analyzes the payment  performance and credit profile of the remaining
outstanding  loans.  Portfolio  statistics as of the October 20, 2000 remittance
for activity through September 30, 2000 include the following:

(Dollars In Thousands)                                          Company
                                          Number            Outstanding
                                              Of             Investment
Category                                   Loans               In Loans
--------                                   -----               --------

Customer paying per note terms               149               $ 22,760
Customer 30 days delinquent                   16                  1,683
Customer 60 days delinquent                    2                    218
Customer 90 days or more delinquent            9                  1,073
Foreclosed                                     5                    727
                                             ---               --------
Total                                        181               $ 26,461
                                             ===               ========

         The loans  presented as delinquent or foreclosed in the above table are
not reported as delinquent, non-accrual, impaired, or foreclosed by the Company,
as the seller / servicer has advanced scheduled interest and scheduled principal
payments on the loans and thus  maintained them all on a current status with the
Company.

                                       30
<PAGE>




         Additional  portfolio  statistics as of the October 20, 2000 remittance
for activity through September 30, 2000 include the information presented in the
following  table.  FICO Score is a mathematical  calculation used throughout the
mortgage banking industry that  incorporates  various variables in quantifying a
borrower's  credit  strength.  A higher FICO Score is associated with a borrower
who presents a stronger credit profile; e.g. few or no late payments on existing
or historical debt, regular  employment  history,  favorable  financial profile,
etc. A lower  FICO Score is  associated  with a borrower  who  presents a weaker
credit profile;  e.g. multiple late payments,  uncollected debt, open judgements
against the borrower,  etc. Various  statistical studies in the mortgage banking
industry have shown that credit losses typically increase  exponentially as FICO
Scores  decline.  In other words,  the  incremental  default rate expected for a
change  from a 550  FICO  Score  to a 500 FICO  Score  is much  larger  than the
incremental  default  rate  expected for a change from a 750 FICO Score to a 700
FICO  Score.  According  to an article  posted on the Fair,  Isaac,  and Company
Internet  site  (Fair  Isaac is an  industry  leader  in credit  scoring),  most
mortgage  bankers  view a FICO  Score  of 640 or more as  allowing  the  average
borrower to obtain a home loan. Actual results may vary on a case by case basis.

         The FICO Scores  utilized in the following  table are the original FICO
Scores for the borrowers  which were calculated in 1998 by the seller / servicer
of the  Special  Residential  Loan Pool.  Borrower  credit  profiles  could have
changed, favorably or unfavorably, since that time.

(Dollars In Thousands)                                    Company
                                 Number               Outstanding
                                     Of                Investment
Original FICO Score Range         Loans                  In Loans
-------------------------         -----                  --------
Less than 500                         6                  $  1,405
500 through 549                      26                     4,094
550 through 599                      57                     7,509
600 through 649                      57                     9,162
650 through 699                      28                     3,467
700 through 749                       3                       284
Above 749                             4                       540
                                    ---                  --------
Total                               181                  $ 26,461
                                    ===                  ========

         The weighted  average  original FICO score for the Special  Residential
Loan Pool as of the October 20, 2000 remittance for activity  through  September
30, 2000 was 595.

         The original loan to value ratios for the Special Residential Loan Pool
as of the October 20, 2000  remittance for activity  through  September 30, 2000
ranged from 26% to 100%. A single loan presented an original loan to value ratio
of 100%, with the next highest original loan to value ratio being 90%.  However,
based upon current  appraisals for  foreclosed  properties and properties in the
process of foreclosure within the Special Residential Loan Pool, the Company has
become aware of deficiencies  in the current market value of certain  collateral
versus the associated loan balances.

         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

                                       31
<PAGE>

         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 2000  through a  combination  of net  income,
amortization  of deferred stock  compensation,  and  amortization  of intangible
assets,  management does not foresee that the  aforementioned  requirements will
have a material adverse impact upon the Company in 2000. 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.

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 nine months ended  September  30, 2000 and September 30,
1999:
<CAPTION>
                                                                                  Nine Months Ended September 30,
                                                                         -----------------------------------------
                                                                                        2000                 1999
                                                                                        ----                 ----
Allowance For Loan Losses                                                                (Dollars In Thousands)

<S>                                                                                  <C>                  <C>
Balance at beginning of year                                                         $ 3,502              $ 2,780

   Charge-offs:  Residential one to four unit real estate loans                         (371)                (113)

   Recoveries                                                                             --                   --

   Provision for loan losses                                                           1,675                  685
                                                                                     -------              -------

Balance at September 30                                                              $ 4,806              $ 3,352
                                                                                     =======              =======

Ratio of net charge-offs during the period to average gross loans
   outstanding during the period net of undisbursed loan funds                         0.13%                0.04%


         Additional ratios applicable to the allowance for loan losses include:

                                                                          September 30, 2000      December 31, 1999
                                                                          ------------------      -----------------

Allowance for loan losses as a percent of non-performing loans                        70.36%                 42.80%

Allowance for loan losses as a percent of gross loans receivable
     net of undisbursed loan funds                                                     1.24%                  0.96%

Allowance for loan losses as a percent of classified assets                           35.73%                 39.91%

</TABLE>
                                       32

<PAGE>



         As subsequently discussed (see "Provision For Loan Losses"), the higher
provision for loan losses  recorded  during the first nine months of 2000 versus
the same period in the prior year resulted from several factors, including:

o    a  $371  thousand  charge-off  during  the  second  quarter  of  2000  that
     represented a 100% charge-off of a residential  mortgage  secured by a home
     significantly damaged by substantial earth movement

o    additional reserves for the Special Residential Loan Pool described above

o    an increase in classified assets

o    growth in the size of the loan portfolio

o    the  portfolio's   continuing   diversification   away  from  its  historic
     concentration in residential real estate.

     Management  anticipates  that further growth in loans  receivable,  ongoing
emphasis on the  origination  and purchase of  construction  and income property
real estate loans, and the planned 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 construction,  commercial business,  and income property
real estate loans present greater risks than  residential real estate loans, and
therefore should be accompanied by suitably higher levels of reserves.

Comparison Of Operating Results For The Three Months And Nine Months
Ended September 30, 2000 and September 30, 1999

General

         For the quarter  ended  September  30, 2000,  the Company  reported net
income of $461  thousand,  equivalent  to $0.15 basic and diluted  earnings  per
share. This compares to net income of $950 thousand, or $0.29 basic earnings per
share and $0.28 diluted earnings per share, during the third quarter of 1999.

         For the nine months ended September 30, 2000, the Company  reported net
income of $1.81  million,  equivalent  to $0.58 basic and diluted  earnings  per
share. This compares to net income of $2.66 million, or $0.82 basic earnings per
share and $0.80  diluted  earnings  per share,  during the first nine  months of
1999.

         Primary factors which constrained  earnings during 2000 compared to the
same periods in 1999 included:

o    increased provisions for loan losses

o    less favorable results on the sale of securities

o    an  adjustment  to net deferred  loan fees during the third quarter of 1999
     that increased interest income by $140 thousand on a one-time basis

o    higher operating costs

o    during  the third  quarter  of 2000,  an  accrual  of $250  thousand  for a
     separation  package being negotiated with Marshall G. Delk, who resigned as
     President & Chief  Operating  Officer of the Company on September 29, 2000.
     Mr. Delk had employment agreements with the Bank and MBBC.

The above  factors more than offset a strong  expansion in net interest  income,
increased service charge income,  and other beneficial  impacts arising from the
Company's  progress in achieving its strategic  transformation  into a community
commercial bank.

                                       33
<PAGE>




Interest Rate Environment

         The table below  presents an overview of the interest rate  environment
during the most  recent  seven  quarters.  Market  interest  rates  have  varied
considerably during this time period. In mid 1999, the Federal Reserve commenced
what  became six  separate  increases  totaling  175 basis  points in its target
federal funds rate, with the last increase  occurring in May, 2000. As a result,
market interest rates generally rose through mid-2000.

         During the third  quarter of 2000,  many  market  interest  rates began
declining,  as a slowing,  though still  healthy,  economy  combined with strong
productivity  increases  convinced many capital  markets  participants  that the
crest of the  interest  rate  cycle had been  attained.  By the end of the third
quarter of 2000,  the LIBOR curve had become almost flat, the Treasury curve had
inverted, fixed mortgage rates were in decline (resulting in increased refinance
activity),  and forward  interest  rates began to reflect a possible rate cut by
the  Federal  Reserve  during the first half of 2001.  However,  there can be no
assurances  as to what  action,  if any, the Federal  Reserve  might take at any
time.

         During much of the past seven  quarters,  the  Treasury  curve has also
been  impacted by the US  Government's  repurchasing  of longer  dated  Treasury
securities  in  conjunction  with the  growing  federal  budget  surplus.  These
repurchases reduced the supply of 30 year Treasury bonds, thereby driving up the
price and decreasing the yield.

         At  September  30,  2000,  the entire  Treasury  curve  provided a bond
equivalent yield notably below the Federal Reserve's targeted federal funds rate
of 6.50%.  Note that the 11th District Cost Of Funds Index ("COFI") is by nature
a lagging  index that trails  changes in more  responsive  interest rate indices
such as those associated with the Treasury or LIBOR markets.
<TABLE>

         The interest  rate  environment  at September  30, 2000  constituted  a
traditionally difficult one for financial institutions,  including the Bank. The
flatness of the term  structure of interest  rates  reduced net interest  income
generated by differences in asset and liability  durations.  In addition,  yield
differentials  between  shorter  term  wholesale  funding  and most high  credit
quality, low duration spread products (i.e. securities bought with the objective
of generating net interest  income) were at historically  low levels,  impairing
interest  margins  and  leading  a  number  of  financial  institutions  to sell
securities,  repay  wholesale  debt,  and re-deploy the freed capital into other
areas.
<CAPTION>
Index                   12/31/98    3/31/99   6/30/99    9/30/99  12/31/99    3/31/00   6/30/00    9/30/00
-----                   --------    -------   -------    -------  --------    -------   -------    -------
<S>                        <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
3 month Treasury bill      4.46%      4.47%     4.76%      4.85%     5.31%      5.89%     5.86%      6.21%
6 month Treasury bill      4.54%      4.52%     5.03%      4.96%     5.73%      6.14%     6.22%      6.27%
1 year Treasury bill       4.52%      4.71%     5.05%      5.18%     5.96%      6.24%     6.06%      6.08%
2 year Treasury note       4.53%      4.98%     5.52%      5.60%     6.24%      6.48%     6.36%      5.97%
5 year Treasury note       4.54%      5.10%     5.65%      5.76%     6.34%      6.32%     6.18%      5.84%
30 year Treasury bond      5.09%      5.62%     5.97%      6.05%     6.48%      5.84%     5.90%      5.88%
Prime rate                 7.75%      7.75%     7.75%      8.25%     8.50%      9.00%     9.50%      9.50%
COFI                       4.66%      4.52%     4.50%      4.61%     4.85%      5.00%     5.36%      5.55%

</TABLE>
                                       34

<PAGE>

Net Interest Income

         Net interest income rose slightly from $4.36 million during the quarter
ended  September 30, 1999 to $4.40 million  during the most recent three months.
The third quarter of 1999 benefited from a $140 thousand, one-time adjustment to
net deferred  loan fees.  Net interest  income for the first nine months of 2000
totaled  $13.45  million,  up 11.7% from  $12.04  million  during the first nine
months of 1999.  These  increases  were  favorably  impacted by a larger average
balance sheet in 2000 versus 1999. The Company's  average margin on total assets
improved  from 3.56% during the first nine months of 1999 to 3.80% for the first
nine months of 2000. The Company's  average margin on total assets declined from
3.87% during the quarter  ended  September 30, 1999 to 3.67% in the three months
ended  September 30, 2000. The Company's ratio of net interest income to average
total assets was lower in the most recent  quarter than during the first half of
2000 due to:

o    the  maturity of certain  funding  locked in during the latter part of 1999
     and early 2000,  which  provided the Company with  additional  net interest
     income during a rising interest rate  environment  during the first half of
     the year

o    the  aforementioned  interest rate environment  during the third quarter of
     2000, with incremental  funding costs and incremental  investment yields at
     historically  narrow  spreads (i.e.  the Company  realized a  comparatively
     small spread on the $12.6 million in balance sheet growth  recorded  during
     the third quarter of 2000)

o    loans  receivable  representing a lower  percentage of average total assets
     during the third quarter of 2000 than earlier in 2000, in conjunction  with
     a softening in loan production during the most recent quarter

o    a lower average balance of certain relatively higher yielding  construction
     loans during the third quarter of 2000 than during the first half of 2000

         The following  factors  contributed  toward the  improvement in spreads
realized in the first nine  months of 2000  versus the  similar  period in 1999,
coincident with the Company's ongoing implementation of its strategic plan:

o    Average loans as a percentage of average total assets  increased from 73.2%
     during the first nine months of 1999 to 79.5%  during the first nine months
     of 2000.  This  change  in asset  mix was  particularly  beneficial  to the
     Company's spreads because loans are, by a significant margin, the Company's
     highest yielding asset category.

o    Transaction  deposit  accounts  comprised a greater  percentage  of average
     total  assets  during the first nine months of 2000 (32.8%) than during the
     same  period a year  earlier  (30.5%).  This change in funding mix was also
     particularly  beneficial to the Company's spreads,  as transaction  deposit
     accounts  present a significantly  lower cost of funds than do certificates
     of deposit and wholesale borrowings.

o    The  average  rate on  interest  earning  assets was 8.26%  during the nine
     months of 2000,  up 55 basis points from a year earlier.  In contrast,  the
     Company's  average cost of interest  bearing  liabilities was just 27 basis
     points  higher  during the first nine  months of 2000 than during the first
     nine months of 1999.  The Company was able to constrain the average cost of
     its funding in a rising  general  market  interest rate  environment by the
     shift in the deposit mix, utilizing new and lower cost sources of wholesale
     funding,  and by having a portion  of its  borrowings  locked in at a fixed
     rate for an extended period of time.

o    The increase in the average rate on interest earning assets during 2000 was
     fostered by the Company's shift in loan mix toward more interest  sensitive
     types of loans (e.g.  commercial  real estate) and more interest  sensitive
     products across all types of loans. During 2000, the Company introduced new
     adjustable  rate loan products and new hybrid loan products with three year
     initial fixed rates for income  property  loans,  aiming to shift  business
     away from, for example,  the less interest rate sensitive 5 year fixed rate
     balloon and 5 year fixed rate hybrid products.

                                       35
<PAGE>

<TABLE>
         The following  table presents the average  annualized  rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing  liabilities,  and the resulting net
interest  spread,  net interest  margin,  and average  interest  margin on total
assets for the three months ended September 30, 2000 and 1999.  Annualized rates
were calculated by using the day counts (e.g. 30/360,  actual/365) applicable to
each major category of financial instruments.
<CAPTION>
                                    Three Months Ended September 30, 2000     Three Months Ended September 30, 1999
                                   ----------------------------------------  ----------------------------------------
(Dollars In Thousands)                 Average                     Average       Average                     Average
                                       Balance      Interest          Rate       Balance      Interest          Rate
                                       -------      --------          ----       -------      --------          ----
Assets
------
Interest earning assets:
<S>                 <C>              <C>              <C>            <C>       <C>              <C>            <C>
   Cash equivalents (1)              $  11,303        $  187         6.58%     $   4,942        $   62         4.71%
   Investment securities (2)             7,471           150         8.03%        11,476           179         6.06%
   Mortgage backed securities (3)       58,392         1,011         6.93%        63,705         1,085         6.58%
   Loans receivable, net (4)           379,048         8,118         8.57%       347,167         7,211         8.00%
   FHLB stock                            2,869            48         6.66%         3,159            41         5.27%
                                     ---------        ------                   ---------        ------
Total interest earning assets          459,083         9,514         8.29%       430,449         8,578         7.60%
Non-interest earnings assets            20,344        ------                      20,152        ------
                                     ---------                                 ---------
Total assets                         $ 479,427                                 $ 450,601

Liabilities & Equity
--------------------
Interest bearing liabilities:
   NOW accounts                      $  37,419           137         1.46%     $  26,798           107         1.54%
   Savings accounts                     15,885            64         1.60%        15,571            71         1.79%
   Money market accounts                91,749         1,088         4.72%        91,697           962         4.16%
   Certificates of deposit             233,497         3,243         5.53%       216,152         2,535         4.79%
                                     ---------        ------                   ---------        ------         ----

   Total interest-bearing deposits     378,550         4,532         4.76%       350,218         3,675         4.29%
   FHLB advances                        40,675           583         5.70%        36,652           505         5.50%
   Other borrowings (5)                     11            --         6.73%         2,530            38         5.78%
                                     ---------        ------                   ---------        ------

Total interest-bearing liabilities     419,236         5,115         4.85%       389,400         4,218         4.41%
Demand deposit accounts                 16,642        ------                      17,856        ------
Other non-interest bearing
liabilities                              3,001                                     1,647
                                     ---------                                 ---------

Total liabilities                      438,879                                   408,903

Stockholders' equity                    40,548                                    41,698
                                     ---------                                 ---------

Total liabilities & equity           $ 479,427                                 $ 450,601
                                     =========                                 =========

Net interest income                                   $4,399                                    $4,360
                                                      ======                                    ======
Interest rate spread (6)                                             3.44%                                     3.67%
Net interest earning assets             39,847                                    41,049
Net interest margin (7)                                3.83%                                     4.05%
Net interest income /
     average total assets                              3.67%                                     3.87%
Interest earnings assets /
     interest bearing liabilities         1.10                                      1.11

<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  investment  securities  both  available  for  sale  and  held  to
     maturity.

(3)  Includes  mortgage backed  securities,  including CMO's, both available for
     sale and held to maturity.

(4)  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 of $69,000 and $182,000 in 2000 and
     1999, respectively.

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

(6)  Interest rate spread represents the difference  between the average rate on
     interest   earning  assets  and  the  average  rate  on  interest   bearing
     liabilities.

(7)  Net  interest  margin  equals net  interest  income  before  provision  for
     estimated loan losses divided by average interest earning assets.
</FN>
</TABLE>

                                       36
<PAGE>
<TABLE>
         The following  table presents the average  annualized  rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing  liabilities,  and the resulting net
interest  spread,  net interest  margin,  and average  interest  margin on total
assets for the nine months ended September 30, 2000 and 1999.  Annualized  rates
were calculated by using the day counts (e.g. 30/360,  actual/365) applicable to
each major category of financial instruments.
<CAPTION>
                                    Nine Months Ended September 30, 2000      Nine Months Ended September 30, 1999
                                   ----------------------------------------  ----------------------------------------
(Dollars In Thousands)                 Average                     Average       Average                     Average
                                       Balance      Interest          Rate       Balance      Interest          Rate
                                       -------      --------          ----       -------      --------          ----
Assets
------
Interest earning assets:
<S>                                  <C>            <C>              <C>       <C>            <C>              <C>
   Cash equivalents (1)              $   8,733      $    411         6.29%     $   6,830      $    244         4.78%
   Investment securities (2)             9,397           536         7.62%        14,394           669         6.21%
   Mortgage backed securities (3)       55,052         2,888         6.99%        77,510         3,842         6.61%
   Loans receivable, net (4)           375,140        23,972         8.52%       329,965        20,103         8.12%
   FHLB stock                            3,047           169         7.41%         3,118          118          5.06%
                                     ---------      --------                   ---------      --------
Total interest earning assets          451,369        27,976         8.26%       431,817        24,976         7.71%
Non-interest earnings assets            20,491                                    19,031
                                     ---------                                 ---------
Total assets                         $ 471,860                                 $ 450,848
                                     =========                                 =========

Liabilities & Equity
--------------------
Interest bearing liabilities:
   NOW accounts                      $  34,781           399         1.53%     $  23,538           270         1.53%
   Savings accounts                     15,506           199         1.71%        15,444           208         1.80%
   Money market accounts                87,747         2,986         4.55%        81,043         2,515         4.15%
   Certificates of deposit             228,437         8,985         5.25%       231,229         8,354         4.83%
                                     ---------      --------                   ---------      --------
   Total interest-bearing deposits     366,471        12,569         4.58%       351,254        11,347         4.32%
   FHLB advances                        45,392         1,950         5.74%        35,098         1,443         5.50%
   Other borrowings (5)                    225            11         6.53%         3,413           146         5.72%
                                     ---------      --------                   ---------      --------
Total interest-bearing liabilities     412,088        12,530         4.71%       389,765        12,936         4.44%
Demand deposit accounts                 16,722      --------                      17,635      --------
Other non-interest bearing               3,058                                     1,804
liabilities                          ---------                                 ---------

Total liabilities                      431,868                                   409,204

Stockholders' equity                    39,992                                    41,644
                                     ---------                                 ---------
Total liabilities & equity           $ 471,860                                 $ 450,848
                                     =========                                 =========

Net interest income                                 $ 13,446                                  $ 12,040
                                                    ========                                  ========
Interest rate spread (6)                                             3.55%                                     3.27%
Net interest earning assets             39,281                                    42,052
Net interest margin (7)                                3.97%                                     3.72%
Net interest income /
     average total assets                              3.80%                                     3.56%
Interest earnings assets /
     interest bearing liabilities         1.10                                      1.11
<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  investment  securities  both  available  for  sale  and  held  to
     maturity.

(3)  Includes  mortgage backed  securities,  including CMO's, both available for
     sale and held to maturity.

(4)  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 of $211,000 and $252,000 in 2000 and
     1999, respectively.

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

(6)  Interest rate spread represents the difference  between the average rate on
     interest   earning  assets  and  the  average  rate  on  interest   bearing
     liabilities.

(7)  Net  interest  margin  equals net  interest  income  before  provision  for
     estimated loan losses divided by average interest earning assets.
</FN>
</TABLE>

                                       37
<PAGE>




Rate / Volume Analysis
<TABLE>

         The following  tables utilize the figures from the preceding  tables to
present a comparison  of interest  income and interest  expense  resulting  from
changes in 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.
<CAPTION>

                                                             Three Months Ended September 30, 2000
                                                                          Compared To
                                                             Three Months Ended September 30, 1999
                                             ----------------------------------------------------------------------
                                                                                          Volume

(Dollars In Thousands)                                Volume              Rate            / Rate               Net
                                                      ------              ----            ------               ---
<S>                                                    <C>               <C>               <C>              <C>
Interest-earning assets
-----------------------
Cash equivalents                                       $  79             $  20             $  26            $  125
Investment securities                                    (62)               51               (18)              (29)
Mortgage backed securities                               (90)               18                (2)              (74)
Loans receivable, net                                    662               224                21               907
FHLB Stock                                                (4)               12                (1)                7
                                                       -----            ------             -----             -----
     Total interest-earning assets                       585               325                26               936
                                                       -----            ------             -----             -----

Interest-bearing liabilities
----------------------------
NOW Accounts                                              42                (9)               (3)               30
Savings accounts                                           1                (8)               --                (7)
Money market accounts                                      1               125                --               126
Certificates of deposit                                  202               471                35               708
                                                       -----            ------             -----             -----
Total interest-bearing deposits                          246               579                32               857
FHLB advances                                             55                22                 1                78
Other borrowings                                         (38)                5                (5)              (38)
                                                       -----            ------             -----             -----
     Total interest-bearing liabilities                  263               606                28               897
                                                       -----            ------             -----             -----

Increase in net interest income                        $ 322            $ (281)            $  (2)            $  39
                                                       =====            ======             =====             =====
</TABLE>

                                       38
<PAGE>

<TABLE>
<CAPTION>

                                                             Nine Months Ended September 30, 2000
                                                                          Compared To
                                                             Nine Months Ended September 30, 1999
                                             ----------------------------------------------------------------------
                                                                                          Volume
(Dollars In Thousands)                                Volume              Rate            / Rate               Net
                                                      ------              ----            ------               ---
<S>                                                    <C>               <C>               <C>              <C>
Interest-earning assets
-----------------------
Cash equivalents                                      $   68             $  77             $  22           $   167
Investment securities                                   (233)              152               (52)             (133)
Mortgage backed securities                            (1,113)              224               (65)             (954)
Loans receivable, net                                  2,752               982               135             3,869
FHLB Stock                                                (3)               55                (1)               51
                                                       -----             -----             -----            ------
     Total interest-earning assets                     1,471             1,490                39             3,000
                                                       -----             -----             -----            ------
Interest-bearing liabilities
----------------------------
NOW Accounts                                             129                --                --               129
Savings accounts                                           1               (10)               --                (9)
Money market accounts                                    209               241                21               471
Certificates of deposit                                 (101)              738                (6)              631
                                                       -----             -----             -----            ------
Total interest-bearing deposits                          238               969                15             1,222
FHLB advances                                            424                64                19               507
Other borrowings                                        (137)               21               (19)             (135)
                                                       -----             -----             -----            ------
     Total interest-bearing liabilities                  525             1,054                15             1,594
                                                       -----             -----             -----            ------
Increase (decrease) in net interest income             $ 946             $ 436             $  24            $1,406
                                                       =====             =====             =====            ======

</TABLE>


Interest Income

         Interest  income  increased  from $8.6 million and $25.0 million during
the three and nine months  ended  September  30, 1999 to $9.5  million and $28.0
million during the three and nine months ended June 30, 2000.  This increase was
primarily due to:

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

o    a generally higher interest rate  environment in 2000 versus 1999,  leading
     to greater  amounts of  interest  income on  adjustable  rate loans and new
     asset originations and purchases

o    a larger  average  balance  sheet  during the three and nine  months  ended
     September 30, 2000 compared to the same periods during the prior year

                                       39
<PAGE>




         Interest income on loans rose from $7.2 million during the three months
ended September 30, 1999 to $8.1 million during the most recent quarter. For the
nine months ended  September  30, 2000,  interest  income on loans totaled $24.0
million,  up 19.2% from $20.1 million  during the first nine months of 1999. The
expansion  in  interest  income on loans  during  2000  versus 1999 was due to a
combination of greater volumes and higher 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 resulted from two
factors:

o    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

o    the upward  repricing of adjustable  rate loans within the  Company's  loan
     portfolio in conjunction with higher general market interest rates

         Interest  income on cash  equivalents  rose from $62  thousand and $244
thousand for the three and nine months ended September 30, 1999 to $187 thousand
and $411 thousand for the same periods in 2000. These increases  occurred due to
a combination  of higher volumes and higher rates.  The higher average  interest
rates stemmed from both the higher general interest rate environment in 2000 and
from the Company's  enhanced cash management  practices in 2000.  These enhanced
cash  management  practices  included  utilizing  a wider  range of  short  term
investment  products  shopped  among a  greater  number  of  counterparties.  In
particular,  the Company earned comparatively  attractive rates of return during
2000 on certain overnight repurchase agreements  collateralized with whole loans
conducted with  counterparties  presenting a strong credit  profile.  During the
third quarter of 2000, the Company  maintained a higher average  balance of cash
equivalents than targeted due to loan  originations  below forecasted levels and
due to loan purchases closing toward the end of the period.

         Interest  income on investment  securities  declined from $179 thousand
and $669 thousand  during the three and nine months ended  September 30, 1999 to
$150 thousand and $536 thousand  during the same periods in 2000. This reduction
occurred as higher  interest rates,  particularly on LIBOR based,  variable rate
corporate trust preferred securities,  were insufficient to offset the impact of
lower average  volumes  stemming from the Company's  strategic  plan of shifting
assets into loans.

         Interest  income on mortgage  backed  securities fell from $1.1 million
and $3.8 million  during the three and nine months ended  September  30, 1999 to
$1.0 million and $2.9 million during the same periods in 2000. This decrease was
primarily caused by a reduction in volume, as the Company used the proceeds from
prepayments and sales of mortgage  backed  securities to fund growth in the loan
portfolio and, in 2000, repay FHLB advances and other borrowings. All securities
purchased by the Company in 2000 have been mortgage backed securities, primarily
short term, low duration,  Agency collateralized mortgage obligations,  as these
assets  provide  a  steady  stream  of cash for  reinvestment  into  loans,  are
relatively liquid, can be easily used in collateralized borrowings,  count under
the Qualified  Thrift Lender test, and support the Company's  interest rate risk
management objectives.

         Interest  income on FHLB stock  increased  from $41  thousand  and $118
thousand  during  the three and nine  months  ended  September  30,  1999 to $48
thousand  and $169  thousand  during  the same  periods in 2000.  This  increase
largely stemmed from higher  effective  dividend  rates,  which in turn resulted
from two factors:

o    the higher general market interest rate environment in 2000 versus 1999

o    the FHLB-SF  decision to pay  particularly  high dividend  rates during the
     first two quarters of 2000 in conjunction with its capital management plan

                                       40
<PAGE>




Interest Expense

         Interest  expense on  deposits  increased  from $3.7  million and $11.3
million  during  the three and nine  months  ended  September  30,  1999 to $4.5
million and $12.6 million during the same periods in 2000.  These increases were
due to both  higher  average  volumes  and greater  interest  rates.  The higher
volumes  occurred in conjunction  with the Company's  strategic plan to continue
expanding its deposit base. The higher general market interest rate  environment
in 2000 led the  Company to raise  interest  rates  across  most of its  deposit
product line in order to remain  competitive  with other financial  institutions
and non-bank competitors including money market mutual funds.

         The Company's  interest expense on deposits during the third quarter of
2000 was impacted by:

o    the addition of the State of California $8.0 million time deposit, which is
     priced more similar to a wholesale  borrowing than to a retail  certificate
     of deposit

o    the rollover and substantial  upward repricing of a significant  portion of
     the certificate of deposit portfolio in June, 2000

These factors significantly contributed to the weighted average cost of deposits
rising from 4.39%  during the second  quarter of 2000 to 4.56%  during the third
quarter of 2000.

         A  number  of  financial  institution  competitors  also  priced  their
deposits more  aggressively  and  extensively  marketed those products and price
points  during the third  quarter of 2000,  causing the  Company to  selectively
raise  deposit  rates in order to retain both funds and customer  relationships.
Actions by competitors included extensive but targeted direct mail campaigns and
the introduction of a new indexed money market product accompanied by widespread
media  advertising.  In addition,  many Internet  based  financial  institutions
continue to offer  relatively high certificate of deposit rates. The Company has
sought to constrain  the rise in its cost of deposits by  attracting  additional
transaction   account  balances,   particular  consumer  and  business  checking
accounts.

         During 2000, the Company has been particularly  successful in promoting
its Money Market Plus account,  its new Interest Checking Plus account,  and its
"40+" NOW account. These products present attractive benefits to consumers.  For
example,  customers  earn  progressively  higher  interest  rates on their Money
Market Plus and  Interest  Checking  Plus  accounts as their  balances  increase
through the products'  multiple tiers.  Customers  utilizing a "40+" NOW account
obtain free Bank image  checks and other free  services.  To further  reduce the
concentration  of certificates of deposit in the deposit  portfolio and moderate
the cost of funds,  the Company  intends to introduce  new  transaction  account
products and  services in the future,  particularly  those  targeted at business
customers,.

         At September 30, 2000, the Company's  weighted  average nominal cost of
deposits  was 4.60%,  or 95 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 4.48% at June 30,  2000,  or 88 basis points below
the COFI Index for the same date.

         Interest  expense on borrowings  increased  from $543 thousand and $1.6
million  during  the three and nine  months  ended  September  30,  1999 to $583
thousand and $2.0 million during the same periods in 2000.  This rise was due to
both an increase in average volume and a rise in average interest rate.  Average
balances  increased to partially  fund the growth in the loan  portfolio,  while
interest  rates  on  maturing  /  rollover  and  new  borrowings   increased  in
conjunction with the capital markets environment.

                                       41
<PAGE>

Provision For Loan Losses

         Provision for loan losses totaled $650 thousand during the three months
ended  September  30, 2000,  up from $265  thousand  during the third quarter of
1999.  Provision  for loan losses for 2000 year to date total  $1,675  thousand,
significantly  above the $685 thousand  recorded during the first nine months of
1999. The significantly  higher provisions during the 2000 stemmed from multiple
factors, as discussed below.

         During  the second  quarter of 2000,  the  Company  recorded  its first
charge-off of the year.  The $371 thousand  charge-off  represented a relatively
unusual 100% loss on a residential mortgage.  The subject home was impacted by a
significant landslide, which was sufficiently extensive to both damage the house
and  eliminate  any land value.  The Company  plans to pursue  recovery  through
financial  participation  in any proceeds from  litigation  being pursued by the
borrower.

         Additional  reserve  allocations  were made during the second and third
quarters  of 2000 for the  Special  Residential  Loan  Pool  which  the  Company
purchased  in 1998.  While the  seller has met all its  contractual  obligations
through October, 2000, the Company allocated additional reserves due to concerns
regarding the future  capacity of the seller to honor its credit  guaranty,  the
present delinquency  profile of the mortgage pool, and the differential  between
loan principal balances and current appraisals for foreclosed loans and loans in
the process of foreclosure (see Special Residential Loan Pool).

         Loans rated "substandard" by the Company increased from $7.8 million at
March 31, 2000 to $9.9  million at June 30, 2000 to $13.2  million at  September
30, 2000. The Company  allocates a greater  percentage of reserves against loans
classified as substandard versus those loans receiving a more favorable internal
credit rating. During the third quarter of 2000, a commercial  construction loan
with an  outstanding  balance of $2.8 million and a total  commitment  amount of
$3.1 million was downgraded to  substandard,  contributing  to an increased need
for loan loss reserves at September 30, 2000.

         The size of the Company's loan portfolio has increased throughout 2000,
and the mix of loans continued to evolve away from its historic concentration in
relatively lower risk residential  mortgages.  The Company allocates reserves in
accordance  with both loan  portfolio  size and mix,  with the recent  growth in
commercial & industrial  real estate  loans in  particular  generating a greater
internal requirement for loan loss reserves.

         Other  factors  contributing  to the higher  provision  for loan losses
recorded during 2000 included:

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

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

         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.

         The Company's  ratio of loan loss  reserves to gross loans  outstanding
increased  from 0.96% at December 31, 1999 to 1.24% at September  30, 2000.  The
Company  anticipates  that this ratio will  continue  to  increase in the fourth
quarter of 2000 to the extent that the Company is  successful  in its  strategic
plan of increasing total assets while expanding  construction,  income property,
and small  business  lending.  The Company has  recently  hired two  experienced
commercial  bankers to augment  its  production  and  management  of  commercial
business loans.

                                       42
<PAGE>




Non-interest Income

         Non-interest  income  increased  from $564  thousand  during  the third
quarter of 1999 to $630  thousand  during the three months ended  September  30,
2000. In contrast,  non-interest  income  declined from $2.0 million  during the
first nine months of 1999 to $1.7 million  during the first nine months of 2000.
The reduction in year to date figures was primarily caused by differing  results
on the  sale of  securities;  partially  mitigated  by an  increase  in  service
charges.  During the first nine months of 1999, a pre-tax gain of $503  thousand
was  realized on the sale of  securities,  versus a $77  thousand  pre-tax  loss
during 2000, resulting in an aggregate $580 thousand pre-tax difference.

         Non-interest  income from the Company's  core  operations has generally
showed strong  improvement  over the past year. Fee income from customer service
charges  increased  31.9% from $270 thousand during the third quarter of 1999 to
$356  thousand  during  the third  quarter  of 2000.  Year to date  results  are
similar,  with customer service charges increasing from $747 thousand during the
first nine months of 1999 to $949 thousand for 2000.  The rise in service charge
income during 2000 has resulted from:

o    the Company's growing base of transaction accounts

o    increased debit card activity by the Bank's customers

o    a new fee & service charge schedule that was  implemented  during the third
     quarter of 2000

         The Company is pursuing higher service charge income in future quarters
through:

o    the installation of an additional remote ATM

o    further increases in the portfolio of transaction accounts

o    the implementation of Internet banking with electronic bill payment

o    the conversion of additional business checking accounts to account analysis

         Commissions from the sale of non-FDIC  insured  products  experienced a
comparatively  weak  quarter  during  the third  quarter of 2000,  with  results
impaired by a lack of a President for the Bank's Portola Investment  Corporation
subsidiary and by the write-off of certain accounts receivable. Commissions from
sales of  noninsured  products  declined  from $194  thousand  during  the third
quarter of 1999 to $145 thousand  during the third quarter of 2000. The Bank has
retained  an  executive  search  firm to assist in  hiring a new  President  for
Portola  Investment  Corporation,  who functions as the  alternative  investment
program  manager for the Bank.  For the first nine  months of 2000,  commissions
from the sale of non-FDIC insured investment products totaled $534 thousand,  up
from $465 thousand during the first nine months of 1999.

         Income from loan servicing declined from $46 thousand and $111 thousand
during the three and nine months  ended  September  30, 1999 to $30 thousand and
$90 thousand  during the similar  periods in 2000.  Because the Company has been
conducting  its mortgage  banking on a servicing  released  basis and because of
principal  reductions  on the existing  portfolio  of loans  serviced for others
(particularly Agency servicing), the Company anticipates that loan servicing for
others will continue to decrease.

                                       43
<PAGE>


General & Administrative Expense

         General &  administrative  expenses rose from $2.97 million  during the
third  quarter of 1999 to $3.55  million  during the most recent  three  months.
General & administrative  expenses increased from $8.68 million during the first
nine months of 1999 to $10.26  million during the first nine months of 2000. The
Company's  ratio of general &  administrative  expense to average  total  assets
increased  from 2.64% during the quarter  ended  September 30, 1999 to 2.96% for
the most recent three months. There was a similar increase in this ratio for the
first nine months of 2000 versus 1999.  Higher  expense  levels were realized in
most areas of the Company's operations as a result of increased business volumes
and several other factors, as discussed below.

         Compensation  and employee  benefits  expense was $543 thousand  higher
during  the  third  quarter  of 2000 than  during  the  third  quarter  of 1999.
September 30 year to date  compensation  and employee  benefits expense was $909
thousand  higher  in 2000  than in 1999.  Factors  leading  to  these  increases
included:

o    an accrual of $250 thousand during the third quarter of 2000 in conjunction
     with the  negotiation  of a separation  package for  Marshall G. Delk,  who
     resigned as President & Chief Operating  Officer on September 29, 2000. Mr.
     Delk maintained employment contracts with both the Bank and MBBC.

o    a  larger  average   employee  base  in  2000,  with  9.5%  more  full-time
     equivalents  ("FTE's")  employed at September 30, 2000 versus September 30,
     1999

o    $30  thousand in employee  relocation  costs  during  2000,  including  $20
     thousand during the third quarter

o    higher  expenses for  performance  based  incentive and  commission  plans,
     including  $150 thousand in accrued  costs for a new program  introduced in
     2000 associated with performance based cash incentives

o    the need to increase selected  compensation  levels during 2000 in order to
     attract and retain qualified staff in a competitive environment for labor

o    the addition of a new Chief Executive Officer, a Chief Financial Officer, a
     Controller, and a Systems Conversion Manager in 2000

o    $34  thousand  in  non-recurring  costs  during the second  quarter of 2000
     associated   with  the   settlement  of  certain   non-qualified   benefits
     obligations payable in Company stock

         Occupancy  and  equipment  expenses  increased in 2000 versus the prior
year in part in conjunction with the hiring of a new facility management company
in 2000. The new facility  management  company identified  deferred  maintenance
items for several buildings that were addressed in 2000.

         Data processing  costs increased in conjunction with a larger number of
customer  accounts,  as the  Company  incurs  certain  expenses on a per account
basis. In addition,  due to the short term, and more  expensive,  renewal of the
Company's current primary data processing  contract during the second quarter of
2000, the Company anticipates  continuing to incur greater data processing costs
until  conversion to the new core processing  platform during 2001. The new core
processing  platform is built upon a leading relational database and operates in
a client / server  environment.  This new core processing  platform was selected
because  of  its  ability  to  effectively   support  the  Company's   strategic
transformation and due to the efficiencies inherent in its structure and design.
The Company is using the  implementation of the new core processing system as an
opportunity  to  re-engineer  a wide range of  processes,  from  demand  deposit
account analysis to security accounting to safe deposit box billing.

         Legal and accounting costs were $54 thousand greater in the most recent
quarter than they were during the third quarter of 1999. September 30, 2000 year
to date legal and  accounting  costs totaled $167 thousand  above their level of
one year  earlier.  During 2000,  the Company has incurred  higher costs for its
co-sourced  internal audit program and in conjunction  with the attestation work
of its  independent  auditors.  During the past nine  months,  the  Company  has
incurred  significant  legal costs in regards to several  issues,  including the
Special Residential Loan Pool, a now settled employment related matter, a review
of certain  employee  benefit plans,  the  administration  and collection of the
$4.85 million non-accrual loan originated by MBBC, and research into a potential
change in charter for the Bank.

                                       44
<PAGE>




         Expenses for consulting  increased  from $49 thousand  during the first
nine  months of 1999 to $118  thousand  during  the first  nine  months of 2000.
During  2000,  the Company  has  retained  consultants  to assist in a number of
areas,  including systems conversions,  Internet banking,  regulatory compliance
testing,  compensation and benefit planning, and loan credit review.  Charitable
contributions  increased from $33 thousand  during the first nine months of 1999
to $65 thousand during the first nine months of 2000.

         As detailed in the Company's  Proxy Statement for the Annual Meeting of
Stockholders  held  on May  25,  2000,  the  Director  Emeritus  Program  allows
individual  Directors meeting certain service requirements to retire between the
ages of 65 and 72; and to receive upon retirement  certain benefits  including a
cash  payment  equal to the then  current  annual  Director  retainer  fee.  Two
Directors  retired  from the Board  during the second  quarter of 2000,  and the
Company is accruing  additional  expense  under this Program in order to provide
benefits to eligible  Directors  in future  periods.  A total of $56 thousand in
expense has been recorded for this Program in 2000.

         During the nine  months  ended  September  30,  2000,  a range of other
operating costs,  including  supplies,  postage,  and correspondent bank service
charges all rose from their levels of one year earlier in  conjunction  with the
Company's  growth in  customer  accounts.  Operating  expenses  during the third
quarter of 2000 were also increased by various  promotional costs related to the
Company's 75th anniversary.  The Company used the 75th anniversary  milestone to
conduct a series of community outreach events aimed at increasing visibility and
developing new customer  relationships.  The Company is currently in the process
of re-evaluating its correspondent  banking and branch support operations,  with
the intent to seek alternatives  providing better customer service combined with
lower costs to the Bank. In  conjunction  with this process,  the Bank commenced
operating as the "bank of first deposit" in October, and thus settled certain of
its accounts directly with the Federal Reserve Bank of San Francisco.

         The  Company's   Board  of  Directors  and  Management   recognize  the
importance of reducing the Company's ratio of general &  administrative  expense
to average total assets in improving profitability. During the second quarter of
2000, the Company made the final payment to the investment banking firm that had
been  retained  in  1999.  The  Company  terminated  all of its  directly  owned
universal life insurance  policies  during 2000. The surrender of these policies
reduces future periodic operating costs and provides additional cash for lending
and investment.  During the third quarter of 2000, the Company commenced a broad
initiative  to constrain its operating  costs.  The Company  intends to continue
reviewing its vendor  relationships and internal operating costs as the tactical
business  plan  for  2001  is  finalized  and as the  integration  planning  and
re-engineering for the new core processing environment is completed.

Income Taxes

         Income tax expense  declined in 2000 versus 1999 due to reduced pre-tax
income.  The Company's  effective  book tax rate during the first nine months of
2000 was  slightly  higher  than for the  comparable  period  in 1999 due to the
increased  effect of various  permanent  differences in light of lower levels of
pre-tax income.

Item 3.  Quantitative And Qualitative Disclosures About Market Risk

         For a current  discussion of the nature of market risk  exposures,  see
"Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - Interest Rate Risk Management And Exposure". Readers should also
refer to the quantitative and qualitative  disclosures  (consisting primarily of
interest rate risk) in the  Company's  Annual Report on Form 10-K for the fiscal
year ended  December 31,  1999.  There has been no  significant  change in these
disclosures since the filing of that document.

                                       45
<PAGE>


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings

         The Company is not involved in any material  pending legal  proceedings
         other than routine legal  proceedings  occurring in the ordinary course
         of business.  Such other routine legal proceedings in the aggregate are
         believed by management  to be  immaterial  to the  Company's  financial
         condition or results of operations.

Item 2.  Changes In Securities

         None.

Item 3.  Defaults Upon Senior Securities

         Not applicable.

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

         No matters  were  submitted  to a vote of security  holders  during the
quarter ended September 30, 2000.

Item 5.  Other Information

         None.

Item 6.  Exhibits And Reports On Form 8-K

         A.  Exhibits

                  27       Financial Data Schedule (in electronic filing only)

         B.  Reports On Form 8-K

                  During the period July 1, 2000 through  October 31, 2000,  the
                  Company filed the following Current Reports on Form 8-K:

                    1.     Form 8-K dated September 8, 2000. This Current Report
                           reported  the  signing of an  Information  Processing
                           System  Agreement  between Monterey Bay Bank and Open
                           Solutions, Inc.

                    2.     Form 8-K  dated  September  29,  2000.  This  Current
                           Report  reported the  resignation of Marshall G. Delk
                           from his positions as President  and Chief  Operating
                           Officer  at  both  Monterey  Bay  Bancorp,  Inc.  and
                           Monterey Bay Bank.

                    3.     Form 8-K dated October 20, 2000.  This Current Report
                           reported the hiring of David E. Porter as Senior Vice
                           President  of  Commercial   and  Retail  Banking  for
                           Monterey Bay Bank.  This Current Report also reported
                           that C. Edward Holden was appointed President of both
                           Monterey  Bay  Bancorp,  Inc.  and Monterey Bay Bank.
                           This Current Report also reported the  resignation of
                           Gary C. Tyack as Senior Vice  President  and Director
                           of Retail Banking for Monterey Bay Bank.

                    4.     Form 8-K dated October 31, 2000.  This Current Report
                           contained Registrant's third quarter earnings release
                           and  information  regarding  changes  in the Board of
                           Directors.

                                       46
<PAGE>




                                   SIGNATURES

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

                                                  MONTEREY BAY BANCORP, INC.
                                                                (Registrant)



Date:    November 13, 2000                  By:      /s/ C. Edward Holden
                                                     ---------------------
                                                     C. Edward Holden
                                                     Chief Executive Officer
                                                     President
                                                     Vice Chairman



Date:    November 13, 2000                  By:      /s/ Mark R. Andino
                                                     ---------------------
                                                     Mark R. Andino
                                                     Chief Financial Officer
                                                     (Principal Financial &
                                                     Accounting Officer)




                                       47