UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                            ----------------------

                                FORM 10-K

[X]   ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
      EXCHANGE ACT OF 1934
      For the Year ended         December  31, 1998        

                                      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  0-25418

                            CENTRAL COAST BANCORP                 
                            ---------------------                 
            (Exact name of registrant as specified in its charter)

            STATE OF CALIFORNIA                   77-0367061            
            -------------------                   ----------            
    (State or other jurisdiction of     (I.R.S.Employer Identification No.)
     incorporation or organization)                        

   301 Main Street, Salinas, California                    93901      
   ------------------------------------                    -----      
 (Address of principal executive offices)               (Zip code)

      Registrant's telephone number, including area code    (408) 422-6642

     Securities registered pursuant to Section 12(b) of the Act:      None

          Securities registered pursuant to Section 12(g) of the Act:

                             Title of each class
                             -------------------
                                Common Stock
                               (no par value)


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      

Indicate by check mark if disclosure of  delinquent  filers  pursuant to Item
405 of  Regulation  S-K is not contained  herein,  and will not be contained,
to  the  best  of  the  registrant's   knowledge,   in  definitive  proxy  or
information  statements  incorporated  by  reference in Part III of this Form
10-K or any amendment to this Form 10-K  [  ].

The  aggregate  market  value of the voting stock held by  non-affiliates  of
the registrant at March 8, 1999  was $92,459,969.22.
As of March 8,  1999, the  registrant  had  6,215,796  shares of Common Stock
outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE
The following  documents are  incorporated  by reference into this Form 10-K:
Part III, Items 10 through 13 from  registrant's  definitive  proxy statement
for the 1998 annual meeting of shareholders.


The Index to Exhibits is located at page 73                Page 1 of 92 Pages


                                       PART I

   ITEM 1.  BUSINESS

         GENERAL DEVELOPMENT OF BUSINESS.

         Certain  matters  discussed or incorporated by reference in this Annual
   Report on Form 10-K  including,  but not limited  to,  matters  described  in
   Item 7 -  "Management's  Discussion  and Analysis of Financial  Condition and
   Results of Operations,"  are  forward-looking  statements that are subject to
   risks  and   uncertainties   that  could  cause  actual   results  to  differ
   materially  from those  projected.  Changes to such risks and  uncertainties,
   which could impact future financial  performance,  include, among others, (1)
   competitive  pressures in the banking  industry;  (2) changes in the interest
   rate environment;  (3) general economic  conditions,  nationally,  regionally
   and in the operating  market areas of the Company and the Banks;  (4) changes
   in the  regulatory  environment;  (5)  changes  in  business  conditions  and
   inflation;  (6) changes in securities  markets;  and (7) effects of Year 2000
   problems  discussed  herein.  Therefore,  the  information  set forth therein
   should be carefully  considered  when  evaluating  the business  prospects of
   the Company and the Banks.

         Central  Coast  Bancorp (the  "Company")  is a  California  corporation
   organized in 1994 to act as the bank  holding  company of Bank of Salinas and
   Cypress Bank,  state-chartered banks (the "Banks"). The Banks,  headquartered
   in Salinas and Seaside,  respectively,  serve individuals,  merchants,  small
   and  medium-sized  businesses,  professionals,  agribusiness  enterprises and
   wage earners located in the Salinas Valley and the Monterey Peninsula.

         On February 21, 1997, the Bank of Salinas purchased certain assets
   and assumed certain liabilities of the Gonzales and Castroville branch
   offices of Wells Fargo Bank.  As a result of the transaction the Bank
   assumed deposit liabilities, received cash, and acquired tangible
   assets.  This transaction resulted in intangible assets, representing the
   excess of the liabilities assumed over the fair value of the tangible
   assets acquired.

         In January 1997, Cypress Bank opened a new branch office in
   Monterey, California, so that it might better serve business and
   individual customers on the Monterey Peninsula.  In December 1998, the
   Bank of Salinas opened an additional new branch office in Salinas,
   California, in order to better provide services to the growing Salinas
   community.

         Other than  holding  the shares of the  subsidiary  Banks,  the Company
   conducts no significant  activities.  Although,  it is  authorized,  with the
   prior  approval of the Board of Governors of the Federal  Reserve System (the
   "Board of  Governors"),  the Company's  principal  regulator,  to engage in a
   variety of  activities  which are deemed  closely  related to the business of
   banking.

         The  Banks  operate  through  their  headquarters  offices  located  in
   Salinas and Seaside,  California and through their branch offices  located in
   Castroville,   Gonzales,   King   City,   Marina,   Monterey   and   Salinas,
   California.  The Banks  offer a full range of  commercial  banking  services,
   including  the  acceptance  of demand,  savings  and time  deposits,  and the
   making of commercial,  real estate (including  residential  mortgage),  Small
   Business  Administration,  personal,  home improvement,  automobile and other
   installment  and  term  loans.  They  also  offer  travelers'  checks,   safe
   deposit  boxes,  notary  public,  customer  courier and other  customary bank
   services.  The Bank of Salinas  and Cypress  Bank  Offices are open from 9:00
   a.m. to 5:00 p.m.,  Monday  through  Thursday,  and 9:00 a.m. to 6:00 p.m. on
   Friday.  The Bank of Salinas also  operates a limited  service  facility in a
   retirement  home  located in Salinas,  California.  The facility is open from
   10:00  a.m.  to  12:00  p.m.  on  Wednesday  of each  week.  The  Banks  have
   automated teller machines (ATMs) located at the Castroville,  Gonzales,  King
   City,  Marina,  Monterey,  Salinas and Seaside  offices,  the Monterey County
   Fairgrounds,   the  Soledad  Correctional  Training  Facility  Credit  Union,
   Salinas  Valley  Memorial  Hospital and Fort Hunter  Liggett which is located
   in Jolon,  California.  The  Banks are  insured  under  the  Federal  Deposit
   Insurance  Act and  each  depositor's  account  is  insured  up to the  legal
   limits  thereon.  The  Banks  are  chartered  (licensed)  by  the  California
   Commissioner of Financial  Institutions  ("Commissioner") and have chosen not
   to  become  a  member  of the  Federal  Reserve  System.  The  Banks  have no
   subsidiaries.

         The Banks also  currently  offer  personal  and  business  Visa  credit
   cards.  The Banks have arranged  with a  correspondent  institution  to offer
   trust  services  to the Banks'  customers  on request.  The Banks  operate an
   on-site computer system which provides  independent  processing of the Banks'
   deposits, loans and financial accounting.

         The three  areas in which  the Banks  have  directed  virtually  all of
   their lending  activities  are: (i) commercial  loans;  (ii) consumer  loans;
   and  (iii)  real  estate  loans  (including   residential   construction  and
   mortgage loans).  As of December 31, 1998,  these three categories  accounted
   for  approximately  44 percent,  4 percent and 52 percent,  respectively,  of
   the Banks' loan portfolio.

         The  Banks'   deposits  are  attracted   primarily  from   individuals,
   merchants,    small   and   medium-sized   businesses,    professionals   and
   agribusiness  enterprises.  The  Banks'  deposits  are  not  received  from a
   single  depositor or group of  affiliated  depositors  the loss of any one of
   which would have a  materially  adverse  effect on the business of the Banks,
   nor is a  material  portion  of the  Banks'  deposits  concentrated  within a
   single industry or group of related industries.

         As of December  31, 1998,  the Banks served a total of 24  municipality
   and  governmental  agency  depositors  totaling  $30,929,000 in deposits.  In
   connection  with  the  deposits  of  municipalities  or  other   governmental
   agencies or entities,  the Banks are generally  required to pledge securities
   to secure  such  deposits,  except for the first  $100,000  of such  deposits
   which are insured by the Federal Deposit Insurance Corporation ("FDIC").

         As  of   December   31,   1998,   the  Banks  had  total   deposits  of
   $489,192,000.  Of this total,  $149,757,000  represented  noninterest-bearing
   demand deposits,  $98,226,000  represented  interest-bearing demand deposits,
   and $241,209,000 represented interest-bearing savings and time deposits.

         The  principal  sources of the Banks'  revenues  are:  (i) interest and
   fees on loans;  (ii)  interest  on  Federal  Funds  sold  (funds  loaned on a
   short-term  basis  to  other  banks)  ; and  (iii)  interest  on  investments
   (principally  government  securities).  For the fiscal  year  ended  December
   31,  1998 these  sources  comprised  72 percent,  8 percent,  and 20 percent,
   respectively, of the Banks' total interest income.

      SUPERVISION AND REGULATION

      The  common  stock  of the  Company  is  subject  to  the  registration
requirements   of  the   Securities   Act  of  1933,  as  amended,   and  the
qualification  requirements  of the  California  Corporate  Securities Law of
1968,  as amended.  The Banks'  common  stock,  however,  is exempt from such
requirements.   The  Company  is  also  subject  to  the  periodic  reporting
requirements  of  Section  13 of the  Securities  Exchange  Act of  1934,  as
amended,  which include, but are not limited to, annual,  quarterly and other
current reports with the Securities and Exchange Commission.

      The  Banks  are  licensed  by  the  Commissioner,  their  deposits  are
insured  by the FDIC,  and they have  chosen  not to  become  members  of the
Federal Reserve System.  The Banks have no  subsidiaries.  Consequently,  the
Banks are subject to the supervision  of, and are regularly  examined by, the
Commissioner   and  the  FDIC.  Such   supervision  and  regulation   include
comprehensive  reviews  of all  major  aspects  of the  Banks'  business  and
condition,  including  their  capital  ratios,  allowance  for possible  loan
losses and other  factors.  However,  no inference  should be drawn that such
authorities  have  approved any such  factors.  The Company and the Banks are
required to file  reports  with the  Commissioner,  the FDIC and the Board of
Governors and provide such additional  information as the Commissioner,  FDIC
and the Board of Governors may require.

      The Company is a bank  holding  company  within the meaning of the Bank
Holding  Company Act of 1956,  as amended (the "Bank Holding  Company  Act"),
and is  registered  as such  with,  and  subject to the  supervision  of, the
Board of  Governors.  The Company is  required to obtain the  approval of the
Board of  Governors  before it may  acquire all or  substantially  all of the
assets of any bank,  or  ownership  or control  of the  voting  shares of any
bank if,  after  giving  effect to such  acquisition  of shares,  the Company
would own or  control  more than 5% of the voting  shares of such  bank.  The
Bank Holding  Company Act  prohibits  the Company from  acquiring  any voting
shares  of, or  interest  in,  all or  substantially  all of the assets of, a
bank located  outside the State of California  unless such an  acquisition is
specifically  authorized  by the  laws of the  state in  which  such  bank is
located.  Any such  interstate  acquisition is also subject to the provisions
of the Riegle-Neal  Interstate  Banking and Branching  Efficiency Act of 1994
discussed below.

      The  Company,  and any  subsidiaries  which it may acquire or organize,
are deemed to be  "affiliates"  of the Banks  within the meaning of that term
as defined in the Federal  Reserve Act. This means,  for example,  that there
are  limitations  (a) on  loans  by  the  Banks  to  affiliates,  and  (b) on
investments  by the Banks in  affiliates'  stock as  collateral  for loans to
any borrower.  The Company and its  subsidiaries  are also subject to certain
restrictions  with respect to engaging in the  underwriting,  public sale and
distribution of securities.

      In addition,  regulations of the Board of Governors  promulgated  under
the Federal  Reserve Act require that  reserves be maintained by the Banks in
conjunction   with  any  liability  of  the  Company  under  any   obligation
(promissory  note,   acknowledgement  of  advance,   banker's  acceptance  or
similar  obligation)  with a weighted average maturity of less than seven (7)
years to the extent that the  proceeds of such  obligations  are used for the
purpose of supplying funds to the Banks for use in its banking  business,  or
to maintain the availability of such funds.

      The Board of  Governors  and the FDIC have adopted  risk-based  capital
guidelines  for  evaluating  the capital  adequacy of bank holding  companies
and  banks.  The  guidelines  are  designed  to  make  capital   requirements
sensitive to  differences in risk profiles  among banking  organizations,  to
take into  account  off-balance  sheet  exposures  and to aid in  making  the
definition of bank capital  uniform  internationally.  Under the  guidelines,
the  Company  and the Banks are  required  to  maintain  capital  equal to at
least  8.0% of its assets  and  commitments  to extend  credit,  weighted  by
risk,  of which  at least  4.0%  must  consist  primarily  of  common  equity
(including  retained  earnings) and the remainder may consist of subordinated
debt, cumulative preferred stock, or a limited amount of loan loss reserves.

      Assets,  commitments to extend credit,  and off-balance sheet items are
categorized  according to risk and certain assets  considered to present less
risk than  others  permit  maintenance  of capital at less than the 8% ratio.
For example,  most home mortgage  loans are placed in a 50% risk category and
therefore  require  maintenance  of capital equal to 4% of such loans,  while
commercial  loans are placed in a 100% risk  category and  therefore  require
maintenance of capital equal to 8% of such loans.

      The Company and the Banks are subject to regulations issued by the
Board of Governors and the FDIC which require maintenance of a certain
level of capital.  These regulations impose two capital standards:  a
risk-based capital standard and a leverage capital standard.

Under the Board of Governors risk-based capital guidelines, assets reported on
an institution's balance sheet and certain off-balance sheet items are
assigned to risk categories, each of which has an assigned risk weight.
Capital ratios are calculated by dividing the institution's qualifying
capital by its period-end risk-weighted assets.  The guidelines establish
two categories of qualifying capital:  Tier 1 capital (defined to include
common shareholders' equity and noncumulative perpetual preferred stock)
and Tier 2 capital which includes, among other items, limited life(and in
case of banks, cumulative) preferred stock, mandatory convertible
securities, subordinated debt and a limited amount of reserve for credit
losses.  Effective October 1,1998, the Board of Governors and other federal
bank regulatory agencies approved including in Tier 2 capital up to 45% of
the pretax net unrealized gains on certain available-for-sale equity
securities having readily determinable fair values (i.e. the excess, if
any, of fair market value over the book value or historical cost of the
investment security). The federal regulatory agencies reserve the right to
exclude all or a portion of the unrealized gains upon a determination that
the equity securities are not prudently valued.  Unrealized gains and
losses on other types of assets, such as bank premises and
available-for-sale debt securities, are not included in Tier 2 capital, but
may be taken into account in the evaluation of overall capital adequacy and
net unrealized losses on available-for-sale equity securities will continue
to be deducted from Tier 1 capital as a cushion against risk.  Each
institution is required to maintain a risk-based capital ratio (including
Tier 1 and Tier 2 capital) of 8%, of which at least half must be Tier 1
capital.

      Under  the  Board  of   Governors   leverage   capital   standard   an
institution  is  required  to  maintain a minimum  ratio of Tier 1 capital to
the sum of its quarterly  average total assets and quarterly  average reserve
for  loan  losses,   less   intangibles  not  included  in  Tier  1  capital.
Period-end  assets may be used in place of quarterly  average total assets on
a  case-by-case  basis.  The Board of  Governors  and the FDIC have adopted a
revised minimum  leveraged ratio for bank holding  companies as a supplement
to the  risk-weighted  capital  guidelines.  The old  rule  established  a 3%
minimum leverage  standard for well-run banking  organizations  (bank holding
companies and banks)with  diversified  risk profiles.  Banking  organizations
which  did not  exhibit  such  characteristics  or had  greater  risk  due to
significant  growth,  among  other  factors,  were  required  to  maintain  a
minimum  leverage  ratio 1% to 2%  higher.  The old  rule  did not take  into
account the  implementation  of the market risk capital  measure set forth in
the  federal  regulatory  agency  capital  adequacy  guidelines.  The revised
leverage  ratio  establishes  a minimum  Tier1 ratio of 3% (Tier 1 capital to
total  assets) for the highest  rated bank  holding  companies  or those that
have implemented the risk-based  capital market risk measure.  All other bank
holding  companies  must maintain a minimum Tier 1 leverage  ratio of 4% with
higher  leverage  capital  ratios  required for bank holding  companies  that
have  significant   financial  and/or  operational   weakness,  a  high  risk
profile,  or are  undergoing  or  anticipating  rapid  growth.  The old  rule
remains in effect for banks,  however,  the federal  regulatory  agencies are
currently continuing work on revised leverage rule for banks.

      At December  31,  1998,  the Banks and the  Company  are in  compliance
with the risk-based  capital and leverage ratios  described  above.  See Item
8  below  for a  listing  of  the  Company's  risk-based  capital  ratios  at
December 31, 1998 and 1997.

      On  December  19,  1991,  President  Bush  signed the  Federal  Deposit
Insurance  Corporation  Improvement  Act of 1991  ("FDICIA").  The  Board  of
Governors  and  FDIC  adopted   regulations   effective  December  19,  1992,
implementing a system of prompt  corrective  action pursuant to Section 38 of
the  Federal  Deposit  Insurance  Act  and  Section  131 of the  FDICIA.  The
regulations   establish   five   capital   categories   with  the   following
characteristics:  (1) "Well  capitalized" - consisting of institutions with a
total  risk-based  capital  ratio  of 10%  or  greater,  a Tier 1  risk-based
capital  ratio of 6% or greater and a leverage  ratio of 5% or  greater,  and
the  institution  is not  subject  to an order,  written  agreement,  capital
directive   or  prompt   corrective   action   directive;   (2)   "Adequately
capitalized" - consisting of  institutions  with a total  risk-based  capital
ratio of 8% or greater,  a Tier 1 risk-based  capital  ratio of 4% or greater
and a leverage  ratio of 4% or  greater,  and the  institution  does not meet
the definition of a "well capitalized"  institution;  (3)  "Undercapitalized"
- consisting  of  institutions  with a total  risk-based  capital  ratio less
than 8%, a Tier 1  risk-based  capital  ratio of less than 4%, or a  leverage
ratio of less than 4%; (4) "Significantly  undercapitalized"  - consisting of
institutions  with a total  risk-based  capital ratio of less than 6%, a Tier
1  risk-based  capital  ratio of less  than 3%, or a  leverage  ratio of less
than 3%; (5)  "Critically  undercapitalized"  - consisting of an  institution
with a ratio of  tangible  equity  to total  assets  that is equal to or less
than 2%.

      The   regulations   established   procedures  for   classification   of
financial  institutions within the capital  categories,  filing and reviewing
capital  restoration  plans required under the regulations and procedures for
issuance of  directives by the  appropriate  regulatory  agency,  among other
matters.  The  regulations  impose  restrictions  upon  all  institutions  to
refrain  from  certain  actions  which  would  cause  an  institution  to  be
classified within any one of the three  "undercapitalized"  categories,  such
as  declaration  of dividends or other  capital  distributions  or payment of
management  fees, if following the  distribution  or payment the  institution
would be  classified  within  one of the  "undercapitalized"  categories.  In
addition,   institutions   which   are   classified   in  one  of  the  three
"undercapitalized"   categories   are  subject  to  certain   mandatory   and
discretionary  supervisory  actions.  Mandatory  supervisory  actions include
(1)  increased  monitoring  and  review by the  appropriate  federal  banking
agency;  (2)  implementation  of a capital  restoration plan; (3) total asset
growth   restrictions;   and  (4)  limitation   upon   acquisitions,   branch
expansion,  and  new  business  activities  without  prior  approval  of  the
appropriate  federal banking agency.  Discretionary  supervisory  actions may
include  (1)   requirements  to  augment  capital;   (2)  restrictions   upon
affiliate  transactions;  (3) restrictions upon deposit gathering  activities
and interest rates paid; (4)  replacement  of senior  executive  officers and
directors;  (5)  restrictions  upon  activities  of the  institution  and its
affiliates;  (6) requiring  divestiture or sale of the  institution;  and (7)
any other  supervisory  action that the  appropriate  federal  banking agency
determines  is  necessary  to  further  the  purposes  of  the   regulations.
Further,  the federal banking  agencies may not accept a capital  restoration
plan  without  determining,  among  other  things,  that the plan is based on
realistic  assumptions  and is likely to succeed in restoring the  depository
institution's  capital.  In addition,  for a capital  restoration  plan to be
acceptable,   the  depository   institution's  parent  holding  company  must
guarantee  that the  institution  will comply with such  capital  restoration
plan.  The  aggregate  liability  of the  parent  holding  company  under the
guaranty  is  limited  to the  lesser of (i) an amount  equal to 5 percent of
the   depository   institution's   total   assets   at  the  time  it  became
undercapitalized,  and (ii) the amount that is necessary  (or would have been
necessary)  to  bring  the  institution  into  compliance  with  all  capital
standards  applicable  with  respect  to such  institution  as of the time it
fails to comply with the plan.  If a depository  institution  fails to submit
an   acceptable   plan,   it  is  treated   as  if  it  were   "significantly
undercapitalized."  FDICIA also  restricts the  solicitation  and  acceptance
of and  interest  rates  payable on brokered  deposits by insured  depository
institutions   that  are  not  "well   capitalized."  An   "undercapitalized"
institution  is  not  allowed  to  solicit  deposits  by  offering  rates  of
interest  that  are  significantly   higher  than  the  prevailing  rates  of
interest on insured  deposits in the particular  institution's  normal market
areas or in the  market  areas in which  such  deposits  would  otherwise  be
accepted.

      Any  financial   institution   which  is   classified  as   "critically
undercapitalized"  must be placed in conservatorship  or receivership  within
90 days of such  determination  unless it is also  determined that some other
course  of  action  would  better  serve  the  purposes  of the  regulations.
Critically  undercapitalized  institutions  are also  prohibited  from making
(but not  accruing)  any payment of  principal  or  interest on  subordinated
debt  without  the prior  approval  of the FDIC and the FDIC must  prohibit a
critically  undercapitalized  institution  from taking  certain other actions
without  its  prior  approval,  including  (1)  entering  into  any  material
transaction   other  than  in  the  usual  course  of   business,   including
investment expansion,  acquisition,  sale of assets or other similar actions;
(2)  extending  credit for any highly  leveraged  transaction;  (3)  amending
articles  or  bylaws  unless  required  to do  so to  comply  with  any  law,
regulation or order;  (4) making any material  change in accounting  methods;
(5)  engaging  in  certain  affiliate  transactions;   (6)  paying  excessive
compensation  or  bonuses;   and  (7)  paying  interest  on  new  or  renewed
liabilities  at rates which would  increase  the  weighted  average  costs of
funds beyond prevailing rates in the institution's normal market areas.

      Under the  FDICIA,  the federal  financial  institution  agencies  have
adopted  regulations  which  require  institutions  to establish and maintain
comprehensive  written real estate  policies  which address  certain  lending
considerations,   including   loan-to-value   limits,   loan   administrative
policies,  portfolio diversification  standards, and documentation,  approval
and reporting  requirements.  FDICIA further  generally  prohibits an insured
state  bank  from   engaging  as  a  principal  in  any   activity   that  is
impermissible  for a  national  bank,  absent  FDIC  determination  that  the
activity would not pose a significant  risk to the Bank  Insurance  Fund, and
that  the bank  is,  and  will  continue  to be,  within  applicable  capital
standards.  Similar  restrictions  apply to  subsidiaries  of  insured  state
banks.  The Company  does not  currently  intend to engage in any  activities
which would be restricted or prohibited under the FDICIA.

      The federal  banking  agencies during 1996 issued a joint agency policy
statement  regarding the management of interest-rate  risk exposure (interest
rate risk is the risk that changes in market  interest rates might  adversely
affect  a  bank's  financial  condition)  with  the  goal  of  ensuring  that
institutions with high levels of interest-rate  risk have sufficient  capital
to cover their  exposures.  This policy  statement  reflected  the  agencies
decision at that time not to promulgate a  standardized  measure and explicit
capital  charge for interest  rate risk,  in the  expectation  that  industry
techniques for measurement of such risk will evolve.

      However,   the  Federal  Financial   Institution   Examination  Counsel
(OFFIEC)  on  December 13,  1996,  approved  an  updated  Uniform  Financial
Institutions  Rating  System  ("UFIRS").  In addition to the five  components
traditionally  included in the  so-called  CAMEL  rating  system  which has
been used by bank  examiners  for a number of years to classify  and evaluate
the soundness of financial  institutions  (including capital adequacy,  asset
quality,  management,  earnings and  liquidity),  UFIRS includes for all bank
regulatory  examinations conducted on or after January 1,  1997, a new rating
for a sixth category  identified as  sensitivity  to market risk.  Ratings in
this  category  are  intended  to  reflect  the  degree to which  changes  in
interest rates,  foreign  exchange rates,  commodity  prices or equity prices
may  adversely  affect an  institution's  earnings  and  capital.  The rating
system henceforth will be identified as the "CAMELS" system.

      The federal  financial  institution  agencies have  established  safety
and  soundness  standards  for insured  financial  institutions  covering (1)
internal controls,  information systems and internal audit systems;  (2) loan
documentation;  (3) credit  underwriting;  (4) interest  rate  exposure;  (5)
asset  growth;  (6)  compensation,  fees  and  benefits;  and  (7)  excessive
compensation  for  executive  officers,  directors or principal  shareholders
which could lead to material  financial  loss. If an agency  determines  that
an  institution  fails to meet any  standard,  the  agency  may  require  the
financial  institution to submit to the agency an acceptable  plan to achieve
compliance  with  the  standard.  If  the  agency  requires  submission  of a
compliance  plan and the  institution  fails to timely  submit an  acceptable
plan  or  to  implement  an  accepted  plan,  the  agency  must  require  the
institution   to  correct  the   deficiency.   Under  the  final   rule,   an
institution  must file a  compliance  plan  within 30 days of a request to do
so from the institution's  primary federal  regulatory  agency.  The agencies
may elect to initiate  enforcement  action in certain  cases rather than rely
on an existing  plan  particularly  where  failure to meet one or more of the
standards could threaten the safe and sound operation of the institution.

      The  Board of  Governors  issued  final  amendments  to its  risk-based
capital  guidelines  to be effective  December 31, 1994,  requiring  that net
unrealized  holding  gains  and  losses  on  securities  available  for  sale
determined  in  accordance  with  SFAS  No.  115,   "Accounting  for  Certain
Investments  in Debt and Equity  Securities,"  are not to be  included in the
Tier 1 capital  component  consisting  of common  stockholders'  equity.  Net
unrealized losses on marketable equity securities  (equity  securities with a
readily  determinable  fair  value),  however,  will  continue to be deducted
from Tier 1 capital.  This rule has the general  effect of valuing  available
for sale  securities  at  amortized  cost (based on  historical  cost) rather
than at fair value  (generally at market  value) for purposes of  calculating
the risk-based and leverage capital ratios.

      On December 13, 1994, the Board of Governors  issued  amendments to its
risk-based  capital  guidelines  regarding  concentration  of credit risk and
risks  of  non-traditional  activities,  which  were  effective  January  17,
1996.   As   amended,    the   risk-based   capital    guidelines    identify
concentrations  of credit  risk and  evaluate  an  institution's  ability  to
manage  such  risks  and the risk  posed  by  non-traditional  activities  as
important factors in assessing an institution's overall capital adequacy.

      Community   Reinvestment  Act  ("CRA")  regulations   effective  as  of
July 1,  1996 evaluate banks' lending to low and moderate income  individuals
and businesses  across a four-point scale from  "outstanding" to "substantial
noncompliance,"  and are a factor in  regulatory  review of  applications  to
merge,  establish new branches or form bank holding  companies.  In addition,
any bank rated in  "substantial  noncompliance"  with the CRA regulations may
be subject to enforcement proceedings.

      The Banks  have a current  rating of  "satisfactory"  or better for CRA
compliance.

      The   Company's   ability   to  pay  cash   dividends   is  subject  to
restrictions  set forth in the  California  General  Corporation  Law.  Funds
for payment of any cash  dividends by the Company  would be obtained from its
investments  as well as  dividends  and/or  management  fees from the  Banks.
The  payment  of  cash  dividends  and/or  management  fees by the  Banks  is
subject to restrictions  set forth in the California  Financial Code, as well
as  restrictions  established  by the  FDIC.  See  Item 5 below  for  further
information  regarding  the payment of cash  dividends by the Company and the
Banks.

      COMPETITION

      At  December  31,  1998,  there  were 56  branches  of  commercial  and
savings  banks in the cities of  Castroville,  Gonzales,  King City,  Marina,
Salinas,  Seaside  and  the  Monterey  Peninsula.   Additionally,  the  Banks
compete with savings and loan  associations  and, to a lesser extent,  credit
unions,  finance  companies and other financial service providers for deposit
and loan customers.

      Larger  banks  may  have a  competitive  advantage  because  of  higher
lending  limits and major  advertising  and  marketing  campaigns.  They also
perform services,  such as trust services,  international  banking,  discount
brokerage  and  insurance  services  which the Banks  are not  authorized  or
prepared  to offer  currently.  The Banks have made  arrangements  with their
correspondent  banks  and  with  others  to  provide  such  services  for its
customers.  For  borrowers  requiring  loans in  excess of the  Banks'  legal
lending  limits,  the Banks have offered,  and intend to offer in the future,
such loans on a  participating  basis with its  correspondent  banks and with
other  independent  banks,  retaining  the  portion  of such  loans  which is
within their lending  limits.  As of December 31, 1998, the Banks'  aggregate
legal  lending  limits  to a  single  borrower  and such  borrower's  related
parties were  $7,947,000  on an unsecured  basis and  $13,245,000  on a fully
secured basis based on regulatory capital of $52,981,000.

      Each  Bank's  business  is  concentrated  in its  service  area,  which
primarily  encompasses  Monterey  County,  including the Salinas  Valley area
and to a lesser extent,  the contiguous areas of San Benito County,  Southern
Santa  Cruz  County,  and Santa  Clara  County.  The  economy  of the Bank of
Salinas's   service  area  is  primarily   dependent  upon  the  agricultural
industry.  Consequently,  Bank  of  Salinas  competes  with  other  financial
institutions  for deposits  from and loans to  individuals  and companies who
are also dependent  upon the  agricultural  industry.  The economy of Cypress
Bank's  service area is primarily  dependent on the tourist  supported  small
business  industry.  Cypress Bank competes with other financial  institutions
located in their own communities and in surrounding communities.

      Based upon data as of the most recent practicable date (June 30,1998)(1)
there were 73  operating  commercial  and savings  bank  branches in Monterey
County  with total  deposits  of  $3,656,276,000.  The Banks held a total
of  $489,192,000 in deposits,  representing  approximately  13.4% of total
commercial  and savings banks  deposits in Monterey  County as of June 30, 1998.
Of the Banks'competitors, two are independent banksheadquartered  in Monterey  
County.  The Banks also  compete with savings and loans associations in 
Monterey County.

      In order to  compete  with the major  financial  institutions  in their
primary  service  areas,  the Banks use to the fullest  extent  possible  the
flexibility  which is accorded by their  independent  status.  This  includes
an  emphasis  on  specialized  services,   local  promotional  activity,  and
personal  contacts  by the Banks'  officers,  directors  and  employees.  The
Banks also seek to provide  special  services and programs for individuals in
its primary service area who are employed in the  agricultural,  professional
and business  fields,  such as loans for equipment,  furniture,  tools of the
trade or  expansion  of  practices  or  businesses.  In the  event  there are
customers  whose loan demands  exceed the Banks'  lending  limits,  the Banks
seek  to  arrange  for  such  loans  on  a  participation  basis  with  other
financial  institutions.  The Banks also  assist  those  customers  requiring
services   not   offered  by  the  Banks  to  obtain   such   services   from
correspondent banks.

      Banking is a business  which  depends on interest  rate  differentials.
In general,  the  difference  between the interest  rate paid by the Banks to
obtain their  deposits and other  borrowings  and the interest  rate received
by the Banks on loans  extended to customers  and on  securities  held in the
Banks' portfolio comprise the major portion of the Banks' earnings.

      Commercial  banks  compete with savings and loan  associations,  credit
unions,  other  financial  institutions  and other  entities  for funds.  For
instance,  yields on  corporate  and  government  debt  securities  and other
commercial  paper affect the ability of commercial  banks to attract and hold
deposits.  Commercial  banks also  compete  for loans with  savings  and loan
associations,  credit unions, consumer finance companies,  mortgage companies
and other lending institutions.

      The interest  rate  differentials  of the Banks,  and  therefore  their
earnings,  are  affected  not  only  by  general  economic  conditions,  both
domestic  and foreign,  but also by the  monetary and fiscal  policies of the
United  States as set by statutes  and as  implemented  by federal  agencies,
particularly  the Federal  Reserve Board.  This agency can and does implement
national  monetary  policy,  such as  seeking  to curb  inflation  and combat
recession,  by  its  open  market  operations  in  United  States  government
securities,  adjustments  in the amount of interest  free reserves that banks
and other financial  institutions  are required to maintain,  and adjustments
to the  discount  rates  applicable  to  borrowing  by banks from the Federal
Reserve  Board.  These  activities   influence  the  growth  of  bank  loans,
investments  and deposits  and also affect  interest  rates  charged on loans
and paid on  deposits.  The  nature  and  timing  of any  future  changes  in
monetary policies and their impact on the Banks are not predictable.

      In 1996 the FDIC,  pursuant  to  Congressional  mandate,  reduced  bank
deposit  insurance  assessment  rates to a range from $0 to $0.27 per $100 of
deposits,  dependent  upon a bank's  risk.  Based  upon the above  risk-based
assessment  rate schedule,  the Banks' current  capital ratios and the Banks'
current  levels  of  deposits,   the  Banks   anticipate  no  change  in  the
assessment rate applicable to the Banks during 1999 from that in 1998.

      Since  1986,   California  has  permitted  California  banks  and  bank
holding  companies  to be  acquired by banking  organizations  based in other
states  on a  "reciprocal"  basis  (i.e.,  provided  the other  state's  laws
permit California banking  organizations to acquire banking  organizations in
that state on  substantially  the same  terms and  conditions  applicable  to
local  banking  organizations).  Some  increase  in  merger  and  acquisition
activity  among  California  and  out-of-state   banking   organizations  has
occurred  as a result  of this  law,  as well as  increased  competition  for
loans and deposits.

      Since October 2,  1996,  California law implementing certain provisions
of  prior  federal  law has  (1) permitted  interstate  merger  transactions;
(2) prohibited  interstate  branching  through  the  acquisition  of a branch
business  unit  located  in  California  without  acquisition  of  the  whole
business  unit  of  the  California  bank;  and   (3) prohibited   interstate
branching  through  de  novo  establishment  of  California  branch  offices.
Initial  entry  into  California  by  an  out-of-state  institution  must  be
accomplished  by  acquisition  of or merger with an existing whole bank which
has been in existence for at least five years.

      Recently,  the Federal  banking  agencies,  especially  the OCC and the
Board of  Governors,  have taken  steps to increase  the types of  activities
in which  national banks and bank holding  companies can engage,  and to make
it easier to  engage  in such  activities.  On  November  20,  1996,  the OCC
issued  final  regulations  permitting  national  banks to  engage in a wider
range of activities  through  subsidiaries.  "Eligible  institutions"  (those
national  banks that are well  capitalized,  have a high overall rating and a
satisfactory  CRA rating,  and are not subject to an  enforcement  order) may
engage in  activities  related  to  banking  through  operating  subsidiaries
after going through a new expedited  application  process.  In addition,  the
new  regulations  include a  provision  whereby a national  bank may apply to
the OCC to  engage in an  activity  through  a  subsidiary  in which the bank
itself  may  not  engage.  This  OCC  regulation  could  be  advantageous  to
national  banks  depending  on the extent to which the OCC  permits  national
banks to engage in new lines of business.

      Certain  legislative  and  regulatory  proposals  that could affect the
Bank and the banking  business  in general  are pending or may be  introduced
before the United States  Congress,  the  California  State  Legislature  and
Federal  and  state  government  agencies.  The  United  States  Congress  is
considering  numerous  bills that could reform  banking  laws  substantially.
For example,  proposed bank  modernization  legislation  under  consideration
would,  among  other  matters  include  a repeal  of the  Glass-Steagall  Act
restrictions  on banks that now prohibit the  combination  of commercial  and
investment banks.

      It is not  known to what  extent,  if any,  the  legislative  proposals
will  be  enacted  and  what  effect  such  legislation  would  have  on  the
structure,    regulation   and   competitive   relationships   of   financial
institutions.  It is  likely,  however,  that many of these  proposals  would
subject the Company and the Banks to  increased  regulation,  disclosure  and
reporting  requirements  and would increase  competition  and the Banks' cost
of doing business.

      In  additional  to pending  legislative  changes,  the various  banking
regulatory  agencies  frequently  propose rules and  regulations to implement
and enforce  already  existing  legislation.  It cannot be predicted  whether
or in what form any such rules or  regulations  will be enacted or the effect
that such and regulations may have on the Company and the Banks.


--------
(1) "FDIC Institution Office Deposits", June 30, 1998


ITEM 2.  PROPERTIES

      The headquarters  office and centralized  operations of the Company are
located  at 301  Main  Street,  Salinas,  California.  The  Company  owns and
leases properties which house  administrative  and data processing  functions
and eight  banking  offices.  Major  owned and leased  facilities  are listed
below.

BANK OF SALINAS                            CYPRESS BANK
301 main street                            1658 fremont boulevard
salinas, california                        seaside, california
leased - term expires 1999                 leased - term expires 1999
                                           
10601 merritt street                       228 reservation road
castroville, california                    marina, california
owned                                      leased - term expires 2004
                                           
400 alta street                            484 lighthouse avenue
gonzales, california                       monterey, california.
leased - term expires 2003                 leased - term expires 2000
                                           
532 broadway
king city, california
leased - term expires 2002

1285 north davis road
salinas, california.
leased - term expires 2008


      The  above  leases  contain  options  to extend  for  three to  fifteen
years.  Included  in the above are two facilities leased  from shareholders  at
terms and  conditions  which  management  believes  are  consistent  with the
commercial  lease market.  Rental rates are adjusted  annually for changes in
certain  economic  indices.  The annual  minimum  lease  commitments  are set
forth in Footnote 7 of Item 8 Financial  Statements  and  Supplementary  Data
included in this report and incorporated herein by reference.


ITEM 3.  LEGAL PROCEEDINGS

      There are no material  proceedings  adverse to the Company or the Banks
to which any director,  officer,  affiliate of the Company or 5%  shareholder
of the  Company  or  the  Banks,  or any  associate  of  any  such  director,
officer,  affiliate  or 5%  shareholder  of the Company or Banks are a party,
and  none  of the  above  persons  has a  material  interest  adverse  to the
Company or the Banks.

      Neither the  Company nor the Banks are a party to any pending  legal or
administrative   proceedings   (other  than   ordinary   routine   litigation
incidental to the Company's or the Banks'  business) and no such  proceedings
are known to be contemplated.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

       No matters  were  submitted to a vote of security  holders  during the
fourth quarter of 1998.



ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
          STOCKHOLDER MATTERS

      (a)  Market Information

      Prior to the second quarter of 1998, there was limited  trading in and
no established  public trading market for the Company's  common stock.  As of
the  second  quarter of 1998,  the  Company's common stock is listed on the
Nasdaq  National  Market  exchange (trading symbol CCBN)  
Sandler  O'Neill &  Partners,  L.P.  and Hoefer  &  Arnett,  Incorporated are
registered  as  market  makers  in the Company's stock.  Based on  information  
provided to the Company from Nasdaq and Heofer & Arnett(for  those  quarters 
prior  to the  Company's  Nasdaq listing),  the  range of high and low bids for 
the  common  stock for the twomost  recent  fiscal years, restated to reflect  
all stock  dividends  and stock  splits distributed by the Company and the 
5-for-4  stock  split declared in January 1999, are presented below.
<TABLE>
<CAPTION>
Calendar Year                                          Low                  High
<S>                                                    <C>                 <C>    
1998

   First Quarter .......................            $     14.55         $     19.20

   Second Quarter ......................                  16.50               20.41

   Third Quarter .......................                  13.20               18.50

   Fourth Quarter ......................                  14.40               16.10

1997

   First Quarter ........................            $    11.45         $     17.82

   Second Quarter ......................                  12.36               17.00

   Third Quarter .......................                  16.18               18.18

   Fourth Quarter ......................                  14.00               16.45
</TABLE>


      The  closing  price for the  Company's  common  stock was $14.875 as of
March 8, 1999.

      (b)   Holders

      As of March 8,  1999,  there  were approximately  1,150  holders of the
common  stock of the  Company.  There are no other  classes of common  equity
outstanding.

       (c)   Dividends

      The Company's  shareholders are entitled to receive  dividends when and
as  declared  by its  Board  of  Directors,  out of funds  legally  available
therefor,  subject to the  restrictions  set forth in the California  General
Corporation Law (the  "Corporation  Law").  The Corporation Law provides that
a  corporation   may  make  a  distribution   to  its   shareholders  if  the
corporation's  retained  earnings  equal at least the amount of the  proposed
distribution.  The Corporation  Law further  provides that, in the event that
sufficient   retained   earnings   are  not   available   for  the   proposed
distribution,  a corporation  may  nevertheless  make a  distribution  to its
shareholders  if it meets  two  conditions,  which  generally  stated  are as
follows:   (1)   the  corporation's  assets  equal at least  1-1/4  times its
liabilities;  and  (2)  the  corporation's  current assets equal at least its
current  liabilities or, if the average of the corporation's  earnings before
taxes on income and before  interest  expenses for the two  preceding  fiscal
years was less than the average of the  corporation's  interest  expenses for
such  fiscal  years,  then the  corporation's  current  assets  must equal at
least  1-1/4  times its  current  liabilities.  Funds for payment of any cash
dividends by the Company  would be obtained from its  investments  as well as
dividends and/or management fees from the Banks.

      The payment of cash  dividends  by the  subsidiary  Banks is subject to
restrictions  set forth in the  California  Financial  Code  (the  "Financial
Code").  The  Financial  Code  provides  that  a  bank  may  not  make a cash
distribution  to its  shareholders  in excess of the lesser of (a) the bank's
retained  earnings;  or (b) the bank's  net income for its last three  fiscal
years,  less  the  amount  of any  distributions  made by the  bank or by any
majority-owned  subsidiary  of the  bank  to  the  shareholders  of the  bank
during  such  period.   However,  a  bank  may,  with  the  approval  of  the
Commissioner,  make a  distribution  to its  shareholders  in an  amount  not
exceeding  the greater of (a) its retained  earnings;  (b) its net income for
its last  fiscal  year;  or (c) its net income for its current  fiscal  year.
In the event that the Commissioner  determines that the shareholders'  equity
of a bank is  inadequate  or that the  making of a  distribution  by the bank
would be unsafe or unsound,  the  Commissioner  may order the bank to refrain
from making a proposed distribution.

      The FDIC may also  restrict  the payment of  dividends  if such payment
would  be  deemed  unsafe  or  unsound  or  if  after  the  payment  of  such
dividends,  the  bank  would  be  included  in one of the  "undercapitalized"
categories  for capital  adequacy  purposes  pursuant to the Federal  Deposit
Insurance  Corporation  Improvement  Act of  1991.  Additionally,  while  the
Board of  Governors  has no general  restriction  with respect to the payment
of cash  dividends by an adequately  capitalized  bank to its parent  holding
company,  the Board of Governors might,  under certain  circumstances,  place
restrictions  on the  ability of a  particular  bank to pay  dividends  based
upon peer group averages and the  performance  and maturity of the particular
bank,  or object to  management  fees on the basis  that such fees  cannot be
supported by the value of the  services  rendered or are not the result of an
arm's length transaction.

      Under these  provisions  and  considering  minimum  regulatory  capital
requirements,  the amount  available for  distribution  from the Banks to the
Company was approximately $17,747,000 as of December 31, 1998.

      To date,  the Company has not paid a cash dividend and  presently  does
not intend to pay cash  dividends  in the  foreseeable  future.  The  Company
distributed  a  five-for-four  stock  split in February  1999,  a ten percent
stock  dividend  in  1998,  a  three-for-two  stock  split  in 1997 and a ten
percent  stock  dividend  in 1996.  The  Board of  Directors  will  determine
payment of  dividends in the future after  consideration  of various  factors
including  the  profitability  and  capital  adequacy  of the Company and the
Banks.



      The   following   table   presents   certain   consolidated   financial
information  concerning  the  business  of the  Company  and  its  subsidiary
Banks.   This   information   should   be  read  in   conjunction   with  the
Consolidated  Financial  Statements,  the  notes  thereto,  and  Management's
Discussion and Analysis included in this report.
<TABLE>
<CAPTION>
                                      Years Ended December 31,
                          -------------------------------------------------
(Dollar amounts in          1998      1997      1996     1995      1994
thousands)
<S>                         <C>       <C>      <C>       <C>       <C>   

OPERATING RESULTS
Total Interest Income       $37,354   $33,916   $29,301  $26,964   $21,646
Total Interest Expense       13,319    12,041     9,859   10,008     7,071
                          -------------------------------------------------
   Net Interest Income       24,035    21,875    19,442   16,956    14,575
Provision for Credit Losses     159        64       352      695     1,745
                          -------------------------------------------------
Net Interest Income After Provision
   for Credit Losses         23,876    21,811    19,090   16,261    12,830
Other Income                  2,084     1,765     1,456    1,302     1,315
Other Expenses               13,859    12,573    11,115   10,263     9,170
                          -------------------------------------------------
Income before Income Taxes   12,101    11,003     9,431    7,300     4,975
Income Taxes                  4,948     4,500     3,571    2,975     2,046
                          -------------------------------------------------
NET INCOME                  $ 7,153   $ 6,503   $ 5,860  $ 4,325   $ 2,929
---------------------------------------------------------------------------

Basic Earnings Per Share    $  1.18   $  1.09   $  1.01  $  0.75   $  0.53
Diluted Earnings Per Share     1.09      1.01      0.94     0.70      0.50
---------------------------------------------------------------------------
FINANCIAL CONDITION AND CAPITAL - YEAR-END BALANCES

Net Loans                  $307,818  $251,271  $235,992 $191,000  $179,266                                                      
Total Assets                543,933   497,674   376,832  357,236   310,362                                                 
Deposits                    489,192   450,301   338,663  326,089   283,823                                      
Shareholders' Equity         51,199    43,724    36,332   29,916    25,547
---------------------------------------------------------------------------
FINANCIAL CONDITION AND CAPITAL - AVERAGE BALANCES

Net Loans                  $271,590  $238,793  $203,117 $173,065  $179,514           
Total Assets                499,354   441,013   355,386  329,502   290,166                        
Deposits                    447,598   396,457   319,110  300,291   265,512       
Shareholders' Equity         47,587    39,969    33,228   27,684    23,691                    
---------------------------------------------------------------------------
SELECTED FINANCIAL RATIOS
Rate of Return on:
   Average Total Assets       1.43%     1.47%     1.65%    1.31%     1.01%
   Average Shareholders'
     Equity                  15.03%    16.27%    17.64%   15.62%    12.36%
Rate of Average Shareholders'Equity
 to Total Average Assets      9.53%     9.06%     9.35%    8.40%     8.16%
---------------------------------------------------------------------------
</TABLE>



(a)
(1)   Distribution  of Assets,  Liabilities  and Equity;  Interest Rates and 
        Interest Differential 
                Table One in  Management's  Discussion and Analysis  included
in this report sets forth the  Company's  average  balance  sheets  (based on
daily  averages)  and an  analysis of interest  rates and the  interest  rate
differential  for each of the three years in the period  ended  December  31,
1998 and is hereby incorporated by reference.

      (2)  Volume/Rate Analysis
               Information as to the impact of changes in average rates and
average balances on interest earning assets and interest bearing
liabilities is set forth in Table Two in Management's Discussion and
Analysis.
 
(b)   Investment Portfolio

      (1)   The book value of investment securities at December 31, 1998 and 
            1997 is set forth in Note 5 of Item 8 - "Financial Statements and 
            Supplementary Data" and are included in this report and incorporated
            herein by reference.
      

      (2)   The book value, maturities and weighted average yields of
            investment securities as of December 31, 1998 are set forth in
            Table Twelve of Management's Discussion  and Analysis included
            in this report and incorporated herein by reference.

      (3)   There were no issuers of securities for which the book value
            was greater than 10% of shareholders'  equity other than U.S.
            Government and U.S. Government Agencies and Corporations. 

(c)  Loan Portfolio

      (1)   The composition of the loan portfolio is summarized in Table
            Three of Management's Discussion and Analysis included in this
            report and is incorporated herein by reference.

      (2)   The maturity distribution of the loan portfolio at December 31,
            1998 is summarized in Table Eleven of Management's Discussion
            and Analysis included in this report and is incorporated herein
            by reference.

      (3)   Nonperforming Loans

            The Company's current policy is to cease accruing interest when
            a loan becomes 90 days past due as to principal or interest,
            when the full timely collection of interest or principal
            becomes uncertain or when a portion of the principal balance
            has been charged off, unless the loan is well secured and in
            the process of collection.  When a loan is placed on nonaccrual
            status, the accrued and uncollected interest receivable is
            reversed and the loan is accounted for on the cash or cost
            recovery method thereafter, until qualifying for return to
            accrual status.  Generally, a loan may be returned to accrual
            status when all delinquent interest and principal become
            current in accordance with the terms of the loan agreement or
            when the loan is both well secured and in process of
            collection.

            For further discussion of nonperforming loans, refer to Risk
            Elements section of Management Discussion Analysis in this
            report.

(d)   Summary of Loan Loss Experience

      (1)   An analysis of the allowance for loan loss showing charged off and
            recovery activity as of December 31, 1998 is summarized in Table
            Five of Management's Discussion and Analysis included in this
            report and is incorporated herein by reference.  Factors used in
            determination of the allowance for loan losses are discussed in
            greater detail in the "Risk Elements" section of Management's
            Discussion and Analysis included in this report and are
            incorporated herein by reference.

      (2)   In evaluating the adequacy of the allowance for loan losses, the
            Company attempts to allocate the allowance for loan losses to
            specific categories of loans.  Management believes that any
            breakdown or allocation of the allowance for possible loan
            losses into loan categories lends an appearance of exactness
            which does not exist in that the allowance is utilized as a
            single unallocated allowance available for all loans.  Further,
            management believes that the breakdown of historical losses in
            the preceding table is a reasonable representation of
            management's expectation of potential losses in the next full
            year of operation.  However, the allowance for loan losses
            should not be interpreted as an indication of when charge-offs
            will occur or as an indication of future charge-off trends.

(e)    Deposits

     (1)    Table One in Management's Discussion and Analysis included in this
            report sets forth the distribution of average deposits for the years
            ended December 31, 1998, 1997 and 1996 and is incorporated herein by
            reference.

     (2)    Table Ten in Management's Discussion and Analysis included in this
            report sets forth the maturities of time certificates of deposit of
            $100,000 or more at December 31, 1998 and is incorporated herein by
            reference.

 

3(f)   Return on Equity and Assets

     (1)    The table at page 16 of this section sets forth the ratios of net
            income to average assets and average shareholders' equity, and
            average shareholders' equity to average assets.  As the Company has
            never paid a cash dividend, the dividend payout ratio is not
            indicated.




ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition  to the  historical  information  contained  herein,  this Annual
Report  contains  certain  forward-looking  statements.  The  reader  of this
Annual  Report should  understand  that all such  forward-looking  statements
are  subject to various  uncertainties  and risks  that  could  affect  their
outcome.  The Company's  actual  results could differ  materially  from those
suggested  by such  forward-looking  statements.  Factors that could cause or
contribute to such  differences  include,  but are not limited to,  variances
in the  actual  versus  projected  growth in assets,  return on assets,  loan
losses,   expenses,   rates   charged  on  loans  and  earned  on  securities
investments,  rates  paid on  deposits,  competition  effects,  fee and other
noninterest   income  earned,   general  economic   conditions,   nationally,
regionally  and in the  operating  market areas of the Company and the Banks,
changes in the  regulatory  environment,  changes in business  conditions and
inflation,  changes in  securities  markets,  effects  of Year 2000  problems
discussed  herein,  as well as  other  factors.  This  entire  Annual  Report
should  be read to put such  forward-looking  statements  in  context  and to
gain a more complete  understanding of the  uncertainties  and risks involved
in the Company's business.

Business Organization

Central Coast Bancorp (the "Company"), a California corporation organized
in 1994, acts as the holding company for Bank of Salinas and Cypress Bank
(the "Banks"), state-chartered banks, headquartered in Salinas and Seaside,
California, respectively.  As of December 31, 1998, the Banks operated
eight full-service branches and one limited-service branch in Monterey
County, California.  Other than its investment in the Banks, the Company
currently conducts no other significant business activities, although it is
authorized to engage in a variety of activities which are deemed closely
related to the business of banking upon prior approval of the Board of
Governors, the Company's principal regulator.

The Banks  offer a full  range of  commercial  banking  services,  offering a
diverse range of traditional  banking  products and services to  individuals,
merchants,    small   and   medium-sized   businesses,    professionals   and
agribusiness  enterprises  located in the  Salinas  Valley  and the  Monterey
Peninsula.

The Company has expanded its banking  operations  through internal growth and
the  acquisition of other banking units.  Bank of Salinas'  newest branch was
opened  deNovo in December  1998. It is located in Salinas'  newest  shopping
area,   Westridge   Center.  On  February  21,  1997,  the  Bank  of  Salinas
purchased  certain  assets and assumed  certain  liabilities  of the Gonzales
and  Castroville  branch  offices of Wells  Fargo  Bank.  As a result of that
transaction  the  Bank  assumed  deposit  liabilities,   received  cash,  and
acquired  tangible assets.  This transaction  resulted in intangible  assets,
representing  the excess of the  liabilities  assumed  over the fair value of
the tangible assets acquired.

In  January  1997,  Cypress  Bank  opened a new  branch  office in  Monterey,
California,  so that it might better serve business and individual  customers
on the Monterey Peninsula.

The following  analysis is designed to enhance the reader's  understanding of
the  Company's  financial  condition  and the  results of its  operations  as
reported in the Consolidated  Financial  Statements  included  in this Annual
Report.  Reference  should  be  made to  those  statements  and the  Selected
Financial  Data presented  elsewhere in this report for  additional  detailed
information.  Average  balances,  including such balances used in calculating
certain financial ratios,  are generally  comprised of average daily balances
for the Company.  Except within the "overview"  section,  interest income and
net interest income are presented on a tax equivalent basis.


Overview

Central  Coast Bancorp  continued  its record of increased  earnings in
each  successive  year  since  the  founding  of Bank  of  Salinas  in  1983.
Earnings  for the  year  ended  December  31,  1998  were  $7,153,000  versus
$6,503,000  for 1997.  Diluted  earnings  per share for the years  were $1.09
and $1.01.  The earnings  per share for the two years have been  adjusted for
the 5 for 4 stock split paid on February 26, 1999.

For the year 1998, net interest income increased  $2,160,000  (9.9%) to
$24,035,000  from the  prior  year.  The  interest  income  component  was up
$3,438,000 to  $37,354,000  due to a 13.0% growth in average  earning  assets
of  $51,738,000.  Loan  volume  made  up  $32,797,000  of this  increase  and
represented   a  13.7%  growth  in  loans.   The  higher  loan  volume  added
$3,410,000  in interest  income on a year over year basis.  This increase was
offset in part by decrease of  $1,201,000  due to a 44 basis point decline in
the  average  yield  received  on  loans  during  1998.  Interest  income  on
investment  securities  grew  $1,650,000  (28.3%)  as average  balances  were
$25,727,000  (25.8%)  higher  and the  average  yield  improved  by 12  basis
points.  During  the year,  the  Company  began a program  to reduce  Federal
Funds sold and move those funds into  higher  yielding  securities.  Interest
income  from  Federal  Funds sold  declined  $421,000  (12.9%) in 1998 versus
1997.  Interest expense  increased  $1,278,000  (10.6%) in 1998 due mostly to
growth of  $33,175,000  (11.0%) in average  interest  bearing  deposits.  The
average  rate  paid on  interest-bearing  liabilities  was 4.0% for both 1998
and  1997.  Net  interest  margin  for 1998 was 5.34%  versus  5.49% in 1997.
This change  reflects the effect of the 50 basis point  decrease in the prime
rate during the fourth quarter.

Noninterest  income  increased  $319,000 to  $2,084,000  in 1998 versus
1997.  Service charges on deposits  provided  $159,000 of the increase mostly
due  to  higher  volumes.  The  increased  volume  of  mortgage  originations
contributed an additional $136,000 on a year over year basis.

Noninterest  expenses  increased  $1,286,000  (10.2%)  to  $13,859,000.
Salary and  benefits  expenses  increased  10.5% to  $8,385,000.  Part of the
higher  expense was  attributable  to the full year effect in 1998 of the two
branches  purchased  from  Wells  Fargo  Bank in late  February  1997 and the
December  1998  opening of the new  Westridge  branch in Salinas.  Additional
staff has been  added  Company  wide due to  growth.  During  the  year,  the
Company  installed  a wide  area  network,  a  Year  2000  compliant  central
computer and software  system and upgraded  many of its  workstations.  These
enhancements  provide the platform for growth, but contributed  significantly
to the $128,000  (30.5%)  increase in depreciation  for 1998 versus 1997. For
1998,  the Company had an overhead  efficiency  ratio of 53.1% as compared to
53.2% for 1997.

Assets of the Company  totaled  $543,933,000 at December 31, 1998 which
was an increase of  $46,259,000  (9.3%) from the 1997 ending  balances.  Loan
ending   balances   totaled   $312,844,000   on  December   31,  1998  versus
$256,062,000  on December  31,1997.  Nonperforming  loans were  $2,123,000 at
the  end of  1998  versus  $895,000  at the  end of  1997.  One  real  estate
secured  loan  for  $1,174,000,  which  was in  the  process  of  collection,
accounted  for most of the  $1,228,000  increase.  This  loan was  refinanced
outside  the Bank in March  1999.  Deposits  grew 8.6% to total  $489,192,000
at December 31, 1998.

For  1998,  the  Company  realized  a return  on  assets of 1.43% and a
return on equity of 15.0%  versus  1.47% and  16.3%,  respectively,  in 1997.
Central  Coast  Bancorp ended 1998 with a Tier 1 capital ratio of 13.6% and a
total risk-based capital ratio of 14.8%.

Management's  continuing  goals for the Banks are to  deliver a full array of
competitive  products to their customers while  maintaining the  personalized
customer  service  of  a  community  bank.  We  believe  this  strategy  will
provide  continued  growth and the ability to achieve above  average  returns
for our shareholders.

Accounting Pronouncements

See Note One in the Consolidated Financial Statements at Item 8.



(A)   Results of Operations

Net Interest Income/Net Interest Margin

Net  interest  income  represents  the excess of interest  and fees earned on
interest-earning  assets (loans,  securities and federal funds sold) over the
interest  paid on deposits and  borrowed  funds.  Net interest  margin is net
interest income expressed as a percentage of average earning assets.

Net  interest   income  for  1998  totaled   $24,130,000  and  was  up  10.1%
($2,223,000)  over the prior  year.  The  interest  income  component  was up
$3,501,000 to  $37,449,000.  Most of the increase was  attributable to growth
in the earning  assets.  Average  outstanding  loan balances of  $271,590,000
for 1998  reflected  a 13.7%  increase  over  1997  balances.  This  increase
contributed an additional  $3,410,000 to interest  income.  This increase was
offset in part by an average 44 basis  point  decrease  in loan  yields  that
caused a reduction of $1,201,000 in interest  income.  Competitive  pressures
and  three  25 basis  point  decreases  in the  prime  rate  late in the year
contributed to the lower yields.  The securities  portfolio  average balances
grew  $25,727,000  (25.8%)  which added  $1,511,000 to interest  income.  The
average  yield  received  on  securities  was up 16 basis  points  and  added
$202,000 to interest  income.  Federal Funds sold interest  income  decreased
$421,000 as the average balances were $6,786,000 (11.3%) lower.

Interest  expense  increased  $1,278,000  (10.6%)  in  1998  over  1997.  The
average  balances  of  interest  bearing  liabilities  increased  $31,307,000
(10.4%).  The  higher  balances  were due in part to the full year  effect in
1998 of the deposits  acquired in the February  1997 purchase of two branches
from Wells Fargo Bank.  Interest  expense  attributable  to the higher volume
was  $1,787,000.  Lower  rates  paid  on  all  interest  bearing  liabilities
helped offset the higher  expense by $509,000.  Net interest  margin for 1998
was 5.36% versus 5.50% in 1997.

Net  interest   income  for  1997  totaled   $21,907,000  and  was  up  12.7%
($2,465,000)  over 1996.  Average  earning assets were  $398,416,000  in 1997
for  an  increase  of  $73,213,000   over  1996.  The  purchase  of  the  two
branches from Wells Fargo Bank  accounted for  approximately  $25,000,000  of
this  increase.   In  1997,   interest  income  increased  by  $4,647,000  to
$33,948,000.  The  higher  volume  of  earning  assets  added  $6,003,000  to
interest  income  in  1997.  The  average  yield  received  on  all  interest
earning  assets  fell 49  basis  points  to  8.52%.  The  yield  differential
reduced interest income by $1,356,000.

Interest  expense  increased  $2,182,000  (22.1%) in 1997 over 1996.  Average
balances of  interest  bearing  liabilities  increased  $52,933,000  in 1997.
Approximately  $28,000,000  of that increase was  attributable  to the branch
purchase from Wells Fargo Bank.  Interest  expense was up  $2,409,000  due to
the higher average  balances.  Changes due to rate  variations  helped offset
the  increase by  $227,000.  Net  interest  margin for 1997 was 5.50%  versus
5.98% in 1996.

Table One,  Analysis  of Net  Interest  Margin on Earning  Assets,  and Table
Two,  Analysis  of  Volume  and  Rate  Changes  on Net  Interest  Income  and
Expenses,  are  provided to enable the reader to  understand  the  components
and past  trends  of the  Banks'  interest  income  and  expenses.  Table One
provides an analysis of net interest  margin on earning  assets setting forth
average  assets,   liabilities  and  shareholders'  equity;  interest  income
earned and interest  expense paid and average rates earned and paid;  and the
net  interest  margin on earning  assets.  Table Two  presents an analysis of
volume and rate change on net interest income and expense.


Table One:  Analysis of Net Interest Margin on Earning Assets
<TABLE>
<CAPTION>

(Taxable Equivalent Basis)                   1998                            1997                               1996
----------------------------------------------------------------------------------------------------------------------------------
In thousands                      Avg                  Avg         Avg                  Avg          Avg                   Avg 
(except percentages)             Balance    Interest   Yield      Balance   Interest    Yield       Balance    Interest    Yield
----------------------------------------------------------------------------------------------------------------------------------
<S>                             <C>         <C>        <C>       <C>         <C>         <C>       <C>         <C>         <C>
Assets:
Earning Assets
  Loans (1) (2)                 $ 271,590    $27,037   9.96%     $ 238,793   $24,828     10.40%    $ 203,117    $22,330    10.99%
  Investment Securities (3)       125,380      7,568   6.04%        99,653     5,855      5.88%       82,883      4,936     5.96%
  Other                            53,184      2,844   5.35%        59,970     3,265      5.44%       39,203      2,035     5.19%
                                   ------      -----   ----         ------     -----      ----        ------      -----     ---- 
Total Earning Assets              450,154    $37,449   8.32%       398,416   $33,948      8.52%      325,203    $29,301     9.01%
                                             -------   ----                  -------      ----                  -------     ---- 
Cash & due from banks              38,889                           33,144                            22,867
Other assets                       10,311                            9,453                             7,316
                                   ------                            -----                             -----
                                $ 499,354                        $ 441,013                         $ 355,386
                                =========                        =========                         =========

Liabilites & Shareholders'
  Equity:
Interest bearing liabilities:
  Demand deposits                $ 89,637    $ 1,720   1.92%      $ 93,161   $ 1,881      2.02%     $ 75,295    $ 1,629     2.16%
  Savings                         101,256      3,774   3.73%        95,767     3,875      4.05%      102,819      4,303     4.19%
  Time deposits                   142,580      7,825   5.49%       111,370     6,187      5.56%       71,119      3,927     5.52%
  Other borrowings                     -          -      n/a         1,868        98      5.25%           -          -      n/a
                                  -------     ------   ----         ------    ------      ----       -------      -----     ----
Total interest bearing
  liabilities                     333,473     13,319   3.99%       302,166    12,041      3.98%      249,233      9,859     3.96%
                                              ------   ----                   ------      ----                    -----     ---- 
Demand deposits                   114,125                           96,159                            69,877
Other Liabilities                   4,169                            2,719                             3,048
                                    -----                            -----                             -----
Total Liabilities                 451,767                          401,044                           322,158
Shareholders' Equity               47,587                           39,969                            33,228
                                   ------                           ------                            ------
                                $ 499,354                        $ 441,013                         $ 355,386
                                =========                        =========                         =========
Net interest income & margin (4)             $24,130   5.36%                 $21,907      5.50%                 $19,442     5.98%
                                             =======   ====                  =======      ====                  =======     ==== 
</TABLE>


-----------------------------            
1. Loans interest includes loan fees of $951,000, $1,037,000 and $901,000 in
1998, 1997 and 1996, and interest recognized from
payments collected on nonaccrual loans of
$619,000 in 1996.
2. Average balances of loans include average allowance for loan losses of
$4,260,000, $4,229,000 and $4,439,000, and average deferred
loan fees of $587,000, $571,000 and $613,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
3. Includes taxable-equivalent adjustments that primarily relate to income
on certain securities that is exempt from
federal income taxes. The effective federal statutory tax rate was
34% for 1998, 1997 and 1996.
4. Net interest margin is computed by dividing net interest
income by total average earning assets.
 


Table Two: Volume/Rate Analysis
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
(in thousands) 1998 over 1997
Increase (decrease) due to change in:
                                                                      Net
                                              Volume    Rate (5)    Change
                                              ------    --------    ------
<S>                                          <C>        <C>        <C>    
Interest-earning assets:
   Net Loans (1)(2)(3) ......................$ 3,410    $(1,201)   $ 2,209
   Investment securities(4) .................  1,511        202      1,713
   Federal funds sold & other ...............   (370)       (51)     (421)
                                                -----     ------     ----- 
     Total ..................................  4,551     (1,050)     3,501
                                               -----     -------     -----

Interest-bearing liabilities:
   Demand deposits ..........................    (71)       (90)      (161)
   Savings deposits .........................    222       (323)      (101)
   Time deposits ............................  1,734        (96)     1,638
   Other borrowings .........................    (98)         0        (98)
                                                 ---        ---        --- 
     Total ..................................  1,787       (509)     1,278
                                               -----       ----      -----
Interest differential .......................$ 2,764    $  (541)   $ 2,223
</TABLE>
<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
(in thousands) 1997 over 1996
Increase (decrease) due to change in:
                                                                      Net
                                              Volume     Rate(5)     Change
                                              ------     -------     ------
<S>                                          <C>        <C>        <C>
Interest-earning assets:
   Net loans (1)(2)(3) ......................$ 3,924    $(1,426)   $ 2,498
   Investment securities(4) .................    999        (80)       919
   Federal funds sold & other ...............  1,080        150      1,230
                                               -----       ----      -----
     Total ..................................  6,003     (1,356)     4,647
                                               -----     ------      -----

Interest-bearing liabilities:
   Demand deposits ..........................     393       (141)       252
   Savings deposits .........................    (296)      (132)      (428)
   Time deposits ............................   2,214         46      2,260
   Other borrowings .........................      98          -         98
                                                  ---        ---        ---
     Total ..................................   2,409       (227)     2,182
                                                -----       ----      -----
Interest differential ....................... $ 3,594    $(1,129)   $ 2,465
--------------------------------------------------------------------------------
</TABLE>

1. The average balance of non-accruing loans is immaterial as a percentage
of total loans and, as such, has been included in
net loans.
2. Loan fees of $951,000, $1,037,000 and $901,000 for the years ended
December 31, 1998, 1997 and 1996, respectively, have
been included in the interest income
computation.
3. Rate variance includes impact of interest income recognized from
payments received on nonaccrual loans of $619,000 in 1996.
4. Includes taxable-equivalent adjustments that primarily relate to income
on certain securities that is exempt from
federal income taxes. The effective federal statutory tax rate was 34% for
1998, 1997 and 1996.
5. The rate / volume variance has been included in the rate variance.




Provision for Loan Losses

Credit  quality  remained  strong in 1998.  Consequently,  the  Company  made
provisions  for loan  losses  of only  $159,000.  This  amounted  to 0.06% of
average  loans  outstanding.  In 1997,  the Company  provided  $64,000.  That
was a decrease of $288,000 from 1996.

Service Charges and Fees and Other Income

For 1998,  noninterest  income was up $319,000  (18.1%)  from 1997 results to
$2,084,000.  Service charges and fees related to deposit  accounts  accounted
for $159,000 of the  increase.  The growth came from both higher  volumes and
some  selective  fee  increases.  Other  income was up  $160,000  to $849,000
over 1997  results.  Mortgage  origination  fees  accounted  for  $136,000 of
that  increase  as  mortgage  activity  was  significantly  higher  in  1998.
Should  interest  rates  increase,  activity in mortgage  originations  would
most likely decrease resulting in a decrease in those fees.

In 1997,  income realized from service charges on deposit accounts  increased
$341,000  or 46.4% to  $1,076,000  over  $735,000  in 1996.  The  increase in
income from fees and service  charges was largely the result of the  increase
in deposit  accounts  due to the two former  Wells Fargo  branches as well as
growth in the total  number  of  interest  bearing  and  noninterest  bearing
demand  deposit  accounts at all  branches.  Other income  decreased  $32,000
(4.4%)  in 1997  versus  1996.  Income  from the sale  and  servicing  of SBA
loans was $119,000 in 1997  representing  a decrease of $42,000 or 26.1% over
$161,000  recognized  in 1996.  The Company is retaining the SBA loans in its
portfolio rather than selling them.

Salaries and Benefits

Salary and benefits  expenses  increased  $799,000  (10.5%) to  $8,385,000 in
1998 from the level in 1997.  Part of the  higher  expense  was  attributable
to the full year  effect in 1998 of the two  branches  purchased  from  Wells
Fargo Bank in late  February  1997 and the  December  1998 opening of the new
Westridge  branch in Salinas.  Additional  staff has been added  Company wide
due to  growth.  At the end of 1998,  the full time  equivalent  (FTE)  staff
was 197 versus 181 at the end of 1997.  Components  of salaries  and benefits
that increased  significantly  included;  base salary and wages, $533,000 and
benefits including employer taxes $224,000.

Salaries and employee  benefits expense for 1997 was $7,586,000,  an increase
of  17.9%  over  the  $6,437,000  incurred  in  1996.  The  increase  in 1997
primarily  reflected  the  impact  of  increased  headcount  because  of  the
purchase  of the  Wells  Fargo  branches  and to  accommodate  growth  in the
Banks.  In 1997,  the FTE staff  increased 36 positions from the end of 1996.
Salaries and employee  benefits in 1997  included  approximately  $175,000 of
nonrecurring  charges  for  restructuring   related  to  the  acquisition  of
Cypress Bank and $250,000 for a salary continuation plan.

Occupancy and Furniture and equipment

Premise and fixed asset related  expenses were  $1,975,000 in 1998.  This was
an increase of  $286,000  over 1997.  During  1998,  the Company  installed a
wide area  network,  a Year 2000  compliant  central  computer  and  software
system and upgraded  many of its computer  workstations.  These  enhancements
provide  the  platform  for  growth,  but  contributed  significantly  to the
increase in premise and fixed asset  expenses.  Other  significant  increases
occurred in repairs and  maintenance  of equipment,  janitorial and gardening
and rent on leased quarters.

For 1997,  premise and fixed asset  related  expenses  increased  $124,000 or
7.92%  to  $1,689,000.  Most  of the  increase  was  related  to  the  branch
acquisition.

Other Expenses

Other  expenses   increased  $201,000  (6.1%)  to  $3,499,000  in  1998.  ATM
expense  was up  $77,000  (51.3%)  as the  Banks  added  more  locations  and
changed the service  provider.  Promotional  expenses were up $51,000 (46.3%)
as the Banks  increased  their  advertising  campaigns.  Those two categories
saw the largest changes from the prior year.

Other expenses were  $3,298,000 in 1997  representing an increase of $185,000
or  5.9%  from  1996  expenses  of  $3,113,000.  The  increase  in  1997  was
primarily   related  to  increased   supplies  expense  and  amortization  of
intangibles related to the purchase of two branches in that year.

Provision for Taxes

The effective tax rate on income was 40.9%,  40.9%,  and 37.9% in 1998,  1997
and 1996,  respectively.  The primary factor  reducing the effective tax rate
of the  Company  in 1996  was a change  in the  valuation  allowance  for the
deferred  tax assets of Cypress  Bank.  The  effective  tax rate was  greater
than the federal  statutory tax rate due to state tax expense of  $1,292,000,
$1,213,000,  and  $1,030,000 in these years.  Tax-exempt  income of $190,000,
$63,000,  and none ($0) from  investment  securities in these years helped to
reduce the effective tax rate.

(B)  Balance Sheet Analysis

Central Coast Bancorp's total assets at December 31, 1998 were $543,933,000
compared to $497,674,000 at December 31, 1997, representing an increase of
9.3%.  The average balances of total assets of $499,354,000 in 1998
represent an increase of $58,341,000 or 13.2% over $441,013,000 in 1997.

Loans

The Banks  concentrate  their  lending  activities in four  principal  areas:
commercial loans (including  agricultural  loans);  installment  loans;  real
estate-other  loans and real estate  construction  loans (both commercial and
personal).  At  December  31,  1998,  these  four  categories  accounted  for
approximately   44%,   4%,  46%  and  6%  of  the  Banks'   loan   portfolio,
respectively,  as compared  to 49%,  3%, 42%,  and 6% at December  31,  1997.
Strong  economic  activity  in the  Banks'  market  area  coupled  with lower
interest  rates  resulted in some  shifting loan demands  during 1998.  While
all loan  categories  reflect  year over year growth  from 1997 to 1998,  the
largest  growth  took place in the real  estate-other  category.  Table Three
summarizes  the  composition of the loan portfolio for the past five years as
of December 31:



Table Three:  Loan Portfolio Composite
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
In thousands
-----------------------------------------------------------------------------
                        1998        1997        1996       1995       1994
<S>                    <C>        <C>        <C>          <C>        <C>
Commercial             $136,685    124,714    $111,545    $85,823    $78,627
Installment              11,545      9,349       8,230      5,677      6,445
Real Estate:   
   Construction          19,929     14,645      27,997     24,852     24,076                    
   Other                144,685    107,354      93,241     79,644     74,769
-----------------------------------------------------------------------------        
Total Loans             312,844    256,062     241,013    195,996    183,917
Allowance for
   Credit Losses        (4,352)    (4,223)     (4,372)    (4,446)    (4,068)
  Deferred Loans Fees     (674)      (568)       (649)      (550)      (583)
-----------------------------------------------------------------------------
Total                  $307,818   $251,271    $235,992   $191,000   $179,266
-----------------------------------------------------------------------------
</TABLE>

 
The  majority  of the  Bank's  loans are direct  loans  made to  individuals,
local  businesses  and  agri-businesses.  The Bank  relies  substantially  on
local promotional  activity,  personal  contacts by bank officers,  directors
and employees to compete with other  financial  institutions.  The Bank makes
loans to  borrowers  whose  applications  include a sound  purpose,  a viable
repayment  source  and a plan  of  repayment  established  at  inception  and
generally backed by a secondary source of repayment.

Commercial  loans  consist of credit  lines for  operating  needs,  loans for
equipment  purchases,  working  capital,  and  various  other  business  loan
products.  Installment  loans  include a range of  traditional  consumer loan
products  offered by the Company  such as personal  lines of credit and loans
to finance purchases of autos,  boats,  recreational  vehicles,  mobile homes
and various  other  consumer  items.  The  construction  loans are  generally
composed of  commitments to customers  within the Company's  service area for
construction  of  both  commercial  properties  and  custom  and  semi-custom
single  family  residences.  Other real estate  loans  consist  primarily  of
loans to the Banks'  depositors  secured by first trust  deeds on  commercial
and  residential   properties   typically  with  short-term   maturities  and
original  loan to value ratios not exceeding  75%. In general,  except in the
case of loans  with  SBA  guarantees,  the  Company  does not make  long-term
mortgage  loans;  however,  the Company has  informal  arrangements  in place
with  mortgage  lenders  to  assist   customers  in  securing   single-family
mortgage financing.

Average  net loans in 1998 were  $271,590,000  representing  an  increase  of
$32,797,000  or 13.7%  over  1997.  The  favorable  economic  conditions  and
lower  interest  rates  provided  the impetus  for  continuing  loan  growth.
Average  net  loans  of  $238,793,000  in 1997  represented  an  increase  of
$35,676,000 or 17.6% from $203,117,000 in 1996.

Risk  Elements - The Company  assesses and manages  credit risk on an ongoing
basis  through  stringent  credit  review and  approval  policies,  extensive
internal  monitoring and established  formal lending policies.  Additionally,
the  Company   contracts   with  an  outside   loan  review   consultant   to
periodically  grade  new loans and to review  the  existing  loan  portfolio.
Management  believes  its  ability to  identify  and  assess  risk and return
characteristics   of  the   Company's   loan   portfolio   is  critical   for
profitability  and growth.  Management  strives to continue the  historically
low level of credit  losses by continuing  its emphasis on credit  quality in
the  loan  approval  process,   active  credit   administration  and  regular
monitoring.  With this in mind,  management  has designed and  implemented  a
comprehensive  loan review and grading  system that  functions to continually
assess the credit risk inherent in the loan portfolio.

Ultimately, credit quality may be influenced by underlying trends in the
economic and business cycles. The Company's business is concentrated in
Monterey County, California whose economy is highly dependent on the
agricultural industry.  As a result, the Company lends money to individuals
and companies dependent upon the agricultural industry.  In addition, the
Company has significant extensions of credit  and commitments to extend
credit which are secured by real estate, totalling approximately $212.1
million at December 31, 1998.  The ultimate recovery of these loans is
generally dependent on the successful operation, sale or refinancing of the
real estate.  The Company monitors the effects of current and expected
market conditions and other factors on the collectibility of real estate
loans.  When, in management's judgement, these loans are impaired, an
appropriate provision for losses is recorded.  The more significant
assumptions management considers involve estimates of the following: lease,
absorption and sale rates; real estate values and rates of return;
operating expenses; inflation; and sufficiency of collateral independent of
the real estate including, in limited instances, personal guarantees.

In extending  credit and  commitments  to  borrowers,  the Company  generally
requires  collateral  and/or  guarantees  as security.  The repayment of such
loans is  expected to come from cash flow or from  proceeds  from the sale of
selected  assets of the borrowers.  The Company's  requirement for collateral
and/or  guarantees is determined on a case-by-case  basis in connection  with
management's   evaluation   of  the   credit-worthiness   of  the   borrower.
Collateral  held  varies  but may  include  accounts  receivable,  inventory,
property, plant and equipment,  income-producing  properties,  residences and
other real  property.  The Company  secures its  collateral by perfecting its
interest  in  business   assets,   obtaining  deeds  of  trust,  or  outright
possession  among  other  means.  Credit  losses  from  lending  transactions
related to real estate and agriculture  compare  favorably with the Company's
credit losses on its loan portfolio as a whole.

Management believes that its lending policies and underwriting standards
will tend to minimize losses in an economic downturn, however, there is no
assurance that losses will not occur under such circumstances.  The Banks'
loan policies and underwriting standards include, but are not limited to,
the following: 1) maintaining a thorough understanding of the Banks'
service area and limiting investments outside of this area, 2) maintaining
a thorough understanding of borrowers' knowledge and capacity in their
field of expertise, 3) basing real estate construction loan approval not
only on salability of the project, but also on the borrowers' capacity to
support the project financially in the event it does not sell within the
original projected time period, and 4) maintaining conforming and prudent
loan to value and loan to cost ratios based on independent outside
appraisals and ongoing inspection and analysis by the Banks' construction
lending officers.  In addition, the Banks strive to diversify the risk
inherent in the construction portfolio by avoiding concentrations to
individual borrowers and on any one project.

Nonaccrual, Past Due and Restructured Loans

Management generally places loans on nonaccrual status when they become 90
days past due, unless the loan is well secured and in the process of
collection.  Loans are charged off when, in the opinion of management,
collection appears unlikely. Table Four sets forth nonaccrual loans and
loans past due 90 days or more for December 31:

Table Four:  Non-Performing Loans
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
In thousands                           1998     1997     1996    1995     1994
--------------------------------------------------------------------------------                                
<S>                                  <C>        <C>     <C>      <C>    <C>
Past due 90 days or more and still accruing:
   Real estate                       $ 1,174    $   6   $   59   $  71  $     -
   Commercial                             73       73       60      35        -
   Installment and other                   -        -       90       -        6
--------------------------------------------------------------------------------
                                        1,247       79      209     106       6
--------------------------------------------------------------------------------
Nonaccrual:
   Real estate                           543      628      419     633    2,697
   Commercial                            333      188      184     194       99
   Installment and other                   -        -        1      24       33
--------------------------------------------------------------------------------
                                         876      816      604     851    2,829
--------------------------------------------------------------------------------
Total nonperforming loans            $ 2,123   $  895   $  813   $ 957  $ 2,835
================================================================================
</TABLE>

Interest  due but  excluded  from  interest  income on  nonaccrual  loans was
approximately  $45,000  in 1998,  $7,000  in 1997  and  $50,000  in 1996.  In
1998,  1997 and 1996 interest  income  recognized  from payments  received on
nonaccrual loans was $17,000, $7,000 and $619,000, respectively.

At  December  31,  1998,  the  recorded  investment  in loans  that are
considered   impaired  was  $727,000  of  which   $335,000  are  included  as
nonaccrual  loans above.  Such  impaired  loans had a valuation  allowance of
$164,000.  The average  recorded  investment  in impaired  loans  during 1998
was $776,000.  The Company  recognized  interest  income on impaired loans of
$64,000.

There were no troubled debt  restructurings or loan  concentrations in excess
of 10% of total loans not  otherwise  disclosed  as a category of loans as of
December 31, 1998.  Management is not aware of any potential  problem  loans,
which were  accruing and current at December 31, 1998,  where  serious  doubt
exists  as to  the  ability  of the  borrower  to  comply  with  the  present
repayment terms.

Other real estate  owned was  $105,000  and $348,000 at December 31, 1997 and
1996, respectively (none at December 31, 1998).

Allowance for Loan Losses Activity

The  provision  for credit  losses is based upon  management's  evaluation of
the  adequacy  of  the  existing  allowance  for  loans   outstanding.   This
allowance is increased by  provisions  charged to expense and reduced by loan
charge-offs   net  of  recoveries.   Management   determines  an  appropriate
provision based upon the interaction of three primary  factors:  (1) the loan
portfolio  growth in the  period,  (2) a  comprehensive  grading  and  review
formula for total loans outstanding, and (3) actual previous charge-offs.

The allowance for credit  losses  totaled  $4,352,000 or 1.39% of total loans
at December  31, 1998  compared to  $4,223,000  or 1.65% at December 31, 1997
and   $4,372,000  or  1.81%  at  December  31,  1996.  The  decrease  in  the
allowance  as a percentage  of total loans is  primarily  due to the increase
in loan  balances  in a  generally  strong  economic  environment.  It is the
policy of  management  to maintain the allowance for credit losses at a level
adequate for known and future  risks  inherent in the loan  portfolio.  Based
on  information   currently  available  to  analyze  credit  loss  potential,
including economic factors,  overall credit quality,  historical  delinquency
and a history  of actual  charge-offs,  management  believes  that the credit
loss   provision  and  allowance  is  prudent  and  adequate.   However,   no
prediction  of the  ultimate  level of loans  charged off in future years can
be made with any certainty.

Table  Five  summarizes,  for  the  years  indicated,  the  activity  in  the
allowance for loan losses.


Table Five:  Allowance for Loan Losses
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
For the year ended December 31      1998      1997      1996     1995      1994
(dollars in thousands)
----------------------------------------------------------------------------------
<S>                               <C>      <C>       <C>       <C>       <C> 

Average loans outstanding         $276,437 $243,593  $208,169  $178,012  $183,434
----------------------------------------------------------------------------------

Allowance for possible credit losses
   at beginning of period          $ 4,223   $4,372    $4,446   $ 4,068   $ 2,840

Loans charged off:
   Real estate                         (16)    (100)     (207)      (52)      (45)
    Installment                        (31)     (61)      (22)      (80)     (125)
    Commercial                        (130)    (279)     (391)     (302)     (413)
----------------------------------------------------------------------------------
                                      (177)    (440)     (620)     (434)     (583)
----------------------------------------------------------------------------------                                      
                                     
Recoveries of loans previously
   Charged off: 
   Real estate                          20       28        11         -         -
   Installment                          11       37        27        29        35
   Commercial                          116      162       156        88        31
----------------------------------------------------------------------------------
                                       147      227       194       117        66  
----------------------------------------------------------------------------------
Net loans charged off                  (30)    (213)     (426)     (317)     (517)

Additions to allowance charged
  to operating expenses                159       64       352       695     1,745
----------------------------------------------------------------------------------
                                            
Allowance for possible loans
   Losses at end of period         $ 4,352  $ 4,223   $ 4,372   $ 4,446   $ 4,068
 ==================================================================================


Ratio of net charge-offs to
  Average loans outstanding          0.01%    0.09%     0.20%     0.18%     0.28%

Provision of allowance for possible
 credit losses to average 
 loans outstanding                   0.06%    0.03%     0.17%     0.39%     0.95%

Allowance for possible credit losses to loans
 net of deferred fees at year end    1.39%    1.65%     1.82%     2.27%     2.22%
----------------------------------------------------------------------------------
</TABLE>


As part of its loan review  process,  Management  has  allocated  the overall
allowance  based on specific  identified  problem loans and  historical  loss
data.  Table Six  summarizes  the allocation of the allowance for loan losses
at December 31, 1998 and 1997.





Table Six:  Allowance for Loan Losses by Loan Category
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
                                December 31, 1998        December 31, 1997
                                   Percent                    Percent
                                      of                         of
                                 loans in each              loans in each                                                       
                                   category                   category
                                      to                         to
(Dollars in thousands)         Amount total loans        Amount total loans
                                     loans                      loans
---------------------------------------------------------------------------
<S>                      <C>            <C>       <C>             <C> 
Commercial               $  3,416       43%       $   2,704       48%
Real estate                   678       52%             695       47%
Consumer                      139        3%             108        4%
Loans held for sale             -        2%               -        1%
---------------------------------------------------------------------------
Total allocated             4,233      100%           3,507      100%
Total unallocated             119                       716
---------------------------------------------------------------------------
   Total                 $  4,352                 $   4,223
---------------------------------------------------------------------------
</TABLE>


Other Real Estate Owned

The Company did not have any  properties  in OREO at December  31,  1998.  At
the end of 1997,  the Company had  properties  with a total value of $105,000
in OREO.

Deposits

Deposits at December 31, 1998 totaled  $489,192,000  and were up  $38,891,000
(8.6%) over the 1997  year-end  balances.  The  increase  in  year-end  total
deposits is attributable to internal  growth in  noninterest-bearing  demand,
interest-bearing  demand,  savings and time  deposit  categories.  At the end
of 1997,  total deposits were  $450,301,000.  That represented a $111,638,000
or 32.9%  increase  over the  balances  at  December  31,  1996.  Deposits in
the two branches  purchased  from Wells Fargo Bank in February 1997 accounted
for  $55,025,000  of the  increase.  Those two  branches  realized  growth of
approximately $21,000,000 from the date of acquisition.

Equity

See  Note 15 in the  financial  statements  for a  discussion  of  regulatory
capital  requirements.  Management  believes  that the  Company's  capital is
adequate to support anticipated  growth, meet the cash dividend  requirements
of the Banks  and meet the  future  risk-based  capital  requirements  of the
Banks and the Company.

Market Risk Management

Overview.  The goal for  managing the assets and  liabilities  of the Bank is
to maximize  shareholder  value and earnings while maintaining a high quality
balance sheet  without  exposing the Bank to undue  interest  rate risk.  The
Board of Directors  has overall  responsibility  for the  Company's  interest
rate  risk  management  policies.   The  Bank  has  an  Asset  and  Liability
Management  Committee  (ALCO) which  establishes  and monitors  guidelines to
control the sensitivity of earnings to changes in interest rates.

Asset/Liability   Management.    Activities   involved   in   asset/liability
management  include  but are not limited to  lending,  accepting  and placing
deposits,  investing in securities  and issuing  debt.  Interest rate risk is
the  primary  market  risk   associated  with   asset/liability   management.
Sensitivity  of  earnings  to  interest  rate  changes  arises when yields on
assets change in a different  time period or in a different  amount from that
of  interest  costs on  liabilities.  To  mitigate  interest  rate risk,  the
structure  of the balance  sheet is managed  with the goal that  movements of
interest  rates on assets and  liabilities  are  correlated and contribute to
earnings  even in periods of volatile  interest  rates.  The  asset/liability
management  policy  sets limits on the  acceptable  amount of variance in net
interest   margin  and  market  value  of  equity  under  changing   interest
environments.  The Banks use  simulation  models to  forecast  earnings,  net
interest margin and market value of equity.

Simulation  of earnings is the primary  tool used to measure the  sensitivity
of earnings to interest rate changes.  Using  computer  modeling  techniques,
the Company is able to estimate  the  potential  impact of changing  interest
rates on  earnings.  A balance  sheet  forecast is prepared  using  inputs of
actual   loan,    securities   and   interest   bearing   liabilities   (i.e.
deposits/borrowings)  positions as the beginning  base. The forecast  balance
sheet is processed  against  three  interest  rate  scenarios.  The scenarios
include a 100 basis point rising rate  forecast,  a flat rate  forecast and a
100 basis point  falling  rate  forecast  within a one year time  frame.  The
Company's  1999 net interest  income  forecast is  determined  by utilizing a
forecast balance sheet projected from year end 1998 balances.

The following assumptions were used in the modeling activity:
      Earning asset growth of 14.5% based on ending balances
      Loan growth of 11.4% based on ending balances
      Investment and funds sold growth of 16.7% based on ending balances
      Deposit growth of 12.8% based on ending balances
      Balance sheet target balances were the same for all rate scenarios

The following table summarizes the effect on net interest  income of a +/- 100
basis  point  change in interest  rates as  measured  against a flat rate (no
change) scenario.

Table  7:  Interest  Rate  Risk  Simulation  of  Net  Interest  Income  as of
December 31, 1998

                                        Estimated Impact on
                                         1999 Net Interest
                                             Income
                                             ------
                                          (in thousands)

   Variation from flat rate scenario
        +100                                $  826
        -100                                (1,007)

The simulations of earnings do not  incorporate any management  actions which
might  moderate  the  negative  consequences  of  interest  rate  deviations.
Therefore,   they  do  not  reflect  likely  actual  results,  but  serve  as
conservative estimates of interest rate risk.

The  Company  also uses a second  simulation  scenario  that rate  shocks the
balance sheet with an immediate  parallel  shift in interest  rates of +/-100
basis  points.  This scenario  provides  estimates of the future market value
of equity (MVE) and net  interest  income  (NII).  MVE measures the impact on
equity due to the changes in the market values of assets and  liabilities  as
a result of a change in interest  rates.  The Bank  measures  the  volatility
of these  benchmarks  using a twelve month time  horizon.  Using the December
31, 1998 balance sheet as the base for the  simulation,  the following  table
summarizes the effect on net interest income of a +/-100 basis point change in 
interest rates:

Table 8:  Interest Rate Risk Simulation of NII as of December 31, 1998

                                        % Change          Change
                                          in NII          in NII
                                      from Current     from Current
                                    12 Mo. Horizon   12 Month Horizon
                                    --------------   ----------------
                                                        (in thousands)
              +100bp                        7.6%            $2,504
              -100bp                      ( 8.5%)          ($2,802)


These  results  indicate  that the  balance  sheet is asset  sensitive  since
earnings  increase  when  interest  rates  rise.  The  magnitude  of the  NII
change  is within  the  Company's  policy  guidelines.  The  asset  liability
management   policy  limits  aggregate  market  risk,  as  measured  in  this
fashion,   to  an  acceptable   level  within  the  context  of   risk-return
trade-offs.

Gap analysis  provides  another  measure of interest  rate risk.  The Company
does not  actively  use gap analysis in managing  interest  rate risk.  It is
presented  here for  comparative  purposes.  Interest rate  sensitivity  is a
function of the repricing  characteristics  of the Bank's portfolio of assets
and  liabilities.   These  repricing  characteristics  are  the  time  frames
within  which the  interest-bearing  assets and  liabilities  are  subject to
change in  interest  rates  either at  replacement,  repricing  or  maturity.
Interest rate  sensitivity  management  focuses on the maturity of assets and
liabilities  and  their  repricing   during  periods  of  changes  in  market
interest  rates.  Interest  rate  sensitivity  is measured as the  difference
between  the  volumes  of  assets  and  liabilities  in  the  Bank's  current
portfolio  that are  subject to  repricing  at  various  time  horizons.  The
differences are known as interest sensitivity gaps.

As  reflected  in Table Nine,  at  December  31,  1998,  the Company is asset
sensitive  in all time frames  except for the  immediately  repricing  items.
This gap position  would  indicate  that as interest  rates rise,  the Bank's
earnings  should be favorably  impacted  and  conversely,  as interest  rates
fall,   earnings   should  be   adversely   impacted.   Because  the  deposit
liabilities  do not reprice  immediately  with changes in interest  rates the
Company  is very  asset  sensitive.  In 1998,  Management  began a program to
diversify  some of the Banks assets into longer term  investment  instruments
that  will  help  reduce  earnings   volatility  in  falling   interest  rate
environments.  As a result of this  program,  the interest  rate  sensitivity
gap  ratios  in Table  Nine as of  December  31,  1998 show  decreased  asset
sensitivity when compared to those as of December 31, 1997.








Table Nine:  INTEREST RATE SENSITIVITY DECEMBER 31,1998
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
  Assets and Liabilities                                      Over three
  which Mature or Reprice:                     Next day       months and     Over one
                                              and within        within      and within         Over
      (In thousands)         Immediately     three months      one year     five years      five years     Total
---------------------------------------------------------------------------------------------------------------------
<S>                               <C>             <C>           <C>            <C>             <C>           <C>
Interest earning assets:
Federal funds sold                $ 4,202              $ -            $ -           $ -             $ -      $ 4,202
Investment securities               1,525           32,610         11,092        27,487          97,673      170,387
Loans, excluding
   nonaccrual loans
   and overdrafts                  10,104          204,938          8,919        78,346          13,062      315,369
---------------------------------------------------------------------------------------------------------------------
Total                            $ 15,831        $ 237,548       $ 20,011      $105,833       $ 110,735    $ 489,958
=====================================================================================================================
Interest bearing
   liabilities:
Interest bearing demand          $ 98,226              $ -            $ -           $ -             $ -     $ 98,226
Savings                           104,447                -              -             -               -      104,447
Time certificates                      14           43,703         81,983        10,950             112      136,762
Other Borrowings                        -                -              -             -               -            -
---------------------------------------------------------------------------------------------------------------------
Total                           $ 202,687         $ 43,703       $ 81,983      $ 10,950           $ 112    $ 339,435
=====================================================================================================================
Interest rate
   sensitivity gap             $ (186,856)       $ 193,845      $ (61,972)     $ 94,883       $ 110,623
Cumulative interest
   rate sensitivity gap        $ (186,856)         $ 6,989      $ (54,983)     $ 39,900       $ 150,523
Ratios:
Interest rate
   sensitivity gap                   0.08             5.44           0.24          9.67          988.71
Cumulative interest
   rate sensitivity gap              0.08             1.03           0.83          1.12            1.44
---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, 1997
Ratios:
Interest rate
 sensitivity gap                     0.37             6.06           0.41          4.08          222.17
Cumulative interest
 rate sensitivity gap                0.37             1.35           1.13          1.35            1.39
----------------------------------------------------------------------------------------------------------------------
</TABLE>


Liquidity

Liquidity  management  refers to the Company's ability to provide funds on an
ongoing basis to meet  fluctuations  in deposit  levels as well as the credit
needs  and   requirements  of  its  clients.   Both  assets  and  liabilities
contribute  to  the  Company's  liquidity  position.   Federal  funds  lines,
short-term  investments  and securities,  and loan  repayments  contribute to
liquidity,  along with  deposit  increases,  while loan  funding  and deposit
withdrawals   decrease   liquidity.   The  Banks  assess  the  likelihood  of
projected  funding  requirements by reviewing  historical  funding  patterns,
current and forecasted  economic  conditions  and  individual  client funding
needs.  Commitments to fund loans and  outstanding  standby letters of credit
at  December  31,  1998,  were  approximately  $122,423,000  and  $1,556,000,
respectively.  Such loans relate  primarily to revolving  lines of credit and
other commercial loans, and to real estate construction loans.

The  Company's  sources  of  liquidity  consist  of  overnight  funds sold to
correspondent  banks,  unpledged  marketable  investments  and loans held for
sale.  On December  31,  1998,  consolidated  liquid  assets  totaled  $153.5
million or 28.2% of total  assets as compared  to $164.2  million or 33.0% of
total  consolidated  assets on  December  31,  1997.  In  addition  to liquid
assets,  the  subsidiary  Banks  maintain  short  term  lines of credit  with
correspondent  banks.  At  December  31,  1998,  the  Banks  had  $23,500,000
available  under these credit lines.  Additionally,  the Banks are members of
the  Federal  Home Loan Bank.  At  December  31,  1998,  the Banks could have
arranged  for  up  to  $17,114,000  in  secured  borrowings  from  the  FHLB.
Informal  agreements  are also in place with various  other banks to purchase
participations  in loans,  if  necessary.  The  Company  serves  primarily  a
business and  professional  customer  base and, as such,  its deposit base is
susceptible  to economic  fluctuations.  Accordingly,  management  strives to
maintain  a balanced  position  of liquid  assets to  volatile  and  cyclical
deposits.

Liquidity  is  also  affected  by  portfolio  maturities  and the  effect  of
interest  rate   fluctuations  on  the   marketability  of  both  assets  and
liabilities.   In  1998,   the  Company   adopted   Statement   of  Financial
Accounting Standards (SFAS) No. 133,  "Accounting for Derivative  Instruments
and Hedging  Activities".  In  conjunction  with the adoption of SFAS 133 the
Banks  reclassified  all  securities  into the  available-for-sale  category.
This  enables  the Banks to sell any of their  unpledged  securities  to meet
liquidity needs.

The maturity  distribution  of certificates  of deposit in  denominations  of
$100,000  or more is set forth in Table Ten.  These  deposits  are  generally
more rate sensitive than other  deposits and,  therefore,  are more likely to
be withdrawn to obtain higher yields elsewhere if available.

Table Ten:  Certificates of Deposit in Denominations of $100,000 or More
<TABLE>
<CAPTION>
------------------------------------------------------------------
                                                      Year Ended
                                                      12/31/98
------------------------------------------------------------------
<S>                                                   <C>
 Three months or less                                 $27,967,000

 Over three months through six months                  22,280,000

 Over six months through twelve months                 29,637,000

 Over twelve months                                     8,293,000
------------------------------------------------------------------
 Total                                                $88,177,000
------------------------------------------------------------------
</TABLE>


Loan demand also affects the Bank's liquidity position.  Table Eleven
presents the maturities of loans at December 31, 1998.






Table Eleven:  Loan Maturities - December 31, 1998
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                 One year
                          One year               through                 Over
  (in thousands)          or less               five years            five years             Total
---------------------------------------------------------------------------------------------------------
<S>                      <C>                    <C>                  <C>                   <C>
  Commercial,
   financial and
   agricultural           $115,509,000           $ 20,334,000          $ 3,409,000          $139,252,000

  Real estate -
   construction             18,957,000                472,000              500,000            19,929,000

  Real estate -
    other                   78,889,000             57,864,000           11,533,000           148,286,000

  Installment                9,912,000              1,621,000               12,000            11,545,000

---------------------------------------------------------------------------------------------------------
  Total                   $223,267,000           $ 80,291,000         $ 15,454,000          $319,012,000
---------------------------------------------------------------------------------------------------------
</TABLE>


 Loans shown above with maturities greater than one year include
$36,604,000 of floating interest rate loans and $59,141,000 of fixed
rate loans.


The  maturity  distribution  and  yields  of the  investment  portfolios  are
presented in Table Twelve which follows:

<TABLE>
<CAPTION>
Table Twelve:  Securities  Maturities  and Weighted  Average Yields - December 31, 1998
---------------------------------------------------------------------------------------------------
                                                                                           Weighted
                                                Amortized Unrealized Unrealized   Market   Average
In thousands                                      Cost       Gain      Losses     Value     Yield
---------------------------------------------------------------------------------------------------
<S>                                               <C>        <C>        <C>       <C>       <C>
December 31, 1998
Available for sale Securities:
U.S. Treasury and agency securities
     Maturing within 1 year                       $13,976      $ 119        $ -   $ 14,095   6.16%
     Maturing after 1 year but within 5 years      27,248        239          -     27,487   6.16%
     Maturing after 5 years but within 10 years    20,037         15          -     20,052   6.27%
     Maturing after 10 years but within 15 years   19,486        118          -     19,604   6.08%
     Maturing after  15 years                      29,169        293          -     29,462   6.19%
State & Political Subdivision
     Maturing after 5 year but within 10 Years      3,159          9         10      3,154   4.06%
     Maturing after 10 year but within 15 Years    22,144         44        199     21,993   4.18%
     Maturing after 15 Years                        3,418         15         24      3,409   4.74%
Corporate Debt Securities                                                                   
    Maturing within 1 year                         29,608          -          -     29,608   5.92%                   
Other                                               1,525          -          -      1,525       -
---------------------------------------------------------------------------------------------------
Total investment securities                     $ 169,770      $ 852      $ 235   $170,387   5.73%
===================================================================================================
</TABLE>

The principal cash  requirements of the Company are for expenses  incurred in
the  support  of  administration  and  operations  of the  Banks.  These cash
requirements  are  funded  through  direct  reimbursement   billings  to  the
Banks.  For nonbanking  functions,  the Company is dependent upon the payment
of cash  dividends  by the Banks to  service  its  commitments.  The  Company
expects  that the cash  dividends  paid by the  Bank to the  Company  will be
sufficient to meet this payment schedule.

Off-Balance Sheet Items

The Bank has certain ongoing  commitments under operating  leases.  (See Note
7 of the  financial  statements  for the  terms.)  These  commitments  do not
significantly impact operating results.

As of  December  31,  1998,  commitments  to  extend  credit  were  the  only
financial   instruments  with  off-balance  sheet  risk.  The  Bank  has  not
entered into any  contracts  for  financial  derivative  instruments  such as
futures,  swaps,  options etc.  Loan  commitments  increased to  $122,423,000
from  $90,649,000 at December 31, 1997. The  commitments  represent  39.1% of
total loans at year-end 1998 versus 35.4% a year ago.

Disclosure of Fair Value

The  Financial  Accounting  Standards  Board  (FASB),  Statement of Financial
Accounting  Standards Number 107,  Disclosures  about Fair Value of Financial
Statements,   requires  the  disclosure  of  fair  value  of  most  financial
instruments,   whether   recognized  or  not   recognized  in  the  financial
statements.   The  intent  of   presenting   the  fair  values  of  financial
instruments  is to depict the  market's  assessment  of the present  value of
net future cash flows  discounted to reflect both current  interest rates and
the market's assessment of the risk that the cash flows will not occur.

In determining  fair values,  the Company used the carrying  amount for cash,
short-term  investments,  accrued interest receivable,  short-term borrowings
and accrued  interest  payable as all of these  instruments are short term in
nature.   Securities  are  reflected  at  quoted  market  values.  Loans  and
deposits  have  a  long  term  time  horizon  which   required  more  complex
calculations   for  fair  value   determination.   Loans  are  grouped   into
homogeneous  categories  and broken  down  between  fixed and  variable  rate
instruments.  Loans with a variable  rate,  which  reprice  immediately,  are
valued  at  carrying  value.  The fair  value of fixed  rate  instruments  is
estimated by discounting  the future cash flows using current  rates.  Credit
risk and  repricing  risk  factors are  included in the current  rates.  Fair
value for  nonaccrual  loans is reported at carrying value and is included in
the net  loan  total.  Since  the  allowance  for  loan  losses  exceeds  any
potential   adjustment  for  nonaccrual   valuation,   no  further  valuation
adjustment has been made.

Demand  deposits,  savings and certain  money market  accounts are short term
in nature so the  carrying  value equals the fair value.  For  deposits  that
extend over a period in excess of four  months,  the fair value is  estimated
by  discounting  the future cash payments using the rates  currently  offered
for deposits of similar remaining maturities.

At 1998 year end, the fair values  calculated  on the Bank's  assets are .09%
above the carrying  values  versus  1.08% above the  carrying  values at year
end 1997.The change in the  calculated  fair value  percentage  relates to
the securities  and loan  categories and is the result of changes in interest
rates in 1998 (see Note 12 of the financial statements).

Year 2000

As the year 2000  approaches,  a critical  issue has  emerged  regarding  how
existing   application   software   programs   and   operating   systems  can
accommodate  this date value. In brief,  many existing  application  software
products in the  marketplace  were  designed to only  accommodate a two digit
date  position  which  represents  the  year  (e.g.,  "95" is  stored  on the
system and  represents  the year  1995).  As a result,  the year 1999  (i.e.,
"99")  could  be the  maximum  date  value  these  systems  will  be  able to
accurately  process.  This is not just a  banking  problem,  as  corporations
around the world and in all industries are similarly impacted.

The Company is uncertain  regarding the consequences  of the Year 2000 (Y2K)
issue  on  the  future  results  of   operations,   liquidity  and  financial
condition;  but  believes  that  failure to ensure  that its  systems  are in
compliance  with Y2K  requirements  could have a material  adverse  effect on
its  business.  As a result,  the  Company has made  addressing  Y2K issues a
priority of  management  and the Board.  Based upon  actions  implemented  to
date,  the  Company  currently  anticipates  that it will  be  successful  in
addressing  Y2K issues  and  anticipates  no  materially  adverse  processing
problems.  The  Company is  subject to  examination  by the  Federal  Deposit
Insurance  Corporation  and the Federal  Reserve Bank under their Y2K Phase I
and Phase II programs.  Management is not currently  aware of any  conditions
cited as unsatisfactory by such federal bank regulatory agencies.

      All mission critical  systems have been identified by the Company,  and
the Company is  currently  testing,  or  developing  contingency  plans,  for
each.  The term "mission  critical"  refers to an  application or system that
is  vital  to  the  successful   continuance   of  core  business   activity.
Significantly  all mission  critical  hardware and  software  utilized by the
Company are  provided by third  parties.  This  requires  that the Company is
in close  contact  with  relevant  vendors  and  contractors  as it  conducts
testing and contingency  planning.  The Company  anticipates  that all of its
mission   critical   systems  will  be  tested  and   implemented,   or  that
contingency plans will be written and in place, by March 31, 1999.

The  Company  has  made   disclosures  to  all  existing  and  new  customers
regarding  the  importance  of the Y2K issue and its relevance to the Company
and the customer.  The Company is  conducting  an ongoing  effort to identify
customers  that  represent  material  risk  exposure to the  institution,  to
evaluate  their Y2K  preparedness  and risk to the Company  and to  implement
appropriate risk controls.

The  Company  also  continues  to  evaluate  the cost to address  Y2K issues.
Most costs incurred to date are in conjunction  with the planned  replacement
of  systems.  The  cost  of  system  replacements  accelerated  to  meet  Y2K
requirements  and Y2K project  specific  costs have not been  significant  to
the  operations  of  Company  as  a  whole.  Management  estimates  that  the
incremental  cost of mitigating  Year 2000 risk exclusive of management  time
that has been redirected to focus on this matter will be  approximately  $171
thousand.
 
Despite  efforts  undertaken  to  date  and  as  projected,  there  can be no
assurance  that  problems  will not arise which could have an adverse  impact
upon the Company due, among other matters,  to the  complexities  involved in
computer  programming  related to  resolution  of Year 2000  problems and the
fact that the systems of other  companies on which  Central Coast Bancorp and
its  subsidiaries,  Bank of Salinas and Cypress  Bank,  may rely must also be
corrected on a timely basis.  Many phases of the  Company's Y2K  preparedness
plan  have  been  completed:   the  Company  has  identified,   assessed  and
prioritized   mission   critical   systems;   developed   Year  2000  testing
strategies  and plans;  implemented  a customer due  diligence  program;  and
tested most  mission  critical  systems.  But,  delays,  mistakes or failures
in correcting Y2K system  problems by other  companies on which Central Coast
Bancorp  and its  subsidiaries  may rely,  could have a  significant  adverse
impact upon Central Coast Bancorp and its  subsidiaries,  Bank of Salinas and
Cypress  Bank,  and their  ability to mitigate the risk of adverse  impact of
Y2K problems for their customers.

The  disclosure  set  forth  above   contains   forward-looking   statements.
Specifically,  such  statements  are  contained  in sentences  including  the
words   "expect"   or   "anticipate"    or   "could"   or   "should".    Such
forward-looking  statements are subject to inherent  risks and  uncertainties
that may cause actual results to differ  materially  from those  contemplated
by such  forward-looking  statements.  The  factors  that  may  cause  actual
results to differ materially from those  contemplated by the  forward-looking
statements  include the failure by third parties  adequately to remediate Y2K
issues or the inability of the Company to complete  testing  software changes
on  the  time  schedules  currently  expected.   Nevertheless,   the  Company
currently  expects  that  its  Y2K  compliance  efforts  will  be  successful
without material adverse effects on its business.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by Item 7A of Form 10-K is contained in Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                      Page 
Independent Auditors' Report                                           44

Consolidated Balance Sheets, December 31, 1998 and 1997                45

Consolidated Statements of Income for the years ended 
   December 31, 1998, 1997 and 1996                                    46

Consolidated Statements of Cash Flows for the years ended
   December 31, 1998, 1997 and 1996                                    47

Consolidated Statements of Shareholders' Equity for the
   years ended December 31, 1998, 1997 and 1996                        48

Notes to Consolidated Financial Statements                          49-66

All schedules have been omitted since the required information is not
present in amounts sufficient to require submission of the schedule or
because the information required is included in the Consolidated Financial
Statements or notes thereto.



INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders of Central Coast Bancorp:

We have  audited  the  accompanying  consolidated  balance  sheets of Central
Coast  Bancorp and  subsidiaries  as of December  31, 1998 and 1997,  and the
related  consolidated  statements of income,   shareholders'  equity and cash
flows for each of the three  years in the period  ended  December  31,  1998.
These  financial   statements  are  the   responsibility   of  the  Company's
management.  Our  responsibility  is to express an opinion on these financial
statements based on our audits.

We  conducted  our audits in  accordance  with  generally  accepted  auditing
standards.  Those  standards  require  that we plan and  perform the audit to
obtain reasonable  assurance about whether the financial  statements are free
of  material  misstatement.  An audit  includes  examining,  on a test basis,
evidence   supporting   the  amounts  and   disclosures   in  the   financial
statements.  An audit  also  includes  assessing  the  accounting  principles
used and  significant  estimates  made by  management,  as well as evaluating
the overall  financial  statement  presentation.  We believe  that our audits
provide a reasonable basis for our opinion.

In our  opinion,  the  consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial position of Central
Coast  Bancorp  and  subsidiaries  at  December  31,  1998 and 1997,  and the
results  of their  operations  and  their  cash  flows  for each of the three
years in the period ended  December  31, 1998 in  conformity  with  generally
accepted accounting principles.


DELOITTE & TOUCHE LLP

Salinas, California
January 25, 1999
   (February 26, 1999 as to the stock split information in Note 1)

CONSOLIDATED BALANCE SHEETS
CENTRAL COAST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
December 31,                                                                           1998                         1997
-------------------------------------------------------------------------------------------------------------------------
<S>                                                                            <C>                         <C>
ASSETS
  Cash and due from banks                                                      $ 44,684,000                 $ 39,891,000
  Federal funds sold                                                              4,202,000                   64,706,000
-------------------------------------------------------------------------------------------------------------------------
    Total cash and equivalents                                                   48,886,000                  104,597,000
  Securities:
    Available-for-sale                                                          170,387,000                   91,481,000
    Held-to-maturity (Market value: 1997, $39,105,000)                                    -                   39,048,000
  Loans held for sale                                                             6,168,000                    1,331,000
  Loans:
    Commercial                                                                  136,685,000                  124,714,000
    Real estate-construction                                                     19,929,000                   14,645,000
    Real estate-other                                                           144,685,000                  107,354,000
    Installment                                                                  11,545,000                    9,349,000
-------------------------------------------------------------------------------------------------------------------------
    Total loans                                                                 312,844,000                  256,062,000
    Allowance for credit losses                                                  (4,352,000)                  (4,223,000)
    Deferred loan fees, net                                                        (674,000)                    (568,000)
-------------------------------------------------------------------------------------------------------------------------
  Net Loans                                                                     307,818,000                  251,271,000
-------------------------------------------------------------------------------------------------------------------------
  Premises and equipment, net                                                     3,069,000                    2,001,000
  Accrued interest receivable and other assets                                    7,605,000                    7,945,000
-------------------------------------------------------------------------------------------------------------------------
Total assets                                                                  $ 543,933,000                $ 497,674,000
=========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
  Deposits:
    Demand, noninterest bearing                                               $ 149,757,000                $ 126,818,000
    Demand, interest bearing                                                     98,226,000                   89,107,000
    Savings                                                                     104,447,000                   99,748,000
    Time                                                                        136,762,000                  134,628,000
-------------------------------------------------------------------------------------------------------------------------
    Total Deposits                                                              489,192,000                  450,301,000
  Accrued interest payable and other liabilities                                  3,542,000                    3,649,000
-------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                               492,734,000                  453,950,000
-------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Notes 7 and 13)
Shareholders' Equity:
  Preferred stock-no par value; authorized
    1,000,000 shares; no shares issued
  Common stock - no par value; authorized 25,000,000 shares;
    issued and outstanding: 6,112,045  shares in 1998
     and 5,460,586 shares in 1997                                                41,104,000                   31,644,000
  Shares held in deferred compenstion trust ( 71,949 shares in 1998
    and none in 1997), net of deferred obligation                                         -                            -
  Retained earnings                                                               9,733,000                   11,979,000
  Accumulated other comprehensive income, net of taxes of $254,000
    in 1998 and $71,000 in 1997                                                     363,000                      101,000
-------------------------------------------------------------------------------------------------------------------------
Shareholders' equity                                                             51,199,000                   43,724,000
-------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity                                    $ 543,933,000                $ 497,674,000
=========================================================================================================================
</TABLE>
See notes to Consolidated Financial Statements


CONSOLIDATED STATEMENTS OF INCOME
CENTRAL COAST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Years Ended December 31,                               1998                    1997                     1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                    <C>                     <C>
                                                                      
INTEREST INCOME
   Loans (including fees)                              $ 27,037,000           $ 24,828,000             $22,330,000
   Investment securities                                  7,473,000              5,823,000               4,936,000
   Other                                                  2,844,000              3,265,000               2,035,000
-------------------------------------------------------------------------------------------------------------------
       Total interest income                             37,354,000             33,916,000              29,301,000
------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
   Interest on deposits                                  13,319,000             11,943,000               9,859,000
   Other                                                          -                 98,000                       -
------------------------------------------------------------------------------------------------------------------
       Total interest expense                            13,319,000             12,041,000               9,859,000
-------------------------------------------------------------------------------------------------------------------
Net Interest Income                                      24,035,000             21,875,000              19,442,000
Provision for Credit Losses                                (159,000)               (64,000)               (352,000)
-------------------------------------------------------------------------------------------------------------------
Net Interest Income after
   Provision for Credit Losses                           23,876,000             21,811,000              19,090,000
------------------------------------------------------------------------------------------------------------------

NONINTEREST INCOME
   Service charges on deposits                            1,235,000              1,076,000                 735,000
   Other income                                             849,000                689,000                 721,000
------------------------------------------------------------------------------------------------------------------
      Total noninterest income                            2,084,000              1,765,000               1,456,000
------------------------------------------------------------------------------------------------------------------

NONINTEREST EXPENSES
   Salaries and benefits                                  8,385,000              7,586,000               6,437,000
   Occupancy                                                970,000                889,000                 728,000
   Furniture and equipment                                1,005,000                800,000                 837,000
   Other                                                  3,499,000              3,298,000               3,113,000
------------------------------------------------------------------------------------------------------------------
     Total noninterest expenses                          13,859,000             12,573,000              11,115,000
------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes                               12,101,000             11,003,000               9,431,000
Provision for Income Taxes                                4,948,000              4,500,000               3,571,000
------------------------------------------------------------------------------------------------------------------
       Net Income                                       $ 7,153,000            $ 6,503,000              $5,860,000
==================================================================================================================

Basic Net Income per Share                                   $ 1.18                 $ 1.09                  $ 1.01
Diluted Net Income per Share                                 $ 1.09                 $ 1.01                  $ 0.94
==================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements



CONSOLIDATED STATEMENTS OF CASH FLOWS
CENTRAL COAST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                                         1998                1997               1996
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                       <C>                 <C>                 <C>
CASH FLOWS FROM OPERATIONS:
   Net income                                                             $ 7,153,000         $ 6,503,000         $5,860,000
   Reconciliation of net income to net cash provided
   by operating activities:
     Provision for credit losses                                              159,000              64,000            352,000
     Depreciation                                                             656,000             513,000            557,000
     Amortization and accretion                                                (6,000)           (369,000)           (42,000)
     Deferred income taxes                                                   (333,000)             31,000           (300,000)
     Gain on sale of securities                                               (58,000)                  -                  -
     Net (gain) loss on sale of equipment                                           -             (19,000)            52,000
     Gain on sale of other real estate owned                                  (20,000)            (21,000)           (87,000)
   Increase in accrued interest receivable and other assets                   129,000          (1,779,000)          (787,000)
   Increase in accrued interest payable and other liabilities                 364,000           1,939,000            606,000
   Increase (decrease) in deferred loan fees                                  106,000             (81,000)            99,000
-----------------------------------------------------------------------------------------------------------------------------
       Net cash provided by operations                                      8,150,000           6,781,000          6,310,000
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Net decrease in interest-bearing
     deposits in financial institutions                                             -             999,000          3,493,000
   Proceeds from maturities of investment securities
        Available-for-sale                                                107,423,000          63,750,000                  -
        Held-to-Maturity                                                   20,959,000          41,882,000         56,969,000
   Proceeds from sale of available-for-sale securities                      9,119,000                   -                  -
   Purchase of investment securities
        Available-for-sale                                               (176,593,000)       (154,353,000)                 -
        Held-to-Maturity                                                            -         (10,181,000)       (48,161,000)
   Net change in loans held for sale                                       (4,837,000)           (884,000)            93,000
   Net increase in loans                                                  (56,812,000)        (15,723,000)       (45,485,000)
   Proceeds from sale of other real estate owned                              125,000             725,000            287,000
   Proceeds from sale of equipment                                                  -              31,000              1,000
   Capital expenditures                                                    (1,724,000)         (1,386,000)          (417,000)
-----------------------------------------------------------------------------------------------------------------------------
       Net cash used in investing activities                             (102,340,000)        (75,140,000)       (33,220,000)
-----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in deposit accounts                                        38,891,000         111,638,000         12,574,000
   Net increase (decrease) in short-term borrowings                          (289,000)            289,000                  -
   Proceeds from sale of stock                                                264,000             380,000            319,000
   Shares repurchased under stock repurchase plan                            (374,000)                  -                  -
   Fractional shares repurchased                                              (13,000)             (8,000)            (5,000)
-----------------------------------------------------------------------------------------------------------------------------
       Net cash provided by financing activities                           38,479,000         112,299,000         12,888,000
-----------------------------------------------------------------------------------------------------------------------------
  Net increase (decrease) in cash and equivalents                         (55,711,000)         43,940,000        (14,022,000)
Cash and equivalents, beginning of year                                   104,597,000          60,657,000         74,679,000
-----------------------------------------------------------------------------------------------------------------------------
Cash and equivalents, end of year                                        $ 48,886,000        $104,597,000       $ 60,657,000
=============================================================================================================================
NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1997 and 1996 the Company obtained $461,000 and $42,000, respectively of real estate (OREO) in connection with
foreclosures of delinquent loans (none in 1998).  In 1998 stock option exercises and stock repurchases totalling $384,000
were performed through a "stock for stock" exercise under the Company's deferred compensation plan (see Note 11).
-----------------------------------------------------------------------------------------------------------------------------
OTHER CASH FLOW INFORMATION:
   Interest paid                                                         $ 13,100,000         $11,367,000         $9,852,000
   Income taxes paid                                                        4,619,000           3,497,000          4,063,000
=============================================================================================================================
See Notes to Consolidated Financial Statements
</TABLE>

CONSOLIDATED  STATEMENTS  OF  SHAREHOLDERS'  EQUITY
CENTRAL COAST BANCORP AND SUBSIDIARIES
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                          Accumulated Other
                                                                                            Comprehensive
                                                                                               Income -
                                                                                            Net Unrealized
                                                                                          Gain on Available-
Years Ended December 31,                           Common Stock                Retained        For-Sale
1998, 1997 and 1996                            Shares          Amount          Earnings       Securities         Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>              <C>                     <C>    <C>         
 Balances, January 1, 1996                      4,759,601      $ 25,860,000     $ 4,056,000             $ -    $ 29,916,000
    Net income and comprehensive income                 -                 -       5,860,000               -       5,860,000
    10% stock dividend                            475,960         4,440,000      (4,440,000)              -               -
    Shares repurchased                               (816)           (5,000)              -               -          (5,000)
    Stock options and warrants
      exercised                                   106,789           319,000               -               -         319,000
    Tax benefit of stock options
      exercised                                         -           242,000               -               -         242,000
----------------------------------------------------------------------------------------------------------------------------
 Balances, December 31, 1996                    5,341,534        30,856,000       5,476,000               -      36,332,000
    Net income                                          -                 -       6,503,000               -       6,503,000
    Changes in unrealized gains
       on securities available for sale,
       net of taxes of $71,000                         -                 -               -         101,000         101,000
                                                                                                            ----------------
    Comprehensive income                                                                                          6,604,000
                                                                                                            ----------------
    Shares repurchased                               (434)           (8,000)              -               -          (8,000)
    Stock options and warrants
      exercised                                   119,486           380,000               -               -         380,000
    Tax benefit of stock options
      exercised                                         -           416,000               -               -         416,000
----------------------------------------------------------------------------------------------------------------------------
 Balances, December 31, 1997                    5,460,586        31,644,000      11,979,000         101,000      43,724,000
    Net income                                          -                 -       7,153,000               -       7,153,000
    Changes in unrealized gains
       on securities available for sale,
       net of taxes of $223,000                         -                 -               -         320,000         320,000
    Reclassification adjustment for
       gains included in income,
       net of taxes of $40,000                          -                 -               -         (58,000)        (58,000)
                                                                                                            ----------------
    Comprehensive income                                -                 -               -                       7,415,000
                                                                                                            ----------------
    10% stock dividend                            546,059         9,399,000      (9,399,000)                              -
    Stock options and warrants
      exercised                                   153,019           647,000               -               -         647,000
    Shares repurchased                            (47,619)         (770,000)                                       (770,000)
    Tax benefit of stock options                                                                                          -
      exercised                                         -           183,000               -               -         183,000
----------------------------------------------------------------------------------------------------------------------------
Balances, December 31, 1998                     6,112,045      $ 41,103,000     $ 9,733,000        $ 363,000    $ 51,199,000
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CENTRAL COAST BANCORP AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

NOTE 1.  SIGNIFICANT  ACCOUNTING  POLICIES AND OPERATIONS.  The  consolidated
financial  statements  include  Central Coast Bancorp (the "Company") and its
wholly-owned  subsidiaries,  Bank of Salinas and Cypress Bank (the  "Banks").
All  material  intercompany  accounts  and  transactions  are  eliminated  in
consolidation.  The  accounting  and  reporting  policies  of the Company and
the  Banks  conform  to  generally   accepted   accounting   principles   and
prevailing   practices  within  the  banking  industry.   In  preparing  such
financial   statements,   management  is  required  to  make   estimates  and
assumptions  that affect the reported  amounts of assets and  liabilities  as
of the date of the balance  sheet and  revenues  and expenses for the period.
Actual  results could differ  significantly  from those  estimates.  Material
estimates that are  particularly  susceptible  to significant  changes in the
near term relate to the  determination  of the  allowance  for credit  losses
and  the  carrying  value  of  other  real  estate  owned.   Management  uses
information  provided by an  independent  loan review  service in  connection
with the determination of the allowance for loan losses.

Bank of Salinas  operates  five full service  branches in the Salinas  Valley
and  Cypress  Bank  operates  three full  service  branches  on the  Monterey
Peninsula,  serving  small and medium sized  business  customers,  as well as
individuals.  The Banks  focus on  business  loans and  deposit  services  to
customers throughout Monterey.

Investment  Securities  are  classified  at the time of purchase  into one of
three   categories:   held-to-maturity,    trading   or   available-for-sale.
Investment   securities   classified  as  held-to-maturity  are  measured  at
amortized  cost based on the  Company's  positive  intent and ability to hold
such  securities  to  maturity.   Trading  securities  are  bought  and  held
principally  for the  purpose  of  selling  them  in the  near  term  and are
carried at market  value with a  corresponding  recognition  of  unrecognized
holding  gain  or  loss  in  the  results  of   operations.   The   remaining
investment securities are classified as  available-for-sale  and are measured
at market value with a  corresponding  recognition of the unrealized  holding
gain or loss (net of tax  effect) as a separate  component  of  shareholders'
equity until  realized.  Accretion of discounts and  amortization of premiums
arising at  acquisition  are included in income using  methods  approximating
the  effective  interest  method.  Gains and losses on sales of  investments,
if any, are determined on a specific identification basis.

Loans  are  stated  at  the  principal  amount  outstanding,  reduced  by any
charge-offs  or  specific  valuation  allowance.  Loan  origination  fees and
certain  direct loan  origination  costs are  deferred  and the net amount is
recognized  using the effective yield method,  generally over the contractual
life of the loan.

Interest  income is accrued as earned.  The  accrual of  interest on loans is
discontinued  and any accrued and unpaid  interest is reversed when principal
or interest is ninety days past due,  when  payment in full of  principal  or
interest  is not  expected  or when a portion of the  principal  balance  has
been  charged  off.  Income  on such  loans  is then  recognized  only to the
extent that cash is received  and where the future  collection  of  principal
is probable.  Senior  management  may grant a waiver from  nonaccrual  status
if a loan is well  secured and in the process of  collection.  When a loan is
placed on nonaccrual  status,  the accrued and unpaid interest  receivable is
reversed and the loan is accounted  for on the cash or cost  recovery  method
thereafter,  until  qualifying  for return to accrual  status.  Generally,  a
loan may be returned to accrual  status when all   delinquent  interest   and
principal  become  current in accordance  with the original terms of the loan
agreement  or  when  the  loan  is  both  well  secured  and  in  process  of
collection.

Loans  held for sale are  stated  at the  lower of cost or  aggregate  market
value.

The allowance for credit  losses is an amount that  management  believes will
be adequate to absorb losses  inherent in existing  loans and  commitments to
extend  credit,  based  on  evaluations  of  collectibility  and  prior  loss
experience.  The  allowance  is  established  through a provision  charged to
expense.  Loans are charged  against the allowance when  management  believes
that the  collectibility  of the  principal is unlikely.  In  evaluating  the
adequacy  of the  reserve,  management  considers  numerous  factors  such as
changes in the  composition  of the  portfolio,  overall  portfolio  quality,
loan  concentrations,  specific  problem loans,  and current and  anticipated
local economic conditions that may affect the borrowers' ability to pay.

A loan is impaired  when,  based on current  information  and  events,  it is
probable  that  the  Company  will be  unable  to  collect  all  amounts  due
according to the  contractual  terms of the loan  agreement.  Impaired  loans
are  measured  based on the  present  value of  expected  future  cash  flows
discounted  at  the  loan's  effective  interest  rate  or,  as  a  practical
expedient,  at the loan's  observable  market  price or the fair value of the
collateral if the loan is collateral-dependent.

Real estate and other assets acquired in  satisfaction  of  indebtedness  are
recorded  at the lower of  estimated  fair  market  value net of  anticipated
selling costs or the recorded loan amount,  and any  difference  between this
and the loan  amount is treated as a loan loss.  Costs of  maintaining  other
real  estate   owned,  subsequent  write  downs   and  gains or losses on the
subsequent sale are reflected in current earnings.

Premises and equipment are stated at cost less  accumulated  depreciation and
amortization.    Depreciation    and   amortization   are   computed   on   a
straight-line  basis over the lesser of the lease terms or  estimated  useful
lives of the assets, which are generally 3 to 30 years.

Intangible  assets  representing  the excess of the  purchase  price over the
fair  value of  tangible  net  assets  acquired,  are  being  amortized  on a
straight-line basis over seven years and are included in other assets.

Stock Compensation.  The Company  accounts for its stock-based  awards using
the intrinsic  value method in accordance with  Accounting  Principles  Board
No.  25,   Accounting   for  Stock  Issued  to  Employees   and  its  related
interpretations.   No  compensation   expense  has  been  recognized  in  the
financial  statements  for  employee  stock  arrangements.  Note  11  to  the
Consolidated  Financial  Statements  contains  a  summary  of the  pro  forma
effects to reported  net income and  earnings per share as if the Company had
elected  to  recognize  compensation  cost  based  on the  fair  value of the
options  granted  at grant  date as  prescribed  by  Statement  of  Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.

Income taxes are provided  using the asset and liability  method.  Under this
method,  deferred tax assets and  liabilities  are  recognized for the future
tax  consequences  of differences  between the financial  statement  carrying
amounts of existing assets and  liabilities  and their  respective tax bases.
Deferred tax assets and liabilities  arise  principally  from  differences in
reporting  provisions  for credit losses,  net operating loss  carryforwards,
interest  on  nonaccrual  loans,  depreciation,  state  franchise  taxes  and
accruals  related to the salary  continuation  plan.  Deferred tax assets and
liabilities  are  measured  using  enacted  tax  rates  expected  to apply to
taxable  income  in the  years  in  which  those  temporary  differences  are
expected to be  recovered  or settled.  The effect on deferred tax assets and
liabilities  of a change in tax rates is  recognized  in income in the period
that includes the enactment date.

Earnings per share.  Basic  earnings  per share is computed by dividing  net
income by the weighted  average of common shares  outstanding  for the period
(6,037,000,  5,966,000 and 5,814,000 in 1998,  1997 and 1996,  respectively).
Diluted  earnings per share reflects the potential  dilution that could occur
if  outstanding  stock options and stock  purchase  warrants were  exercised.
Diluted  earnings  per  share is  computed  by  dividing  net  income  by the
weighted  average common shares  outstanding for the period plus the dilutive
effect of options and warrants  (546,000,  485,000 and 401,000 in 1998,  1997
and  1996,  respectively).  All  earnings  per  share  information  has  been
adjusted  retroactively  for stock  dividends of 10% in July 1996 and January
1998,  a  3-for-2  stock  split in March  1997 and a 5-for-4  stock  split in
January 1999.

Stock split.  On January 25, 1999 the Board of  Directors  declared a 5-for-4
stock split,  which was distributed on February  26,1999,  to shareholders of
record as of  February  8,  1999.  All share  and per  share  data  including
stock  option and warrant  information  have been  retroactively  adjusted to
reflect the stock split.

Comprehensive  income.  In 1998 the Company  adopted  Statement  of Financial
Accounting  Standards (SFAS) No. 130, Reporting  Comprehensive  Income, which
requires  that an  enterprise  report,  by major  components  and as a single
total,  the change in net assets  during the period  from  nonowner  sources.
Such  amounts  have  been   reported  in  the   accompanying   statements  of
shareholders' equity.

Segment  reporting.   In  1998  the  Company  adopted  Financial   Accounting
Standards  Statement  (FAS)  No.  131,   Disclosures  about  Segments  of  an
Enterprise  and Related  Information,  which  establishes  annual and interim
reporting  standards  for an  enterprise's  operating  segments  and  related
disclosures  about  its  products,  services,   geographic  areas  and  major
customers.  Management  has  determined  that  since  all of  the  commercial
banking  products and services  offered by the Company are  available in each
of  the  Company's  wholly-owned  bank  subsidiaries,  their  operations  are
located  within  the  same  economic  environment  and  management  does  not
allocate   resources  based  on  the  performance  of  different  lending  or
transaction  activities,  it is appropriate to aggregate the Banks and report
them as a single operating segment.

Reclassification  of  investment   securities.   Effective  July1,  1998  the
Company adopted Statement of Financial  Accounting  Standards (SFAS) No. 133,
"Accounting  for  Derivative  Instruments  and  Hedging  Activities",   which
establishes  accounting and reporting  standards for  derivative  instruments
and  hedging  activities.  In  connection  with the  adoption of SFAS 133 the
Company   reclassified   certain   securities   with  an  amortized  cost  of
$18,085,000  and  a  fair  value  of  $18,202,000  from  held-to-maturity  to
available-for-sale.  Adoption  of this  statement  did  not  have  any  other
impact on the  Company's  consolidated  financial  position and had no impact
on the Company's results of operations or cash flows.

NOTE 2.  ACQUISITION  OF CYPRESS  COAST BANK.  On May 31,  1996,  the Company
completed its acquisition of Cypress Coast Bank  ("Cypress")  whereby Cypress
became  a  subsidiary  of the  Company  and  continues  to  operate  from its
offices  in Seaside  and  Marina.  Cypress  shareholders  received  shares of
common  stock  of the  Company  in a  tax-free  exchange.  At May  31,  1996,
Cypress  had  unaudited  total  assets  of  $46.9  million,  including  $29.8
million  in net loans  and  total  unaudited  liabilities  of $42.7  million,
including  $42.5  million in deposits.  The  transaction  has been  accounted
for as a pooling-of-interests.

NOTE 3.  BRANCH  ACQUISITION.  On  February  21,  1997,  the Bank of  Salinas
purchased  certain  assets and assumed  certain  liabilities  of the Gonzales
and  Castroville  branch  offices  of Wells  Fargo  Bank.  As a result of the
transaction  the Bank assumed  deposit  liabilities  ($34 million),  received
cash  ($31  million),  and  acquired  tangible  assets  ($1  million).   This
transaction  resulted in intangible  assets,  representing  the excess of the
liabilities assumed over the fair value of the tangible assets acquired.

NOTE  4.  CASH  AND  DUE  FROM   BANKS.   The   Company,   through  its  bank
subsidiaries,  is  required  to maintain  reserves  with the Federal  Reserve
Bank.  Reserve  requirements  are  based  on a  percentage  of  deposits.  At
December  31,  1998  the  Company   maintained   reserves  of   approximately
$7,584,000 in the form of vault cash and balances at the Federal
 Reserve to satisfy regulatory requirements.


NOTE 5. SECURITIES.  THE SCHEDULED MATURITIES AND WEIGHTED AVERAGE YIELDS OF
THE COMPANY'S INVESTMENT SECURITIES PORTFOLIO AS OF DECEMBER 31, 1998 AND 1997
ARE AS FOLLOWS:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
                                                                                           Weighted
                                                Amortized Unrealized Unrealized   Market   Average
In thousands                                      Cost       Gain      Losses     Value     Yield
---------------------------------------------------------------------------------------------------
<S>                                               <C>         <C>           <C>   <C>       <C>
DECEMBER 31, 1998
Available for sale securities:
U.S. Treasury and agency securities
     Maturing within 1 year                       $13,976      $ 119        $ -   $ 14,095   6.16%
     Maturing after 1 year but within 5 years      27,248        239          -     27,487   6.16%
     Maturing after 5 years but within 10 years    20,037         15          -     20,052   6.27%
     Maturing after 10 years but within 15 years   19,486        118          -     19,604   6.08%
     Maturing after  15 years                      29,169        293          -     29,462   6.19%
State & Political Subdivision
     Maturing after 5 year but within 10 Years      3,159          9         10      3,154   4.06%
     Maturing after 10 year but within 15 Years    22,144         44        199     21,993   4.18%
     Maturing after 15 Years                        3,418         15         24      3,409   4.74%
Corporate Debt Securities                                                                   
    Maturing within 1 year                         29,608          -          -     29,608   5.92%            
Other                                               1,525          -          -      1,525       -
---------------------------------------------------------------------------------------------------
Total investment securities                     $ 169,770      $ 852      $ 235   $170,387   5.73%
===================================================================================================
DECEMBER 31, 1997
Available for sale securities:
U.S. Treasury and agency securities
     Maturing within 1 year                       $32,861        $ -        $ 5   $ 32,856   5.68%
     Maturing after 1 year but within 5 years      48,410        184          7     48,587   6.16%
Corporate Debt Securities
     Maturing within 1 year                        10,034          -          -     10,034   5.05%
Other                                                   4                                4       -
---------------------------------------------------------------------------------------------------
       Total available for sale                   $91,309      $ 184       $ 12   $ 91,481   5.87%
---------------------------------------------------------------------------------------------------
Held to maturity securities:
U.S. Treasury and
   agency securities
     Maturing within 1 year                       $27,484        $ 7       $ 11   $ 27,480   5.60%
     Maturing after 1 year but within 5 years       8,495         66          2      8,559   6.34%
     Maturing after 5 years but within 10 years        20          -          -         20   9.05%
     Maturing after 10 years                          857          6          9        854   7.00%
State & Political Subdivision
     Maturing after 5 years but within 10 years     2,192          -          -      2,192   5.60%
---------------------------------------------------------------------------------------------------
       Total held to maturity                     $39,048       $ 79       $ 22   $ 39,105   5.79%
---------------------------------------------------------------------------------------------------
Total investment securities                     $ 130,357      $ 263       $ 34   $130,586   5.85%
===================================================================================================
</TABLE>


At December 31, 1998 and 1997,  securities  with a book value of  $56,936,000
and  $57,289,000  were pledged as collateral for deposits of public funds and
other purposes as required by law or contract.

U.S.  Treasury  Securities with a market value of $9,119,000 and an amortized
cost of  $9,061,000  were sold  during the fiscal  year  ended  December  31,
1998.  There were no sales of securities in 1997 or 1996.
 
NOTE 6. LOANS AND ALLOWANCE  FOR CREDIT  LOSSES.  The Company's  business is
concentrated  in  Monterey   County,   California  whose  economy  is  highly
dependent  on the  agricultural  industry.  As a result,  the  Company  lends
money  to  individuals   and  companies   dependent  upon  the   agricultural
industry.  In  addition,  the Company has  significant  extensions  of credit
and  commitments  to extend  credit  which are  secured by real  estate,  the
ultimate  recovery  of  which  is  generally   dependent  on  the  successful
operation,  sale or refinancing of real estate,  totaling  approximately $212
million.  The Company  monitors  the effects of current and  expected  market
conditions  and other  factors on the  collectibility  of real estate  loans.
When,  in  management's  judgment,  these  loans  are  impaired,  appropriate
provisions  for  losses  are  recorded.  The  more  significant   assumptions
management  considers involve estimates of the following:  lease,  absorption
and sale rates; real estate values and rates of return;  operating  expenses;
inflation;  and  sufficiency  of  collateral  independent  of the real estate
including, in limited instances, personal guarantees.

In extending  credit and  commitments  to  borrowers,  the Company  generally
requires  collateral  and/or  guarantees  as security.  The repayment of such
loans is  expected to come from cash flow or from  proceeds  from the sale of
selected  assets of the borrowers.  The Company's  requirement for collateral
and/or  guarantees is determined on a case-by-case  basis in connection  with
management's   evaluation   of  the  credit   worthiness   of  the  borrower.
Collateral  held  varies  but may  include  accounts  receivable,  inventory,
property, plant and equipment,  income-producing  properties,  residences and
other real  property.  The Company  secures its  collateral by perfecting its
interest  in  business   assets,   obtaining  deeds  of  trust,  or  outright
possession  among  other  means.  Credit  losses  from  lending  transactions
related to real estate and agriculture  compare  favorably with the Company's
credit losses on its loan portfolio as a whole.

The activity in the allowance for credit losses is summarized as follows:
<TABLE>
<CAPTION>
In thousands                         1998              1997           1996
---------------------------------------------------------------------------
<S>                              <C>               <C>            <C>
   Balances, beginning of year   $  4,223          $  4,372       $  4,446
   Provision charged to expense       159                64            352
   Loans charged off                 (177)             (440)          (620)
   Recoveries                         147               227            194
---------------------------------------------------------------------------
   Balance, end of year          $  4,352          $  4,223       $  4,372
===========================================================================
</TABLE>


In determining the provision for estimated losses related to specific major
loans, management evaluates its allowance on an individual loan basis,
including an analysis of the credit worthiness, cash flows and financial
status of the borrower, and the condition and the estimated value of the
collateral.  Specific valuation allowances for secured loans are determined
by the excess of recorded investment in the loan over the fair market value
or net realizable value where appropriate, of the collateral.  In
determining overall general valuation allowances to be maintained and the
loan loss allowance ratio, management evaluates many factors including
prevailing and forecasted economic conditions, regular reviews of the
quality of loans, industry experience, historical loss experience,
composition and geographic concentrations of the loan portfolio, the
borrowers' ability to repay and repayment performance and estimated
collateral values.

Management  believes  that the  allowance  for credit  losses at December 31,
1998 is prudent and  warranted,  based on  information  currently  available.
However,  no prediction of the ultimate  level of loans charged off in future
years can be made with any certainty.

Nonperforming loans at December 31 are summarized below:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
In thousands                                                                           1998                      1997
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>                            <C>
Past due 90 days or more and still accruing:
   Real estate                                                                      $ 1,174                       $ 6
   Commercial                                                                            73                        73
   Installment and other                                                                  -                         -
----------------------------------------------------------------------------------------------------------------------
                                                                                      1,247                        79
----------------------------------------------------------------------------------------------------------------------
Nonaccrual:
   Real estate                                                                          543                       628
   Commercial                                                                           333                       188
   Installment and other                                                                  -                         -
----------------------------------------------------------------------------------------------------------------------
                                                                                        876                       816
----------------------------------------------------------------------------------------------------------------------
Total nonperforming loans                                                           $ 2,123                     $ 895
======================================================================================================================
</TABLE>


Interest  due  but  excluded  from  interest  income  on  nonaccrual loans  was
approximately  $45,000,  $7,000 and $50,000 in 1998, 1997 and 1996 respectively.
In 1998,  1997 and 1996,  interest income recognized  from payments received on
nonaccrual loans was $17,000, $7,000 and $619,000, respectively.

At  December  31,  1998 and  1997,  the  recorded  investment in loans that are
considered  impaired  under  SFAS No.  114 was  $727,000 and $996,000  of which
$335,000  and  $816,000 are included as nonaccrual loans above.  Such  impaired
loans had  valuation  allowances totalling $164,000 and  $200,000  based on the
estimated  fair values of the  collateral The average  recorded  investment  in
impaired  loans  during 1998 and 1997 was $776,000  and  $829,000.  The Company
recognized interest income on impaired loans of $64,000 and $33,000 in 1998 and
1997, respectively.

      Other real estate owned included in other assets was $105,000 at
December 31, 1997 (none at December 31, 1998).

NOTE 7. PREMISES AND EQUIPMENT.  premises  and  equipment  at  december 31 are
summarized as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
In thousands                                              1998              1997
---------------------------------------------------------------------------------
<S>                                                     <C>              <C>    
Land                                                    $  145           $   145
Building                                                   460               478
Furniture and equipment                                  5,641             4,073
Leasehold improvement                                    1,310             1,161
---------------------------------------------------------------------------------
                                                         7,556             5,857
Accumulated depreciation and amortization               (4,487)           (3,856)
---------------------------------------------------------------------------------
Premises and equipment, net                            $ 3,069          $  2,001
---------------------------------------------------------------------------------
</TABLE>


The  Company's  facilities  leases  expire in October 1999  through  November
2008  with  options  to extend  for three to  fifteen  years.  These  include
three  facilities  leased from  shareholders  at terms and  conditions  which
management  believes  are  consistent  with  the  market.  Rental  rates  are
adjusted  annually for changes in certain  economic  indices.  Rental expense
was approximately  $456,000,  $422,000 and $406,000,  including lease expense
to  shareholders  of $134,000,  $152,000 and $174,000 in 1998, 1997 and 1996,
respectively.  The minimum  annual  rental  commitments  under these  leases,
including the remaining  rental  commitment under the leases to shareholders,
are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
                                                                    Operating
In thousands                                                         Leases
--------------------------------------------------------------------------------
<S>                                                                   <C>      
     1999                                                             $     519
     2000                                                                   240
     2001                                                                   236
     2002                                                                   231
     2003                                                                   141
     Thereafter                                                             492
--------------------------------------------------------------------------------
Total                                                                $    1,859
--------------------------------------------------------------------------------
</TABLE>


NOTE 8. INCOME TAXES. The provision for income taxes is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
In thousands                       1998              1997            1996
------------------------------------------------------------------------------
<S>                               <C>              <C>               <C>
   Current:
     Federal                      $    3,946       $    3,255        $  2,830
     State                             1,335            1,214           1,041
------------------------------------------------------------------------------
     Total                             5,281            4,469           3,871
------------------------------------------------------------------------------
   Deferred:
     Federal                           (290)               32           (289)
     State                              (43)              (1)            (11)
------------------------------------------------------------------------------
     Total                             (333)               31           (300)
------------------------------------------------------------------------------
   Total                          $    4,948       $    4,500        $  3,571
------------------------------------------------------------------------------
</TABLE>


A  reconciliation  of the Federal  income tax rate to the  effective tax rate
is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                           1998           1997             1996
-----------------------------------------------------------------------------------
<S>                                         <C>             <C>              <C>  
   Statutory Federal income tax rate        35.0%           35.0%            35.0%
   State income taxes (net of                                            
     Federal income tax benefit)             7.1%            7.2%             7.6%
   Change in the valuation allowance
     for deferred tax assets                     -               -           (4.0%)
   Tax exempt interest income               (0.8%)          (0.8%)                -
   Other                                    (0.4%)          (0.5%)           (0.7%)
-----------------------------------------------------------------------------------
   Effective tax rate                       40.9%           40.9%            37.9%
-----------------------------------------------------------------------------------
</TABLE>



The tax  effects  of  temporary  differences  that give  rise to  significant
portions  of  the  deferred  tax  assets  and  deferred  tax  liabilities  at
December 31, 1998 and 1997, respectively, are presented below:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
In thousands                                         1998              1997
--------------------------------------------------------------------------------

<S>                                                 <C>                <C>     
Deferred Tax assets (liabilities):
   Provision for credit losses                      $   1,680          $  1,609
   State income taxes                                     263               185
   Salary continuation plan                               265               165
   Excess serving rights                                   86               110
   Unrealized gain on                                                
     available-for-sale securities                       (253)              (71)
   Accrual to cash adjustments                             30                45
   Interest on nonaccrual loans                            35                22
   Depreciation and amortization                          254               161
   Other                                                    1                 3
--------------------------------------------------------------------------------
Net deferred tax asset                              $   2,361          $  2,229
--------------------------------------------------------------------------------
</TABLE>

NOTE  9.  DETAIL  OF  OTHER  EXPENSE.  Other  expense  for  the  years  ended
December 31, 1998, 1997 and 1996 consists of the following:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
In thousands                             1998             1997             1996
--------------------------------------------------------------------------------
<S>                                   <C>              <C>              <C>    
   Professional fees                  $   461          $   358          $   454
   Customer expenses                      431              340              379
   Data processing                        386              334              330
   Marketing                              335              302              345
   Stationary and supplies                326              466              319
   Shareholder and director               262              249              284
   Amortization of intangibles            257              209                -
   Insurance                              196              180              176
   Dues and assessments                   109              123               65
   Other                                  736              737              761
--------------------------------------------------------------------------------
Total                                $  3,499         $  3,298         $  3,113
--------------------------------------------------------------------------------
</TABLE>

NOTE 10.  STOCK  PURCHASE  WARRANTS.  During  1995 and  1994,  warrants  were
issued in connection  with the sale of the  Company's  common stock at a rate
of one  warrant  for  every  share  of  stock  purchased.  The  warrants  are
exercisable  at $4.18 and  expire on June 30,  1999.  During  1998,  1997 and
1996,  respectively  15,868 , 5,875 and 30,157 warrants were exercised and at
December 31, 1998, 137,995 warrants were outstanding.
 
NOTE 11.  EMPLOYEE  BENEFIT  PLANS.  The Company has two stock  option  plans
under which  incentive  stock  options or  nonqualified  stock options may be
granted to certain key  employees or directors  to purchase  authorized,  but
unissued,  common  stock.  Shares may be  purchased  at a price not less than
the fair  market  value of such  stock on the  date of  grant.  Options  vest
over  various  periods  not in  excess  of ten  years  from date of grant and
expire not more than ten years from date of grant.

Activity  under the stock  option  plans  adjusted  for stock  dividends  and
stock splits is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
                                                                                                        Weighted
                                                                                                         Average
                                                            Shares           Price per share              Price
--------------------------------------------------------------------------------------------------------------------

<S>                                                          <C>             <C>                             <C>   
   Balances, January 1, 1996                                 899,573         $ 1.42    -      7.05           $ 3.30
     Granted (wt. avg. fair value $2.91 per share)           441,375           8.04    -     10.42            10.33
     Canceled                                                (24,853)          1.42    -      6.18             3.32
     Exercised                                               (87,311)          1.42    -      4.72             2.23
--------------------------------------------------------------------------------------------------------------------
   Balances, December 31, 1996                             1,228,784           1.42    -     10.42             5.65
     Granted (wt. avg. fair value $3.46 per share)            37,812           9.94    -     16.50            11.14
     Expired                                                 (95,738)          2.32    -      9.82             8.37
     Exercised                                              (125,558)          1.42    -      6.18             2.85
--------------------------------------------------------------------------------------------------------------------
   Balances, December 31, 1997                             1,045,300           2.32    -     16.50             5.94
     Granted (wt. avg. fair value $5.60 per share)            68,125          15.40    -     18.80            16.71
     Expired                                                 (22,000)          9.82    -      9.82             9.82
     Exercised                                              (137,150)          2.32    -      9.82             4.24
--------------------------------------------------------------------------------------------------------------------
   Balances, December 31, 1998                               954,275         $ 2.32    -     18.80           $ 6.86
--------------------------------------------------------------------------------------------------------------------
</TABLE>

Additional  information  regarding  options  outstanding  as of December  31,
1998 is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                   Options Outstanding                                    Options Exercisable
                                   --------------------------------------------------------------------------
                                              Weighted Average
                                                  Remaining         Weighted                              Weighted
         Range of                 Number         Contractual        Average             Number             Average
      Exercise Prices          Outstanding      Life (years)     Exercise Price       Exercisable      Exercise Price
-----------------------------------------------------------------------------------------------------------------------
           <S>         (C)               <C>                  <C>            <C>                 <C>               <C>   
          $2.32  -     2.32           343,235              0.1            $ 2.32              343,235           $ 2.32
           4.72  -     6.17           178,321              5.5              5.84              156,361             5.91
           8.04  -     9.94           359,594              7.9              9.67              242,591             9.67
          15.40       18.80            73,125              9.4             16.87                2,269            16.50
-----------------------------------------------------------------------------------------------------------------------
          $2.32  -    18.80           954,275              4.1            $ 6.86              744,456           $ 5.51
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

At December 31, 1998, 797,360 shares were available for additional grants.

401(k) Savings Plan

The Company has a 401(k)  Savings  Plan under which  eligible  employees  may
elect to make tax  deferred  contributions  from their  annual  salary,  to a
maximum  established  annually  by the IRS.  The  Company  matches 20% of the
employees'  contributions.  The Company may make additional  contributions to
the  plan  at the  discretion  of  the  Board  of  Directors.  All  employees
meeting age and service  requirements  are  eligible  to  participate  in the
Plan.  Company   contributions  vest  after  3  years  of  service.   Company
contributions  during  1998,  1997  and  1996  which  are  funded  currently,
totaled $68,000, $56,000 and $46,000, respectively.

Salary Continuation Plan

In  1996  the  Company  established  a  salary  continuation  plan  for  five
officers  which  provides  for  retirement  benefits  upon  reaching  age 63.
During  1997  two of such  officers  terminated  their  employment  with  the
Company   without   vesting   in  the  plan.   The   Company   accrues   such
post-retirement  benefits  over the  vesting  periods  (of five or ten years)
based on a  discount  rate of 7.5%.  In the event of a change in  control  of
the Company,  the officers'  benefits will fully vest.  The Company  recorded
compensation  expense of $225,000,  $117,000  and $250,000 in 1998,  1997 and
1996,   respectively.   Accrued   compensation   payable   under  the  salary
continuation  plan  totaled  $592,000  and  $367,000 at December 31, 1998 and
1997, respectively.

Deferred Compensation Plan

In  1998  the  Company  established  a  deferred  compensation  plan  for the
benefit of the Board of Directors  and certain  officers.  In addition to the
deferral of  compensation,  the plan allows  participants  the opportunity to
defer  taxable  income  derived  from  the  exercise  of stock  options.  The
participant's  may,  after making an election to defer  receipt of the option
shares for a specified  period of time, use a  "stock-for-stock"  exercise to
tender to the Company  mature  shares with a fair value equal to the exercise
price of the stock options  exercised.  The Company  simultaneously  delivers
new shares to the  participant  equal to the value of shares  surrendered and
the remaining  shares under option are placed in a trust  administered by the
Company,   to  be   distributed   in  accordance   with  the  terms  of  each
participant's  election  to defer.  During  1998,  22,430  shares with a fair
value  of  approximately  $384,000  were  tendered  to the  Company  using  a
"stock-for-stock"  exercise and, at December 31, 1998,  71,949 shares (with a
fair value of  approximately  $1,158,000  at December  31, 1998) were held in
the Deferred Compensation Trust.

Additional Stock Plan Information

As  discussed   in  Note  1,  the  Company   continues  to  account  for  its
stock-based  awards  using the  intrinsic  value  method in  accordance  with
Accounting   Principles  Board  No.  25,   Accounting  for  Stock  Issued  to
Employees  and its  related  interpretations.  No  compensation  expense  has
been recognized in the financial statements for employee stock arrangements.

Statement  of  Financial   Accounting   Standards  No.  123,  Accounting  for
Stock-Based  Compensation,  (SFAS 123)  requires the  disclosure of pro forma
net income and  earnings  per share had the  Company  adopted  the fair value
method as of the  beginning  of fiscal  1995.  Under SFAS 123, the fair value
of  stock-based  awards to employees is calculated  through the use of option
pricing  models,  even though such models were developed to estimate the fair
value  of  freely  tradable,   fully  transferable  options  without  vesting
restrictions,  which  significantly  differ from the  Company's  stock option
awards.  These models also require subjective  assumptions,  including future
stock price  volatility  and expected time to exercise,  which greatly affect
the  calculated  values.  The  Company's  calculations  were  made  using the
Black-Scholes  option  pricing  model  with the  following  weighted  average
assumptions:  expected  life,  four years  following  vesting;  average stock
volatility of 16.5%;  risk free  interest  rates ranging from 4.52% to 5.77%;
and no dividends  during the expected  term. The Company's  calculations  are
based  on  a  multiple   option   valuation   approach  and  forfeitures  are
recognized  as they occur.  If the  computed  fair  values of the 1998,  1997
and 1996 awards had been  amortized  to expense  over the  vesting  period of
the awards,  pro forma net income  would have been  $6,957,000  ($1.15  basic
and $1.06  diluted  earnings  per share,  $6,345,000  ($1.06  basic and $0.98
diluted  earnings per share) and  $5,348,000  ($0.92 basic and $0.86  diluted
per  share) in 1998,  1997 and 1996,  respectively.  However,  the  impact of
outstanding   non-vested  stock  options  granted  prior  to  1995  has  been
excluded  from the pro forma  calculation;  accordingly,  the 1998,  1997 and
1996 pro forma  adjustments  are not  indicative  of future  period pro forma
adjustments,  when  the  calculation  will  apply  to  all  applicable  stock
options.

NOTE  12.  DISCLOSURES  ABOUT  FAIR  VALUE  OF  FINANCIAL  INSTRUMENTS.The 
following disclosure  of the estimated  fair value of financial  instruments
is made in accordance  with the  requirements  of SFAS No. 107,  "Disclosures
About  Fair  Value  of  Financial  Instruments".  The  estimated  fair  value
amounts  have been  determined  by using  available  market  information  and
appropriate  valuation  methodologies.   However,  considerable  judgment  is
required to  interpret  market data to develop the  estimates  of fair value.
Accordingly,  the estimates  presented are not necessarily  indicative of the
amounts  that could be  realized  in a current  market  exchange.  The use of
different  market  assumptions  and/or  estimation   techniques  may  have  a
material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
                               December 31,1998            December 31,1997
                              Carrying   Estimated        Carrying   Estimated
In thousands                   Amount   Fair Value         Amount   Fair Value
-------------------------------------------------------------------------------

<S>                           <C>          <C>            <C>         <C>     
FINANCIAL ASSETS
Cash and cash equivalents     $ 48,886     $48,886        $104,597    $104,597
Securities                     170,387     170,387         130,529     130,586
Loans held for sale              6,168       6,208           1,331       1,453
Loans, net                     307,818     308,253         251,271     256,361

FINANCIAL LIABILITIES
Demand deposits                247,983     247,983         215,925     215,925
Time deposits                  136,762     137,559         134,628     135,542
Savings deposits               104,447     104,447          99,748      99,748
Other borrowings                     -           -             289         289
-------------------------------------------------------------------------------
</TABLE>


The  following  estimates  and  assumptions  were used to  estimate  the fair
value of the financial instruments.
 
Cash and cash  equivalents - The carrying amount is a reasonable  estimate of
fair value.

Securities - Fair values of  securities  are based on quoted market prices or
dealer  quotes.  If a quoted market price was not  available,  fair value was
estimated using quoted market prices for similar securities.

Loans,  net - Fair values for  certain  commercial,  construction,  revolving
customer  credit and other loans were  estimated  by  discounting  the future
cash  flows  using  current  rates at which  similar  loans  would be made to
borrowers with similar credit  ratings and similar  maturities,  adjusted for
the allowance for credit losses.

Certain  adjustable rate loans have been valued at their carrying values,  if
no significant  changes in credit  standing have occurred  since  origination
and the interest  rate  adjustment  characteristics  of the loan  effectively
adjust  the  interest  rate  to  maintain  a  market  rate  of  return.   For
adjustable rate loans which have had changes in credit  quality,  appropriate
adjustments to the fair value of the loans are made.

Demand,  time and  savings  deposits - The fair value of  noninterest-bearing
and  adjustable  rate deposits and savings is the amount  payable upon demand
at  the  reporting  date.  The  fair  value  of  fixed-rate  interest-bearing
deposits  with fixed  maturity  dates was estimated by  discounting  the cash
flows  using  rates  currently  offered  for  deposits  of similar  remaining
maturities.

Off-balance  sheet  instruments  - The fair  value of  commitments  to extend
credit is estimated  using the fees  currently  charged to enter into similar
agreements,  taking into account the remaining  terms of the  agreements  and
the  present  credit-worthiness  of the  counterparties.  The fair  values of
standby  and  commercial  letters  of  credit  are  based  on fees  currently
charged for similar  agreements  or on the estimated  cost to terminate  them
or  otherwise  settle  the  obligations  with  the  counterparties.  The fair
values  of  such  off-balance  sheet  instruments  were  not  significant  at
December  31,  1998 and 1997 and,  therefore,  have not been  included in the
table above.

NOTE 13.  COMMITMENTS  AND  CONTINGENCIES.  In the normal  course of business
there are various  commitments  outstanding  to extend  credit  which are not
reflected  in  the  financial  statements,   including  loan  commitments  of
approximately  $122,423,000  and  standby  letters  of credit  and  financial
guarantees  of   $1,556,000   at  December  31,  1998.   The  Bank  does  not
anticipate any losses as a result of these transactions.

Approximately  $23,177,000  of loan  commitments  outstanding at December 31,
1998 relate to  construction  loans and are  expected to fund within the next
twelve months.  The remainder  relate  primarily to revolving lines of credit
or other  commercial  loans.  Many of these loan  commitments are expected to
expire  without  being drawn upon.  Therefore  the total  commitments  do not
necessarily represent future cash requirements.

Stand-by   letters  of  credit  are  commitments   written  by  the  Bank  to
guarantee the  performance of a customer to a third party.  These  guarantees
are  issued  primarily  relating  to  purchases  of  inventory  by the Banks'
commercial  customers,  are typically  short-term in nature and virtually all
such commitments are collateralized.

Most of the  outstanding  commitments  to extend credit are at variable rates
tied to the Banks'  reference  rate of interest.  The  Company's  exposure to
credit  loss  in the  event  of  nonperformance  by the  other  party  to the
financial  instrument for  commitments  to extend credit and standby  letters
of  credit  issued  is the  contractual  amount  of  those  instruments.  The
Company uses the same credit  policies in making  commitments and conditional
obligations  as  it  does  for  on-balance-sheet   instruments.  The  Company
controls  the credit  risk of the  off-balance  sheet  financial  instruments
through the normal credit approval and monitoring process.


NOTE 14.  RELATED  PARTY  LOANS.  The Company  makes  loans to  officers  and
directors  and  their  associates  subject  to loan  committee  approval  and
ratification  by  the  Board  of  Directors.   These   transactions   are  on
substantially  the same terms as those  prevailing at the time for comparable
transactions  with  unaffiliated  parties and do not involve more than normal
risk of  collectibility.  An analysis  of changes in related  party loans for
the year ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Beginning Balance          Additions           Repayments        Ending Balance
--------------------------------------------------------------------------------
<S>                       <C>                  <C>                <C>       
$9,119,000                $11,817,000          $14,728,000        $6,208,000
--------------------------------------------------------------------------------
</TABLE>

Committed lines of credit, undisbursed loans and standby letters of credit
to directors and officers at December 31, 1998 were approximately
$4,820,000.

NOTE 15.  REGULATORY  MATTERS.  The Company is subject to various  regulatory
capital  requirements  administered by federal banking  agencies.  Failure to
meet  minimum  capital   requirements  can  initiate  certain  mandatory  and
possibly,   additional   discretionary   actions  by   regulators   that,  if
undertaken,  could have a direct material  effect on the Company's  financial
statements.  Capital  adequacy  guidelines and the  regulatory  framework for
prompt  corrective  action  require  that the Company meet  specific  capital
adequacy  guidelines  that  involve  quantitative  measures of the  Company's
assets,  liabilities and certain  off-balance sheet items as calculated under
regulatory   accounting   practices.   The  Company's   capital  amounts  and
classifications  are also subject to qualitative  judgments by the regulators
about components, risk weighting and other factors.

Quantitative  measures  established by regulation to ensure capital  adequacy
require the Company to  maintain  minimum  ratios of total and Tier 1 capital
(as defined in the  regulations) to  risk-weighted  assets (as defined) and a
minimum  leverage  ratio of Tier 1 capital  to average  assets (as  defined).
Management  believes,  as of December  31,  1998 that the  Company  meets all
capital adequacy requirements to which it is subject.

As of December  31, 1998 and 1997,  the most  recent  notifications  from the
Federal  Deposit  Insurance   Corporation   categorized  the  Banks  as  well
capitalized  under the  regulatory  framework for prompt  corrective  action.
To be categorized as well  capitalized the Banks must maintain  minimum total
risk-based,  Tier 1  risk-based  and Tier 1  leverage  ratios as set forth in
the table.  There are no  conditions or events since that  notification  that
management believes have changed the institution's category.

The  following  table  shows the  Company's  and the  Banks'  actual  capital
amounts and ratios at December 31, as well as the minimum  capital  ratios to
be categorized as "well capitalized" under the regulatory framework:

<TABLE>
<CAPTION>
                                                                                         To Be Categorized
                                                                                       Well Capitalized Under
                                                              For Capital                 Promt Corrective
                                     Actual                Adequacy Purposes:           Action Provisions:
                                 ----------------          ------------------           ------------------
                               Amount         Ratio       Amount           Ratio       Amount           Ratio
                               ------         -----       ------           -----       ------           -----

<S>                            <C>              <C>        <C>                <C>       <C>                <C>  
AS OF DECEMBER 31, 1998:
Total Capital (to Risk Weighted Assets):
   Company                     53,588,000       14.8%      29,004,000         8.0%               N/A                   
   Bank of Salinas             45,996,000       14.3%      25,796,000         8.0%     32,245,000         10.0%
   Cypress Bank                 5,203,000       14.1%       2,950,000         8.0%      3,687,000         10.0%
Tier 1 Capital (to Risk Weighted Assets)
   Company                     49,326,000       13.6%      14,502,000         4.0%               N/A                   
   Bank of Salinas             42,196,000       13.1%      12,898,000         4.0%     19,347,000         6.0%       
   Cypress Bank                 4,743,000       12.9%       1,475,000         4.0%      2,212,000         6.0%
Tier 1 Capital (to Risk Average Assets)
   Company                     49,326,000        9.9%      19,935,000         4.0%               N/A                
   Bank of Salinas             42,196,000        9.4%      18,014,000         4.0%     22,518,000         5.0%
   Cypress Bank                 4,743,000        8.2%       2,300,000         4.0%      2,874,000         5.0%
AS OF DECEMBER 31, 1997:
Total Capital (to Risk Weighted Assets):
   Company                     45,782,000       15.2%      24,046,000         8.0%               N/A                
   Bank of Salinas             38,887,000       14.5%      21,514,000         8.0%     26,892,000         10.0%
   Cypress Bank                 5,012,000       14.6%       2,739,000         8.0%      3,423,000         10.0%
Tier 1 Capital (to Risk Weighted Assets)
   Company                     41,968,000       14.0%      12,023,000         4.0%               N/A                     
   Bank of Salinas             35,501,000       13.2%      10,757,000         4.0%     16,135,000         6.0%      
   Cypress Bank                 4,584,000       13.4%       1,369,000         4.0%      2,054,000         6.0%
Tier 1 Capital (to Risk Average Assets)
   Company                     41,968,000        9.6%      17,570,000         4.0%               N/A                
   Bank of Salinas             35,501,000        8.9%      15,869,000         4.0%     19,837,000         5.0%
   Cypress Bank                 4,584,000        8.8%       2,084,000         4.0%      2,605,000         5.0%
</TABLE>


The ability of the Company to pay cash  dividends  in the future will largely
depend upon the cash  dividends  paid to it by its  subsidiary  Banks.  Under
State and Federal law regulating  banks,  cash  dividends  declared by a Bank
in any  calendar  year  generally  may  not  exceed  its net  income  for the
preceding  three fiscal  years,  less  distributions  to the Company,  or its
retained   earnings.   Under  these  provisions,   and  considering   minimum
regulatory capital  requirements,  the amount available for distribution from
the Banks to the Company was  approximately  $17,747,000  as of December  31,
1998.

The Banks are  subject  to certain  restrictions  under the  Federal  Reserve
Act,  including  restrictions  on the extension of credit to  affiliates.  In
particular,  the Banks are prohibited  from lending to the Company unless the
loans are secured by specified  types of  collateral.  Such secured loans and
other  advances  from the  Banks  are  limited  to 10% of Bank  shareholders'
equity,  or a combined  maximum of $4,863000  at December  31, 1998.  No such
advances were made during 1998 or 1997.
















NOTE 16. CENTRAL COAST BANCORP (PARENT COMPANY ONLY)
THE  CONDENSED  FINANCIAL  STATEMENTS  OF CENTRAL  COAST  BANCORP  FOLLOW (IN
THOUSANDS):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
December 31,                                          1998                1997
-------------------------------------------------------------------------------

<S>                                            <C>                    <C>     
Assets:
   Cash - interest bearing account with Bank   $     2,339            $    191
   Investment in Banks                              48,629              41,841
   Premises and equipment, net                       1,506                 491
   Other Assets                                        549               1,916
-------------------------------------------------------------------------------
    Total assets                               $    53,023          $   44,439
-------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
   Liabilities                                 $     1,824            $    715
   Shareholders Equity                              51,199              43,724
-------------------------------------------------------------------------------
    Total liabilities and shareholders' equity $    53,023          $   44,439
-------------------------------------------------------------------------------
</TABLE>



CONDENSED INCOME STATEMENTS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
Years ended December 31,                    1998            1997          1996
-------------------------------------------------------------------------------
<S>                                    <C>            <C>              <C>    
   Management fees                     $   5,957      $    3,624       $   840
   Other income                                2              11             -
   Cash dividends received 
    from the Banks                         1,500           2,000           500
-------------------------------------------------------------------------------
     Total income                          7,459           5,635         1,340
   Operating expenses                      7,435           6,386         1,737
-------------------------------------------------------------------------------
   Income(loss) before income taxes and equity in
     undistributed net income of Banks        23            (751)         (397)
   Provision (credit) for income            (604)         (1,125)         (352)
   Equity in undistributed
     net income of Banks                   6,526           6,129         5,905
-------------------------------------------------------------------------------
  Net income (loss)                        7,153           6,503         5,860
  Other comprehensive income                 262             101             -
-------------------------------------------------------------------------------
  Comprehensive income                 $   7,415      $    6,604      $  5,860           
-------------------------------------------------------------------------------
</TABLE>




















CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Years ended December 31,                                           1998                1997               1996
-------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>                 <C>                <C>      
Increase (decrease) in cash:
Operations:
   Net income                                                     $   7,153           $   6,503          $   5,860
   Adjustments to reconcile net
     income to net cash provided (used)
     by operations:
     Equity in undistributed
       net income of Banks                                           (6,526)             (6,129)            (5,905)
     Depreciation                                                       213                  71                  1
     (Increase) decrease in other assets                              1,367               (656)              (522)
     Increase (decrease) in liabilities                               1,292                 450                 80
-------------------------------------------------------------------------------------------------------------------
     Net cash provided (used) by operations                           3,499                 239              (486)
-------------------------------------------------------------------------------------------------------------------
Investing Activities -
   Capital expenditures                                             (1,228)               (494)               (69)
-------------------------------------------------------------------------------------------------------------------
Financing Activities:
   Short-term borrowings                                                  -                   -                  -
   Fractional shares repurchased                                       (13)                 (8)                (5)
   Stock repurchases                                                  (374)
   Stock options and warrants exercised                                 264                 380                319
-------------------------------------------------------------------------------------------------------------------
     Net cash provided (used) by financing activities                 (123)                 372                314
-------------------------------------------------------------------------------------------------------------------
     Net increase (decrease) in cash                                  2,148                 117              (241)
   Cash balance, beginning of year                                      191                  74                315
-------------------------------------------------------------------------------------------------------------------
   Cash balance, end of year                                      $   2,339            $    191            $    74
-------------------------------------------------------------------------------------------------------------------
</TABLE>


NOTE 17. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
In thousands (except per share data)
--------------------------------------------------------------------------------------------------------
                                                  1998                               1997
                                    --------------------------------   ---------------------------------
Three months ended                  Dec.31  Sep.30  June.30 Mar.31     Dec.31   Sep.30  June.30 Mar.31
--------------------------------------------------------------------------------------------------------
<S>                                  <C>     <C>     <C>     <C>        <C>      <C>     <C>     <C>   
Interest revenue                     $9,498  $9,583  $9,281  $8,992     $8,993   $8,737  $8,554  $7,632
Interest expense                      3,211   3,358   3,415   3,335      3,305    3,125   2,999   2,612
--------------------------------------------------------------------------------------------------------
Net interest revenue                  6,287   6,225   5,866   5,657      5,688    5,612   5,555   5,020
Provision for credit losses              78      40      24      17         64        -       -       -
--------------------------------------------------------------------------------------------------------
Net interest revenue after
  credit losses provision             6,209   6,185   5,842   5,640      5,624    5,612   5,555   5,020
Total noninterest revenues              670     490     530     394        531      428     420     386
Total operating expenses              3,635   3,314   3,458   3,452      3,180    3,200   3,244   2,949
--------------------------------------------------------------------------------------------------------
Income before taxes                   3,244   3,361   2,914   2,582      2,975    2,840   2,731   2,457
Income taxes                          1,284   1,391   1,205   1,068      1,216    1,155   1,123   1,006
--------------------------------------------------------------------------------------------------------
Net income                            1,960   1,970   1,709   1,514      1,759    1,685   1,608   1,451
--------------------------------------------------------------------------------------------------------
Per common share:
   Basic earnings per share           $0.32   $0.33   $0.28   $0.25      $0.29    $0.28   $0.27   $0.25
   Diluted earnings per share          0.30    0.30    0.26    0.23       0.27     0.26    0.25    0.23
--------------------------------------------------------------------------------------------------------
Price range per common share:
    High                             $16.10  $18.50  $20.41  $19.20     $16.45   $18.18  $17.00  $17.82
    Low                               14.40   13.20   16.50   14.55      14.00    16.18   12.36   11.45
--------------------------------------------------------------------------------------------------------
</TABLE>


The  principal  market on which the  Company's  common stock is traded is the
Nasdaq  National  Market.  The  earnings  per share  and high and low  common
share prices in the  preceding  table have been  adjusted  retroactively  for
stock  dividends of 10% in July 1996 and January  1998, a 3-for-2 stock split
in March 1997 and a 5-for-4 stock split in January 1999.


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
             ACCOUNTING AND FINANCIAL DISCLOSURE.

             Not applicable.


                                  PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

                  The information required by Item 10 of Form 10-K is
incorporated by reference to the information contained in the Company's
Proxy Statement for the 1999 Annual Meeting of Shareholders which will be
filed pursuant to Regulation 14A.

ITEM 11.  EXECUTIVE COMPENSATION

      The  information  required by Item 11 of Form 10-K is  incorporated  by
reference to the  information  contained in the Company's Proxy Statement for
the 1999  Annual  Meeting of  Shareholders  which will be filed  pursuant  to
Regulation 14A.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                MANAGEMENT

      The  information  required by Item 12 of Form 10-K is  incorporated  by
reference to the  information  contained in the Company's Proxy Statement for
the 1999  Annual  Meeting of  Shareholders  which will be filed  pursuant  to
Regulation 14A.

ITEM  13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The  information  required by Item 13 of Form 10-K is  incorporated  by
reference to the  information  contained in the Company's Proxy Statement for
the 1999  Annual  Meeting of  Shareholders  which will be filed  pursuant  to
Regulation 14A.


                                    PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

    (a)(1)  Financial Statements.   Listed and included in Part II, Item 8.

      (2)   Financial Statement Schedules.      Not applicable.






      (3)   Exhibits.
            <TABLE>
              <C>       <S>
            (2.1)       Agreement  and Plan of  Reorganization  and Merger by
                        and  between   Central  Coast  Bancorp,   CCB  Merger
                        Company   and   Cypress   Coast   Bank  dated  as  of
                        December 5,  1995,  incorporated  by  reference  from
                        Exhibit  99.1 to Form 8-K filed  with the  Commission
                        on December 7, 1995.

            (3.1)       Articles   of    Incorporation,    incorporated    by
                        reference   from   Exhibit   4.8   to    Registration
                        Statement  on Form S-8 No.  33-89948,  filed with the
                        Commission on March 3, 1995.

            (3.2)       Bylaws, as amended.

            (4.1)       Specimen   form  of  Central   Coast   Bancorp  stock
                        certificate   incorporated   by  reference  from  the
                        Company's  1994 Annual  Report on Form 10K filed with
                        the Commission on March 31, 1995.

            (10.1)      Lease agreement dated December 12, 1994, related to
                        301 Main Street, Salinas, California incorporated
                        by reference from the Company's 1994 Annual Report
                        on Form 10K filed with the Commission on March 31,
                        1995.

            (10.2)      King City Branch Lease incorporated by reference
                        from Exhibit 10.3 to Registration Statement on Form
                        S-4 No. 33-76972, filed with the Commission on
                        March 28, 1994.

            (10.3)      Amendment   to  King  City  Branch  Lease
                        incorporated   by  reference  from  Exhibit  10.4  to
                        Registration  Statement  on Form  S-4  No.  33-76972,
                        filed with the Commission on March 28, 1994.

            *(10.4)     1982 Stock Option Plan, as amended, incorporated by
                        reference from Exhibit 4.2 to Registration
                        Statement on Form S-8 No. 33-89948, filed with the
                        Commission on March 3, 1995.

            *(10.5)     Form of  Nonstatutory  Stock Option  Agreement  under
                        the  1982   Stock   Option   Plan   incorporated   by
                        reference   from   Exhibit   4.6   to    Registration
                        Statement  on Form S-8 No.  33-89948,  filed with the
                        Commission on March 3, 1995.


            *(10.6)     Form of Incentive  Stock Option  Agreement  under the
                        1982 Stock  Option  Plan  incorporated  by  reference
                        from  Exhibit 4.7 to  Registration  Statement on Form
                        S-8  No.  33-89948,  filed  with  the  Commission  on
                        March 3, 1995.


            *(10.7)     1994 Stock  Option  Plan  incorporated  by  reference
                        from  Exhibit 4.1 to  Registration  Statement on Form
                        S-8  No.  33-89948,  filed  with  the  Commission  on
                        March 3, 1995.

            *(10.8)     Form of  Nonstatutory  Stock Option  Agreement  under
                        the  1994   Stock   Option   Plan   incorporated   by
                        reference   from   Exhibit   4.3   to    Registration
                        Statement  on  Form  S-8  No.  33-89948,  filed  with
                        Commission on March 3, 1995.

            *(10.9)     Form of Incentive  Stock Option  Agreement  under the
                        1994 Stock  Option  Plan  incorporated  by  reference
                        from  Exhibit 4.4 to  Registration  Statement on Form
                        S-8  No.  33-89948,  filed  with  the  commission  on
                        March 3, 1995.

            *(10.10)    Form   of   Director    Nonstatutory   Stock   Option
                        Agreement   under   the  1994   Stock   Option   Plan
                        incorporated   by  reference   from  Exhibit  4.5  to
                        Registration  Statement  on Form  S-8  No.  33-89948,
                        filed with the commission on March 3, 1995.

            *(10.11)    Form  of Bank of  Salinas  Indemnification  Agreement
                        for  directors and  executive  officers  incorporated
                        by reference  from  Exhibit  10.9 to Amendment  No. 1
                        to Registration  Statement on Form S-4 No.  33-76972,
                        filed with the Commission on April 15, 1994.

            *(10.12)    401(k)  Pension and Profit  Sharing Plan Summary Plan
                        Description  incorporated  by reference  from Exhibit
                        10.8  to  Registration  Statement  on  Form  S-4  No.
                        33-76972,  filed  with the  Commission  on March  28,
                        1994.

            *(10.13)    Specimen  form of Employment  Agreement  incorporated
                        by  reference  from  Exhibit  10.13 to the  Company's
                        1996  Annual  Report  on  Form  10K  filed  with  the
                        Commission on March 31, 1997.

            *(10.14)    Specimen  form  of  Executive   Salary   Continuation
                        Agreement  incorporated  by  reference  from  Exhibit
                        10.14 to the  Company's  1996  Annual  Report on Form
                        10K filed with the Commission on March 31, 1997.

            *(10.15)    1994 Stock Option Plan, as amended,  incorporated  by
                        reference  from  Exhibit  A to  the  Proxy  Statement
                        filed with the  Commission  on  September  3, 1996 in
                        connection  with Central Coast  Bancorp's 1996 Annual
                        Shareholders' Meeting held on September 23, 1996.



            (10.16)     Specimen of Indemnification  Agreement,  incorporated
                        by reference  from  Exhibit D to the Proxy  Statement
                        filed with the  Commission  on  September  3, 1996 in
                        connection  with Central Coast  Bancorp's 1996 Annual
                        Shareholders' Meeting held on September 23, 1996.

             (10.17)    Purchase   and    Assumption    Agreement   for   the
                        Acquisition    of   Wells    Fargo   Bank    Branches
                        incorporated  by reference  from Exhibit 10.17 to the
                        Company's  1996 Annual  Report on Form 10K filed with
                        the Commission on March 31, 1997.

            *(10.18)    Employee  Stock  Ownership  Plan and Trust  Agreement
                        incorporated  by reference  from Exhibit 10.18 to the
                        Company's  1996 Annual  Report on Form 10K filed with
                        the Commission on March 31, 1997.

             (10.19)    Lease agreement dated March 7, 1997, related to 
                        484 Lighthouse Avenue, Monterey, California 
                        incorporated by reference from Exhibit 10.19
                         to the Company's 1997 Annual Report on Form 10K
                        filed with the Commission on march 27, 1998.
                        
              (21.1)    The  Registrant's  only  subsidiaries are
                        its  wholly-owned  subsidiaries,  Bank of Salinas and
                        Cypress Bank.

              (23.1)    Independent auditor's consent

              (27.1)    Financial Data Schedule
</TABLE>
              

            *Denotes    management    contracts,    compensatory   plans   or
            arrangements.


      (b)   Reports on Form 8-K. - none




An Annual Report for the fiscal year ended  December 31, 1998,  and Notice of
Annual  Meeting and Proxy  Statement  for the Company's  1999 Annual  Meeting
will be mailed to  security  holders  subsequent  to the date of filing  this
Report.  Copies of said  materials  will be  furnished to the  Commission  in
accordance with the Commission's Rules and Regulations.
                                 
                                   SIGNATURES
     Pursuant to the  requirements  of Section 13 or 15(d) 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.
                                   CENTRAL COAST BANCORP

Date: March 20, 1999    By: /S/ NICK VENTIMIGLIA           
                           ----------------------------
                            Nick Ventimiglia,  President and Chief 
                            Executive Officer (Principal Executive Officer)

Date: March 20, 1999    By: /S/ ROBERT STANBERRY       
                           ----------------------------
                            Robert Stanberry, Chief Financial Officer
                            (Principal Accounting and Financial Officer)

     Pursuant to the  requirements  of the  Securities  Exchange  Act of 1934
this report has been signed below by the  following  persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature                           Title                          Date
---------                           -----                          ----
<S>                                 <C>                           <C>
/S/ C. EDWARD BOUTONNET             Director                      3/20/99
-----------------------             
(C. Edward Boutonnet)

                                    Director                      3/20/99
-----------------------             
(Bradford G. Crandall)

/S/ ALFRED P. GLOVER                Director                      3/20/99
-----------------------             
(Alfred P. Glover)

                                    Director                      3/20/99
-----------------------             
(Michael T. Lapsys)

/S/ ROBERT M. MRAULE                Director                      3/20/99
-----------------------             
(Robert M. Mraule)

/S/ DUNCAN L. MCCARTER              Director                      3/20/99
-----------------------             
(Duncan L. McCarter)

/S/ LOUIS A. SOUZA                  Director                      3/20/99
-----------------------             
(Louis A. Souza)

/S/ MOSE E. THOMAS                  Director                      3/20/99
-----------------------             
(Mose E. Thomas)

/S/ NICK VENTIMIGLIA               Chairman,Presidentand CEO      3/20/99
-----------------------             
(Nick Ventimiglia)                 
</TABLE>

                                   




                              EXHIBIT INDEX

<TABLE>
<CAPTION>
Exhibit                                                     Sequential
Number                        Description                  Page Number
------                        -----------                  -----------

<C>         <S>                                                  <C>
3.2         Bylaws, as amended.                                   74

23.1        Independent auditors' consent.                        90

27.1        Financial Data Schedule.                              91
</TABLE>