UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

(Mark One)

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

                For the quarterly period ended September 30, 1999

                                       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 0-24842


                           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
      incorporation or organization)                     Identification No.)

567 AUTO CENTER DRIVE, WATSONVILLE, CALIFORNIA                  95076
--------------------------------------------------------------------------------
   (Address of principal executive offices)                   (Zip Code)

                                 (831) 768-4800
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)

                                 Not Applicable
--------------------------------------------------------------------------------
              (Former name, former address and former fiscal year,
                         if changed since last report)

         Indicate by check mark whether the registrant (1) has filed all 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:  3,492,887 shares of
common  stock,  par value $.01 per share,  were  outstanding  as of November 10,
1999.


<PAGE>



<TABLE>
                                            MONTEREY BAY BANCORP, INC.

                                                       Index


<CAPTION>
PART I.          FINANCIAL INFORMATION                                                                              Page
                 ---------------------
<S>              <C>                                                                                                <C>
                 Item 1     Consolidated Statements of Financial Condition as of
                            September 30, 1999 and December 31, 1998..............................................   1

                            Consolidated Statements of Operations for the Three and
                            Nine Months Ended September 30, 1999 and 1998.........................................   2

                            Consolidated Statement of Stockholders' Equity for the
                            Nine Months Ended September 30, 1999..................................................   3

                            Consolidated Statements of Cash Flows for the
                            Nine Months Ended September 30, 1999 and 1998.........................................   4

                            Notes to Consolidated Financial Statements............................................   6

                 Item 2
                            Management's Discussion and Analysis of Financial Condition
                            and Results of Operations.............................................................   7

                 Item 3    Quantitative and Qualitative Disclosure of Market Risk.................................  18

PART II          OTHER INFORMATION
                 -----------------

                 Item 1    Legal Proceedings......................................................................  19

                 Item 2    Changes in Securities..................................................................  19

                 Item 3    Defaults Upon Senior Securities........................................................  19

                 Item 4    Submission of Matters to a Vote of Security Holders....................................  19

                 Item 5    Other Information......................................................................  19

                 Item 6    Exhibits and Reports on Form 8-K.......................................................  19

SIGNATURES .......................................................................................................  20

</TABLE>


<PAGE>


Item 1.  Financial Statements.
-----------------------------

MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998 (Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                     September 30,          December 31,
                                                                                         1999                  1998
                                                                                      -----------           -----------
<S>                                                                                   <C>                   <C>
ASSETS
Cash and due from depository institutions                                             $    10,093           $    11,626
Overnight deposits                                                                          2,475                 5,325
                                                                                      -----------           -----------

      Total cash and cash equivalents                                                      12,568                16,951

Loans held for sale, at market                                                               --                   2,177
Securities available for sale:
   Mortgage-backed securities (amortized cost of $62,696 at
      September 30, 1999 and $97,158 at December 31, 1998)                                 61,434                98,006

   Corporate trust preferreds (amortized cost, of $11,451 at
      September 30, 1999 and $18,658 at December 31, 1998)                                 11,271                19,154

   Investment securities (amortized cost of $252 at December 31, 1998)                       --                     256
Securities held to maturity:
   Mortgage-backed securities (market value of $65 at
      September 30, 1999 and $96 at December 31, 1998)                                         67                    97

Loans receivable held for investment (net of allowance for loan losses
   at September 30, 1999, $3,352; and at December 31, 1998, $2,780)                       358,782               298,775

Federal Home Loan Bank stock, at cost                                                       3,170                 3,039
Premises and equipment, net                                                                 7,053                 6,316
Accrued interest receivable                                                                 2,678                 2,537
Core deposit premiums and other intangibles, net                                            3,107                 3,630
Other assets                                                                                3,587                 3,881
                                                                                      -----------           -----------
TOTAL ASSETS                                                                          $   463,717           $   454,819
                                                                                      ===========           ===========
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
   Savings deposits                                                                   $   369,932           $   370,677
   Federal Home Loan Bank advances                                                         46,582                35,182
   Securities sold under agreements to repurchase                                           2,530                 4,490
   Accounts payable and other liabilities                                                   1,579                 2,581
                                                                                      -----------           -----------
      Total liabilities                                                                   420,623               412,930
                                                                                      -----------           -----------

COMMITMENTS AND CONTINGENCIES                                                                --                    --

STOCKHOLDERS' EQUITY:
   Preferred stock, $.01 par value, 2,000,000 shares authorized
      and unissued                                                                           --                    --
   Common stock, $.01 par value, 9,000,000 shares authorized
      and 4,378,289 shares issued (3,535,387 shares outstanding at
      September 30, 1999; and 3,505,355 shares outstanding at December 31, 1998)               45                    45
   Additional paid-in capital                                                              27,787                27,586
   Unearned shares held by employee stock ownership plan (188,672 at
      September 30, 1999; and 215,623 at December 31, 1998)                                (1,207)               (1,380)

   Treasury stock, at cost (956,699 shares at September 30, 1999;
      and 986,731 shares at December 31, 1998)                                            (12,625)              (12,920)

   Retained earnings, substantially restricted                                             29,942                27,764
   Accumulated other comprehensive income - unrealized gain
      (loss) on securities                                                                   (848)                  794
                                                                                      -----------           -----------
      Total stockholders' equity                                                           43,094                41,889
                                                                                      -----------           -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                            $   463,717           $   454,819
                                                                                      ===========           ===========
<FN>

See notes to consolidated financial statements.
</FN>
</TABLE>

                                                                1

<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>

CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (UNAUDITED)
(Dollars in thousands, except per share amounts)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                Three Months Ended                Nine Months Ended
                                                                    September 30,                   September 30,
                                                             ------------------------          ------------------------
                                                               1999            1998             1999             1998
<S>                                                          <C>              <C>              <C>              <C>
INTEREST INCOME:
   Loans receivable                                          $ 7,211          $ 5,127          $20,103          $15,487
   Mortgage-backed securities                                  1,085            1,793            3,842            4,767
   Other investment securities                                   282              829            1,031            2,365
                                                             -------          -------          -------          -------

      Total interest income                                    8,578            7,749           24,976           22,619
                                                             -------          -------          -------          -------
INTEREST EXPENSE:
   Savings deposits                                            3,675            4,324           11,347           12,391
   FHLB advances and other borrowings                            543              297            1,589            1,196
                                                             -------          -------          -------          -------

      Total interest expense                                   4,218            4,621           12,936           13,587
                                                             -------          -------          -------          -------
NET INTEREST INCOME BEFORE PROVISION
   FOR LOAN LOSSES                                             4,360            3,128           12,040            9,032

PROVISION FOR LOAN LOSSES                                        265               77              685              682
                                                             -------          -------          -------          -------
NET INTEREST INCOME AFTER PROVISION
   FOR LOAN LOSSES                                             4,095            3,051           11,355            8,350
                                                             -------          -------          -------          -------
NONINTEREST INCOME:
   Gain on sale of investment securities                        --                 31              503               14
   Gain  on sale of real estate owned                           --                  3               11               12
   Commissions from sales of noninsured products                 194              126              465              415
   Customer service charges                                      270              220              747              585
   Income from loan servicing                                     46               58              111              182
   Other income                                                   54               60              189              182
                                                             -------          -------          -------          -------

      Total noninterest income                                   564              498            2,026            1,390
                                                             -------          -------          -------          -------
GENERAL AND ADMINISTRATIVE EXPENSE:
   Compensation and employee benefits                          1,361            1,275            4,082            3,788
   Occupancy and equipment                                       285              250              856              816
   Data processing fees                                          269              224              757              607
   Deposit insurance premiums                                     40               36              123               99
   Legal and accounting expenses                                  94               64              322              482
   Stationery, telephone and office expenses                     156              149              443              400
   Advertising and promotion                                      69              116              234              279
   Amortization of core deposit premiums                         174              174              523              521
   Other expenses                                                523              430            1,344            1,153
                                                             -------          -------          -------          -------

      Total general and administrative expense                 2,971            2,718            8,684            8,145
                                                             -------          -------          -------          -------
INCOME BEFORE INCOME TAX EXPENSE                               1,688              831            4,697            1,595

INCOME TAX EXPENSE                                               738              371            2,041              762
                                                             -------          -------          -------          -------
NET INCOME                                                   $   950          $   460          $ 2,656          $   833
                                                             =======          =======          =======          =======

BASIC EARNINGS PER SHARE                                     $   .28          $   .13          $   .80          $   .23
                                                             =======          =======          =======          =======
DILUTED EARNINGS PER SHARE                                   $   .27          $   .12          $   .77          $   .22
                                                             =======          =======          =======          =======
CASH DIVIDENDS PER SHARE                                     $   .08          $   .06          $   .15          $   .12
                                                             =======          =======          =======          =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

                                                               2
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

<TABLE>
CONSOLIDATED  STATEMENT OF  STOCKHOLDERS'  EQUITY  (UNAUDITED) NINE MONTHS ENDED
SEPTEMBER 30, 1999 (Dollar amounts in thousands)
----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                                           Accumulated
                                                                                                              Other
                                                          Additional                                      Comprehensive
                                       Common Stock        Paid in     Acquired    Treasury     Retained  Income (loss),
                                    Shares(1)   Amount     Capital     by ESOP      Stock(2)    Earnings     net of tax     Total
                                    ---------   ------     -------     --------    ---------    --------  --------------    ------
<S>                                 <C>           <C>      <C>         <C>          <C>         <C>           <C>         <C>
Balance at
   December 31, 1998                3,505,355     $ 45     $27,586     $ (1,380)    $(12,920)   $ 27,764      $  794      $ 41,889

Options exercised
   using treasury stock                30,032                                            295          52                       347
                                                                                                    (530)                     (530)
Dividends paid

Earned ESOP shares                                             201          173                                                374

Net income                                                                                         2,656                     2,656

Change in unrealized gains
   on securities available for
   sale, net of taxes                                                                                         (1,346)       (1,346)

Reclassification adjustment
   for gains on securities
   available for sale included in
   income, net of taxes                                                                                         (296)         (296)
                                    ----------------------------------------------------------------------------------------------
Balance at
   September 30, 1999               3,535,387     $ 45     $27,787     $ (1,207)    $(12,625)   $ 29,942      $ (848)     $(43,094)
                                    ==============================================================================================

<FN>

(1)  The number of shares of common  stock  includes  359,375  shares which are pledged as security for a loan to the Bank's ESOP.
     Shares earned at September 30, 1999 and December 31, 1998 were 170,703 and 143,750, respectively.

(2)  The Company held 956,699 shares of  repurchased  Company common stock as of September 30, 1999 and 986,731 as of December 31,
     1998.

See notes to consolidated financial statements.
</FN>
</TABLE>

                                                                3
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited) (Dollars in thousands)
--------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                       Nine Months Ended
                                                                                         September 30,
                                                                                 -----------------------------
OPERATING ACTIVITIES:                                                                1999              1998
                                                                                 -------------     -----------
<S>                                                                              <C>               <C>
   Net income                                                                    $   2,656         $     833
   Adjustments to reconcile net income to net cash provided by
      operating activities:
   Depreciation and amortization of premises and equipment                             355               336
   Amortization of core deposit premiums                                               523               521
   Amortization of purchase premiums, net of discounts                                 248               781
   Loan origination fees deferred, net                                                 107               (90)
   Amortization of deferred loan fees                                                 (252)             (193)
   Provision for loan losses                                                           685               682
   Compensation expense related to ESOP shares released                                374               440
   Gain on sale of investment securities                                              (502)              (14)
   Gain on sale of real estate owned                                                   (11)              (12)
   Gain on sale of fixed assets                                                        --                (22)
   Charge-offs on loans receivable, net of recoveries                                 (113)                3
   Originations of loans held for sale                                              (5,884)           (8,923)
   Proceeds from sales of loans originated for sale                                  8,061             8,618
   Change in income taxes payable and deferred income taxes                           (291)              (32)
   Change in other assets                                                            1,187               645
   Change in interest receivable                                                      (141)             (887)
   Change in accounts payable and other liabilities                                   (447)              556
                                                                                 ---------         ---------

         Net cash  provided by operating activities                                  6,555             3,242
                                                                                 ---------         ---------

INVESTING ACTIVITIES:

   Loans originated for the portfolio, net                                        (129,825)          (68,358)
   Purchases of loans receivable                                                      (672)          (33,012)
   Principal payments on loans receivable                                           69,952            69,650
   Purchased of mortgage-backed securities available for sale                          --            (31,281)
   Proceeds from sales of mortgage-backed securities available for sale             16,920            12,564
   Principal paydowns on mortgage-backed securities                                 17,400            17,910
   Purchases of corporate securities available for sale                               --             (11,200)
   Proceeds from sale of corporate securities available for sale                     7,746              --
   Purchases of investment securities available for sale                                (7)          (15,998)
   Proceeds from sales of investment securities available for sale                     259            21,960
   Proceeds from maturities of investment securities                                  --               8,245
   Decreases in certificates of deposit                                               --                  99
   Purchases of FHLB stock                                                            (131)             (150)
   Purchases of premises and equipment, net                                         (1,092)           (2,154)
   Proceeds from sale of fixed assets                                                 --                 418
                                                                                 ---------         ---------
         Net cash used in investing activities                                     (19,450)          (31,307)
                                                                                 ---------         ---------
</TABLE>

                                                 -continued-

                                                      4
<PAGE>


MONTEREY BAY BANCORP, INC. AND SUBSIDIARY

<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (Unaudited) (Dollars in thousands)
--------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                                                       Nine Months Ended
                                                                                         September 30,
                                                                                 -----------------------------
                                                                                     1999              1998
                                                                                 -------------     -----------
<S>                                                                                 <C>            <C>
FINANCING ACTIVITIES:

   Net increase (decrease) in savings deposits                                      $ (745)        $ 50,607
   Purchase of savings deposits, net of core deposit premiums                         --              (1,096)
   Proceeds of Federal Home Loan Bank advances, net                                 11,400             3,900
   Repayments of reverse repurchase agreements, net                                 (1,960)             (350)
   Purchase of treasury stock, net of proceeds from exercised options                  346            (5,049)
   Cash dividends paid to stockholders                                                (529)             (463)
                                                                                 ---------         ---------
      Net cash provided by financing activities                                      8,512            47,549
                                                                                 ---------         ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                (4,383)           19,484

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                    16,951            13,514
                                                                                 ---------         ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                                        $ 12,568          $ 32,998
                                                                                 =========         =========

CASH PAID DURING THE PERIOD FOR:

   Interest on savings deposits and advances                                     $  12,930         $  13,963

   Income taxes                                                                      2,259               719

NONCASH INVESTING ACTIVITIES:

   Loans transferred to held for investment at market value                            171              --

   Mortgage-backed securities acquired in exchange for securitized
      loans, net of deferred fees                                                     --              47,703

   Real estate acquired in settlement of loans                                         280               194

<FN>

See notes to consolidated financial statements.
</FN>
</TABLE>

                                                             5
<PAGE>


                           MONTEREY BAY BANCORP, INC.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 1999

Note 1.

General

         The accompanying  unaudited consolidated financial statements have been
prepared in accordance with generally  accepted  accounting  principles and with
the  instructions  to Form 10-Q and Rule  10-01 of  Regulation  S-X for  interim
financial  information.  Accordingly,  the adequacy of the disclosure  contained
herein has been determined with the presumption  that the users of these interim
financial  statements have read or have access to the Annual Report on Form 10-K
of Monterey Bay Bancorp,  Inc. (the  "Company")  for the year ended December 31,
1998. Only material changes in financial condition and results of operations are
discussed in the remainder of Part I of this Quarterly Report.

         In the opinion of the  management  of the  Company and its  subsidiary,
Monterey  Bay  Bank  (the  "Bank"),  the  accompanying   unaudited  consolidated
financial  statements  contain  all  adjustments  (consisting  solely  of normal
recurring   accruals)  necessary  for  a  fair  presentation  of  the  Company's
consolidated  financial  condition at September 30, 1999, and December 31, 1998,
the results of its operations for the three and nine months ended  September 30,
1999 and 1998,  and its cash flows for the nine months ended  September 30, 1999
and 1998. All  significant  inter-company  balances and  transactions  have been
eliminated in  consolidation.  Results of operations  for any interim period are
not necessarily indicative of the operating results that may be expected for any
other interim period or for the entire year.

         In preparing  the  consolidated  financial  statements,  management  is
required to make estimates and assumptions  that affect the reported  amounts of
assets and  liabilities  as of the dates of the balance  sheets and revenues and
expenses for the periods covered. Actual results could differ significantly from
those estimates and assumptions.

Note 2.

Comprehensive Income

<TABLE>
         The following  tables disclose  comprehensive  income for the three and
nine months ended September 30, 1999 and 1998 (dollars in thousands).

<CAPTION>
                                                                 Three Months Ended    Nine Months Ended
                                                                    September 30,        September 30,
                                                                -----------------------------------------
                                                                   1999       1998       1999       1998
<S>                                                             <C>        <C>        <C>        <C>
Comprehensive income:
   Net income                                                   $   950    $   511    $ 2,656    $   833

Change in unrealized gains (loss) on securities available for
   sale, net of taxes                                              (464)       467     (1,346)       956

Reclassification adjustment for net losses on securities
   available for sale  included in income, net of taxes               0       (100)      (296)        (8)
                                                                -------    -------    -------    -------
Total comprehensive income                                      $   486    $   878    $ 1,014    $ 1,781
                                                                =======    =======    =======    =======
</TABLE>

                                                   6
<PAGE>



Note 3.

Recently issued Accounting Pronouncements

         In June 1998, the Financial  Accounting  Standards  Board (FASB) issued
Statement of  Financial  Accounting  Standards  (SFAS) No. 133  "Accounting  for
Derivative  Instruments  and  Hedging  Activities".  The  statement  establishes
accounting  and  reporting  standards  for  derivative  instruments  and hedging
activities.  The statement is effective for all fiscal  quarters of fiscal years
beginning  after June 15, 2000. The Company is in the process of determining the
impact of SFAS No. 133 on the Company's financial statements.

         In  October  1998,  the FASB  issued  SFAS  No.  134,  "Accounting  for
Mortgage-Backed  Securities  Retained after the Securitization of Mortgage Loans
Held for Sale by a  Mortgage  Banking  Enterprise".  The  Company  adopted  this
statement on January 1, 1999. It allows  companies  that hold mortgage loans for
sale to classify mortgage-backed securities retained in a securitization of such
loans as either  held-to-maturity,  available  for  sale,  or  trading  based on
management's  intentions.   This  guidance  is  consistent  with  the  treatment
established  for  investments  covered  by SFAS  115,  "Accounting  for  Certain
Investments in Debt and Equity  Securities".  The adoption of this statement was
not material to the financial results of the Company.

Note 4.

Subsequent Event

         The Company  announced  on October 22,  1999 that it was  resuming  the
repurchase program, which permits the repurchase of up to 10%, or 350,535 shares
of its  outstanding  common stock.  Since that time, the Company has repurchased
42,500 shares of common stock for $588,787.

Item 2.  Management's  Discussion  and  Analysis  of Results of  Operations  and
         Financial Condition

         Monterey  Bay  Bancorp,  Inc.  (the  "Company")  is a savings  and loan
holding  company  incorporated  in 1994 under the laws of the State of Delaware.
The Company was  organized  as the holding  company for  Monterey Bay Bank ("the
Bank") in connection with the Bank's conversion from the mutual to stock form of
ownership. On February 14, 1995, the Company issued and sold 4,492,086 shares of
its common stock at an issuance  price of $6.40 per share,  adjusted for splits,
to complete the  conversion.  Net  proceeds to the Company  were $27.1  million,
including shares purchased by the employee stock ownership plan, after deduction
of conversion  expenses and underwriting fees of $1.6 million.  The Company used
$13.5  million of the net proceeds to acquire all of the stock of the Bank.  The
Bank owns a subsidiary,  Portola Investment Corporation ("Portola"), which sells
insurance and brokerage services.

         The  Company's  primary  business  is  providing  conveniently  located
deposit facilities to attract checking, money market, savings and certificate of
deposit  accounts,  and  investing  such deposits and other  available  funds in
mortgage  loans  secured  by  one-to-four   family   residences,   construction,
commercial  real estate,  and business loans.  The Bank's deposit  gathering and
lending markets are primarily  concentrated  in the communities  surrounding its
full service offices located in Santa Cruz, Monterey,  and Santa Clara counties,
in California.  At September 30, 1999,  the Bank had eight full service  offices
and one administrative office.

                                       7

<PAGE>


Safe Harbor Statement for Forward-Looking Statements

         This report  contains  certain  forward-looking  statements  within the
meaning of Section 27A of the  Securities  Act of 1933, as amended,  and Section
21E  of the  Securities  Exchange  Act  of  1934,  as  amended.  Forward-looking
statements,  which are based on certain  assumptions  and describe future plans,
strategies,  and expectations of the Company, are generally  identifiable by use
of the words "believe," "expect," "intend," "anticipate,"  "estimate," "project"
or similar  expressions.  The Company's ability to predict results or the actual
effect of future plans or  strategies  is  inherently  uncertain.  Factors which
could have a material  adverse affect on the operations and future  prospects of
the Company include, but are not limited to, changes in: interest rates, general
economic  conditions,   legislative/regulatory   changes,  monetary  and  fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Board of Governors of the Federal Reserve System,  the quality or composition of
the loan or investment  portfolios,  demand for loan  products,  deposit  flows,
competition,  demand for  financial  services in the  Company's  market area and
accounting  principles,  policies and guidelines.  These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.

Results of Operations for the Three and Nine Months Ended September 30, 1999 and
1998

Overview

         The Company  reported net income of $950,000,  or $.28 per basic share,
for the quarter ended September 30, 1999, compared to net income of $460,000, or
$.13 per basic share, for the same period last year.  Diluted earnings per share
were $.27 for the third  quarter  of 1999,  compared  to $.12 a year ago.  Third
quarter 1999 earnings  were higher than  earnings for the similar  period a year
ago primarily due to substantial increases in net interest income resulting from
higher levels of loans receivable and decreases in the cost of funds.  Return on
average  equity was 9.04% and  return on  average  assets was .84% for the three
month period ended September 30, 1999 compared to 4.14% and .42%, respectively a
year ago.  Return on average  equity was 8.53% and return on average  assets was
 .79% for the nine month period ended  September  30, 1999  compared to 4.13% and
 .42%,  respectively a year ago. Net income for the first nine months of 1999 was
$2,656,000,  or $.80 per basic share,  an increase  from  $833,000,  or $.23 per
basic share,  recorded for the first nine months of 1998.  Diluted  earnings per
share for the nine month period ended  September  30, 1999 was $.77  compared to
$.22 for the same period in 1998.

         Net interest  income  before  provision  for loan losses and  recurring
noninterest  income rose $1.2  million  and $3.0  million for the three and nine
month  periods  ended  September  30, 1999,  respectively,  from the  comparable
periods in 1998. The increase in net interest income was primarily due to growth
in loans receivable and decreases in the cost of funds.  While deposits have not
grown during either the three or nine month  periods  ended  September 30, 1999,
compared  to the  same  periods  in  1998,  the  mix of  deposits  has  changed.
Transaction accounts (defined as checking,  money market, and passbook accounts)
represent  $152.4  million or 41.2% of total  deposits at  September  30,  1999,
compared to $113.6 million or 30.6% at December 31, 1998.

         The most significant component of the Company's revenue is net interest
income, which represents the difference between interest income,  primarily from
loans,  mortgage-backed  securities,  and the investment portfolio, and interest
expense, primarily on deposits and borrowings. The Company's net interest income
and net  interest  margin,  which is defined as net interest  income  divided by
average  interest-earning  assets, are affected by its asset growth and quality,
its asset and liability composition, and the general interest rate environment.

                                        8

<PAGE>

         Service charges, mortgage loan servicing fees, and commissions from the
sale of insurance products and investments through Portola also have significant
effects on the  Company's  results of  operations.  General  and  administrative
expenses consist primarily of employee compensation, occupancy expenses, federal
deposit insurance  premiums,  data processing fees and other operating expenses.
The Company's results of operations are also  significantly  affected by general
economic and  competitive  conditions,  particularly  changes in market interest
rates, government policies, and actions of regulatory agencies.

         Recently,  the Company has focused its efforts on becoming  more like a
community-based  commercial  bank by  increasing  its  commercial  real  estate,
construction, multi-family and business lending activities. As well, the Company
is focusing its deposit  gathering  efforts on small  businesses  in its primary
market,  which will complement the business lending  function.  Separately,  the
Company  will  continue  to pursue  growth  in lower  cost  transaction  deposit
accounts (checking, passbook, and money market accounts).

Net Interest Income

         Interest income for the quarter ended September 30, 1999,  increased by
10.7% to $8.6  million,  compared to $7.7 million for the third quarter of 1998.
For the nine months ended  September 30, 1999,  total interest  income was $25.0
million,  a 10.4%  increase  compared to $22.6 million during the same period in
1998. The primary  reason for the increase in interest  income for the three and
nine month  periods  ended  September  30, 1999,  compared to the same period in
1998, was the increase in average interest  earning assets.  The average balance
of interest  earning  assets was $431.0 million and $432.0 million for the three
and nine month periods ended  September 30, 1999,  respectively.  These balances
compare  favorably to the $415.0 million and $405.0 million  average  balance of
interest earning assets for the three and nine month periods ended September 30,
1998. The increase in average interest earning assets for the three month period
ended September 30, 1999 compared to the same period in 1998 was due to an $96.0
million increase in loans receivable,  offset by a $45.0 million decrease in the
average balance of  mortgage-backed  securities and a $35.0 million  decrease in
the average balance of investment securities.

         The weighted  average  yield on interest  earning  assets  increased to
7.97% and 7.71% for the  quarter  and nine  months  ended  September  30,  1999,
compared  to 7.46% for the same  periods  in 1998.  The  average  yield on loans
receivable was slightly lower at 8.31% and 8.12% for the quarter and nine months
ended September 30, 1999, compared to 8.18% and 8.11% for the comparable periods
in 1998. The weighted  average yield on interest earning assets during the three
and nine months ended September 30, 1999 increased  compared to the same periods
in 1998 due to  loans  receivable  for the  quarter  ended  September  30,  1999
representing a larger percentage of total interest earning assets. Average loans
receivable for the quarter and nine months ended September 30, 1999  represented
80.5% and 76.4%,  respectively,  of total interest  earning  assets  compared to
60.5% and 63.0%, respectively,  for the same periods in 1998. The yield on loans
receivable  is  substantially  higher  than  the  yield on  mortgage-backed  and
investment  securities.  The  Company  is  continuing  to pursue  its  long-term
strategic goal to increase the net interest  margin by replacing  lower-yielding
securities with higher-yielding loans.

         Interest  expense was $4.2 million and $12.9 million,  respectively for
the quarter and nine months ended  September 30, 1999,  compared to $4.6 million
and $13.6  million,  respectively  for the same periods a year ago. The $400,000
decrease in interest expense for both the quarter and $700,000  decrease for the
nine months  ended  September  30, 1999 was due to a decline in both the average
rate and average balances in deposits  primarily due to a decline in certificate
of deposits accounts,  partially offset by an increase in the average balance in
money market  accounts.  The decline in the weighted average cost of deposits is
due to the  success  the  Company has had in  achieving  its  strategic  goal of

                                       9
<PAGE>


changing  the  mix of  deposits  to  increase  transaction  accounts  (checking,
passbook,  and money market accounts) as well as a decline in rates paid on time
deposits.  At September 30, 1999,  the Company had $152.4 million in transaction
accounts  or 41.2% of  total  deposits  with a  weighted  average  cost of 2.99%
(compared to $96.9 million or 26.1% of total  deposits  with a weighted  average
cost of 2.53% at September 30, 1998.

<TABLE>
         The changes in net interest  income for the three and nine months ended
September 30, 1999 compared with the corresponding  periods in 1998 are analyzed
in the following table. The table shows the changes by major component,  setting
forth changes attributable to changes in volume, changes attributable to changes
in  interest  rates,  and  the  net  effect  of  both  (in  thousands).  Changes
attributable to both rate and volume have been attributed to rate:

<CAPTION>
                                                             Three Months Ended September 30,
                                                                  1999 Compared with 1998
                                                                    Increase (Decrease)
                                                         -----------------------------------------
                                                         Volume            Rate              Net
                                                         -------          -------          -------
<S>                                                      <C>              <C>              <C>
Interest income:
   Loans                                                 $ 1,975          $   109          $ 2,084
   Mortgage-backed securities                               (749)              41             (708)
   Investment securities                                    (440)            (107)            (547)
                                                         -------          -------          -------
                                                             786               43              829
                                                         -------          -------          -------
Interest expense:
   On customer deposits                                     (275)            (374)            (649)
   On borrowings                                             314              (68)             246
                                                         -------          -------          -------
                                                              39             (442)            (403)
                                                         -------          -------          -------
Change in net interest income                            $   747          $   485          $ 1,232
                                                         =======          =======          =======



                                                              Nine Months Ended September 30,
                                                                  1999 Compared with 1998
                                                                    Increase (Decrease)
                                                         -----------------------------------------
                                                         Volume            Rate              Net
                                                         -------          -------          -------
Interest income:
   Loans                                                 $ 4,578          $    38          $ 4,616
   Mortgage-backed securities                               (941)              16             (925)
   Investment securities                                    (983)            (351)          (1,334)
                                                         -------          -------          -------
                                                           2,654             (297)           2,357
                                                         -------          -------          -------
Interest expense:
   On customer deposits                                     (100)            (944)          (1,044)
   On borrowings                                             583             (190)             393
                                                         -------          -------          -------
                                                             483            1,134             (651)
                                                         -------          -------          -------
Change in net interest income                            $ 2,171          $   837          $ 3,008
                                                         =======          =======          =======
</TABLE>

                                       10
<PAGE>

<TABLE>

         Average  assets and  liabilities  together with average  interest rates
earned and paid for the three and nine months ended  September 30, 1999 and 1998
are summarized as follows  (dollars in millions).  Included in the quarter ended
September  30, 1999  interest  income was a one time  adjustment to net deferred
loan fees of approximately $140,000.  Excluding the effect of this adjustment in
the  quarter  ended and year to date  September  30,  1999 would  reduce the net
interest spread to 3.73% and 3.42%, respectively:
<CAPTION>
                                                           Three Months Ended September 30,
                                              ----------------------------------------------------------
                                                        1999                             1998
                                              ------------------------           -----------------------
                                               Average         Yield/            Average         Yield/
       Interest earning assets:                Balance          Rate             Balance          Rate
                                               -------          ----             -------          ----
<S>                                              <C>            <C>                <C>            <C>
          Loans                                  $347           8.31%              $251           8.18%
          Mortgage-backed securities               64           6.81%               109           6.55%
          Investment securities                    20           5.74%                55           5.99%
             Total interest earning assets        431           7.97%               415           7.46%
       Noninterest earning assets                  20                                20
                                                 ----                              ----
             Total assets                        $451                              $435
                                                 ====                              ====
       Interest bearing liabilities:
          Deposits                               $368           3.96%              $368           4.66%
          Borrowings                               39           5.49%                19           6.15%
                                                 ----                              ----
             Total interest bearing               407           4.11%               387           4.74%
       liabilities
       Noninterest bearing liabilities              2                                 3
       Stockholders' equity                        42                                45
                                                 ----                              ----

             Total liabilities and
                stockholders' equity             $451                              $435
                                                 ====                              ====

       Net interest rate spread                                 3.86%                             2.72%
       Net interest margin                                      4.05%                             3.01%

       Ratio of interest bearing assets to
          interest bearing liabilities                           106%                              107%
</TABLE>
<TABLE>
<CAPTION>
                                                           Nine Months Ended September 30,
                                              ---------------------------------------------------------
                                                       1999                               1998
                                              ------------------------           ----------------------
                                               Average         Yield/            Average         Yield/
       Interest earning assets:                Balance          Rate             Balance          Rate
                                               -------          ----             -------          ----
<S>                                              <C>            <C>                <C>            <C>
          Loans                                  $330           8.12%              $255           8.11%
          Mortgage-backed securities               78           6.61%                99           6.58%
          Investment securities                    24           5.66%                53           5.51%
                                                 ----                              ----
             Total interest earning assets        432           7.71%               405           7.46%
       Noninterest earning assets                  19                                18
                                                 ----                              ----
             Total assets                        $451                              $423
                                                 ====                              ====

       Interest bearing liabilities:
          Deposits                               $369           4.11%              $348           4.76%
          Borrowings                               38           5.52%                26           6.15%
                                                 ----                              ----
             Total interest bearing               407           4.25%               374           4.85%
       liabilities
       Noninterest bearing liabilities              2                                 3
       Stockholders' equity                        42                                46
                                                 ----                              ----

             Total liabilities and
                stockholders' equity             $451                              $423
                                                 ====                              ====

       Net interest rate spread                                 3.46%                             2.61%
       Net interest margin                                      3.72%                             2.98%

       Ratio of interest bearing assets to
          interest bearing liabilities                           106%                              108%

</TABLE>
                                       11
<PAGE>

Provision for Loan Losses

         The  allowance  for loan  losses is  maintained  at a level  considered
appropriate  by  management  and is based on an ongoing  assessment of the risks
inherent in the loan portfolio.  The allowance is increased by the provision for
estimated loan losses, which is charged against operations,  and is decreased by
the amount of net loans  charged  off  during  the  period.  In  evaluating  the
adequacy of the allowance for loan losses,  management incorporates such factors
as collateral  value,  portfolio  composition and  concentration,  and trends in
local and national  economic  conditions and the related impact on the financial
strength of the Company's borrowers. (See "Asset Quality.")

         For the three and nine months ended  September 30, 1999,  the provision
for loan losses was $265,000 and $685,000, respectively, compared to $77,000 and
$682,000  for the same  periods in 1998.  The Company  continued to increase its
provision for loan losses  largely due to a net increase in higher risk forms of
lending.  At September 30, 1999, the Company's allowance for loan losses totaled
$3.4  million or .93% of loans  receivable,  compared to $2.8 million or .92% of
loans  receivable at December 31, 1998.  At September 30, 1999,  the Company had
real estate owned totaling  $159,300,  consisting of a single one-to four-family
residential property acquired through foreclosure in 1998. This property sold on
October 12, 1999 for  $166,087,  resulting  in a small  recovery.  Nonperforming
loans  totaled  $704,804  or .19% of loans  receivable  at  September  30,  1999
compared to $1.7 million,  or .69% of loans receivable at September 30, 1998 and
$1.5 million, or .50% of loans receivable at December 31, 1998.

Noninterest Income

         Noninterest  income for the three and nine months ended  September  30,
1999 was $564,000 and $2.0 million compared to $498,000 and $1.4 million for the
comparable  periods in 1998,  primarily  due to  increases  in customer  service
charges  and  commissions  from  sales  on  noninsured  products.   Included  in
noninterest  income for the nine months ended  September  30, 1999 were gains on
the sale of investment  securities of $503,000.  Excluding the increases in gain
on the sale of investment  securities for the nine month period ended  September
30,  1999  compared  to the same period in 1998,  noninterest  income  increased
$133,000 due primarily to a $162,000  increase in customer service charges.  The
increase in customer  service  charges  resulted from  continuing  growth in the
number of customer  checking  accounts  resulting  primarily  from the continued
consolidation of financial institutions in the Company's market.

General and Administrative Expenses

         General and administrative  expenses were $3.0 million and $8.7 million
for the three and nine months ended September 30, 1999, compared to $2.7 million
and $8.1 million for similar periods in 1998. The $253,000 and $540,000 increase
in general  and  administrative  expenses  for the three and nine  months  ended
September  30,  1999  compared  to  the  same  periods  in  1998  was  primarily
attributable to increases in compensation and benefits, data processing fees and
occupancy and equipment  expenses.  The increases in general and  administrative
expenses  were  primarily  due to  higher  compensation  and  benefits  and data
processing  fees, as new employees  were hired to support the Company's  deposit
growth and the  expansion  of its branch  locations  and new  product  lines and
services.

         General and  administrative  expense as a percentage of average  assets
for the three month ended  September 30, 1999 were 2.60%,  compared to 2.50% for
the comparable period in 1998. More importantly,  the efficiency ratio, which is
general  and  administrative  expense  divided  by net  interest  income  before
provision for loan losses plus  noninterest  revenue,  improved during the three
months  ended  September  30,  1999  compared  to similar  periods in 1998.  The
efficiency  ratio for the quarter and nine months ended  September  30, 1999 was
60% and 62% respectively,  compared to 75% and 78%,  respectively for comparable
periods in 1998. The  improvement in the efficiency  ratio in 1999 was

                                       12
<PAGE>

primarily due to improvements in net interest income and securities  gains,  and
to a lesser  extent to efforts to contain  growth in general and  administrative
expenses.

COMPARISON OF CHANGES IN FINANCIAL CONDITION

         Total assets of the Company were $463.7  million at September 30, 1999,
compared to $454.8  million at December 31, 1998,  an increase of $8.9  million.
The slight increase in assets during the first nine months of 1999 was primarily
due to  the  growth  in  loans  receivable  partially  offset  by  the  sale  of
mortgage-backed  and corporate  securities and  prepayments  on  mortgage-backed
securities.

         Mortgage-backed and investment  securities  decreased $44.8 million, or
38.1%, to $72.7 million,  during the nine months ended September 30, 1999. These
decreases  were  offset by an  increase  of $60.0  million,  or 20.1%,  in loans
receivable during the same period.

         Loans  receivable  held for investment were $358.8 million at September
30, 1999,  compared to $298.8 million at December 31, 1998. Loans other than one
to four family residential real estate loans comprise $191.8 million or 53.0% of
loans  receivable at September  30, 1999 compared to $119.8  million or 39.0% or
loans  receivable.  The Company  successfully  continued to focus its efforts on
changing  its  mix of  interest  earning  assets  by  emphasizing  construction,
commercial real estate, and business lending activities,  resulting in increased
loan yields.  However,  these types of loans also carry greater credit risk than
do one to four family  residential  real estate  loans.  The growth in portfolio
loan fundings was due to a low interest rate  environment,  which  promotes loan
production,  additions  to  sales  staff,  and the  expansion  of the  Company's
portfolio  lending into  construction,  commercial,  multi-family,  and business
lending.

         At September 30, 1999, the Company's  permanent  commercial real estate
loan portfolio was $67.1 million,  or 18.5% of total loans  receivable,  up from
$37.9  million,  or 12.7% of total loans  receivable  at December 31,  1998.  At
September 30, 1999,  the Company had $53.8 million or 14.8% of net  construction
loans  compared to $27.5  million,  or 9.2%, at December 31, 1998.  Construction
loans are made  primarily to  residential  builders and to  commercial  property
developers. At September 30, 1999, the Company had $40.0 million of multi-family
residential loans, or 11.1% of total loans receivable, up from $35.4 million, or
11.9%,  at December 31, 1998. The Company also had business loans totaling $30.8
million, or 8.5%, of total loans receivable,  at September 30, 1999, compared to
$19.0  million,  or 6.4%, at December 31, 1998. The Company's one to four family
residential real estate loans totaled $167.0 million, or 47.0%, at September 30,
1999 compared to $179.0 million, or 61.0%, at December 31, 1998.

         During  the  nine  months  ended  September  30,  1999,  the  Company's
liabilities  increased by $7.7 million to $420.6 million, from $412.9 million at
December 31, 1998. The increase in liabilities was primarily  attributable to an
increase of $9.4 million in borrowings.  Deposits of $370.0 million were largely
unchanged from December 31, 1998.  Continued  emphasis has been placed on growth
of low-cost transaction deposit accounts.  Transaction deposit accounts are made
up of  passbook  savings,  checking,  and  money  market  accounts.  Transaction
accounts increased from $113.6 million,  or 30.6%, of total deposits at December
31, 1998 to $152.4  million,  or 41.2%, of total deposits at September 30, 1999.
Time  deposits  declined  from  $257.1  million at  December  31, 1998 to $217.5
million at September  30, 1999.  Average  transaction  deposits at September 30,
1999, bore a weighted average interest rate of 2.99%.

         At September 30, 1999, shareholders' equity was $43.1 million, compared
to $41.9 million at December 31, 1998.  Equity  increased by $1.2 million due to
net income for the first nine months of 1999 of $2.7 million,  partially  offset
by the payment of cash dividends  totaling  $529,000,  or $.15 per share, on the
Company's  outstanding  common  stock,  and  a  $1.6  million  decrease  in  the
unrealized gains

                                       13
<PAGE>

on securities available for sale, net of taxes. Tangible book value per share of
Monterey  Bay  Bancorp,  Inc.  common  stock was $11.95 at  September  30, 1999,
compared to $11.60 at December 31, 1998.

Interest Rate Sensitivity and Market Risk Analysis

         Market risk is the risk of losses  resulting  from  adverse  changes in
market pricing and rates. The Company's  market risk is primarily  interest rate
risk associated with its lending, deposit and borrowing functions. Interest rate
risk arises when interest  rates on assets change in a different  time period or
in a different proportion from that of liabilities. Management actively monitors
the Company's  interest rate sensitivity  position with the primary objective of
prudently  structuring  the balance sheet so that movements of interest rates on
assets and liabilities are highly correlated and produce reasonable net interest
margin  even in  periods  of  volatile  interest  rates.  Interest  rate risk is
considered by management to be the  Company's  most  significant  market risk in
terms of potential for material impact upon the Company's financial position and
results of  operations.  In the normal  course of  business,  the Company is not
exposed to other types of market  risk such as risk  associated  with  commodity
prices or foreign currencies.

         Management  seeks to manage its asset and liability  portfolios to help
reduce any  adverse  impact on its net  interest  income  caused by  fluctuating
interest  rates.  A key  objective of  asset/liability  management  is to manage
interest rate risk  associated  with changing asset and liability cash flows and
market  interest  rate  movements.  Interest rate risk occurs when interest rate
sensitive  assets and  liabilities  do not reprice  simultaneously  and in equal
volumes.  The  Company's  asset/liability  committee  provides  oversight to the
interest rate risk management process and recommends policy guidelines regarding
exposure to interest rates for approval by the Board of Directors.  Adherence to
these  policies is monitored on an ongoing basis,  and decisions  related to the
management of interest  rate exposure due to changes in balance sheet  structure
and/or market  interest  rates are made when  appropriate  and agreed to by this
committee.

         The Company manages interest rate risk principally  through emphasizing
the origination of adjustable  rate loans and short or  intermediate  term fixed
rate loans and the  matching of these  assets with short and  intermediate  term
certificates of deposit and adjustable rate borrowings. The Company's monitoring
activities  related to managing  interest  rate risk include both  interest rate
sensitivity "gap" analysis and the use of a simulation model. While gap analysis
provides a picture of the interest rate risk embedded in the balance  sheet,  it
provides only a static view of interest rate  sensitivity at a specific point in
time,  and does not measure  the  potential  volatility  in  forecasted  results
relating to changes in market interest rates over time. Accordingly, the Company
combines the use of gap analysis with use of a simulation model,  which provides
a dynamic  assessment  of interest rate  sensitivity.  The  simulation  model is
designed to enable the Company to generate a forecast of net interest income and
market value of equity given  various  interest rate  forecasts and  alternative
strategies.  The model is also designed to measure the  anticipated  impact that
prepayment  risk,  basis risk,  customer  maturity  preferences,  volumes of new
business and changes in the relationship  between long- and short-term  interest
rates have on the performance of the Company.

         Interest rate sensitivity  estimated by management,  as measured by the
change in the market  value of equity as a  percentage  of the present  value of
assets if interest  rate levels  were to increase by 2%, was  negative  1.64% at
June 30, 1999 indicating that the Company is vulnerable to increases in interest
rates and advantaged if interest  rates decline.  The change in the market value
of equity as a percentage of the present value of assets if interest rate levels
were to increase by 2% was negative  1.92% at December 31, 1998.  While progress
in reducing  interest rate  sensitivity has been made,  management  continues to
pursue  strategies  to reduce the impact of  changes  in  interest  rates on its
market  value  of  equity,   primarily  by  shortening  asset  maturities,   and
lengthening  maturities of  interest-bearing  liabilities when possible,  and by
originating and retaining variable-rate consumer,  business,

                                       14
<PAGE>


construction,  and  commercial  real estate loans,  which  generally have higher
yields than permanent residential loans.

         Since  December  31,  1998,  there  has been a $1.3  million  change in
unrealized  loss on securities  available for sale, net of taxes.  The change in
the  unrealized  loss on  securities  available  for  sale is due to the rise in
interest  rates  in the  later  half of 1999,  which  in the case of fixed  rate
securities has created a decline in value from the purchase  price. It should be
noted that the change in valuation has not changed the cash flow characteristics
of the underlying securities.

Asset Quality

         At September 30, 1999, the Company had $705,000 in nonaccrual loans and
loans  past  due 90 days or more  compared  to $1.5  million  of such  loans  at
December 31, 1998. At September 30, 1999,  impaired  loans totaled $1.7 million,
compared to $3.8 million at December 31, 1998.

         At  September  30,  1999,  the Company had real estate  owned  totaling
$159,300,  consisting  of  a  single  one-to-four  family  residential  property
acquired through foreclosure in 1998. This property sold on October 12, 1999 for
$166,087, resulting in a small recovery.

         To measure the quality of assets, the Company has established  internal
asset  classification  guidelines  as part of its credit  monitoring  system for
identifying  and  reporting  problem  assets  and  determining   provisions  for
anticipated  loan  losses.   The  Company  classifies  assets  it  considers  of
questionable  quality  using  the  classification   categories  of  substandard,
doubtful,  and loss.  The  Company's  classified  assets  consist of  foreclosed
residential properties,  nonperforming assets, and assets that are performing in
accordance with their  contractual  terms but are adversely  classified  because
they  exhibit  one or more  well-defined  weaknesses.  Management  monitors  the
Company's assets regularly, classifies any problem assets, and provides specific
or general valuation allowances when necessary and appropriate.

         Total classified  assets of the Company  decreased to $2.9 million,  or
 .63% of total  assets,  at  September  30, 1999 from $5.1  million,  or 1.13% of
assets,  at December 31,  1998.  At  September  30,  1999,  the Company had $3.1
million of assets classified as substandard and no assets classified as doubtful
or loss.  Substandard  assets  are  comprised  of  loans  with  identified  risk
characteristics indicating the asset maybe inadequately protected by the current
net worth and paying capacity of the obligor or of the collateral  pledged.  The
largest  substandard  loan  at  September  30,  1999  was a  one-to-four  family
residential mortgage with an outstanding principal balance of $313,126.

         The majority of the Company's mortgage loans are secured by real estate
located within the state of  California.  The majority of such loans are secured
by real estate in Santa Cruz,  Monterey,  Santa Clara,  and San Benito counties;
therefore,  the  Company's  credit  risk is  primarily  related to the  economic
conditions of this region.


Capital and Regulatory Standards

         In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation ("FDIC") and general regulatory oversight by the Office of
Thrift Supervision  ("OTS"),  the Bank is required to maintain minimum levels of
regulatory  capital,   including  tangible,  core  and  risk-based  capital.  At
September 30, 1999 and December 31, 1998,  the Bank was in  compliance  with all
regulatory capital requirements.  OTS prompt corrective action (PCA) regulations
include  five  capital  tiers  ranging  from  well   capitalized  to  critically
undercapitalized.  At September 30, 1999 and December 31, 1998, the Bank met the
definition of a well-capitalized institution.

                                       15
<PAGE>


<TABLE>

         The following  table sets forth the Bank's  capital  amounts and ratios
regarding   actual  and  minimum   tangible,   core,  and   risk-based   capital
requirements, together with the amounts and ratios required in order to meet the
definition of a "well capitalized" institution.
<CAPTION>
                                    Minimum Capital        Well Capitalized
                                      Requirements           Requirements               Actual
                                    ----------------       ----------------       -----------------
                                    Amount     Ratio       Amount     Ratio       Amount      Ratio
                                    ------     -----       ------     -----       ------      -----
<S>                                 <C>         <C>        <C>         <C>        <C>          <C>
As of September 30, 1999:
   Total capital
      (to risk-weighted assets)    $26,506      8.00%     $33,133      10.00%     $35,578      10.74%
   Tier 1 capital
      (to risk-weighted assets)       N/A        N/A       19,880       6.00%      32,426       9.88%
   Tier 1 capital
      (to adjusted assets)          22,597      5.00%      22,597       5.00%      32,426       7.17%
   Tangible capital
      (to tangible assets)           6,779      1.50%        N/A         N/A       32,426       7.17%


As of December 31, 1998:
   Total capital
      (to risk-weighted assets)    $21,980      8.00%     $27,475      10.00%     $31,882      11.60%
   Tier 1 capital
      (to risk-weighted assets)       N/A        N/A       16,334       6.00%      29,319      10.77%
   Tier 1 capital
      (to adjusted assets)          17,522      4.00%      21,902       5.00%      29,319       6.69%
   Tangible capital
      (to tangible assets)           6,571      1.50%        N/A         N/A       29,319       6.69%
</TABLE>


Liquidity

         The  Company's   primary  sources  of  funds  are  customer   deposits,
principal, and interest payments on loans and mortgage-backed  securities,  FHLB
advances and other  borrowings  and, to a lesser extent,  proceeds from sales of
securities and loans.  While maturities and scheduled  amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, and competition.

         The Company is required by OTS regulations to maintain an average daily
balance of liquid assets in each calendar  quarter of not less than 4% of either
the amount of its liquidity base at the end of the preceding calendar quarter or
the average daily balance of its  liquidity  base during the preceding  calendar
quarter.  In  addition  to this  minimum  requirement,  the Bank is  required to
maintain  sufficient  liquidity  to ensure  its safe and sound  operations.  The
minimum liquidity requirement may be changed by the OTS to any amount within the
range of 4% to 10%,  depending upon economic  conditions and the savings deposit
flows of savings institutions.  Monetary penalties may be imposed for failure to
meet these liquidity  requirements.  The Bank's average  liquidity ratio for the
quarter ended  September 30, 1999 was 7.5%,  which exceeded the  then-applicable
requirements.  The Bank has never been subject to monetary penalties for failure
to meet its  liquidity  requirements.  The  Company's  strategy  generally is to
maintain  its  liquidity  ratio  at or near  the  required  minimum  in order to
maximize its yield on alternative investments.

                                       16
<PAGE>


Year 2000

         The "Year 2000 issue"  relates to the fact that many computer  programs
use only two digits to represent a year, such as "98" to represent "1998," which
means that in the Year 2000 such programs could  incorrectly treat the Year 2000
as the year 1900. This issue has grown in importance as the use of computers and
microchips   have  become   more   pervasive   throughout   the   economy,   and
interdependencies between systems have multiplied.  The issue must be recognized
as a business problem, rather than simply a computer problem, because of the way
its  effects  could  ripple  through  the  economy.  The Year 2000  issue  could
materially and adversely affect the Company either directly or indirectly.  This
could happen if any of its  critical  computer  systems or equipment  containing
embedded logic fail, if the local infrastructure  (electric power, phone system,
or water system) fails, if its significant vendors are adversely impacted, or if
its borrowers or depositors are adversely  impacted by their internal systems or
those of their  customers  or  suppliers.  Failure of the  Company  to  complete
testing and renovation of its critical  systems on a timely basis,  could have a
material  adverse  effect on the  Company's  financial  condition and results of
operations,  as could Year 2000  problems  faced by others with whom the Company
does business.

         Federal banking  regulators  have been  responsible for supervision and
examination of banks and to determine  whether each institution has an effective
plan for identifying,  renovating,  testing and implementing  solutions for Year
2000  processing and  coordinating  Year 2000 processing  capabilities  with its
customers, vendors and payment system partners. Bank examiners are also required
to assess the soundness of a bank's  internal  controls and to identify  whether
further  corrective  action may be necessary to assure an  appropriate  level of
attention to Year 2000 processing capabilities.

         The Company has a written  plan to mitigate the risks  associated  with
the impact of the Year 2000. The plan directs the Company's Year 2000 activities
under the framework of the Federal Financial  Institutions  Examination  Council
(FFIEC) five-step program.  The FFIEC's five-step program includes the following
phases: awareness, assessment,  renovation,  validation, and implementation. The
awareness  phase,  which the  Company  has  completed,  discusses  the Year 2000
problem and gains executive level support for the necessary resources to prepare
the Company for Year 2000 compliance.  The assessment  phase,  which the Company
has also completed,  assesses the size and complexity of the problem and details
the magnitude of the effort necessary to address the Year 2000 issues.  Although
the awareness and assessment phases are completed,  the Company will continue to
evaluate  any new  issues as they  arise.  In the  renovation  phase,  which the
Company has completed, the required incremental changes to hardware and software
components  are  tested.  In the  validation  stage,  which the Company has also
completed,  the hardware and software  components are tested. The implementation
phase was completed by September 30, 1999.

         The  Company  is  utilizing  both  internal  and  external  sources  to
identify,  correct or reprogram,  and test its systems for Year 2000 compliance.
The Company has identified fifteen  applications  which management  believes are
material to the Company's operations. Based on information received from testing
results,  the Company believes 100% of such applications are Year 2000 compliant
as of September 30, 1999. The testing of the mission  critical  systems for core
banking was completed by May 31, 1999.

         The core banking  product  includes  software  solutions  for checking,
savings,  time  certificates  of  deposit,  general  ledger,  accounts  payable,
automated clearing house, individual retirement accounts,  commercial,  mortgage
and installment loans, proof of deposit and ancillary supporting products.

         The  Company  is also  making  efforts  to ensure  that its  customers,
particularly its significant customers,  are aware of the Year 2000 problem. The
Company has sent Year 2000  correspondence to


                                       17
<PAGE>

the Bank's  significant  deposit and loan  customers.  A customer of the bank is
deemed   significant   if  the   customer   possesses   any  of  the   following
characteristics:

   o     Total indebtedness to the bank of $750,000 or more.

   o     Credit risk rating of five (substandard) or higher.

   o     The  customers  business  is  dependent  on the use of high  technology
         and/or the electronic exchange of information.

   o     The customer's  business is dependent on third party  providers of data
         processing services or products.

   o     An average ledger deposit  balance  greater than $100,000 and more than
         12 transactions during the month.

         The  Company  has amended  its credit  authorization  documentation  to
include consideration  regarding the Year 2000 problem. The Company assesses its
significant  customer's  Year 2000 readiness and assigns an assessment of "low",
"medium",  or "high" risks. Risk evaluation of the Bank's significant  customers
was  substantially  completed by December 31, 1998. Any depositor  determined to
have a high risk is scheduled  for an evaluation by the Bank every 90 days until
the customer can be assigned a low risk assessment.

         Additionally,  the Company has conducted  employee education classes on
Year 2000  preparedness  and  customer  education  to  attempt to  minimize  any
customer anxiety regarding Year 2000 issues. A customer and community  education
plan will be  implemented  in the fourth  quarter of 1999 to further  inform the
community on the safety of money in banks.

         Because of the range of possible  issues and large  number of variables
involved, it is impossible to quantify the total potential cost of the Year 2000
problems,  or to determine  the Company's  worst-case  scenario in the event the
Company's  Year 2000  remediation  efforts or the  efforts of those with whom it
does  business  are not  successful.  In  order  to deal  with  the  uncertainty
associated  with the Year 2000  problem,  the Company  has  developed a business
resumption  contingency plan to address the possibility that efforts to mitigate
the Year  2000 risk are not  successful  either  in whole or part.  These  plans
include manual and off-site  processing of information for critical  information
technology systems and increased cash on hand. The contingency plans,  including
employee training, were tested by August 15, 1999.

         As of  September  30,  1999,  the  Company had  incurred  approximately
$250,000  in total  cumulative  Year 2000  costs,  which have been  expensed  as
incurred.   Year  2000-related  costs  have  been  funded  from  the  continuing
operations  of the Company  and, as of  September  30,  1999,  have  constituted
approximately  2% of the Company's  information  systems  expenses for 1999. The
Company estimates that additional costs to complete Year 2000 compliance will be
approximately  $75,000.  This estimate includes the cost of purchasing  hardware
and licenses for software  programming  tools,  the cost of the time of internal
staff and the cost of  consultants.  The estimate does not include the time that
internal staff is devoting to testing programming  changes.  Certain information
system  projects at the Company have been  deferred as a result of the Company's
Year 2000 compliance efforts.  However, these deferrals are not expected to have
a material effect on the Company's business.


Item 3.  Quantitative and Qualitative Disclosure of Market Risk

         For the above-captioned  information,  see "Management's Discussion and
Analysis of  Financial  Condition  and  Results of  Operations  - Interest  Rate
Sensitivity and Market Risk Analysis."

                                       18
<PAGE>

                           PART II. OTHER INFORMATION


Item 1.  Legal Proceedings.

         The Company is involved as  plaintiff  or  defendant  in various  legal
         actions  incident  to its  business,  none  of  which  is  believed  by
         management to be material to the financial condition of the Company.

Item 2.  Changes in Securities.

         None.

Item 3.  Defaults Upon Senior Securities.

         None.

Item 4.  Submission of Matters to a Vote of Security Holders.

         None.

Item 5.  Other Information.

         None.

Item 6.  Exhibits and Reports on Form 8-K.

         Exhibit 3(i) - Certificate  of  Incorporation  of Monterey Bay Bancorp,
         Inc.,  incorporated by reference to the Company's  Quarterly  Report on
         Form 10-Q for the quarter ended March 31, 1995.

         Exhibit 3(ii) - Bylaws of Monterey Bay Bancorp,  Inc.,  Incorporated by
         reference  to the  Company's  Annual  Report  on Form 10-K for the year
         ended December 31, 1998.

         Exhibit 11.0 - Computation of per share earnings (filed herewith).

         Exhibit 27.0 - Financial Data Schedule (filed herewith).

                                       19
<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.

Date:    November 10, 1999                   By /s/ Marshall G. Delk
        ------------------                   -----------------------------------
                                             Marshall G. Delk
                                             President, Chief Operating Officer
                                               and Chief Financial Officer





                                       20