##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1943    
|  
|   |  | For the fiscal year ended December 31,
    2002                                             
|  
|or
|  
|o  |  | 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 0-21656



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HUMBOLDT BANCORP

(Exact name of registrant as specified in its
charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|                        
|                        
|                        
|                        
|California               |  | 93-1175466                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

2998 Douglas Boulevard,
Suite 330

Roseville, CA 95661


(Address and Zip Code of Principal Executive
Offices)


916.783.2812

(Telephone Number)


Securities Registered Pursuant to
Section 12(b) of the Act:

None


Securities Registered Pursuant to
Section 12(g) of the Act:

Common Stock, without 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 þ          No o

Check if there is no disclosure of delinquent
filers in response to Item 405 of Regulation S-K, and
no disclosure will be contained, to the best of the
registrants knowledge, in definitive proxy of information
statements incorporated by reference in Part III of
Form 10-K     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined in Rule 12b-2 of the
Act)     Yes þ          No o

The aggregate market value of the voting stock
held by non-affiliates of the registrant as of
June 28,2002, based on the closing price on that date of
$14.01 per share was $158,989,616. The number of shares
outstanding of Registrants common stock outstanding as of
June 28, 2002 and February 28, 2003 were 12,441,992
and 12,566,311, respectively.

Documents Incorporated by Reference

Information required by Items 10 through 13
of Part III of this Form 10-K are incorporated by
reference to Humboldt Bancorps proxy statement, which will
be filed within 120 days of the end of the fiscal year.



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TABLE OF CONTENTS



|                                                        |                                                                                               |  |  |  |  |  |  | 
|------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                 
|                                                        | Item 1. Business                                                                             
|                                                        | Item 2. Properties                                                                           
|                                                        | Item 3. Legal Proceedings                                                                    
|                                                        | Item 4. Submission of Matters to a Vote of Security Holders.                                 
|PART II                                                
|                                                        | Item 5. Market for Registrants Common Equity and Related Stockholder Matters.               
|                                                        | Item 6. Selected Consolidated Financial Data.                                                
|                                                        | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                        | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                          
|                                                        | Item 8. Financial Statements and Supplementary Data                                          
|HUMBOLDT BANCORP AND SUBSIDIARIES                      
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS             
|December 31, 2001 and 2002                             
|Note 4 -- Investment Securities                        
|Note 5 -- Loans and Allowance for Loan and Lease Losses
|Note 6 -- Premises and Equipment                       
|Note 7 -- Mortgage Servicing Rights                    
|Note 8 -- Interest-Bearing Deposits                    
|Note 9 -- Lines of Credit and Borrowed Funds           
|Note 10 -- Trust Preferred Securities                  
|Note 11 -- Derivative Financial Instruments            
|Note 12 -- Fees and Other Income                       
|Note 13 -- Other Expenses                              
|Note 14 -- Income Taxes                                
|PART III                                               
|PART IV                                                
|SIGNATURES                                             
|CERTIFICATION                                          
|CERTIFICATION                                          
|EXHIBIT 3.3                                            
|EXHIBIT 3.4                                            
|EXHIBIT 10.2A                                          
|EXHIBIT 10.29                                          
|EXHIBIT 23.1                                           
|EXHIBIT 23.2                                           
|EXHIBIT 23.3                                           



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PART I

This Annual Report on Form 10-K contains
certain forward-looking statements, which are made pursuant to
the safe harbor provisions of the Private Securities Litigation
Act of 1995. Statements that expressly or implicitly predict
future results, performance or events are forward-looking. In
addition, the words expect, believe,
anticipate and similar expressions identify
forward-looking statements. Forward-looking statements are
subject to certain risks and uncertainties that could cause
actual results to differ materially from those expected. Factors
that could cause or contribute to such differences include, but
are not limited to, the following:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | The ability to attract new deposits and
    loans                             
|
| |  | Competitive pricing factors                                                   
|
| |  | Deterioration in economic factors that result
    in increased loan losses    
|
| |  | Market interest rate fluctuations                                             
|
| |  | Operational difficulties related to execution
    of Humboldts strategic plan
|
| |  | Changes in the legal or regulatory
    requirements                           
|
| |  | New technological developments                                                
|
| |  | The ability to recruit and retain top-level
    management and staff          

Readers are advised not to place undue
reliance on any forward-looking statements contained in this
report, which speak only as of the date hereof. Humboldt Bancorp
undertakes no obligation to revise any forward-looking
statements to reflect subsequent events or
circumstances.






|        |         
|------- | --------
|Item 1. | Business

We file our annual report on Form 10-K,
quarterly report on Form 10-Q, current report on
Form 8-K, proxy statements and other information with the
Securities and Exchange Commission. You may obtain these filings
from the SECs web site at http://www.sec.gov. You may also
obtain, free of charge, copies of our annual report, quarterly
reports, current reports, and amendments to these reports,
through our website at http://www.humboldtbancorp.com. These
reports are available through our website as soon as reasonably
practicable after they are electronically filed with the SEC. In
addition, all of our SEC filings since November 14, 2002
were made available on our website within two days of filing
with the SEC.

General

Humboldt Bancorp (Humboldt) is a
California corporation incorporated in January 1995. Humboldt is
registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended. As of December 31, 2002,
Humboldt had total assets of $1.0 billion, total net loans
of $749 million, total deposits of $840 million and
total shareholders equity of $78 million. For the
year ended December 31, 2002, Humboldt reported net income
of $12.3 million, or $0.94 per diluted share.
Humboldts principal operating subsidiary is Humboldt Bank
(Bank), which was founded in 1989 and operates under
a charter issued by the State of California. During 2002,
Humboldt merged its subsidiaries, Tehama Bank, Capitol Valley
Bank and Capitol Thrift & Loan, into the Bank.

Bancorp Financial Services, Inc.
(BFS) is a subsidiary of Humboldt that was founded
jointly by Humboldt and Tehama Bancorp in 1996. Upon the
completion of the merger with Tehama Bancorp in March 2001, BFS
became a wholly-owned subsidiary of Humboldt. BFS was classified
as a discontinued operation during 2001 and the final wind-down
of its operations was completed during the second quarter of
2002. Additional information regarding BFS is contained under
the heading Bancorp Financial Services 
Discontinued Operations later in this Report.

Humboldt also has three subsidiaries formed for
the sole purposed of issuing Trust Preferred Securities. Further
information regarding Trust Preferred Securities is included in
Note 10 to the Financial Statements.

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Humboldt Bank has one subsidiary, HB Investment
Trust, which was formed in December 2001 as a Real Estate
Investment Trust (REIT) organized under the laws of
the State of Maryland. Humboldt Bank owns all of the outstanding
common stock of HB Investment Trust and is the sole contributor
of real estate assets. HB Investment Trust is included in the
consolidated financial statements.

All of Humboldts subsidiaries are listed in
Exhibit 21 of this Report.

Recent Developments

On March 13, 2003, the Bank completed the
sale of its proprietary merchant bankcard operations to an
affiliate of First National Bank Holding Company
(FNB) for $32 million in cash. Humboldt expects
to recognize an after-tax gain of approximately $18 million
in connection with this sale during the first quarter of 2003.
Under the terms of the agreement, FNB has entered into a
five-year lease for approximately 18,000 square feet of office
space in a building owned by the Bank. In addition, the Bank
will continue to provide FNB with sponsorship to VISA and
Mastercard for a period of up to six months after closing, with
FNB providing full indemnification for any losses incurred. At
the point FNB no longer requires sponsorship by the Bank,
approximately $12 million of deposits associated with merchant
loss reserves will be transferred to a financial institution
selected by FNB.

On January 2, 2003, the Bank completed the
sale of the deposits, assets and certain other liabilities of
its branches in Lancaster and Riverside, California to
Silvergate Bank. There was no premium received on the deposits
sold and no material gain or loss was recorded in connection
with the transfer of the other assets and liabilities.

Mergers & Acquisitions

On March 9, 2001, Humboldt acquired, for
approximately 4.4 million shares of common stock and
$220,000 in cash, all of the outstanding common stock of Tehama
Bancorp (Tehama), a one-bank holding company, based
in Red Bluff, California. Each share of Tehama common stock was
converted into and exchanged for 1.775 shares of Humboldt common
stock. The cash consideration represented payment to Tehama
shareholders who exercised their dissenters rights. This
merger was accounted for as a pooling of interests and,
accordingly, all financial information contained in this Report
is has been restated to reflect the combination of Humboldt and
Tehama for all periods presented.

On April 7, 2000, Humboldt acquired Capitol
Thrift & Loan for approximately $11.9 million in cash
and a contingent obligation agreement totaling $4.6 million
due January 30, 2002. Under the terms of the agreement, the
repayment of principal was contingent upon performance of the
Capitol Thrift & Loan loan portfolio. The contingent
liability holders were paid $4.6 million in cash in full
satisfaction of the contingency liability on January 30, 2002.
This final payment resulted in the elimination of negative
goodwill in the amount of approximately $1.2 million and
the creation of a goodwill asset in the amount of
$3.4 million.

Market Area and Competition

The market for banking and bank-related services
is highly competitive. The Bank actively competes in its various
market areas, which are principally in non-metropolitan areas of
Northern California, with other providers of deposit and credit
services. These competitors include other commercial banks,
savings banks, savings and loan associations, credit unions,
mortgage companies, and brokerage firms. The following table
displays the market share percentage and rank for total deposits
in each county where the Bank has operations. The table also
indicates the ranking by deposit size in each of the local
markets. All information in the table was obtained from the
Federal Deposit Insurance Corporation (FDIC) Summary
of Deposits as of June 30,

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2002 (the most recent available information).
Markets where the Bank has ceased operations since June 30,
2002 are not shown.


|          |  |              |      |             |  |  |    | 
|--------- |  | ------------ | ---- | ----------- |  |  | -- | 
|County    |  | Market Share |      | Market Rank
|          |  |              |      |            
|Butte     |  |              | 1.9  | %           |  |  | 10 | 
|         
|         
|         
|         
|Fresno    |  |              | 0.2  | %           |  |  | 21 | 
|         
|         
|         
|         
|Glenn     |  |              | 20.0 | %           |  |  | 3  | 
|         
|         
|         
|         
|Humboldt  |  |              | 35.1 | %           |  |  | 1  | 
|         
|         
|         
|         
|Mendocino |  |              | 3.0  | %           |  |  | 8  | 
|         
|         
|         
|         
|Napa      |  |              | 0.8  | %           |  |  | 14 | 
|         
|         
|         
|         
|Placer    |  |              | 1.7  | %           |  |  | 13 | 
|         
|         
|         
|         
|Shasta    |  |              | 2.2  | %           |  |  | 9  | 
|         
|         
|         
|         
|Tehama    |  |              | 22.0 | %           |  |  | 2  | 
|         
|         
|         
|         
|Trinity   |  |              | 23.8 | %           |  |  | 2  | 

In California, major banks and large regional
banks generally dominate the commercial banking industry. By
virtue of their larger capital bases, such institutions have
substantially greater lending limits than those of Humboldt, as
well as more locations, more products and services, greater
economies of scale and greater ability to make investments in
technology for the delivery of financial services.

Lending and Credit Functions

The Bank makes both secured and unsecured loans
to individuals, firms, and corporations. Secured loans include
first and second real estate mortgage loans. The Bank also makes
direct installment loans to consumers on both a secured and
unsecured basis. At December 31, 2002, consumer, real
estate construction, real estate mortgage, and commercial &
industrial loans represented approximately 10%, 17%, 57%, and
16% respectively, of the total loan portfolio. Specific risk
elements associated with each of the lending categories include,
but are not limited to:



| |                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Commercial &
    Industrial Industry
    concentrations; inability to monitor the condition of collateral
    (inventory, accounts receivable and vehicles); lack of borrower
    management expertise, increased competition; use of specialized
    or obsolete equipment as collateral; insufficient cash flow from
    operations to service debt payment.
|
| | Real
    estate-construction
    Inadequate collateral and long-term financing agreements.                                                                                                                                                                                                                                                                    
|
| | Real estate
    mortgage Changes in local
    economy affecting borrowers employment; insufficient
    collateral value due to decline in property value.                                                                                                                                                                                                    
|
| | Consumer
    Loss of borrowers employment; changes in local economy;
    the inability to monitor collateral (vehicles, boats, and mobile
    homes).                                                                                                                                                                                                        

Inter-agency guidelines adopted by federal bank
regulators mandate that financial institutions establish real
estate lending policies with maximum allowable real estate
loan-to-value limits, subject to an allowable amount of
non-conforming loans as a percentage of capital. The Bank has
adopted the federal guidelines as the maximum allowable limits;
however, policy exceptions are permitted for real estate loan
customers with strong financial credentials.

Credit
Policy

The current lending policy of the Bank is to make
loans primarily to persons who reside, work, or own property in
their primary market areas. Unsecured loans are generally made
only to persons who maintain depository relationships with the
Bank. Secured loans are made to persons who are well established
and have net worth, collateral, and cash flow to support the
loan. Exceptions to the policy are permitted on a case-by-case
basis and require the approving officer to document in writing
the reason for the exception. Policy

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exceptions made for borrowers whose total
aggregate loans exceed the approving officers credit limit
must be submitted to the Chief Credit Officer or the Bank Board
of Directors for approval, depending upon the size of the loan.
The Bank provides each lending officer with written guidelines
for lending activities. Lending authority is delegated by the
Board of Directors of the Bank to Chief Credit Officer and other
loan officers, each of whom is limited in the amount of secured
and unsecured loans which he or she can make to a single
borrower or related group of borrowers. Loans in excess of
individual officer credit authority must either be approved by a
senior officer with sufficient approval authority or be approved
by the Loan Committee of the Banks Board of Directors.


Loan Review
and Allowance for Loan Loss Methodology

The Credit Administration Department of the Bank
reviews, or engages an independent third party to review, the
Banks loan portfolio on a periodic basis to determine any
weaknesses in the portfolio and to assess the general quality of
credit underwriting. The results of the reviews are presented to
the Chief Credit Officer and the Audit Committee. If an
individual loan or credit relationship has a weakness identified
during the review process, the risk rating of the loan, or all
loans comprising a credit relationship, will be downgraded to a
classification that most closely matches the current risk level.
The review process also provides for the upgrade of loans that
show improvement since the last review. Since each loan in a
credit relationship may have a different credit structure,
collateral, and other secondary source of repayment, different
loans in a relationship can be assigned different risk ratings.

During 2002, the Banks risk rating system
was expanded from 8 grades to 9 grades in order to provide for a
more efficient detection of deterioration in borrower financial
condition. Grades 1 through 5 are considered pass,
or very acceptable credit quality that does not require special
monitoring. Grades 6 through 9 are indicative of higher risk
loans that require a greater level of managements
attention. The entire 9-grade rating scale provides for a higher
numeric rating for increased risk. For example, a risk rating of
1 is the least risky of all credits and would be typical of a
loan that is 100% secured by a deposit account(s) at the Bank.
The four credit ratings that require special management
attention are:



| |                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6 (Special
    Mention) A loan that
    exhibits potential credit weaknesses or adverse trends in
    borrower financial condition that requires additional close
    monitoring by management. Operational cash flow insufficient to
    service the debt and collateral values with narrow, but
    sufficient, liquidation margins.
|
| | 7
    (Substandard) A loan that
    is inadequately protected by borrower net worth, cash flow
    capacity or collateral value. Substandard loans typically have
    one or more well-defined weaknesses.                                                                                                                            
|
| | 8
    (Doubtful) A specific
    weaknesses characterized by Substandard where there is no strong
    secondary source of repayment and collection or liquidation in
    full is unlikely. Insufficient information exists to determine
    the amount of potential loss.                                                              
|
| | 9 (Loss) Same characteristics as
    Doubtful; however, probability of either partial or full loss is
    certain and can be reasonably estimated. Loans classified as
    such are generally recommended for charge-off immediately even
    though there is some potential for future recovery.                                     

The Bank performs a quarterly analysis to
determine the adequacy of the Allowance for Loan Losses
(ALL). The ALL analysis segregates the loan
portfolio into 19 different categories based on type of loan.
These categories include commercial construction, agricultural,
government guaranteed, commercial real estate and consumer
loans. First, all loans in each category are assigned a reserve
factor of between 0% and 4.0% based on the inherent risk level
of the category and the Banks loss experience. Next, loans
graded 8 or higher in each category are assigned reserve factors
based on the inherent risk level of the category and the
Banks loan loss experience:

|           |  |                          |             | 
|---------- |  | ------------------------ | ----------- | 
|Loan Grade |  | Range of Reserve Factors
|           |  |                         
|7          |  |                          | 11% to 15%  | 
|          
|          
|          
|          
|8          |  |                          | 44% to 49%  | 
|          
|          
|          
|          
|9          |  |                          | 96% to 100% | 

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All loans graded 5 or 6 are assigned an
additional reserve factor of 0.125% and loans past due
30 days or more are assigned an additional reserve factor
of 0.25%. The aggregation of each of the components above
provides for the analytical required reserve for each category.
Combining the results of the analytical required reserve
calculation for all 19 loan categories provides the total
required ALL.

Humboldts ALL methodology provides for the
establishment of specific reserves, based upon the present value
of future cash flows discounted at the loans effective
rate, the loans observable market price, or the fair value
of collateral if the loan is collateral dependent.

There is no current process used to measure or
adjust for differences between the loss factors for adversely
classified loans used in the ALL analysis and actual losses
charged to the ALL. The difference between the actual ALL (as
presented in the consolidated financial statements) and the
allocated ALL represents the unallocated ALL. The unallocated
ALL provides for coverage of credit losses inherent in the loan
portfolio but not provided for in the ALL analysis. The
unallocated ALL as of December 31, 2002 was approximately
$1.2 million, or 11% of the total ALL.

The ALL represents Humboldts estimate of
the probable losses that have occurred as of the date of the
financial statements, as further described in Note 1 in the
Notes to the Consolidated Financial Statements. Management
believes that the ALL was adequate as of December 31, 2002.
There is, however, no assurance that future loan losses will not
exceed the levels provided for in the ALL which could result in
additional charges to the provision for loan losses. In
addition, bank regulatory authorities, as part of their periodic
examination of the Bank, may require additional charges to the
provision for loan losses in future periods if the results of
their review warrant.

The Securities and Exchange Commission Staff
Accounting Bulletin No. 102 Selected Loan Loss
Allowance Methodology and Documentation Issues (SAB
No. 102) was released on July 10, 2001. It
expresses the staffs views on the development,
documentation, and application of a systematic methodology as
required by Financial Reporting Release No. 28,
Accounting for Loan Losses by Registrants Engaged in
Lending Activities, for determining the ALL in accordance
with general accepted accounting principles. In particular, SAB
No. 102 focuses on the documentation the Securities and
Exchange Commission staff would normally expect registrants to
prepare and maintain in support of the ALL. Management believes
that Humboldts process for determining the adequacy of the
ALL is consistently followed and supported by written
documentation, policies and procedures.

Merchant Bankcard Services

In 1993, Humboldt established a merchant credit
and debit card processing operation (Merchant Bankcard
Services). Since that time, the operation has grown
steadily both in volume and scope of activities. In general,
Merchant Bankcard Services operations involve collecting funds
for, and crediting the accounts of, merchants for sales of
merchandise and services to credit and debit card customers.
Merchant Bankcard Services specializes in providing processing
for first time merchants and small-to medium-sized merchants in
the retail, telephone, mail order and Internet commerce
industries.

While these merchants vary in size,
Humboldts average typical merchant generates approximately
$60,000 in annual processing transaction volume. For the year
ended December 31, 2002, no single merchant accounted for
more than .5% of total gross processing volume. At
December 31, 2002, Merchant Bankcard Services provided
processing services to approximately 103,000 merchants.

During the second quarter of 2002, Humboldt
conducted a strategic review of its Merchant Bankcard Services
and the risks and rewards associated with the business in
general. The review concluded that Humboldts long-term
shareholder value would be maximized by reducing the
Companys overall risk profile through the strategic sale
its Merchant Bankcard Services and refocusing efforts on
community banking. In July 2002, Humboldt entered into a
definitive agreement for the sale of its proprietary Merchant
Bankcard Services to iPayment Holdings, Inc. This agreement was
subsequently terminated by iPayment Holdings. On
February 3, 2003, the Bank entered into a definitive
agreement with a recently formed affiliate of First National
Bank Holding Company called Humboldt Merchant Services, LP, for
the sale of the proprietary

5



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Merchant Bankcard Services. This transaction was
completed on March 13, 2003, and the Bank received cash
consideration of $32 million. As of the closing date,
Humboldt Merchant Services, LP assumed all liability for
transactions processed on or before the closing date.
Accordingly, the Bank no longer has an exposure to losses
related to the proprietary portfolio.


Independent
Service Organization Processing

Humboldt markets its Merchant Bankcard Services
through independent service organizations (ISOs).
Since the VISA and Mastercard association rules only provide
membership to financial institutions, ISOs must be affiliated
with a sponsor financial institution in order to be involved in
the processing of credit and debit card transactions. In most
cases, ISOs solicit merchant accounts and perform the customer
service and collection function, while Humboldt provides the
accounting and credit underwriting function. For these
functions, Humboldt receives an average processing fee of
approximately 0.10%. Under the terms of the ISO agreements,
Humboldt is indemnified against loss by the ISO.

As of December 31, 2002, Humboldt provided
ISO processing for three organizations. The aggregate number of
merchants covered under these agreements was approximately
90,000 at December 31, 2002. For the year ended
December 31, 2002, Humboldt processed approximately
$5 billion of ISO merchant transactions. As part of the
decision to sell the Proprietary business, Humboldt also decided
to exit the ISO processing upon expiration of the existing
contracts. Subsequent to December 31, 2002, one of the ISO
agreements was terminated and approximately 41,000 merchant
accounts were transferred to another sponsor financial
institution. Although the two remaining ISO sponsorships expire
in September 2003 and March 2004, respectively, Humboldt expects
that these ISOs will transfer their merchant accounts to another
sponsor institution prior to the termination date.

In connection with the sale of the Proprietary
portfolio, Humboldt will provide ISO sponsorship for a period
not to exceed six months in order to provide sufficient time for
Humboldt Merchant Services, LP to arrange for an orderly
transfer of the merchant accounts. Under the terms of the
agreement, Humboldt Merchant Services, LP indemnifies Humboldt
for any losses incurred in connection with merchant accounts
acquired from Humboldt or added subsequent to closing.

Merchant
Bankcard Services Risks

There are unique risks associated with processing
merchant credit and debit card transactions. Many of the
merchants accept consumers credit card numbers over the
telephone and Internet. There are no signed drafts and the
entire process is handled electronically. Since consumers find
these transactions easier to dispute than transactions involving
signed drafts, the charge-back rates for services provided over
the telephone and through the Internet are generally higher.
Humboldt views its risk management and fraud avoidance practices
as integral to its operations and overall success because of
potential liability for merchant fraud, charge backs and other
losses. While the first time and small to medium sized merchants
may be potentially profitable accounts, they are by definition
high risk because of the lack of business experience and
consequently require close monitoring. In connection with the
sale of Humboldts proprietary portfolio, the buyer assumed
responsibility for all charge-backs received after the closing
date.

For ISO merchants, risk is mitigated by requiring
merchant reserves and by ISO reserves and guarantees. Reserves
are demand deposit or time deposit account balances with minimum
required balances established by withholding a percentage of
processing volume.

In the event a consumer is dissatisfied with the
merchandise or service, in general, a merchant must accept a
charge-back for a period of 120 days. The merchants
checking account is debited with the charge-back if sufficient
funds exist; otherwise, the merchants reserve funds are
debited. If a merchants reserves are insufficient to fund
the charge-back and an ISO is involved, Humboldt looks to the
applicable and available guarantee, if any, of the ISO. If the
merchants reserve is exhausted and either (i) an ISO
is involved but no guarantee is applicable or available, or
(ii) no ISO is involved, Humboldt uses its internal
reserves to fund the charge-back. Humboldt had $68 million
of deposit accounts related to merchant reserves as of
December 31, 2002. Substantially all of the merchant
deposits account balances were in demand deposit accounts.

6



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##### Table of Contents



An allowance for losses is maintained in
connection with Humboldts merchant bankcard processing
activities. An analysis of the adequacy of the allowance is
performed on a quarterly basis. The analysis assigns risk
factors to processing volumes for each ISO and the Proprietary
portfolio, based on the financial strength of the ISO, loss
experience, merchant charge-back experience and other factors.
At December 31, 2002, the total allowance for merchant
losses was $2.7 million.

Association
Risks

Merchant bankcard processing services are highly
regulated by credit card associations such as VISA and
Mastercard. In order to participate in the credit card programs,
Humboldt must comply with the credit card associations
rules and regulations, which may change from time to time. There
is no guarantee that the credit card associations will not, at
some future point, adopt more restrictive rules that could
adversely impact Humboldt.

The association membership rules also provide the
right for the association to levy a charge to all member banks
in the event there is a major loss within the association
network. The loss would be allocated to all member banks based
on the percentage of transaction processing performed by each
member bank. The ability to mitigate this risk is beyond
Humboldts control.

ATM Funding

In 1996, Humboldt began its automated teller
machine (ATM) funding operation by sponsoring ISOs
that place and service ATMs in various public places such as
restaurants, convenience stores, and gas stations. ATM networks
require each ATM ISO to be sponsored by a chartered financial
institution. Humboldt sponsors these companies and provides cash
for their ATMs under a contractual agreement in exchange for a
fee. Tehama Bank, prior to its acquisition by Humboldt, also was
active in ATM Funding and after completion of the merger
continued to provide ATM funding. During the fourth quarter of
2001, Humboldt determined that an ATM ISO had stolen
approximately $5.0 million that was provided for funding
ATMs. Subsequently, law enforcement authorities recovered
approximately $3.6 million of the cash. A loss of
$1.4 million before tax was recorded in connection with the
theft in 2001. Humboldt is pursuing insurance claims against
bond coverage provided by the ATM ISO and also under the
Banks financial institution bond and other insurance
policies provided by the ATM ISO.

In light of the cash theft and related loss,
management reevaluated the financial risks and rewards
associated with ATM Funding and determined that alternative uses
of the ATM funding cash, such as funding loans, would provide a
more acceptable risk-adjusted return to Humboldt. Accordingly, a
decision was made during the first quarter of 2002 to begin the
process of exiting the ATM Funding business. This process was
completed during the third quarter of 2002.

In December 2002, Humboldt agreed to pay an ATM
ISO $250,000 in order to settle a legal claim in connection with
termination of the ATM ISO agreement. Humboldt received a full
and unconditional release from the ATM ISO. There were no other
pending or threatened legal disputes related to the ATM funding
operation as of December 31, 2002.

Asset/ Liability Management

Humboldts Asset/ Liability Management
Committee (ALCO) is composed of the Chief Financial
Officer, Treasurer, Chief Credit Officer, President and one
board member. The ALCO meets periodically and is charged with
managing the assets and liabilities of the Banks. The committees
attempt to manage asset growth, liquidity, and capital to
maximize income and manage interest rate risk. The ALCO directs
Humboldts acquisition and allocation of funds. A more
comprehensive discussion of Humboldts Asset/ Liability
Management and interest rate risk is contained in the
Managements Discussion and Analysis (Part II, Item 7)
section of this report under the heading Quantitative and
Qualitative Disclosures About Market Risk.

7



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##### Table of Contents



Investment Policy

Humboldts investment policy is to maximize
income consistent with liquidity, asset quality and regulatory
constraints and is reviewed annually by the Board of Directors.
Individual transactions, portfolio composition, and performance
are also reviewed and on a regular basis by the Board of
Directors. Humboldts Chief Financial Officer administers
the policy and reports information to the Board of Directors on
a quarterly basis concerning sales, purchases, maturities and
calls, resultant gains or losses, average maturity, and market
appreciation or depreciation by major investment type.

Bancorp Financial Services 
Discontinued Operations

Bancorp Financial Services, Inc.
(BFS) was originally capitalized in 1996 with
$2,000,000 contributions from both Humboldt Bancorp and Tehama
Bancorp. Upon the completion of the Tehama Bancorp merger in
March 2001, Humboldt became the sole shareholder of BFS. During
the first quarter of 2001, Humboldts Board of Directors
completed a strategic review of BFS, which principally acquired
and serviced small ticket leases on a nationwide basis. This
review was initiated in response to a number of factors,
including the increased regulatory burden associated with BFS
being a wholly owned subsidiary after completion of the Tehama
Bancorp merger, future capital needs of BFS to support its
growth and reliance upon the lease-backed securities market for
liquidity. As a result of this review, Humboldt adopted a plan
to discontinue the operations of BFS by sale and engaged an
investment banking firm to facilitate the sale during the first
quarter of 2001. A valuation reserve of $700,000, net of tax,
was recorded during the first quarter of 2001 based on an
estimate of the value of BFS as a going concern.

During the second quarter of 2001, Humboldt was
notified by the investment banker that the prospects for the
sale of BFS as a going concern were unlikely. In response,
Humboldt adopted a plan to wind-down the operations of BFS in an
orderly manner. This plan included the immediate termination of
all lease and loan acquisition activities. In connection with
the wind-down plan, Humboldt recognized a loss on discontinued
operations, net of tax, of $13.5 million during the second
quarter of 2001. For the year ended December 31, 2001,
Humboldt recognized a total net loss on discontinued operations
of $14.0 million.

During the first and second quarters of 2002, the
wind-down of the BFS operations was completed, including the
sale of all remaining financial assets. A loss on discontinued
operations of $276,000 was recognized during the second quarter
of 2002.

The operating results of BFS are included, net of
tax, in the income statement as income (loss) from
discontinued operations. Additional information on BFS is
contained in Note 3 in the Notes to the Consolidated Financial
Statements.

Economic Conditions, Government Policies and
Legislation

Humboldts profitability is primarily
dependent on interest rate differentials. In general, the
difference between the interest rates paid on interest-bearing
liabilities, such as deposits and other borrowings, and the
interest rates received on interest-earning assets, such as
loans and investment securities, comprise the major portion of
Humboldts earnings. These rates are highly sensitive to
many factors that are beyond the control of Humboldt, such as
inflation, recession and unemployment. The impact which future
changes in domestic and foreign economic conditions might have
on Humboldt cannot be predicted.

The results of operations of Humboldt are
affected by credit policies of monetary authorities,
particularly the Federal Reserve. The instruments of monetary
policy employed by the Federal Reserve to control inflation and
combat economic recession include open market operations in U.S.
government securities, changes in the discount rate on bank
borrowings and changes in reserve requirements against bank
deposits. In view of changing conditions in the national economy
and in the money markets, as well as the effect of actions by
monetary and fiscal authorities, including the Federal Reserve,
no prediction can be made as to possible future changes in
interest rates, deposit levels, loan demand, or the business and
income of Humboldt. Changes in monetary policy could have an
adverse effect on loan demand, the ability of borrowers to repay
outstanding

8



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##### Table of Contents



loans, the value of real estate and other
collateral securing loans, and Humboldts condition and
results of operations in general and, as a result, on the market
value of the Humboldts common stock.


In late 2000 and continuing into 2001, the State
of California was subject to a deterioration in the ability of
major utilities to provide energy for the States needs.
These shortages resulted in increased costs and, during the
summer of 2001, rolling blackouts during which
electric service was interrupted in some areas for short
periods. Although conservation efforts and increased generation
capacity have alleviated electricity shortages, there is no
assurance that future energy shortages will not have a
significant adverse impact on the California economy. In early
2003, the State of California also announced a budget deficit of
approximately $35 billion and plans to curtail spending in
order to close the budget gap. Although Humboldt is not directly
dependent upon funding from the State of California, a further
deterioration in the States financial condition could have
an adverse impact on the prospects for continued economic growth
and development.

From time to time, legislative acts, as well as
regulations, are enacted which have the effect of increasing the
cost of doing business, limiting or expanding permissible
activities, or affecting the competitive balance between banks
and other financial services providers. Proposals to change the
laws and regulations governing the operations and taxation of
banks, bank holding companies, and other financial institutions
and financial services providers are frequently made in the U.S.
Congress, in the state legislatures, and before various
regulatory agencies.

On November 12, 1999, President Clinton
signed into law the Gramm-Leach-Bliley Act of 1999, also
referred to as Financial Services Modernization Act. The
Financial Services Modernization Act repeals the two affiliation
provisions of the Glass-Steagall Act: Section 20, which
restricted the affiliation of Federal Reserve member banks with
firms engaged principally in specified securities
activities; and Section 32, which restricts officer,
director or employee interlocks between a member bank and any
company or person primarily engaged in specified
securities activities. In addition, the Financial Services
Modernization Act also contains provisions that expressly
preempt any state law restricting the establishment of financial
affiliations, primarily related to insurance. The general effect
of the law is to establish a comprehensive framework to permit
affiliations among commercial banks, insurance companies,
securities firms, and other financial services providers by
revising and expanding the Bank Holding Company Act of 1956
(BHCA) framework to permit a holding company system
to engage in a full range of financial activities through a new
entity known as a Financial Holding Company. Financial
activities is broadly defined to include not only banking,
insurance and securities activities, but also merchant banking
and additional activities that the Federal Reserve Board, in
consultation with the Secretary of the Treasury, determines to
be financial in nature, incidental to such financial activities
or complementary activities that do not pose a substantial risk
to the safety and soundness of depository institutions or the
financial system generally. Generally, the Financial Services
Modernization Act:



| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Repeals historical restrictions on, and
    eliminates many federal and state law barriers to, affiliations
    among banks, securities firms, insurance companies, and other
    financial services providers;
|
| |  | Provides a uniform framework for the functional
    regulation of the activities of banks, savings institutions and
    their holding companies;                                                               
|
| |  | Broadens the activities that may be conducted by
    national banks, banking subsidiaries of bank holding companies
    and their financial subsidiaries;                                                      
|
| |  | Provides an enhanced framework for protecting the
    privacy of consumer information;                                                                                                                         
|
| |  | Adopts a number of provisions related to the
    capitalization, membership, corporate governance, and other
    measures designed to modernize the Federal Home Loan Bank system;                             
|
| |  | Modifies the laws governing the implementation of
    the Community Reinvestment Act, sometimes referred to as CRA; and                                                                                        
|
| |  | Addresses a variety of other legal and regulatory
    issues affecting both day-to-day operations and long-term
    activities of financial institutions.                                                      

9



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##### Table of Contents



In order for a company to take advantage of the
ability to affiliate with other financial services providers, it
must become a Financial Holding Company as permitted
under an amendment to the BHCA. To become a Financial Holding
Company, a company would file a declaration with the Federal
Reserve Board, electing to engage in activities permissible for
Financial Holding Companies and certifying that the company is
eligible to do so because all of its insured depository
institution subsidiaries are well-capitalized and well-managed.
In addition, the Federal Reserve Board must also determine that
each of a holding companys insured depository institution
subsidiaries has at least a satisfactory CRA rating.
Humboldt does not have any current plans to apply for Financial
Holding Company status.

Under the Financial Services Modernization Act,
federal banking regulators adopted rules that limit the ability
of financial institutions to disclose non-public information
about customers to third parties not affiliated with the
financial institution. Under the privacy rules, which became
effective in July 2001, financial institutions must provide
notices to customers about their privacy policy (describing the
conditions under which nonpublic personal information is
disclosed), annual notices of their privacy policy to current
customers and a reasonable means for customers to opt
out of having their personal information disclosed to
third parties. These privacy provisions will affect how consumer
information is transmitted through financial institutions and
conveyed to outside vendors. Management does not believe that
compliance with privacy rules will have a material impact on
Humboldts results of operations.

President Bush signed the USA Patriot Act of 2001
(Patriot Act) on October 26, 2001. This
legislation was enacted in response to the terrorist attacks in
New York, Pennsylvania and Washington, D.C. on
September 11, 2001. The Patriot Act is intended to
strengthen U.S. law enforcement and the intelligence
communities ability to work together to combat terrorism
on a variety of levels. The potential impact of the Patriot Act
on financial institutions is significant and wide ranging. The
Patriot Act contains sweeping anti-money laundering and
financial transparency laws and requires various regulations,
including:



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) Due diligence requirements for financial
    institutions that administer, maintain, or manage private bank
    accounts or correspondent accounts for non-U.S. persons.                                         
|
| | (2) Standards for verifying customer
    identification at account opening.                                                                                                                                          
|
| | (3) Rules to promote cooperation among
    financial institutions, regulators, and law enforcement entities
    to assist in the identification of parties that may be involved
    in terrorism or money laundering.
|
| | (4) Reports to be filed by nonfinancial
    trades and business with the Treasury Departments
    Financial Crimes Enforcement Network for transactions exceeding
    $10,000.                                      
|
| | (5) The filing of suspicious activities
    reports by securities brokers and dealers if they believe a
    customer may be violating U.S. laws and regulations.                                                     

Until all new regulations, rules or standards
have been developed; Humboldt is not able to predict the impact
of such law on its financial condition or results of operations
at this time.

Supervision and Regulation of
Humboldt

Humboldt and the Bank are extensively regulated
under both federal and state laws and regulations. These laws
and regulations are primarily intended to protect depositors,
not shareholders. The following information describes statutory
or regulatory provisions affecting Humboldt and the Banks.

The regulations of the Federal Reserve Board, the
FDIC, and the California Department of Financial Institutions
govern most aspects of Humboldts and the Banks
businesses and operations, including, but not limited to, the
scope of its business, investments, reserves against deposits,
the nature and amount of any collateral for loans, the time of
availability of deposited funds, the issuance of securities, the
payment of dividends, bank expansion and bank activities,
including real estate development and insurance activities, and
the making of periodic reports. Various consumer laws and
regulations also apply to the Banks. The Federal Reserve, the
FDIC, and the California Department of Financial Institutions
have broad enforcement powers over depository institutions,
including the power to prohibit a bank from engaging in business
practices which are considered to be unsafe or unsound, to
impose substantial fines and other civil and criminal penalties,
to

10



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##### Table of Contents



terminate deposit insurance, and to appoint a
conservator or receiver under a variety of circumstances. The
Federal Reserve Board also has broad enforcement powers over
bank holding companies, including the power to impose
substantial fines and other civil and criminal penalties.


Regulation of
Bank Holding Companies

Humboldt is a registered bank holding company
subject to regulation by the Board of Governors of the Federal
Reserve System under the BHCA. Humboldt is required to file
financial information with the Federal Reserve periodically and
is subject to periodic examination by the Federal Reserve. The
BHCA requires every bank holding company to obtain the Federal
Reserves prior approval before (1) it may acquire
direct or indirect ownership or control of more than 5% of the
voting shares of any bank that it does not already control;
(2) it or any of its non-bank subsidiaries may acquire all
or substantially all of the assets of a bank; and (3) it
may merge or consolidate with any other bank holding company. In
addition, a bank holding company is generally prohibited from
engaging in, or acquiring, direct or indirect control of the
voting shares of any company engaged in non-banking activities.
This prohibition does not apply to activities listed in the BHCA
or found by the Federal Reserve, by order or regulation, to be
closely related to banking or managing or controlling banks such
as data processing, loan servicing, and brokerage services.

Federal
Deposit Insurance

The Federal Deposit Insurance Corporation insures
deposits of federally insured banks, savings banks, savings
associations and thrifts and safeguards the safety and soundness
of the banking industry. Two separate insurance funds are
maintained and administered by the FDIC. In general, bank
deposits are insured through the Bank Insurance Fund
(BIF). Deposits in savings associations are insured
through the Savings Association Insurance Fund
(SAIF). A SAIF member may merge with a bank as long
as the acquiring bank continues to pay the SAIF insurance
assessments on the deposits acquired. Humboldt Bank pays SAIF
insurance assessments on deposits acquired in branch
acquisitions.

The amount of FDIC assessments paid by each
member institution is based on its relative risk of default as
measured by regulatory capital ratios and other factors. The
assessment rate currently ranges from $0.00 to $0.27 per $100.00
of deposits. At December 31, 2002, the Bank was classified
in a manner that the assessment rate was zero.

The FDIC may increase or decrease the assessment
rate schedule on a semi-annual basis in order to manage the BIF
and SAIF to prescribed statutory target levels. During the
fourth quarter of 2001 and first quarter of 2002, published
reports indicated that the BIF was likely to fall below the
statutory target of 1.25% of insured deposits during 2002
because of a recent increase in the number of bank failures and
growth in bank deposits. This would require the FDIC to increase
the assessment rate for BIF member banks. Although the amount of
any increase is not currently known, if the BIF remains under
the prescribed statutory target for one year all member banks
will be charged $0.23 per $100.00 of deposits. For Humboldt,
this would represent an additional pre-tax expense of
approximately $2 million annually. An increase in the
assessment rate could have a material adverse effect
Humboldts earnings, depending on the amount of the
increase.

All FDIC-insured depository institutions must pay
an annual assessment to provide funds for the payment of
interest on bonds issued by the Financing Corporation, a federal
corporation chartered under the authority of the Federal Housing
Finance Board. The bonds, commonly referred to as FICO bonds,
were issued to capitalize the Federal Savings and Loan Insurance
Corporation. The FDIC established the FICO assessment rates
effective for the fourth quarter of 2001 at approximately $.0184
per $100 annually for assessable deposits. The FICO assessments
are adjusted quarterly to reflect changes in the assessment
bases of the FDICs insurance funds and do not vary
depending on a depository institutions capitalization or
supervisory evaluations.

The FDIC may terminate the deposit insurance of
any insured depository institution if it determines that the
institution has engaged or is engaging in unsafe or unsound
practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, order
or any condition imposed in writing by, or pursuant to written
agreement with, the FDIC. The FDIC may also suspend deposit
insurance

11



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##### Table of Contents



temporarily during the hearing process for a
permanent termination of insurance if the institution has no
tangible capital. The termination of deposit insurance for any
or all of the Banks could have a material adverse effect on
Humboldts results of operations and liquidity due to the
likelihood that substantial deposit withdrawal activity would
occur.


Capital
Adequacy Guidelines

The FDIC has adopted regulations implementing the
prompt corrective action provisions of the Federal Deposit
Insurance Corporation Improvement Act of 1991, which place
financial institutions in the following five categories based
upon capitalization ratios: (1) a well
capitalized institution has a total risk-based capital
ratio of at least 10%, a Tier One risk-based ratio of at least
6% and a leverage ratio of at least 5%; (2) an
adequately capitalized institution has a total risk-
based capital ratio of at least 8%, a Tier One risk-based ratio
of at least 4% and a leverage ratio of at least 4%; (3) an
undercapitalized institution has a total risk-based
capital ratio of under 8%, a Tier One risk-based ratio of under
4% or a leverage ratio of under 4%; (4) a
significantly undercapitalized institution has a
total risk-based capital ratio of under 6%, a Tier One
risk-based ratio of under 3% or a leverage ratio of under 3%;
and (5) a critically undercapitalized
institution has a leverage ratio of 2% or less. Institutions in
any of the three undercapitalized categories would be prohibited
from declaring dividends or making capital distributions. The
FDIC regulations also establish procedures for
downgrading an institution to a lower capital
category based on supervisory factors other than capital.

Undercapitalized depository institutions are
subject to restrictions on borrowing from the Federal Reserve
System. In addition, undercapitalized depository institutions
are subject to growth limitations and are required to submit
capital restoration plans. An insured depository
institutions holding company must guarantee the capital
plan, up to an amount equal to the lesser of 5% of the
depository institutions assets at the time it becomes
undercapitalized or the amount of the capital deficiency when
the institution fails to comply with the plan, for the plan to
be accepted by the applicable federal regulatory authority. The
federal banking agencies may not accept a capital 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. If a depository
institution fails to submit an acceptable plan, it is treated as
if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a
number of requirements and restrictions, including orders to
sell sufficient voting stock to become adequately capitalized
and requirements to reduce total assets. Critically
undercapitalized depository institutions are subject to
appointment of a receiver or conservator, generally within
90 days of the date on which they become critically
undercapitalized.

Humboldt believes that at December 31, 2002,
the Bank had sufficient capital to qualify as well
capitalized under the regulatory requirements. Further
detail on regulatory capital ratios is included in Note 20 of
the Notes to the Consolidated Financial Statements.

Limits on
Dividends and Other Payments

Humboldt initiated the payment of a quarterly
cash dividend during the second quarter of 2002, and paid total
cash dividends of $0.07 per share. Humboldts ability to
obtain funds for the payment of cash dividends, if any, and for
other cash requirements is dependent on the amount of dividends
that may be declared by the Bank. California bank law provides
that dividends may be paid from the lesser of retained earnings
or net income of the bank for its last three years. Further, a
California-chartered bank may not declare a dividend without the
approval of the California Department of Financial Institutions
if the total of dividends and distributions declared in a
calendar year exceeds the greater of the banks retained
earnings or net income for its last fiscal year or its current
fiscal year. The Banks ability to pay dividends may also
be limited by capital adequacy guidelines of the FDIC. Moreover,
regulatory authorities are authorized to prohibit banks and bank
holding companies from paying dividends if payment of dividends
would constitute an unsafe and unsound banking practice.

The Federal Reserve Boards policy statement
governing payment of cash dividends provides that Humboldt
should not pay cash dividends on common stock unless
(i) net income for the past year is sufficient

12



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to fully fund the proposed dividends and
(ii) the prospective rate of earnings retention is
consistent with capital needs, asset quality and overall
financial condition.


Community
Reinvestment Act

Under the Community Reinvestment Act of 1977
(CRA) and implementing regulations of the banking
agencies, a financial institution has a continuing and
affirmative obligation (consistent with safe and sound
operation) to meet the credit needs of its entire community,
including low- and moderate-income neighborhoods. The CRA does
not establish specific lending requirements or programs for
financial institutions, nor does it limit an institutions
discretion to develop the types of products and services that
the institution believes are best suited to its particular
community. The CRA requires that bank regulatory agencies
conduct regular CRA examinations and provide written evaluations
of institutions CRA performance. The CRA also requires
that an institutions CRA performance rating be made public.

Although CRA examinations occur on a regular
basis, CRA performance evaluations are used principally in the
evaluation of regulatory applications submitted by an
institution. CRA performance evaluations are considered in
evaluating applications for such things as mergers, acquisitions
and applications to open new branches. As of the last CRA exam
in October 2000, the Bank had a rating of
outstanding.

State
Regulation

As California-chartered institutions, the Bank is
subject to regular examination by the California Department of
Financial Institutions. State regulation affects the operation
of the Bank with regard to deposits, mortgage lending,
investments and other activities. State regulation may contain
limitations on an institutions activities that are in
addition to limitations imposed under federal law. State
regulation also contains many provisions that are consistent
with federal law.

The California Department of Financial
Institutions may initiate supervisory measures or formal
enforcement actions, and if the grounds provided by law exist,
may place a California-chartered financial institution in
conservatorship or receivership. Whenever the Commissioner of
Financial Institutions considers it necessary or appropriate, he
may also examine the affairs of any holding company or any
affiliate of a California-chartered financial institution.

Employees

At December 31, 2002, Humboldt employed a
total of 443 full-time equivalent employees. None of
Humboldts employees are represented by a collective
bargaining group, and management considers its relations with
its employees to be good. Information regarding employment
contracts for Humboldts executive officers is contained in
the Proxy Statement for the 2003 Annual Meeting.

13



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|        |           
|------- | ----------
|Item 2. | Properties

The executive offices of Humboldt are located at
2998 Douglas Boulevard, Suite 330, Roseville, California.
Humboldt leases this office space. The Bank conducts business
from 19 facilities, all of which are in a good state of repair
and appropriately designed for use as banking facilities. The
Bank provides services conducts operational functions at 22
locations, of which 12 locations are owned and 10 are leased.

Note 19 to Humboldts Consolidated Financial
Statements contains additional information about properties.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In the ordinary course of business, various
claims and lawsuits are brought by and against Humboldt. In the
opinion of management, there is no pending or threatened
proceeding in which an adverse decision could result in a
material adverse change in the consolidated financial condition
or results of operations of Humboldt.






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

There were no submissions of matters to a vote of
security holders during the fourth quarter of the fiscal year
covered by this Report.




PART II






|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters.

Humboldts common stock is traded on the
Nasdaq National Market System (NASDAQ) under the
symbol HBEK. The table below reflects the high and
low closing sales prices for Humboldts common stock as
reported by NASDAQ. As of December 31, 2002, there were
100,000,000 and 20,000,000 shares, respectively, of Humboldt
common stock and preferred stock authorized for issuance, of
which 12,604,157 shares of common stock and no shares of
preferred stock were outstanding.

The stock prices below have been adjusted to
reflect the 6-for-5 stock split issued in August 2002 and the
10% stock dividend issued in June 2001.

|                   |  |      |       |     |  |          |       |  |  |   |       | 
|------------------ |  | ---- | ----- | --- |  | -------- | ----- |  |  | - | ----- | 
|                   |  |      |       |     |  | Cash    
|Quarter Ended      |  | High |       | Low |  | Dividend
|                   |  |      |       |     |  |         
|December 31, 2001  |  | $    | 6.18  |     |  | $        | 4.86  |  |  | $ | 0.000 | 
|                  
|                  
|                  
|                  
|September 30, 2001 |  | $    | 6.42  |     |  | $        | 5.21  |  |  | $ | 0.000 | 
|                  
|                  
|                  
|                  
|June 30, 2001      |  | $    | 6.63  |     |  | $        | 5.56  |  |  | $ | 0.000 | 
|                  
|                  
|                  
|                  
|March 31, 2001     |  | $    | 7.89  |     |  | $        | 5.84  |  |  | $ | 0.000 | 
|                  
|                  
|                  
|                  
|December 31, 2002  |  | $    | 12.22 |     |  | $        | 9.23  |  |  | $ | 0.025 | 
|                  
|                  
|                  
|                  
|September 30, 2002 |  | $    | 15.24 |     |  | $        | 10.42 |  |  | $ | 0.025 | 
|                  
|                  
|                  
|                  
|June 30, 2002      |  | $    | 11.81 |     |  | $        | 6.94  |  |  | $ | 0.021 | 
|                  
|                  
|                  
|                  
|March 31, 2002     |  | $    | 7.36  |     |  | $        | 5.45  |  |  | $ | 0.000 | 

As of December 31, 2002 there were
approximately 1,443 shareholders, not including those held in
street name by brokerage firms. As of December 31, 2002, a
total 1,598,948 options and warrants for Humboldt Bancorp common
stock were outstanding.

The payment of future dividends is at the
discretion of the board of directors and subject to a number of
factors, including results of operations, general business
conditions, capital requirements, general financial condition,
and other factors deemed relevant by the board of directors.
Further, our ability to issue cash dividends is subject to
meeting certain regulatory requirements. See Supervision
and Regulation of Humboldt Bancorp.

14



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##### Table of Contents








|        |                                          
|------- | -----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data.

Humboldt Bancorp

|                                                         |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |           | 
|-------------------------------------------------------- | ---------------------------------------- | ----------------------------------- | ------ | ------- |  | ---- | ------ | ------- | - | ---- | ------ | ------- | - | - | ------- | ------- | - | - | ------ | --------- | 
|                                                         |                                          | 1998                                |        | 1999    |  | 2000 |        | 2001    |   | 2002
|                                                         |                                          |                                     |        |         |  |      |        |         |   |     
|                                                         |                                          |                                    
|                                                         |                                          | In thousands, except per share data
|                                                        
|                                                        
|                                                        
|                                                        
|Interest income                                          |                                          | $                                   | 37,354 |         |  | $    | 39,251 |         |   | $    | 59,516 |         |   | $ | 66,165  |         |   | $ | 64,345 |          
|                                                        
|                                                        
|                                                        
|                                                        
|Interest expense                                         |                                          |                                     | 13,357 |         |  |      | 13,455 |         |   |      | 24,882 |         |   |   | 28,341  |         |   |   | 17,637 |          
|                                                         |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|                                                         | Net interest income                      |                                     |        | 23,997  |  |      |        | 25,796  |   |      |        | 34,634  |   |   |         | 37,824  |   |   |        | 46,708    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Provision for loan losses                                |                                          |                                     | 3,237  |         |  |      | 2,371  |         |   |      | 2,535  |         |   |   | 2,903   |         |   |   | 3,321  |          
|                                                        
|                                                        
|                                                        
|                                                        
|Non-interest income                                      |                                          |                                     | 14,713 |         |  |      | 18,661 |         |   |      | 22,864 |         |   |   | 29,727  |         |   |   | 26,147 |          
|                                                        
|                                                        
|                                                        
|                                                        
|Non-interest expense                                     |                                          |                                     | 26,640 |         |  |      | 34,007 |         |   |      | 41,483 |         |   |   | 50,343  |         |   |   | 52,558 |          
|                                                        
|                                                        
|                                                        
|                                                        
|Merger-related expense                                   |                                          |                                     |       |         |  |      |       |         |   |      |       |         |   |   | 3,531   |         |   |   |       |          
|                                                         |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|                                                         | Income before income taxes               |                                     |        | 8,833   |  |      |        | 8,079   |   |      |        | 13,480  |   |   |         | 10,774  |   |   |        | 16,976    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Income taxes                                             |                                          |                                     | 3,369  |         |  |      | 2,753  |         |   |      | 4,453  |         |   |   | 3,789   |         |   |   | 4,437  |          
|                                                         |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|Net income from continuing operations                    |                                          |                                     | 5,464  |         |  |      | 5,326  |         |   |      | 9,027  |         |   |   | 6,985   |         |   |   | 12,539 |          
|                                                        
|                                                        
|                                                        
|                                                        
|Income (loss) on discontinued operations,
    net of tax |                                          |                                     | 561    |         |  |      | 894    |         |   |      | (7     | )       |   |   | (13,994 | )       |   |   | (276   | )        
|                                                         |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|Net income (loss)                                        |                                          | $                                   | 6,025  |         |  | $    | 6,220  |         |   | $    | 9,020  |         |   | $ | (7,009  | )       |   | $ | 12,263 |          
|                                                         |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|Year End                                                 |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Assets                                   |                                     | $      | 519,757 |  |      | $      | 635,770 |   |      | $      | 852,900 |   |   | $       | 958,917 |   |   | $      | 1,031,550 | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Earning assets                           |                                     |        | 454,747 |  |      |        | 548,919 |   |      |        | 738,466 |   |   |         | 842,514 |   |   |        | 942,321   | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Loans, net of allowance for losses       |                                     |        | 305,048 |  |      |        | 368,148 |   |      |        | 575,142 |   |   |         | 654,567 |   |   |        | 749,034   | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Deposits                                 |                                     |        | 464,208 |  |      |        | 567,097 |   |      |        | 712,807 |   |   |         | 807,086 |   |   |        | 840,427   | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Stockholders equity                     |                                     | $      | 45,559  |  |      | $      | 52,143  |   |      | $      | 71,839  |   |   | $       | 64,582  |   |   | $      | 77,848    | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Shares outstanding                       |                                     |        | 10,209  |  |      |        | 10,661  |   |      |        | 12,346  |   |   |         | 12,530  |   |   |        | 12,604    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Average                                                  |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Assets                                   |                                     | $      | 487,060 |  |      | $      | 565,228 |   |      | $      | 768,229 |   |   | $       | 916,067 |   |   | $      | 983,510   | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Earning assets                           |                                     |        | 435,483 |  |      |        | 495,498 |   |      |        | 672,737 |   |   |         | 801,462 |   |   |        | 893,263   | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Loans                                    |                                     |        | 296,384 |  |      |        | 331,551 |   |      |        | 503,877 |   |   |         | 616,159 |   |   |        | 711,842   | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Deposits                                 |                                     |        | 401,961 |  |      |        | 507,894 |   |      |        | 673,012 |   |   |         | 778,220 |   |   |        | 805,958   | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Stockholders equity                     |                                     | $      | 42,308  |  |      | $      | 48,150  |   |      | $      | 62,551  |   |   | $       | 68,040  |   |   | $      | 71,081    | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Basic shares outstanding                 |                                     |        | 10,725  |  |      |        | 11,049  |   |      |        | 12,037  |   |   |         | 12,464  |   |   |        | 12,503    | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Diluted shares outstanding               |                                     |        | 11,520  |  |      |        | 11,736  |   |      |        | 12,689  |   |   |         | 12,996  |   |   |        | 13,049    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Per Share Data                                           |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Basic earnings                           |                                     | $      | 0.56    |  |      | $      | 0.56    |   |      | $      | 0.75    |   |   | $       | (0.56   | ) |   | $      | 0.98      | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Diluted earnings                         |                                     |        | 0.52    |  |      |        | 0.53    |   |      |        | 0.71    |   |   |         | (0.54   | ) |   |        | 0.94      | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Basic earnings  continuing operations   |                                     |        | 0.51    |  |      |        | 0.48    |   |      |        | 0.75    |   |   |         | 0.56    |   |   |        | 1.00      | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Diluted earnings  continuing operations |                                     |        | 0.47    |  |      |        | 0.45    |   |      |        | 0.71    |   |   |         | 0.54    |   |   |        | 0.96      | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Book value                               |                                     |        | 4.46    |  |      |        | 4.89    |   |      |        | 5.82    |   |   |         | 5.15    |   |   |        | 6.18      | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cash dividends                           |                                     | $      |        |  |      | $      |        |   |      | $      |        |   |   | $       |        |   |   | $      | 0.07      | 
|                                                        
|                                                        
|                                                        
|                                                        
|Performance Ratios                                       |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Return on average assets*                |                                     |        | 1.12%   |  |      |        | 0.94    | % |      |        | 1.18    | % |   |         | 1.06%   |   |   |        | 1.27%     | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Return on average shareholders equity*  |                                     |        | 12.91%  |  |      |        | 11.06   | % |      |        | 14.43   | % |   |         | 14.33%  |   |   |        | 17.64%    | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Average equity to average assets         |                                     |        | 8.69%   |  |      |        | 8.52    | % |      |        | 8.14    | % |   |         | 7.43%   |   |   |        | 7.23%     | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Efficiency ratio*                        |                                     |        | 68.87%  |  |      |        | 76.11   | % |      |        | 72.00   | % |   |         | 73.11%  |   |   |        | 71.56%    | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Leverage ratio                           |                                     |        | 8.58%   |  |      |        | 8.02    | % |      |        | 8.83    | % |   |         | 8.38%   |   |   |        | 8.73%     | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net interest margin                      |                                     |        | 5.51%   |  |      |        | 5.21    | % |      |        | 5.15    | % |   |         | 4.71%   |   |   |        | 5.23%     | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Non-interest revenue to total revenue    |                                     |        | 38.01%  |  |      |        | 41.98   | % |      |        | 39.76   | % |   |         | 44.01%  |   |   |        | 35.89%    | 
|                                                        
|                                                        
|                                                        
|                                                        
|Asset Quality                                            |                                          |                                     |        |         |  |      |        |         |   |      |        |         |   |   |         |         |   |   |        |          
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Non-performing assets                    |                                     | $      | 1,708   |  |      | $      | 2,573   |   |      | $      | 4,657   |   |   | $       | 4,641   |   |   | $      | 3,703     | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Allowance for loan losses                |                                     | $      | 5,136   |  |      | $      | 5,502   |   |      | $      | 8,367   |   |   | $       | 9,765   |   |   | $      | 11,614    | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net charge-offs                          |                                     | $      | 2,177   |  |      | $      | 2,005   |   |      | $      | 1,670   |   |   | $       | 1,505   |   |   | $      | 1,472     | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Non-performing assets to total assets    |                                     |        | 0.33%   |  |      |        | 0.40    | % |      |        | 0.55    | % |   |         | 0.49%   |   |   |        | 0.36%     | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Allowance for loan losses to loans       |                                     |        | 1.66%   |  |      |        | 1.47    | % |      |        | 1.43    | % |   |         | 1.47%   |   |   |        | 1.53%     | 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Net charge-offs to average loans         |                                     |        | 0.73%   |  |      |        | 0.60    | % |      |        | 0.25    | % |   |         | 0.24%   |   |   |        | 0.21%     | 



---



|  |                                                                             
|- | ----------------------------------------------------------------------------
|* | Excluding impact of discontinued operations and
    merger-related expenses.

15



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Overview

At December 31, 2002, Humboldt had total
consolidated assets of $1.0 billion, total net loans of
$749 million, total deposits of $840 million and
stockholders equity of $78 million. For the year
ended December 31, 2002, Humboldt reported net income of
$12.3 million, or $0.94 per diluted share, and net income
from continuing operations of $12.5 million, or $0.96 per
diluted share. The loss on discontinued operations of $276,000
after-tax, or $0.02 per diluted share, resulted from the final
wind-down of Humboldts leasing subsidiary, discussed in
detail below under the heading Discontinued
Operations and in Note 3 of the Notes to the Consolidated
Financial Statements.

All outstanding and weighted average share
amounts presented in this report have been restated to reflect
the six-for-five stock split in 2002, the 10% stock dividends in
1998, 2000 and 2001, and a five-for-two stock split in 1999.

Factors That May Affect Future Results of
Operations



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The sale of our proprietary merchant bankcard
    operation will reduce net income in the short-term and strategic
    initiatives to replace the lost income may be
    inadequate

The sale of the proprietary merchant bankcard
business, which was completed on March 13, 2003, will
result in a decrease in net income of approximately
$4 million annually on a pre-tax basis. Humboldt has
identified several key initiatives, including residential
mortgage lending and new service charge structures that are
expected to provide for a replacement of the lost revenue over a
period of 12 to 24 months. There is no assurance that these
initiatives will, individually or collectively, provide for the
replacement of the lost revenue within the expected time horizon.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to deploy the excess capital
    resulting from the sale of the proprietary merchant bankcard
    business in a timely manner

In order to offset the reduction in earnings per
share resulting from the sale of the proprietary merchant
bankcard business, Humboldts Board of Directors approved a
1.2 million share repurchase program. There is no guarantee
that sufficient shares will be available for repurchase at price
levels that are acceptable or that Humboldt will be able obtain
an adequate return on excess capital through other initiatives
related to community banking.



| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | The decision to exit the ISO sponsorship
    business will adversely impact the Banks liquidity and net
    income if core deposit growth is insufficient

In connection with the decision to sell the
proprietary merchant bankcard business, Humboldt also decided to
cease its sponsorship processing for merchant bankcard ISOs as
its remaining agreements expire. The principal benefit derived
from the ISO sponsorship business is the use of impounded
deposits held as reserves for merchant losses. As of
December 31, 2002, the Bank held approximately
$56 million of ISO deposits. As the ISO agreements expire
between April 2003 and March 2004, the Bank will lose the
related deposits and, in the short-term, need to replace them
with wholesale funding to the extent that core deposit growth is
not sufficient to cover the outflow. Although current market
rates for wholesale borrowings are at historic lows, the cost of
replacing the merchant deposits will result in increased
interest expense.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Potential deterioration of local economic
    conditions could hurt our profitability

The Banks operations are located in
California, and substantially all of the outstanding loans and
commitments are to businesses and individuals located in
Northern California. As a result of this geographic
concentration, the Banks financial results depend largely
upon economic conditions in these areas. Adverse local economic
conditions in California, and, in particular, Northern
California, may have a greater adverse effect on our financial
condition through reduced growth prospects and potentially
higher credit losses than if the Banks operations were
more geographically diverse.

16



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##### Table of Contents





| |                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Plans to convert to a new core bank processing
    system will increase operating expenses and may strain human
    resources and possibly result in service disruptions

In November 2002, the Bank entered into an
agreement with Information Technology, Inc. for the purchase of
hardware and software that will replace the Banks current
core processing system, to upgrade the Banks computer
network architecture and to install new equipment for imaging
and processing checks. The total cost of this upgrade is
approximately $4.5 million, which will be amortized over
useful lives of between three and five years. The conversion is
expected to be completed by July 2003.

Although significant preparation and planning are
being conducted, including the engagement of experienced
consultants and the performance of mock conversions,
the possibility exists that the conversion will not go as
planned. This could result in degraded customer service levels.
A significant or prolonged disruption in service levels
resulting from core processing conversion problems could result
in the loss of customers and have an adverse impact on the
Banks results of operations and liquidity.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Our effective tax rate may increase if the
    California Tax Code is changed

In December 2001, the Bank formed a Real Estate
Investment Trust (REIT) subsidiary, HB Investment
Trust (HBIT). The Bank owns 100% of the voting stock
of HBIT and is the sole contributor of assets, which consist
entirely of real estate secured loans originated and serviced by
the Bank. Although HBIT was formed to provide flexibility in
raising capital through the issuance of preferred stock, no
issuance of preferred stock was made as of December 31,
2002 for the purposes of raising capital. The Bank also benefits
from a reduction in state income tax expense, since any consent
dividends paid by HBIT to the Bank are not subject to state
income tax. For 2002, this resulted in a tax expense reduction
of approximately $1 million. In the event the California
State Tax Code is amended to eliminate the exemption for consent
dividends paid by a REIT, the Bank would have a higher effective
tax rate and increased state tax expense.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | Changes in the method of accounting for stock
    options will reduce our net income and earnings per
    share

In December 2002, the Financial Accounting
Standards Board (FASB) issued SFAS No. 148,
Accounting for Stock-Based Compensation,an Amendment of
SFAS No. 123 in an effort to encourage the recognition of
compensation expense for the issuance of stock options. Humboldt
adopted SFAS No. 148 effective January 1, 2003 using
the prospective application method. Under this method, the
compensation expense and related tax benefit associated with
stock option grants issued on or after January 1, 2003 will
be recognized in the income statement. The unvested portion of
stock option grants issued before January 1, 2003 will continue
to be accounted for under APB No. 25. SFAS No. 148
also requires new pro forma disclosures regarding the cost of
stock options not accounted for under APB No. 25.

The adoption of SFAS No. 148 will reduce
Humboldts net income and earnings per share. The future
amount of this reduction is dependent upon a number of factors,
including the number of options granted and certain variables
used in determining the fair value of each option
granted under the Black-Scholes model. These
variables include the volatility of Humboldts stock price,
Humboldts dividend yield, market interest rates and the
expected life of the options. The actual compensation ultimately
realized by option holders is determined at the time of exercise
based on the differential between the option exercise price and
the current market value of Humboldt stock.

The historical cost of options granted, although
not recognized in the income statement, is presented in Note 1
of the Notes to the Consolidated Financial Statements and is
calculated in the same manner as if such expense were recognized
in the income statement in accordance with SFAS No. 148.

17



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##### Table of Contents





| |                                  
| | ---------------------------------
| | The Bank faces strong competition

In recent years, competition for bank customers,
the source of deposits and loans, has greatly intensified. This
competition includes:



| |   |                                                                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Large national and super-regional banks, which
    have well-established branches and significant market share in
    many of the communities we serve;                                 
|
| |  | Finance companies, investment banking and
    brokerage firms, and insurance companies that offer bank-like
    products;                                                               
|
| |  | Credit unions, which can offer highly competitive
    rates on loans and deposits because they receive tax advantages
    not available to commercial banks;                            
|
| |  | Government-assisted farm credit programs that
    offer competitive agricultural loans;                                                                                                 
|
| |  | Other community banks, including start-up banks,
    which can compete with us for customers who desire a high degree
    of personal service;                                          
|
| |  | Technology-oriented financial institutions
    including large national and super-regional banks offering
    on-line deposit, bill payment, and mortgage loan application
    services.

Other existing single or multi-branch community
banks, or new community bank start-ups, have marketing
strategies similar to Humboldts. These other community
banks can open new branches in the communities in which we serve
and compete directly for customers who want the high level of
service community banks offer. Other community banks also
compete for the same management personnel and the same potential
acquisition and merger candidates in Northern California.

Historically, insurance companies, brokerage
firms, credit unions and other non-bank competitors have less
regulation than banks and can be more flexible in the products
and services they offer. Under the Financial Services
Modernization Act of 1999, most separations between banks,
brokerage firms and insurance companies were eliminated, which
has increased competition.

Summary of Critical Accounting
Policies

The SEC recently issued disclosure guidance for
critical accounting policies. The SEC defines
critical accounting policies as those that require
application of managements most difficult, subjective or
complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently
uncertain and may change in future periods. Humboldts
significant accounting policies are described in Note 1 in the
Notes to the Consolidated Financial Statements. Not all of these
critical accounting policies require management to make
difficult, subjective or complex judgments or estimates.
However, management believes that the following policies could
be considered critical within the SECs definition.



| |                           
| | --------------------------
| | Reserves and Contingencies

Humboldt must manage and control certain inherent
risks in the normal course of its business. These include,
credit risk, fraud risk, operations and settlement risk, and
interest rate risk. Humboldt has established reserves for risk
of losses, including loan losses, tax contingencies and merchant
bankcard losses. The allowance for loan losses represents
Humboldts estimate of the probable losses that have
occurred as of the date of the financial statements, as further
described in Note 1 in the Notes to the Consolidated Financial
Statements. Management believes that Humboldt has appropriately
accrued for tax exposures. The allowance for merchant bankcard
losses represents Humboldts estimate of probable losses
that have occurred as of the date of the financial statements

If Humboldt prevails in a matter for which an
accrual has been established or is required to pay an amount
exceeding recorded reserves, the financial impact will be
reflected in the period in which the matter is resolved.

18



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##### Table of Contents





| |                                 
| | --------------------------------
| | Derivative Financial Instruments

Humboldt has a policy that provides for the use
of derivative financial instruments to hedge interest rate risk.
This policy permits the use of interest rate swap, cap and floor
contracts to hedge specific interest rate risk exposures as part
of Humboldts asset/liability management process. This
policy limits the notional amount of total derivative financial
instruments to 15% of total assets. Notes 1 and 11 in the Notes
to Consolidated Financial Statements contains additional
information on accounting policies related to derivative
financial instruments.



| |                                                         
| | --------------------------------------------------------
| | Discontinued Operations/ Off-Balance Sheet
    Financing

During the first quarter of 2001, Humboldt
classified its leasing subsidiary, BFS, as a discontinued
operation upon adoption of a plan to sell the subsidiary. During
the second quarter of 2001, it was determined that a sale of BFS
was unlikely and the plan was modified to wind-down the
operations of BFS. Management believes that the wind-down of BFS
meets the requirements for classification as a discontinued
operation. Note 3 in the Notes to the Consolidated Financial
Statements contains additional information about Discontinued
Operations.

Prior to its classification as a discontinued
operation, BFS formed three subsidiaries that were not
consolidated on the financial statements of BFS or Humboldt.
These subsidiaries are commonly referred to as special purpose
entities, or SPEs. As of December 31, 2002, only two
subsidiaries were not consolidated. Both of the remaining
unconsolidated subsidiaries are considered
qualifying SPEs that were formed for the sole
purpose of issuing lease-backed notes to institutional
investors. Additional information on these SPEs is provided in
Note 3 in the Notes to the Consolidated Financial Statements.



| |                    
| | -------------------
| | Revenue recognition

Humboldts primary sources of revenue are
interest income from loans and investment securities and fees
received in connection with providing merchant bankcard
processing services. Interest income is recorded on an accrual
basis. Note 1 in the Notes to the Consolidated Financial
Statements contains an explanation of the process for
determining when the accrual of interest income is discontinued
on impaired loans and under what circumstances loans are
returned to an accruing status. Merchant bankcard revenue is
recorded on a cash basis.

An additional source of revenue for Humboldt is
related to the gains recorded in connection with the sale of the
guaranteed portion of certain SBA loans for which Humboldt
retains the right to service the loans. Recording of such gains
involves the use of estimates and assumptions related to the
expected life of the loans and future cash flows. Notes 1 and 7
in the Notes to the Consolidated Financial Statements contains
additional information regarding Humboldts accounting
policy for revenue recorded in connection with the sale of
loans. SBA loan servicing rights are based upon estimates and
are subject to the risk of prepayments and market value
fluctuation.



| |                                            
| | -------------------------------------------
| | Accounting for Stock-Based
    Compensation

For all years presented in the Consolidated
Financial Statements, Humboldt accounted for stock options under
the provisions APB No. 25. Accordingly, no compensation
expense related to the issuance of stock options is reflected in
the income statements. Pro forma disclosures of the impact of
compensation expense (and related tax benefit) associated with
stock options are included in Note 1 in the Notes to the
Consolidated Financial Statements.



| |                  
| | -----------------
| | Business Segments

SFAS No. 131 requires disclosure of key
financial information as measured by management in assessing
performance of Humboldts key business segments, Commercial
Banking and Merchant Bankcard Services. The disclosures related
to the results for these lines of business are included in Note
23 in the Notes to the Consolidated Financial Statements.

19



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##### Table of Contents



Summary of Recent Accounting
Pronouncements

In August 2001, the FASB issued SFAS
No. 144, which replaces SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.The primary objectives of this
Statement are to develop one accounting model, based upon the
framework established in SFAS No. 121, for long-lived
assets to be disposed of by sale and to address significant
implementation issues. This Statement requires that long-lived
assets being disposed of be measured at the lower of carrying
amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore,
discontinued operations will no longer be measured at net
realizable value or include amounts for operating losses that
have not yet occurred. The provisions of this Statement were
effective for financial statements issued for fiscal years
beginning after December 15, 2001 and, generally, are to be
applied prospectively. The effect of this Statement on
Humboldts financial condition and results of operations,
and with respect to the accounting for Humboldts
discontinued leasing operations, was not material.

In April 2002, the FASB issued SFAS No. 145,
which rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt,SFAS 44, Accounting for
Intangible Assets of Motor Carriers,and SFAS No. 64,
Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements.These rescissions eliminate the requirement to
report gains and losses from the extinguishment of debt as an
extraordinary item, net of related income tax effect, and are
effective for fiscal years beginning after May 15, 2002.
This Statement also amends SFAS No. 13, Accounting for
Leases,and requires that capital leases that are modified
so that the resulting lease agreement is classified as an
operating lease be accounted for as a sale-leaseback. This
amendment is effective for transactions occurring after
May 15, 2002. Finally, this Statement amends several
pronouncements to make technical corrections to existing
authoritative pronouncements. The effect of this Statement on
Humboldts financial condition and results of operations
was not material

In July 2002, the FASB issued SFAS No. 146,
which requires companies to recognize costs associated with exit
or disposal activities when they are incurred rather than at the
date of a commitment to an exit or disposal plan. This Statement
is effective prospectively for exit or disposal activities
initiated after December 31, 2002. Management does not
expect this Statement to have a material impact on
Humboldts financial condition or results of operations.

In December 2002, the FASB issued SFAS
No. 148, which provides three alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based compensation. In addition, this
Statement amends the disclosure requirements of SFAS
No. 123 to require more prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the impact
on reported financial results. Finally, this Statement amends
APB Opinion No. 28, Interim Financial Reporting, to
require disclosure about those effects in interim financial
information. This Statement is effective for fiscal and interim
periods ending after December 15, 2002. Humboldt has
elected to adopt the prospective transition method effective
January 1, 2003 and, accordingly, compensation expense will
be recognized for any stock options granted on or after that
date. The unvested portion of stock options granted prior to
January 1, 2003 will continue to be accounted for under the
provisions of APB Opinion No. 25. Management does not
expect this Statement to have a material impact on
Humboldts financial condition or results of operations in
2003. Since the method of determining the value of stock options
prescribed under SFAS No. 123 is based on a valuation model
that relies upon factors that are beyond Humboldts
control, such as stock price volatility and market interest
rates, Management is not able to accurately predict the cost of
options that may be granted in the future and the resulting
impact on Humboldts financial condition and results of
operations. Additional information regarding stock options is
contained in Notes 1 and 17 of the Notes to the Consolidated
Financial Statements and in Humboldts 2003 Proxy Statement.

In November 2002, the FASB issued FIN 45, which
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of
the guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. The initial recognition and
initial measurement provisions of this Interpretation are
applied prospectively to guarantees issued or modified

20



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##### Table of Contents



after December 31, 2002. The adoption of
these recognition provisions will result in recording
liabilities associated with certain guarantees provided by the
Bank, including standby letters of credit. The disclosure
requirements of this Interpretation are effective for financial
statements of interim or annual periods ending after
December 15, 2002. Management does not expect this
Interpretation to have a material impact on Humboldts
financial condition or results of operations.


In January 2003, the FASB issued FIN 46, which
clarifies the application of Accounting Research Bulletin
(ARB) 51, Consolidated Financial Statements,
to certain entities (called variable interest entities) in which
equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity
at risk for the entity to finance its activities without
additional subordinated financial support from other parties.
The disclosure requirements of this Interpretation are effective
for all financial statements issued after January 31, 2003.
The consolidation requirements apply to all variable interest
entities created after January 31, 2003. In addition,
public companies must apply the consolidation requirements to
variable interest entities that existed prior to
February 1, 2003 and remain in existence as of the
beginning of annual or interim periods beginning after
June 15, 2003. Management is currently assessing the impact
of FIN 46, and does not expect this Interpretation to have a
material impact on Humboldts financial condition or
results of operations. The Bank has investments in two limited
partnerships that operate qualified multi-family affordable
housing projects and generate tax credits. The Banks
interest in these partnerships was approximately $945,000 at
December 31, 2002. The assets and liabilities of these
partnerships consist primarily of apartment complexes and
related debt. The Bank accounts for the investments under the
equity method, and therefore the carrying value approximates its
underlying equity in the net assets of the partnerships.
Management believes that these two limited partnerships could be
defined as variable interest entities and, therefore, be
required to consolidate for all reporting periods after
June 15, 2003. Additional information regarding investments
in limited partnerships is provided in Note 1 of the Notes to
the Consolidated Financial Statements.

Income Statement Summary

For the year ended December 31, 2002, net
income was $12.3 million, or $0.94 per diluted share, and
net income from continuing operations was $12.5 million, or
$0.96 per diluted share. The results of continuing operations
produced a return on average assets of 1.27% and a return on
average shareholders equity of 17.6%. For 2001, Humboldt
recognized a net loss of $7.0 million, or $0.54 per diluted
share, and net income from continuing operations of
$7.0 million, or $0.54 per diluted share. The loss from
discontinued operations for 2001 was related to the wind-down of
Humboldts leasing subsidiary, and totaled
$14.0 million, or $1.08 per diluted share. The results of
continuing operations for 2001 reflect the impact of certain
expenses associated with Humboldts merger with Tehama
Bancorp. Excluding these costs on an after-tax basis, the net
income from continuing operations for 2001 was
$9.7 million. Net income and net income from continuing
operations for 2000 were both $9.0 million, or $0.71 per
diluted share.

Net Interest Income

Net interest income is the most significant
source of Humboldts operating income. Net interest income
for 2002 totaled $46.7 million, an increase of $8.9
million, or 23%, over 2001. Net interest income for 2001 totaled
$37.8 million, an increase of $3.2 million, or 9% over 2000.

The banking industry uses two key ratios to
measure relative profitability of net interest revenue. The net
interest rate spread measures the difference between the average
yield on earning assets and the average rate paid on interest
bearing liabilities. The interest rate spread ignores the
beneficial impact of non-interest bearing deposits and capital,
and provides a direct perspective on the effect of market
interest rate movements. The net interest margin is defined as
net interest income as a percent of total average earning
assets, which includes the positive impact of obtaining a
portion of the funding for earning assets with non-interest
bearing deposits and capital.

21



---



##### Table of Contents



Table 1 presents, for the years indicated,
condensed average balance sheet information for Humboldt,
together with interest income and yields earned on average
interest-earning assets and interest expense and rates paid on
average interest-bearing liabilities.

Table 1  Average Rates and
Balances

|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |      |      |  
|------------------------------------------ | -------------------------------------------- | --------------------------------------- | ------ | ---------------------------- | ------- | ---------------------------- | -- | ------- | ------ | --------- | ---- | --------- | ---- | ------- | ------ | --------- | ------- | --------- | -- | ------ | ------ |  | ---- | ---- | ---- | - | ------- | ------- | ------- |  | -- | ------ | ------ |  | ---- | ---- | ---- | -
|                                           |                                              |                                         |        |                              |         |                             
|                                           |                                              | Year ended December 31, 2000            |        | Year ended December 31, 2001 |         | Year ended December 31, 2002
|                                           |                                              |                                         |        |                              |         |                             
|                                           |                                              |                                         |        | Interest                     |         | Average                      |    |         |        | Interest  |      | Average   |      |         |        | Interest  |         | Average  
|                                           |                                              | Average                                 |        | Income or                    |         | Yields or                    |    | Average |        | Income or |      | Yields or |      | Average |        | Income or |         | Yields or
|                                           |                                              | Balance                                 |        | Expense                      |         | Rate                         |    | Balance |        | Expense   |      | Rate      |      | Balance |        | Expense   |         | Rate     
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |          
|                                           |                                              |                                        
|                                           |                                              | (Dollars in thousands)                 
|                                          
|                                          
|                                          
|                                          
|Interest-earning assets:                   |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|                                          
|                                          
|                                          
|                                          
|                                           | Loans                                        |                                         | $      | 503,877                      |         |                              | $  | 48,562  |        |           |      | 9.64      | %    |         | $      | 616,159   |         |           | $  | 55,971 |        |  |      | 9.08 | %    |   | $       | 711,842 |         |  | $  | 56,010 |        |  |      | 7.87 | %   
|                                          
|                                          
|                                          
|                                          
|                                           | Investment securities:                       |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |      |     
|                                          
|                                          
|                                          
|                                          
|                                           |                                              | Taxable securities                      |        |                              | 110,809 |                              |    |         | 7,664  |           |      |           | 6.92 | %       |        |           | 111,825 |           |    |        | 7,125  |  |      |      | 6.37 | % |         |         | 153,025 |  |    |        | 6,871  |  |      |      | 4.49 | %
|                                          
|                                          
|                                          
|                                          
|                                           |                                              | Nontaxable securities(1)                |        |                              | 31,529  |                              |    |         | 1,557  |           |      |           | 4.94 | %       |        |           | 30,131  |           |    |        | 1,571  |  |      |      | 5.21 | % |         |         | 27,293  |  |    |        | 1,425  |  |      |      | 5.22 | %
|                                          
|                                          
|                                          
|                                          
|Interest on deposit in other banks         |                                              |                                         | 738    |                              |         |                              | 49 |         |        |           | 6.64 | %         |      |         | 1,270  |           |         |           | 30 |        |        |  | 2.36 | %    |      |   | 1,103   |         |         |  | 39 |        |        |  | 3.54 | %   
|                                          
|                                          
|                                          
|                                          
|                                           | Federal funds sold                           |                                         |        | 25,784                       |         |                              |    | 1,684   |        |           |      | 6.53      | %    |         |        | 42,077    |         |           |    | 1,468  |        |  |      | 3.49 | %    |   |         |        |         |  |    |       |        |  |      |     |     
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|                                           |                                              | Total interest-earning assets(2)        |        |                              | 672,737 |                              |    | $       | 59,516 |           |      |           | 8.85 | %       |        |           | 801,462 |           |    | $      | 66,165 |  |      |      | 8.26 | % |         |         | 893,263 |  |    | $      | 64,345 |  |      |      | 7.20 | %
|                                          
|                                          
|                                          
|                                          
|Cash and due from banks                    |                                              |                                         | 46,737 |                              |         |                              |    |         |        |           |      |           |      |         | 59,658 |           |         |           |    |        |        |  |      |      |      |   | 51,787  |         |         |  |    |        |        |  |      |     
|                                          
|                                          
|                                          
|                                          
|Premises and equipment, net                |                                              |                                         | 13,976 |                              |         |                              |    |         |        |           |      |           |      |         | 19,043 |           |         |           |    |        |        |  |      |      |      |   | 17,086  |         |         |  |    |        |        |  |      |     
|                                          
|                                          
|                                          
|                                          
|Loan loss allowance                        |                                              |                                         | (7,721 | )                            |         |                              |    |         |        |           |      |           |      |         | (9,371 | )         |         |           |    |        |        |  |      |      |      |   | (10,569 | )       |         |  |    |        |        |  |      |     
|                                          
|                                          
|                                          
|                                          
|Other assets                               |                                              |                                         | 42,500 |                              |         |                              |    |         |        |           |      |           |      |         | 45,275 |           |         |           |    |        |        |  |      |      |      |   | 31,943  |         |         |  |    |        |        |  |      |     
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|                                           |                                              | Total assets                            |        | $                            | 768,229 |                              |    |         |        |           |      |           |      |         |        | $         | 916,067 |           |    |        |        |  |      |      |      |   |         | $       | 983,510 |  |    |        |        |  |      |      |      |  
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|Interest-bearing liabilities:              |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|                                          
|                                          
|                                          
|                                          
|                                           | Interest-bearing checking & savings accounts |                                         | $      | 182,240                      |         |                              | $  | 4,596   |        |           |      | 2.52      | %    |         | $      | 251,780   |         |           | $  | 6,513  |        |  |      | 2.59 | %    |   | $       | 306,147 |         |  | $  | 3,362  |        |  |      | 1.10 | %   
|                                          
|                                          
|                                          
|                                          
|                                           | Time deposit and Ira accounts                |                                         |        | 318,750                      |         |                              |    | 18,558  |        |           |      | 5.82      | %    |         |        | 341,677   |         |           |    | 18,690 |        |  |      | 5.47 | %    |   |         | 277,847 |         |  |    | 10,270 |        |  |      | 3.70 | %   
|                                          
|                                          
|                                          
|                                          
|                                           | Borrowed funds                               |                                         |        | 22,642                       |         |                              |    | 1,728   |        |           |      | 7.63      | %    |         |        | 49,104    |         |           |    | 3,138  |        |  |      | 6.39 | %    |   |         | 81,218  |         |  |    | 4,005  |        |  |      | 4.93 | %   
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|                                           | Total interest-bearing liabilities           |                                         |        | 523,632                      |         |                              | $  | 24,882  |        |           |      | 4.75      | %    |         |        | 642,561   |         |           | $  | 28,341 |        |  |      | 4.41 | %    |   |         | 665,212 |         |  | $  | 17,637 |        |  |      | 2.65 | %   
|                                          
|                                          
|                                          
|                                          
|                                           | Noninterest-bearing deposits                 |                                         |        | 172,022                      |         |                              |    |         |        |           |      |           |      |         |        | 184,762   |         |           |    |        |        |  |      |      |      |   |         | 221,964 |         |  |    |        |        |  |      |      |     
|                                          
|                                          
|                                          
|                                          
|                                           | Other liabilities                            |                                         |        | 10,024                       |         |                              |    |         |        |           |      |           |      |         |        | 20,704    |         |           |    |        |        |  |      |      |      |   |         | 26,005  |         |  |    |        |        |  |      |      |     
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|                                           |                                              | Total liabilities                       |        |                              | 705,678 |                              |    |         |        |           |      |           |      |         |        |           | 848,027 |           |    |        |        |  |      |      |      |   |         |         | 913,181 |  |    |        |        |  |      |      |      |  
|                                          
|                                          
|                                          
|                                          
|                                           | Stockholders equity                         |                                         |        | 62,551                       |         |                              |    |         |        |           |      |           |      |         |        | 68,040    |         |           |    |        |        |  |      |      |      |   |         | 70,329  |         |  |    |        |        |  |      |      |     
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|                                           |                                              | Total liabilities & stockholders equity |        | $                            | 768,229 |                              |    |         |        |           |      |           |      |         |        | $         | 916,067 |           |    |        |        |  |      |      |      |   |         | $       | 983,510 |  |    |        |        |  |      |      |      |  
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|                                           | Net interest income                          |                                         |        |                              |         |                              | $  | 34,634  |        |           |      |           |      |         |        |           |         |           | $  | 37,824 |        |  |      |      |      |   |         |         |         |  | $  | 46,708 |        |  |      |      |     
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|Net Interest Spread                        |                                              |                                         |        |                              |         |                              |    |         |        |           | 4.10 | %         |      |         |        |           |         |           |    |        |        |  | 3.85 | %    |      |   |         |         |         |  |    |        |        |  | 4.55 | %   
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|Average yield on average earning assets(1) |                                              |                                         |        |                              |         |                              |    |         |        |           | 8.85 | %         |      |         |        |           |         |           |    |        |        |  | 8.25 | %    |      |   |         |         |         |  |    |        |        |  | 7.20 | %   
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|Interest expense to average earning assets |                                              |                                         |        |                              |         |                              |    |         |        |           | 3.70 | %         |      |         |        |           |         |           |    |        |        |  | 3.54 | %    |      |   |         |         |         |  |    |        |        |  | 1.97 | %   
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     
|Net interest margin(3)                     |                                              |                                         |        |                              |         |                              |    |         |        |           | 5.15 | %         |      |         |        |           |         |           |    |        |        |  | 4.71 | %    |      |   |         |         |         |  |    |        |        |  | 5.23 | %   
|                                           |                                              |                                         |        |                              |         |                              |    |         |        |           |      |           |      |         |        |           |         |           |    |        |        |  |      |      |      |   |         |         |         |  |    |        |        |  |      |     



---



|    |                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Tax-exempt income has not been adjusted to its
    tax-equivalent basis. Net interest margin on a fully taxable
    basis, for 2000, 2001 and 2002 was 5.26%, 4.81%, and 5.31%
    respectively.
|   
|(2) | Nonaccrual loans are included in the average
    balance.                                                                                                                                       
|   
|(3) | Net interest margin is computed by dividing net
    interest income by total average earning assets.                                                                                            

Humboldts net interest margin for 2002 was
5.23%, an increase of 52 basis points over 2001. This was a
result of a combination of factors that allowed the cost of
interest bearing liabilities to be reduced by 176 basis

22



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##### Table of Contents



points, while the yield on average earning assets
declined by only 106 basis points. After an evaluation was
conducted during the fourth quarter of 2001, management decided
to stop offering premium rate certificates of deposit at certain
branches that had historically obtained most of their funding by
that method. As a result of this change, a substantial portion
of the premium rate certificates of deposit did not remain with
the Bank after maturity and average certificates of deposit
outstanding for 2002 decreased by approximately $64 million, or
19%, from the prior period. This outflow was funded principally
by a reduction in federal funds sold from an average outstanding
balance of $42 million in 2001 to zero in 2002, and a
combination of long and short-term FHLB borrowings. Management
also aggressively lowered rates on interest bearing transaction
accounts during 2002, resulting in a reduction in the average
rate paid by 149 basis points from the prior year, while
short-term market rates remained relatively flat until November
2002.


The reduction in the average yield on earning
assets for 2002 was partially mitigated by the initiation of a
hedging strategy during the first quarter of 2002, proactive
management of the Banks investment securities portfolio
and disciplined loan pricing. The hedging strategy involved
utilizing interest rate swap contracts to synthetically convert
$50 million of the Banks loan portfolio from floating
to fixed rates. For 2002, the interest income on loans reflects
$695,000 related to the loan portfolio hedging contracts,
resulting in an increase in the average yield on loans of
approximately 10 basis points. During the second quarter of
2002, management conducted a comprehensive review of the
Banks securities portfolio, of which over one-third of the
investments are mortgage-related (see Note 4 of the Notes to the
Consolidated Financial Statements for additional information).
This review resulted in the sale of approximately
$41 million of securities which management believed would
not perform well under the expected market rate environment. A
like amount of similar securities was purchased to replace those
sold, with an increased duration of approximately 3 years,
allowing for an improvement in the overall yield on investment
securities. The loan pricing discipline utilized by Humboldt
includes negotiating for a risk-appropriate rate on all loans,
including caps and floors on adjustable rate loans when
possible, and using market-based tools to establish target rates
on fixed rate loans of three years or more.

During 2001, the Federal Reserve lowered
short-term market interest rates a record 11 times, reducing the
target federal funds rate by 475 basis points over the course of
the year. Humboldts margin for 2001 was 4.71%, a decrease
of 44 basis points from 2000. The average yield on earning
assets declined by 59 basis points during 2001, principally due
the downward repricing of Humboldts adjustable rate loans,
which lowered the average yield on loans by 56 basis points,
cash flows from investment securities reinvested at lower market
rates, and a 63% increase in the average federal funds sold
balance at an average rate of 304 basis points lower than 2000.
During the first three quarters of 2001, management did not
aggressively lower the offering rates on certificates of deposit
or rates paid on interest bearing transaction accounts given the
level of uncertainty with respect to potential customer
reaction. As a result, the average cost of interest bearing
liabilities declined by only 34 basis points during 2001. As
described above, a more aggressive position with respect to
deposit rates was adopted during the fourth quarter of 2001 and
full year 2002.

The most significant impact on Humboldt net
interest income between periods is derived from the interaction
of changes in the volume of and rate earned or paid on
interest-earning assets and interest-bearing liabilities. The
volume of interest-earning asset dollars in loans and
investments, compared to the volume of interest-bearing
liabilities represented by deposits and borrowings, combined
with the spread, produces the changes in the net interest income
between periods. Table 2 sets forth, for the years indicated, a
summary of the changes in net interest income due to changes in
average asset and liability balances (volume) and changes
in average interest rates (rate). Changes in interest income and
expense, which are not attributable specifically to either
volume or rate, are allocated proportionately between both
variances.

23



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Table 2  Rate/ Volume
Analysis

|                                  |                                           |                                |       |                                |        |       |        |        |        |      |       |       |       |   |       |        |       |   |      |        |         |   |       |        |         |  
|--------------------------------- | ----------------------------------------- | ------------------------------ | ----- | ------------------------------ | ------ | ----- | ------ | ------ | ------ | ---- | ----- | ----- | ----- | - | ----- | ------ | ----- | - | ---- | ------ | ------- | - | ----- | ------ | ------- | -
|                                  |                                           |                                |       |                               
|                                  |                                           | 2001 compared to 2000          |       | 2002 compared to 2001         
|                                  |                                           | Increase/(Decrease)            |       | Increase/(Decrease)           
|                                  |                                           | in interest income and expense |       | in interest income and expense
|                                  |                                           | due to changes in              |       | due to changes in             
|                                  |                                           |                                |       |                               
|                                  |                                           | Volume                         |       | Rate                           |        | Total |        | Volume |        | Rate |       | Total
|                                  |                                           |                                |       |                                |        |       |        |        |        |      |       |      
|                                  |                                           |                               
|                                  |                                           | (Dollars in thousands)        
|                                 
|                                 
|                                 
|                                 
|Interest Income Attributable To:  |                                           |                                |       |                                |        |       |        |        |        |      |       |       |       |   |       |        |       |   |      |        |         |   |       |       
|                                 
|                                 
|                                 
|                                 
|                                  | Loans                                     |                                | $     | 10,199                         |        |       | $      | (2,790 | )      |      | $     | 7,409 |       |   | $     | 7,529  |       |   | $    | (7,490 | )       |   | $     | 39     |        
|                                 
|                                 
|                                 
|                                 
|                                  | Investment securities                     |                                |       | (24                            | )      |       |        | (501   | )      |      |       | (525  | )     |   |       | 1,702  |       |   |      | (2,102 | )       |   | $     | (400   | )      
|                                 
|                                 
|                                 
|                                 
|                                  | Balance due from banks                    |                                |       | 13                             |        |       |        | (32    | )      |      |       | (19   | )     |   |       | (5     | )     |   |      | 14     |         |   | $     | 9      |        
|                                 
|                                 
|                                 
|                                 
|                                  | Federal funds sold                        |                                |       | 568                            |        |       |        | (784   | )      |      |       | (216  | )     |   |       |       |       |   |      | (1,468 | )       |   | $     | (1,468 | )      
|                                  |                                           |                                |       |                                |        |       |        |        |        |      |       |       |       |   |       |        |       |   |      |        |         |   |       |       
|                                  |                                           | Total increase(decrease)       |       |                                | 10,756 |       |        |        | (4,107 | )    |       |       | 6,649 |   |       |        | 9,226 |   |      |        | (11,046 | ) |       |        | (1,820  | )
|                                  |                                           |                                |       |                                |        |       |        |        |        |      |       |       |       |   |       |        |       |   |      |        |         |   |       |       
|Interest Expense Attributable To: |                                           |                                |       |                                |        |       |        |        |        |      |       |       |       |   |       |        |       |   |      |        |         |   |       |       
|                                 
|                                 
|                                 
|                                 
|                                  | Interest-bearing checking & savings accts |                                |       | 1,799                          |        |       |        | 118    |        |      |       | 1,917 |       |   |       | 597    |       |   |      | (3,748 | )       |   |       | (3,151 | )      
|                                 
|                                 
|                                 
|                                 
|                                  | Time Deposits & IRA accounts              |                                |       | 1,254                          |        |       |        | (1,122 | )      |      |       | 132   |       |   |       | (2,389 | )     |   |      | (5,852 | )       |   |       | (8,241 | )      
|                                 
|                                 
|                                 
|                                 
|                                  | Borrowed Funds                            |                                |       | 1,691                          |        |       |        | (281   | )      |      |       | 1,410 |       |   |       | 1,533  |       |   |      | (845   | )       |   |       | 688    |        
|                                  |                                           |                                |       |                                |        |       |        |        |        |      |       |       |       |   |       |        |       |   |      |        |         |   |       |       
|                                  |                                           | Total increase(decrease)       |       |                                | 4,744  |       |        |        | (1,285 | )    |       |       | 3,459 |   |       |        | (259  | ) |      |        | (10,445 | ) |       |        | (10,704 | )
|                                  |                                           |                                |       |                                |        |       |        |        |        |      |       |       |       |   |       |        |       |   |      |        |         |   |       |       
|Total Change in Net Interest      |                                           | $                              | 6,012 |                                |        | $     | (2,822 | )      |        | $    | 3,190 |       |       | $ | 9,485 |        |       | $ | (601 | )      |         | $ | 8,884 |       
|                                  |                                           |                                |       |                                |        |       |        |        |        |      |       |       |       |   |       |        |       |   |      |        |         |   |       |       

Provision for Loan Losses

The provision for loan losses was
$3.3 million in 2002, compared with $2.9 million in 2001
and $2.5 million in 2000. As a percentage of average
outstanding loans, the provision for loan losses recorded for
2002 was 0.47% of average loans, a decrease of three basis
points over 2001 and 2000. Net loan charge-offs as a percentage
of average outstanding loans for 2002 were 0.21%, compared with
0.24% for 2001 and 0.33% for 2000. The increase in the provision
for loan loss in 2002 is primarily attributed to growth in the
loan portfolio and managements concern about the increased
potential for deterioration of real estate values in the
Banks principal market areas. The provision for loan
losses is based on managements evaluation of inherent
risks in the loan portfolio and the corresponding analysis of
the allowance for loan losses. Additional discussion on loan
quality and the allowance for loan losses is included in the
Asset Qualitysection of this Report.

Non-interest Income

Non-interest income is a significant source of
revenue for Humboldt, representing 28%, 31%, and 29% of total
revenue for the years ended December 31, 2000, 2001, and 2002,
respectively. Total non-interest income for 2002 was
$26.1 million, a decrease of $3.6 million, or 12%,
from 2001. Non-interest income for 2001 was $29.7 million,
an increase of $6.9 million, or 30%, over 2000. Table 3
presents the components of non-interest income for 2000, 2001,
and 2002.

24



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##### Table of Contents



Table 3  Non-interest
income

|                       |                                       |                          |        |        |   |      |        |        |  |   |        |        |  
|---------------------- | ------------------------------------- | ------------------------ | ------ | ------ | - | ---- | ------ | ------ |  | - | ------ | ------ | -
|                       |                                       |                         
|                       |                                       | Years Ended December 31,
|                       |                                       |                         
|                       |                                       | 2000                     |        | 2001   |   | 2002
|                       |                                       |                          |        |        |   |     
|                       |                                       |                         
|                       |                                       | (Dollars in thousands)  
|                      
|                      
|                      
|                      
|Fees and Other Income: |                                       |                          |        |        |   |      |        |        |  |   |        |       
|                      
|                      
|                      
|                      
|                       | Merchant credit card processing fees  |                          | $      | 12,316 |   |      | $      | 16,484 |  |   | $      | 16,916 |  
|                      
|                      
|                      
|                      
|                       | Lease residuals and rentals           |                          |        | 927    |   |      |        | 832    |  |   |        | 405    |  
|                      
|                      
|                      
|                      
|                       | Credit card program fees              |                          |        | 259    |   |      |        | 252    |  |   |        | 29     |  
|                      
|                      
|                      
|                      
|                       | Fees for customer services            |                          |        | 449    |   |      |        | 992    |  |   |        | 684    |  
|                      
|                      
|                      
|                      
|                       | Earnings on life insurance            |                          |        | 433    |   |      |        | 875    |  |   |        | 814    |  
|                      
|                      
|                      
|                      
|                       | ATM Funding Income                    |                          |        | 3,081  |   |      |        | 2,983  |  |   |        | 825    |  
|                      
|                      
|                      
|                      
|                       | Loan and lease servicing fees         |                          |        | 552    |   |      |        | 363    |  |   |        | (413   | )
|                      
|                      
|                      
|                      
|                       | Other (none exceeding 1% of revenues) |                          |        | 1,037  |   |      |        | 1,950  |  |   |        | 798    |  
|                       |                                       |                          |        |        |   |      |        |        |  |   |        |       
|                       |                                       |                          | 19,054 |        |   |      | 24,731 |        |  |   | 20,058 |       
|                      
|                      
|                      
|                      
|                       | Service charges on deposit accounts   |                          |        | 3,236  |   |      |        | 3,521  |  |   |        | 3,030  |  
|                      
|                      
|                      
|                      
|                       | Net gain on sale of loans             |                          |        | 691    |   |      |        | 1,269  |  |   |        | 2,172  |  
|                      
|                      
|                      
|                      
|                       | Net investment securities (loss)/gain |                          |        | (117   | ) |      |        | 206    |  |   |        | 887    |  
|                       |                                       |                          |        |        |   |      |        |        |  |   |        |       
|Total Other Income     |                                       | $                        | 22,864 |        |   | $    | 29,727 |        |  | $ | 26,147 |       
|                       |                                       |                          |        |        |   |      |        |        |  |   |        |       

Merchant bankcard revenue has been
Humboldts largest source of non-interest income. Merchant
bankcard revenue for 2002 totaled $16.9 million, an
increase of $432,000, or 3%, over 2001. Merchant bankcard
revenue for 2002 included $1 million related to a fee paid by
iPayment Holdings, Inc. during the fourth quarter related to
iPayments decision to terminate a definitive agreement for
the purchase of Humboldts proprietary merchant bankcard
business. Also during the fourth quarter of 2002, Humboldt
recognized a reduction in merchant bankcard revenue when
approximately $773,000 was paid to certain independent
contractors in consideration for the elimination of any future
residual commissions. Following a modification of the terms of
an agreement with a merchant processing ISO, Humboldt recorded
merchant bankcard revenue of $3.6 million during 2001. The
agreement, which was negotiated as part of Humboldts
ongoing merchant services risk management process, provided for
payment of this non-recurring fee in consideration for providing
the ISO with the ability to transfer processing of its merchant
accounts to another financial institution. On March 13,
2003, Humboldt completed the sale of its proprietary merchant
bankcard business as described in Note 25 of the Notes to
the Consolidated Financial Statements.

A significant source of non-interest income for
Humboldt is service charges and fees on deposit accounts. Total
deposit service charges and fees for 2002 were
$3.0 million, as compared with $3.5 million in 2001
and $3.2 million 2000. Fees related to Humboldts ATM
funding operation were $3.1 million, $2.9 million, and
$825,000 for 2000, 2001, and 2002, respectively. During the
first quarter of 2002, Humboldt conducted an evaluation of the
risk-return relationship of ATM funding in light of a
$1.4 million pre-tax loss recorded during the fourth
quarter 2001 in connection with the theft of ATM cash.
Management has decided that alternative uses of the ATM funding
cash, such as funding loans, would provide a more acceptable
risk-adjusted return. Accordingly, the ATM funding operation was
terminated during the third quarter of 2002. In 2002, the amount
of ATM funding income included in service charges was
reclassified separately to ATM funding income for consistency of
presentation.

Net gains on the sale of loans, which include
residential real estate and SBA loans, totaled $691,000,
$1.3 million, and $2.2 million for years ended
December 31, 2000, 2001, and 2002 respectively. Loans sold
totaled $63 million, $130 million, and $273 million
for years ended December 31, 2000, 2001, and 2002,
respectively. The increases during 2001 and 2002 are principally
attributable to growth in the Banks SBA lending division,
which is currently ranked among the top originators in Northern
California. The Bank also generally sells the guaranteed portion
of SBA loans and retains the servicing, with the capitalized
value of the servicing asset included as part of the gain on
sale. A valuation allowance of approximately $600,000 was

25



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recorded during the fourth quarter of 2002 based
on the fair value of the SBA servicing asset. No valuation
allowance was recorded at December 31, 2001.


During the third quarter of 2002, the Bank sold
its residential mortgage loan servicing portfolio to a third
party for cash consideration of $2.4 million. The Bank
recognized a loss, net of selling-related costs, of
approximately $259,000 in connection with this sale. Subsequent
to the sale, the Bank adopted a program whereby the residential
mortgage loans are sold on a servicing released
basis.

During 2002, the Banks branch facilities in
Loleta and Willow Creek, California were sold and an aggregate
loss of $130,000 was recognized. The Loleta branch was
permanently closed and customer accounts transferred to the
Fortuna branch. The sale of the Willow Creek facility included a
leaseback of a portion of the building, which continues to serve
as a branch office. During 2001, a building that served as the
administrative office for Capitol Thrift & Loan was sold as
the operation was being consolidated. A gain of $615,000 was
recognized in connection with the sale.

Non-Interest Expense

Total non-interest expense for 2002 was
$52.6 million, a decrease of $1.3 million, or 2%, from
2001. The primary reasons for this decrease were the recognition
of approximately $3.5 million of expenses related to the
Tehama merger and a $1.4 million loss related to the theft
of ATM cash recognized during 2001. Non-interest expense for
2001 was $53.9 million, an increase of $12.3 million,
or 30% over 2000. This increase is principally attributed to the
merger-related expenses and theft loss described above,
recognition of a full-year of expenses related to Capitol Thrift
& Loan (which was acquired in April 2000), and staff and
facilities additions to facilitate growth of Humboldts
Bank and Merchant Bankcard operations.

Table 4 presents the components of non-interest
expense for the years ended December 31, 2000, 2001 and
2002.

Table 4  Non-interest
expense

|                                        |  |                          |        |      |  |      |        |  |  |   |        | 
|--------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                        |  |                         
|                                        |  | Years Ended December 31,
|                                        |  |                         
|                                        |  | 2000                     |        | 2001 |  | 2002
|                                        |  |                          |        |      |  |     
|                                        |  |                         
|                                        |  | (Dollars in thousands)  
|                                       
|                                       
|                                       
|                                       
|Salaries and employee benefits          |  | $                        | 21,662 |      |  | $    | 25,612 |  |  | $ | 25,247 | 
|                                       
|                                       
|                                       
|                                       
|Net occupancy and equipment expense     |  |                          | 5,039  |      |  |      | 5,875  |  |  |   | 6,492  | 
|                                       
|                                       
|                                       
|                                       
|Merchant credit card program            |  |                          | 4,733  |      |  |      | 5,599  |  |  |   | 6,393  | 
|                                       
|                                       
|                                       
|                                       
|Professional and other outside services |  |                          | 1,871  |      |  |      | 2,609  |  |  |   | 3,954  | 
|                                       
|                                       
|                                       
|                                       
|Stationery, supplies and postage        |  |                          | 1,160  |      |  |      | 1,588  |  |  |   | 1,572  | 
|                                       
|                                       
|                                       
|                                       
|Telephone and travel                    |  |                          | 1,260  |      |  |      | 1,534  |  |  |   | 1,756  | 
|                                       
|                                       
|                                       
|                                       
|Amortization of core deposit intangible |  |                          | 684    |      |  |      | 876    |  |  |   | 565    | 
|                                       
|                                       
|                                       
|                                       
|Data processing and ATM fees            |  |                          | 565    |      |  |      | 874    |  |  |   | 801    | 
|                                       
|                                       
|                                       
|                                       
|Advertising                             |  |                          | 473    |      |  |      | 531    |  |  |   | 580    | 
|                                       
|                                       
|                                       
|                                       
|Other (none exceeding 1% of revenues)   |  |                          | 4,036  |      |  |      | 5,245  |  |  |   | 5,198  | 
|                                       
|                                       
|                                       
|                                       
|Merger related items                    |  |                          |       |      |  |      | 3,531  |  |  |   |       | 
|                                        |  |                          |        |      |  |      |        |  |  |   |        | 
|Total expenses                          |  | $                        | 41,483 |      |  | $    | 53,874 |  |  | $ | 52,558 | 
|                                        |  |                          |        |      |  |      |        |  |  |   |        | 

Salaries and employee benefits were relatively
unchanged from 2001 to 2002. Increased healthcare insurance
costs and merit increases were offset by staffing reductions
realized through completion of the Tehama merger integration and
bank charter consolidation initiative. Salary and employee
benefit expense increased by $4.0 million, or 18%, during
2001. This increase is principally attributable to an increase
in the accrual for certain employment contracts that provide two
executives with a phantom equity ownership in the Banks
proprietary merchant bankcard operation, staff additions to
accommodate growth, increased healthcare

26



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##### Table of Contents



insurance costs, and the acquisition of Capitol
Thrift & Loan (9 months of expense recognized in 2000
versus 12 months in 2001).


Net occupancy and equipment expense increased by
$617,000, or 11%, from 2001 to 2002. This increase is
principally attributable to premises and equipment related
expenses associated with Humboldts operations center
facility in Eureka, California. This facility, and related
equipment assets, was placed into service during the first and
second quarters of 2001 and, consequently, a full year of
expense was recognized in 2002. This increase in occupancy and
equipment related expense of $836,000, or 17%, from 2000 to 2001
was principally attributable to increased costs associated with
the Eureka operations center and recognition of a full-year of
occupancy expense related to the Capitol Thrift & Loan
facilities.

Merchant bankcard expense increased by $794,000,
or 14% during 2002 and $866,000, or 18%, during 2001. The
increase for 2002 is principally attributable to growth in
transaction processing volumes and increased amortization
expense related to a merchant portfolio acquired during the
third quarter of 2001. The increase for 2001 is principally
attributable to growth in transaction processing volumes.

Professional and other outside services expense
for 2002 was $4.0 million, an increase of
$1.3 million, or 52%, over 2001. The increase is due
primarily to professional fees associated with the formation of
HB Investment Trust, professional fees related to the bank
charter consolidation initiative, legal fees associated with the
planned sale of the merchant processing division, increased
accounting fees associated with the restatement of
Humboldts financial results for 1999 through 2001, and
legal expenses related to ATM-related litigation that was
settled during the fourth quarter of 2002. Management does not
expect these expenses to be of a recurring nature.

During the first quarter of 2001, Humboldt
incurred $3.5 million of expenses in connection with the
completion and integration of the merger with Tehama Bancorp.
Table 5 sets forth the major components of the merger-related
charge.

Table 5  Merger-related
items

|                      |       |                      |       |       | 
|--------------------- | ----- | -------------------- | ----- | ----- | 
|                      |       | Dollars in thousands
|                     
|                     
|                     
|                     
|Severance & related   |       | $                    | 655   |      
|                     
|                     
|                     
|                     
|Professional fees     |       |                      | 1,664 |      
|                     
|                     
|                     
|                     
|Fixed asset disposals |       |                      | 441   |      
|                     
|                     
|                     
|                     
|System conversions    |       |                      | 262   |      
|                     
|                     
|                     
|                     
|Other                 |       |                      | 509   |      
|                      |       |                      |       |      
|                      | Total |                      | $     | 3,531 | 
|                      |       |                      |       |      

Significant steps were taken during 2002 to
improve Humboldts operating efficiency. The consolidation
of bank charters, which was completed during the second quarter
of 2002, resulted in a reduction of board-related expense of
approximately $500,000. Further, significant steps were taken
during 2002 to rationalize the Banks franchise footprint,
resulting in the closure of branches in Covina, Lodi, Loleta and
San Diego and the sale of branches in Lancaster and Riverside.
Annual operating expense savings in excess of $500,000 is
expected in connection with these sales and closures.
Humboldts efficiency ratio for 2002 was 71.56%, an
improvement of 155 basis points from 2001.

Income Taxes

Humboldts effective income tax rate as a
percentage of pre-tax income for 2002 was 26.1%, as compared to
35.2% in 2001 and 33.0% in 2000. The effective tax rates were
below the expected statutory federal rate of 34.0% and the state
franchise tax rate of 7.1% (net of the federal benefit),
principally, because of exemptions for Enterprise Zone loans for
state tax purposes, exemptions for municipal obligations for
federal purposes, exemptions for municipal obligations for
federal purposes, low income housing tax credits, bank owned
life insurance and other permanent differences. The decrease in
the effective tax rate during 2002 was due in part to a
reduction in the state franchise tax resulting from the
formation of and contribution of assets to HB

27



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##### Table of Contents



Investment Trust, a real estate investment trust
(REIT) subsidiary of the Bank. The increase in the
effective tax rate for 2001 was due to the tax treatment of
certain merger-related expenses, which were not deductible.


Balance Sheet Overview

Total assets at December 31, 2002 were
$1.03 billion, an increase of $73 million, or 8%, from
year-end 2001. Total assets at December 31, 2001 were
$959 million, an increase of $106 million, or 12%,
from the prior year-end. Most of the asset growth experienced
during 2002 and 2001 was in loans, which grew by
$96 million and $81 million, respectively.

Investment Securities

The composition of Humboldts investment
securities portfolio reflects managements investment
strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of interest income. The
investment securities portfolio also provides a means of balance
with respect to interest rate and credit risk inherent in the
loan portfolio, while providing a vehicle for the investment of
available funds, a source of liquidity (by pledging as
collateral or through repurchase agreements) and collateral for
certain public funds deposits.

Humboldts investment securities portfolio
is managed based on a total return concept, that
takes into consideration the yield on individual securities and
the market value appreciation under various interest rate
scenarios at specified future time horizons. The portfolio has,
historically, been comprised principally of mortgage-related
securities (generally about two-thirds of the total) and
bank-qualified municipal obligations. The mortgage-related
securities include both pooled mortgage-back issues and
high-quality CMO structures, with an average duration in the
range of three to five years. These mortgage-related securities
provide yield spread to US Treasury or Agency securities;
however, the cash flows arising from them can be volatile (even
in the best structures) due to refinancing of the underlying
mortgage loans. The historically low mortgage interest rates
experienced during 2002 resulted in the acceleration of cash
flows from the mortgage-related securities, which were then
reinvested in similar securities at current market rates. The
structure of most of the mortgage-related securities provides
for minimal extension risk in the event of increased market
rates.

During both 2002 and 2001, management actively
reviewed the investment securities portfolio on a regular basis
in light of declining market interest rates, the shape of the
yield curve, and Humboldts comprehensive asset/liability
management program. As a result of these reviews, certain
securities were sold during 2002 and 2001 that, in
managements opinion, were unlikely to perform well given
expected market rates. The proceeds received in connection with
the sales were used to purchase additional securities of
approximately the same amount as those sold.

During the fourth quarter of 2002, a single
$15 million short-term US Agency security was purchased to
provide as collateral for Humboldts ISO merchant
processing through VISA. Management expects the collateral
obligation will expire during the second quarter of 2003 in
connection with the termination of a specific ISO processing
agreement. Equity securities at December 31, 2002 consisted
principally of stock in the Federal Home Loan Bank of San
Francisco. Humboldt did not have any corporate debt obligations
as of December 31, 2002. Other securities at
December 31, 2002 included a $3 million Class-C
lease-backed obligation issued by an affiliate of Bancorp
Financial Services, Inc. in March 2000 for which there is no
active market. No cash flows of principal or interest have been
received for this security since the second quarter of 2001,
when certain technical defaults required the redirection of all
cash flows to the senior tranche holders until they are paid in
full, and no interest has been accrued since that time.
Management expects that the underlying collateral will provide
for the return of the principal balance of this security by
December 31, 2005.

At December 31, 2002, the fair value of
Humboldts investment securities totaled $181 million,
an increase of $9 million, or 5%, over the prior year-end.
All investment securities were classified as available for
sale at December 31, 2002 and 2001. The difference
between the fair value and amortized cost is recorded, net of
tax, in the Other Comprehensive Income section of
stockholders equity. Table 6 provides information as to
the composition of Humboldts investment portfolio at
December 31, 2000, 2001 and 2002.

28



---



##### Table of Contents



Table 6  Investment securities
composition*

|                                      |                        |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |       |   |        |         |  |  |       |      |   |   |        |         |  |   |        |         |  |  |      |      |  
|------------------------------------- | ---------------------- | ---------------------- | - | ----------------- | ------- | ----------------- | - | --------- | ------- | ------ |  | ----- | ---- | --------- | - | ------ | ------- | ----- | - | ------ | ------- |  |  | ----- | ---- | - | - | ------ | ------- |  | - | ------ | ------- |  |  | ---- | ---- | -
|                                      |                        |                        |   |                   |         |                  
|                                      |                        | December 31, 2000      |   | December 31, 2001 |         | December 31, 2002
|                                      |                        |                        |   |                   |         |                  
|                                      |                        |                        |   | Approx            |         |                   |   |           |         | Approx |  |       |      |           |   | Approx |         |      
|                                      |                        | Amortized              |   | Market            |         | %                 |   | Amortized |         | Market |  | %     |      | Amortized |   | Market |         | %    
|                                      |                        | Cost                   |   | Value             |         | Yield             |   | Cost      |         | Value  |  | Yield |      | Cost      |   | Value  |         | Yield
|                                      |                        |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |      
|                                      |                        |                       
|                                      |                        | (Dollars in thousands)
|U.S. Treasury and agencies            |                        |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |       |   |        |         |  |  |       |      |   |   |        |         |  |   |        |         |  |  |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three months or less   |                        |   |                  |         |                   |   |          |         |        |  |      |      |           | $ | 1,000  |         |       | $ | 1,008  |         |  |  | 6.17  | %    |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three to twelve months |                        | $ | 1,512             |         |                   | $ | 1,512     |         |        |  | 5.51  | %    |           |   |       |         |       |   |       |         |  |  |      |      |   | $ | 16,714 |         |  | $ | 16,734 |         |  |  | 1.54 | %   
|                                     
|                                     
|                                     
|                                     
|                                      | One to three years     |                        |   | 10,506            |         |                   |   | 10,418    |         |        |  | 6.58  |      |           |   | 1,525  |         |       |   | 1,560  |         |  |  | 4.27  |      |   |   | 1,044  |         |  |   | 1,072  |         |  |  | 3.19 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three to five years    |                        |   |                  |         |                   |   |          |         |        |  |      |      |           |   | 247    |         |       |   | 244    |         |  |  | 4.27  |      |   |   | 544    |         |  |   | 562    |         |  |  | 3.62 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Five to fifteen years  |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |       |   |        |         |  |  |       |      |   |   | 546    |         |  |   | 558    |         |  |  | 3.83 |     
|                                     
|CMO and MBS                           |                        |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |       |   |        |         |  |  |       |      |   |   |        |         |  |   |        |         |  |  |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three months or less   |                        |   | 342               |         |                   |   | 341       |         |        |  | 7.49  |      |           |   | 656    |         |       |   | 658    |         |  |  | 5.78  |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three to twelve months |                        |   | 12,136            |         |                   |   | 12,133    |         |        |  | 6.45  |      |           |   | 21,547 |         |       |   | 21,910 |         |  |  | 5.17  |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | One to three years     |                        |   | 32,116            |         |                   |   | 33,216    |         |        |  | 6.62  |      |           |   | 37,682 |         |       |   | 38,155 |         |  |  | 5.51  |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three to five years    |                        |   | 16,918            |         |                   |   | 17,451    |         |        |  | 6.60  |      |           |   | 45,892 |         |       |   | 45,439 |         |  |  | 5.19  |      |   |   | 5,967  |         |  |   | 6,212  |         |  |  | 5.83 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Five to fifteen years  |                        |   | 15,008            |         |                   |   | 13,860    |         |        |  | 6.89  |      |           |   | 21,434 |         |       |   | 21,227 |         |  |  | 6.29  |      |   |   | 96,746 |         |  |   | 99,199 |         |  |  | 3.55 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Over fifteen years     |                        |   |                  |         |                   |   |          |         |        |  |      |      |           |   | 3,627  |         |       |   | 3,327  |         |  |  | 7.26  |      |   |   | 17,896 |         |  |   | 18,108 |         |  |  | 4.51 |     
|                                     
|Obligations of political subdivisions |                        |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |       |   |        |         |  |  |       |      |   |   |        |         |  |   |        |         |  |  |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three months or less   |                        |   | 430               |         |                   |   | 430       |         |        |  | 6.82  |      |           |   | 720    |         |       |   | 720    |         |  |  | 8.27  |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three to twelve months |                        |   | 264               |         |                   |   | 270       |         |        |  | 8.65  |      |           |   | 1,047  |         |       |   | 1,068  |         |  |  | 8.96  |      |   |   | 593    |         |  |   | 604    |         |  |  | 7.73 |     
|                                     
|                                     
|                                     
|                                     
|                                      | One to three years     |                        |   | 1,627             |         |                   |   | 1,683     |         |        |  | 7.90  |      |           |   | 2,289  |         |       |   | 2,409  |         |  |  | 9.02  |      |   |   | 3,064  |         |  |   | 3,180  |         |  |  | 8.05 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three to five years    |                        |   | 6,057             |         |                   |   | 6,258     |         |        |  | 7.79  |      |           |   | 3,220  |         |       |   | 3,281  |         |  |  | 7.35  |      |   |   | 1,320  |         |  |   | 1,416  |         |  |  | 7.02 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Five to fifteen years  |                        |   | 21,674            |         |                   |   | 22,407    |         |        |  | 7.62  |      |           |   | 18,692 |         |       |   | 19,362 |         |  |  | 8.29  |      |   |   | 21,936 |         |  |   | 23,573 |         |  |  | 7.73 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Over fifteen years     |                        |   | 3,327             |         |                   |   | 3,530     |         |        |  | 7.99  |      |           |   | 3,304  |         |       |   | 3,342  |         |  |  | 8.09  |      |   |   | 1,482  |         |  |   | 1,594  |         |  |  | 8.02 |     
|                                     
|Corporate debt & other securities     |                        |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |       |   |        |         |  |  |       |      |   |   |        |         |  |   |        |         |  |  |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three months or less   |                        |   | 1,304             |         |                   |   | 1,304     |         |        |  | 5.25  |      |           |   |       |         |       |   |       |         |  |  |      |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three to twelve months |                        |   |                  |         |                   |   |          |         |        |  |      |      |           |   |       |         |       |   |       |         |  |  |      |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | One to three years     |                        |   | 5,552             |         |                   |   | 5,693     |         |        |  | 7.77  |      |           |   |       |         |       |   |       |         |  |  |      |      |   |   | 3,031  |         |  |   | 2,911  |         |  |  | 0.00 |     
|                                     
|                                     
|                                     
|                                     
|                                      | Three to five years    |                        |   | 4,116             |         |                   |   | 4,167     |         |        |  | 9.02  |      |           |   | 6,931  |         |       |   | 6,611  |         |  |  | 10.34 |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | Five to fifteen years  |                        |   | 3,876             |         |                   |   | 3,981     |         |        |  | 7.49  |      |           |   | 569    |         |       |   | 577    |         |  |  | 6.36  |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | Over fifteen years     |                        |   |                  |         |                   |   |          |         |        |  |      |      |           |   | 625    |         |       |   | 625    |         |  |  | 7.80  |      |   |   |       |         |  |   |       |         |  |  |     |     
|                                     
|                                     
|                                     
|                                     
|                                      | Equity securities      |                        |   | 731               |         |                   |   | 731       |         |        |  | 6.83  |      |           |   | 950    |         |       |   | 950    |         |  |  | 5.00  |      |   |   | 5,748  |         |  |   | 5,748  |         |  |  | 0.89 |     
|                                      |                        |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |       |   |        |         |  |  |       |      |   |   |        |         |  |   |        |         |  |  |     
|                                      |                        | Total securities       |   | $                 | 137,496 |                   |   | $         | 139,385 |        |  |       | 6.97 | %         |   | $      | 171,957 |       |   | $      | 172,473 |  |  |       | 6.16 | % |   | $      | 176,631 |  |   | $      | 181,471 |  |  |      | 3.95 | %
|                                      |                        |                        |   |                   |         |                   |   |           |         |        |  |       |      |           |   |        |         |       |   |        |         |  |  |       |      |   |   |        |         |  |   |        |         |  |  |     



---



|  |                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------
|* | Weighted average yields are stated on a federal
    tax-equivalent basis of 34%, and have been annualized, where
    appropriate.

Loans

Total loans at December 31, 2002 were
$762 million, an increase of $98 million, or 15%, over the
prior year-end. On an average basis, total loans outstanding
during 2002 were $712 million, an increase of
$96 million, or 16%, over 2001. The loan growth experienced
during 2002 and 2001 is attributed to the generally strong
economic conditions in Humboldts principal market areas,
some of which are among the fastest-growing areas in the state
of California.

Humboldts loan portfolio consists of
commercial real estate, residential real estate, commercial
& industrial and consumer loans. While no specific industry
concentration is considered significant, Humboldts lending
operations are dependent on the local economy. Accordingly, a
downturn in the regional economy could adversely impact
Humboldts borrowers. This could, in turn, reduce the
demand for loans, adversely impact the borrowers abilities
to repay their loans and cause collateral values to decline.

29



---



##### Table of Contents



Table 7 presents the composition of
Humboldts loan portfolio at the dates indicated.

Table 7  Loan portfolio
composition

|                           |                           |                         |        |            |         |        |       |            |        |        |        |            |         |        |       |            |        |        |        |            |         |  |       |       |        |   |         |         |         |  |       |       |        |   |         |         |         |  |       |       |        |  
|-------------------------- | ------------------------- | ----------------------- | ------ | ---------- | ------- | ------ | ----- | ---------- | ------ | ------ | ------ | ---------- | ------- | ------ | ----- | ---------- | ------ | ------ | ------ | ---------- | ------- |  | ----- | ----- | ------ | - | ------- | ------- | ------- |  | ----- | ----- | ------ | - | ------- | ------- | ------- |  | ----- | ----- | ------ | -
|                           |                           |                        
|                           |                           | As of December 31,     
|                           |                           |                        
|                           |                           |                         |        |            |         |        |       |            |        |       
|                           |                           | 1998                    |        | 1999       |         | 2000   |       | 2001       |        | 2002  
|                           |                           |                         |        |            |         |        |       |            |        |       
|Type of Loan               |                           | Amount                  |        | Percentage |         | Amount |       | Percentage |        | Amount |        | Percentage |         | Amount |       | Percentage |        | Amount |        | Percentage
|                           |                           |                         |        |            |         |        |       |            |        |        |        |            |         |        |       |            |        |        |        |           
|                           |                           |                        
|                           |                           | (Dollars in thousands) 
|                          
|                          
|                          
|                          
|Real estate secured loans: |                           |                         |        |            |         |        |       |            |        |        |        |            |         |        |       |            |        |        |        |            |         |  |       |       |        |   |         |         |         |  |       |       |        |   |         |         |         |  |       |      
|                          
|                          
|                          
|                          
|                           | Construction              |                         | $      | 29,541     |         |        |       | 9.68       | %      |        | $      | 31,153     |         |        |       | 8.46       | %      |        | $      | 43,597     |         |  |       | 7.58  | %      |   | $       | 65,021  |         |  |       | 9.97  | %      |   | $       | 129,075 |         |  |       | 17.26 | %     
|                          
|                          
|                          
|                          
|                           | Residential               |                         |        | 73,899     |         |        |       | 24.23      |        |        |        | 80,596     |         |        |       | 21.89      |        |        |        | 108,411    |         |  |       | 18.85 |        |   |         | 109,559 |         |  |       | 16.80 |        |   |         | 105,647 |         |  |       | 14.13 |       
|                          
|                          
|                          
|                          
|                           | Commercial & agricultural |                         |        | 91,979     |         |        |       | 30.15      |        |        |        | 125,702    |         |        |       | 34.14      |        |        |        | 273,047    |         |  |       | 47.47 |        |   |         | 316,571 |         |  |       | 48.54 |        |   |         | 343,957 |         |  |       | 46.00 |       
|                           |                           |                         |        |            |         |        |       |            |        |        |        |            |         |        |       |            |        |        |        |            |         |  |       |       |        |   |         |         |         |  |       |       |        |   |         |         |         |  |       |      
|                           |                           | Total real estate loans |        |            | 195,419 |        |       |            | 64.06  |        |        |            | 237,451 |        |       |            | 64.50  |        |        |            | 425,055 |  |       |       | 73.90  |   |         |         | 491,151 |  |       |       | 75.31  |   |         |         | 578,679 |  |       |       | 77.39  |  
|                          
|                          
|                          
|                          
|Commercial                 |                           |                         | 56,661 |            |         |        | 18.57 |            |        |        | 63,940 |            |         |        | 17.37 |            |        |        | 80,508 |            |         |  | 14.00 |       |        |   | 103,421 |         |         |  | 15.86 |       |        |   | 121,538 |         |         |  | 16.26 |      
|                          
|                          
|                          
|                          
|Lease financing            |                           |                         | 18,612 |            |         |        | 6.10  |            |        |        | 23,414 |            |         |        | 6.36  |            |        |        | 15,818 |            |         |  | 2.75  |       |        |   | 4,633   |         |         |  | 0.71  |       |        |   | 2,387   |         |         |  | 0.32  |      
|                          
|                          
|                          
|                          
|Installment and Other      |                           |                         | 41,833 |            |         |        | 13.71 |            |        |        | 49,822 |            |         |        | 13.53 |            |        |        | 63,601 |            |         |  | 11.06 |       |        |   | 64,394  |         |         |  | 9.87  |       |        |   | 59,144  |         |         |  | 7.91  |      
|                           |                           |                         |        |            |         |        |       |            |        |        |        |            |         |        |       |            |        |        |        |            |         |  |       |       |        |   |         |         |         |  |       |       |        |   |         |         |         |  |       |      
|                           |                           | Total loans             |        |            | 312,525 |        |       |            | 102.45 |        |        |            | 374,627 |        |       |            | 101.76 |        |        |            | 584,982 |  |       |       | 101.71 |   |         |         | 663,599 |  |       |       | 101.75 |   |         |         | 761,748 |  |       |       | 101.88 |  
|                          
|                          
|                          
|                          
|Less:                      |                           |                         |        |            |         |        |       |            |        |        |        |            |         |        |       |            |        |        |        |            |         |  |       |       |        |   |         |         |         |  |       |       |        |   |         |         |         |  |       |      
|                          
|                          
|                          
|                          
|                           | Deferred loan fees        |                         |        | (2,341     | )       |        |       | (0.77      | )      |        |        | (977       | )       |        |       | (0.27      | )      |        |        | (1,473     | )       |  |       | (0.26 | )      |   |         | (1,621  | )       |  |       | (0.25 | )      |   |         | (2,448  | )       |  |       | (0.33 | )     
|                          
|                          
|                          
|                          
|                           | Allowance for loan losses |                         |        | (5,136     | )       |        |       | (1.68      | )      |        |        | (5,502     | )       |        |       | (1.49      | )      |        |        | (8,367     | )       |  |       | (1.45 | )      |   |         | (9,765  | )       |  |       | (1.50 | )      |   |         | (11,614 | )       |  |       | (1.55 | )     
|                           |                           |                         |        |            |         |        |       |            |        |        |        |            |         |        |       |            |        |        |        |            |         |  |       |       |        |   |         |         |         |  |       |       |        |   |         |         |         |  |       |      
|                           |                           | Loans receivable, net   |        | $          | 305,048 |        |       |            | 100.00 | %      |        | $          | 368,148 |        |       |            | 100.00 | %      |        | $          | 575,142 |  |       |       | 100.00 | % |         | $       | 652,213 |  |       |       | 100.00 | % |         | $       | 747,686 |  |       |       | 100.00 | %
|                           |                           |                         |        |            |         |        |       |            |        |        |        |            |         |        |       |            |        |        |        |            |         |  |       |       |        |   |         |         |         |  |       |       |        |   |         |         |         |  |       |      

Humboldts real estate loans are generally
secured by property in Humboldts primary market areas. At
December 31, 2002, the major components of the commercial
real estate portfolio were owner-occupied office/retail (48%),
non-owner occupied office/retail (27%) and lodging (10%). As of
December 31, 2002, Humboldts 20 largest credit
relationships consisted of loans and loan commitments ranging
from $3.9 million to $9.3 million, with an aggregate
total credit exposure of $112 million. All of these credits
have been underwritten in a prudent manner and structured to
minimize Humboldts potential exposure to loss.

Table 8 presents the maturity distribution of
Humboldts commercial real estate, construction real
estate, residential real estate, and commercial portfolios and
the sensitivity of such loans to changes in interest rates at
December 31, 2002.

Table 8  Maturity of
construction/commercial RE loans

|                           |  |                        |         |                |  |           |        |       |  |                    |       |          |  |   |         |  |  |   |        |  |  |   |       | 
|-------------------------- |  | ---------------------- | ------- | -------------- |  | --------- | ------ | ----- |  | ------------------ | ----- | -------- |  | - | ------- |  |  | - | ------ |  |  | - | ----- | 
|                           |  |                        |         |                |  |           |        |       |  |                   
|                           |  |                        |         |                |  |           |        |       |  | Rate structure for
|                           |  |                        |         | loans maturing
|                           |  | Maturity               |         | over one year 
|                           |  |                        |         |               
|                           |  | One year               |         | One through    |  | Over five |        |       |  | Fixed              |       | Floating
|                           |  | or less                |         | five years     |  | years     |        | Total |  | Rate               |       | Rate    
|                           |  |                        |         |                |  |           |        |       |  |                    |       |         
|                           |  |                       
|                           |  | (Dollars in thousands)
|                          
|                          
|                          
|                          
|Commercial                 |  | $                      | 107,550 |                |  | $         | 12,962 |       |  | $                  | 1,026 |          |  | $ | 121,538 |  |  | $ | 10,836 |  |  | $ | 3,152 | 
|                          
|                          
|                          
|                          
|Real Estate  Construction |  |                        | 128,001 |                |  |           | 1,003  |       |  |                    | 71    |          |  |   | 129,075 |  |  |   | 49     |  |  |   | 1,025 | 
|                           |  |                        |         |                |  |           |        |       |  |                    |       |          |  |   |         |  |  |   |        |  |  |   |       | 
|Total                      |  | $                      | 235,551 |                |  | $         | 13,965 |       |  | $                  | 1,097 |          |  | $ | 250,613 |  |  | $ | 10,885 |  |  | $ | 4,177 | 
|                           |  |                        |         |                |  |           |        |       |  |                    |       |          |  |   |         |  |  |   |        |  |  |   |       | 

Loan Servicing

During 2002, Humboldt conducted a comprehensive
review of its mortgage lending and servicing operations. As a
result of this review, which analyzed the revenue and expense
associated with servicing, a decision was made to discontinue
the practice of selling residential mortgage loans with the
servicing retained and to originate and sell all conforming
loans on a servicing-released basis. In connection with this
evaluation, the servicing rights associated with approximately
$260 million of residential mortgage loans was sold during
the third quarter of 2002 for cash consideration. A pre-tax loss
of $259,000 was recognized in connection with this transaction.
As of December 31, 2002, Humboldt had no servicing rights
asset associated with residential mortgage loans.

Humboldt sells the guaranteed portion of most
Small Business Administration (SBA) loans it
originates to institutional investors. However, it retains the
servicing on these loans in order to generate

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ongoing revenues and to retain local customer
relationships. During the fourth quarter of 2002, Humboldt
recorded an impairment valuation reserve of approximately
$600,000 in connection the SBA servicing rights asset and the
carrying value of the asset was $716,000 as of December 31,
2002.


Humboldt accounts for revenue from the sale of
loans where servicing is retained in conformity with the
requirements of SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of
Liabilities. Humboldt records an asset representing the
right to service loans for others when it sells a loan and
retains the servicing rights. The carrying value of loans is
allocated between the loan and the servicing rights, based on
their relative fair values. Fair value is estimated by
discounting estimated future cash flows from the servicing
assets using discount rates that approximate current market
rates and using current expected future prepayment rates. The
servicing rights are amortized in proportion to, and over the
period of, estimated net servicing income, assuming prepayments.

Asset Quality and Non-Performing
Assets

Humboldt manages asset quality and controls
credit risk through diversification of the loan portfolio and
the application of policies designed to promote sound
underwriting and loan monitoring practices. Humboldts loan
administration function is charged with monitoring asset
quality, establishing credit policies and procedures and
enforcing the consistent application of these policies and
procedures across the Bank. The provision for loan losses
charged to earnings is based upon managements judgment of
the amount necessary to maintain the allowance at a level
adequate to absorb probable losses. The amount of provision
charge is dependent upon many factors including loan growth, net
charge-offs, changes in the composition of the loan portfolio,
delinquencies, managements assessment of loan portfolio
quality, general economic conditions that can impact value of
collateral, and other trends. The evaluation of these factors is
performed by the Banks Credit Administration Department
through an analysis of the adequacy of the allowance for loan
losses. Reviews of non-performing, past due loans and larger
credits, designed to identify potential charges to the allowance
for loan losses, as well as determine the adequacy of the
allowance, are conducted on a quarterly basis. These reviews are
performed by an independent third party and Bank staff, and
consider such factors as the financial strength of borrowers,
the value of the applicable collateral, loan loss experience,
anticipated loan losses, growth in the loan portfolio,
prevailing and anticipated economic conditions and other
factors. There were no significant changes in the estimation
methods and assumptions used to determine the adequacy of the
allowance for loan losses during 2001 or 2002. Additional
information regarding the methodology used in determining the
adequacy of the allowance for loan losses in contained in Part I
of this Report in the section titled Lending and Credit
Functions.

Non-performing loans, which include nonaccrual
loans and accruing loans past due over 90 days totaled
$3.6 million, or 0.48% of total loans, at December 31,
2002, as compared to $4.5 million, or 0.67% of total loans,
at December 31, 2001. Non-performing assets, which include
non-performing loans and foreclosed real estate, totaled
$3.7 million, or 0.36% of total assets as of
December 31, 2002, compared with $4.6 million, or
0.48% of total assets as of December 31, 2001.

Loans and leases, including impaired loans and
leases, are classified as nonaccrual if collection of principal
or interest is considered doubtful, generally if they are past
due as to maturity or payment of principal or interest for a
period of more than 90 days, unless such loans and leases
are well-secured and in the process of collection. When a loan
is placed on nonaccrual status, interest previously accrued but
not collected is reversed against current interest income.
Depending on managements evaluation of the borrower and
loan collateral, interest on a nonaccrual loan may be recognized
on a cash basis as payments are received. Loans made to
facilitate the sale of other real estate are made on terms
comparable to loans of similar risk. There were no commitments
to lend additional funds to customers whose loans were on
nonaccrual status at December 31, 2002. Table 9 summarizes
Humboldt non-performing assets for each of the last five years.

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Table 9  Non-Performing
Assets

|                                                             |                            |                        |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |        |       | 
|------------------------------------------------------------ | -------------------------- | ---------------------- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ----- | 
|                                                             |                            |                       
|                                                             |                            | As of December 31,    
|                                                             |                            |                       
|                                                             |                            | 1998                   |       | 1999  |  | 2000 |       | 2001  |  | 2002
|                                                             |                            |                        |       |       |  |      |       |       |  |     
|                                                             |                            |                       
|                                                             |                            | (Dollars in thousands)
|                                                            
|                                                            
|                                                            
|                                                            
|Loans on nonaccrual status                                   |                            | $                      | 565   |       |  | $    | 1,518 |       |  | $    | 1,434 |       |  | $ | 2,915 |       |  | $ | 3,054  |      
|                                                            
|                                                            
|                                                            
|                                                            
|Loans past due 90 days or more and accruing                  |                            |                        | 918   |       |  |      | 899   |       |  |      | 2,373 |       |  |   | 1,560 |       |  |   | 561    |      
|                                                            
|                                                            
|                                                            
|                                                            
|Restructured loans                                           |                            |                        |      |       |  |      |      |       |  |      |      |       |  |   |      |       |  |   |       |      
|                                                             |                            |                        |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |        |      
|                                                             | Total nonperforming loans  |                        |       | 1,483 |  |      |       | 2,417 |  |      |       | 3,807 |  |   |       | 4,475 |  |   |        | 3,615 | 
|                                                            
|                                                            
|                                                            
|                                                            
|Other real estate owned                                      |                            |                        | 225   |       |  |      | 156   |       |  |      | 850   |       |  |   | 166   |       |  |   | 88     |      
|                                                             |                            |                        |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |        |      
|                                                             | Total nonperforming assets |                        | $     | 1,708 |  |      | $     | 2,573 |  |      | $     | 4,657 |  |   | $     | 4,641 |  |   | $      | 3,703 | 
|                                                             |                            |                        |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |        |      
|Allowance for loan losses                                    |                            | $                      | 5,136 |       |  | $    | 5,502 |       |  | $    | 8,367 |       |  | $ | 9,765 |       |  | $ | 11,614 |      
|                                                            
|                                                            
|                                                            
|                                                            
|Asset quality ratios:                                        |                            |                        |       |       |  |      |       |       |  |      |       |       |  |   |       |       |  |   |        |      
|                                                            
|                                                            
|                                                            
|                                                            
|Non-performing assets to total assets                        |                            |                        | 0.33  | %     |  |      | 0.40  | %     |  |      | 0.55  | %     |  |   | 0.48  | %     |  |   | 0.36   | %    
|                                                            
|                                                            
|                                                            
|                                                            
|Non-performing loans to total loans                          |                            |                        | 0.48  | %     |  |      | 0.65  | %     |  |      | 0.65  | %     |  |   | 0.67  | %     |  |   | 0.48   | %    
|                                                            
|                                                            
|                                                            
|                                                            
|Allowance for loan losses to total loans                     |                            |                        | 1.66  | %     |  |      | 1.47  | %     |  |      | 1.43  | %     |  |   | 1.47  | %     |  |   | 1.53   | %    
|                                                            
|                                                            
|                                                            
|                                                            
|Allowance for loan losses to total non-performing
    assets |                            |                        | 301   | %     |  |      | 214   | %     |  |      | 180   | %     |  |   | 210   | %     |  |   | 314    | %    

At December 31, 2002, Humboldt had
approximately $12 million of loans that were not classified
as non-performing but for which known information about the
borrowers financial condition caused management to have
concern about the ability of the borrowers to comply with the
repayment terms of the loans. These loans were identified
through the loan review process described above that provides
for assignment of a risk rating based on a nine-grade scale.
Based on the evaluation of current market conditions, loan
collateral, other secondary sources of repayment and cash flow
generation, management does not anticipate any significant
losses related to these loans. These loans are subject to
continuing management attention and are considered in the
determination of the allowance for loan losses. A decline in the
economic conditions in Humboldts market areas or other
factors could adversely impact individual borrowers or the loan
portfolio in general. Accordingly, there can be no assurance
that other loans will not become 90 days or more past due,
be placed on nonaccrual or transferred to other real estate
owned in the future.

Allowance For Loan Losses

The allowance for loan losses (ALL)
totaled $8.4 million, $9.8 million, and
$11.6 million as of December 31, 2000, 2001 and 2002,
respectively. The ALL as a percentage of total loans was 1.43%,
1.47%, and 1.53% at December 31, 2000, 2001 and 2002
respectively. The ALL as a percentage of non-performing assets
as of December 31, 2000, 2001, and 2002 was 180%, 210%, and
314%, respectively.

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Table 10 provides a summary of activity in the
ALL by type of loan for the years indicated:

Table 10  Summary of Loan Loss
Experience

|                                          |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |      |        |  
|----------------------------------------- | -------------------------------- | ---------------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ---- | ------ | - | ------ | ---- | ------ | - | ------ | ---- | ------ | -
|                                          |                                  | 1998                               |        | 1999   |        | 2000 |        | 2001   |        | 2002
|                                          |                                  |                                    |        |        |        |      |        |        |        |     
|                                          |                                  |                                   
|                                          |                                  | (Dollars in thousands)            
|                                         
|                                         
|                                         
|                                         
|Balance at beginning of year              |                                  | $                                  | 4,076  |        |        | $    | 5,136  |        |        | $    | 5,502  |      |        | $ | 8,367  |      |        | $ | 9,765  |     
|                                          |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |     
|Loans and leases charged off:             |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |     
|                                         
|                                         
|                                         
|                                         
|                                          | Real Estate                      |                                    |        | (141   | )      |      |        | (67    | )      |      |        | (65  | )      |   |        | (33  | )      |   |        | (50  | )     
|                                         
|                                         
|                                         
|                                         
|                                          | Commercial                       |                                    |        | (359   | )      |      |        | (1,307 | )      |      |        | (287 | )      |   |        | (264 | )      |   |        | (941 | )     
|                                         
|                                         
|                                         
|                                         
|                                          | Consumer                         |                                    |        | (25    | )      |      |        | (30    | )      |      |        | (28  | )      |   |        | (534 | )      |   |        | (641 | )     
|                                         
|                                         
|                                         
|                                         
|                                          | Lease financing                  |                                    |        | (316   | )      |      |        | (148   | )      |      |        | (837 | )      |   |        | (905 | )      |   |        | (254 | )     
|                                         
|                                         
|                                         
|                                         
|                                          | Credit card and related accounts |                                    |        | (1,750 | )      |      |        | (963   | )      |      |        | (697 | )      |   |        | (181 | )      |   |        | (243 | )     
|                                         
|                                         
|                                         
|                                         
|                                          | Other                            |                                    |        | (5     | )      |      |        |       |        |      |        | (4   | )      |   |        |     |        |   |        | (18  | )     
|                                          |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |     
|                                          |                                  | Total loans and leases charged off |        |        | (2,596 | )    |        |        | (2,515 | )    |        |      | (1,918 | ) |        |      | (1,917 | ) |        |      | (2,147 | )
|                                         
|                                         
|                                         
|                                         
|Recoveries:                               |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |     
|                                         
|                                         
|                                         
|                                         
|                                          | Real Estate                      |                                    |        |       |        |      |        | 98     |        |      |        | 19   |        |   |        | 11   |        |   |        | 31   |       
|                                         
|                                         
|                                         
|                                         
|                                          | Commercial                       |                                    |        | 127    |        |      |        | 96     |        |      |        | 57   |        |   |        | 95   |        |   |        | 168  |       
|                                         
|                                         
|                                         
|                                         
|                                          | Consumer                         |                                    |        | 8      |        |      |        | 5      |        |      |        | 6    |        |   |        | 105  |        |   |        | 267  |       
|                                         
|                                         
|                                         
|                                         
|                                          | Lease financing                  |                                    |        | 24     |        |      |        | 9      |        |      |        | 7    |        |   |        | 144  |        |   |        | 154  |       
|                                         
|                                         
|                                         
|                                         
|                                          | Credit card and related accounts |                                    |        | 257    |        |      |        | 302    |        |      |        | 159  |        |   |        | 57   |        |   |        | 42   |       
|                                         
|                                         
|                                         
|                                         
|                                          | Other                            |                                    |        | 3      |        |      |        |       |        |      |        |     |        |   |        |     |        |   |        | 13   |       
|                                          |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |     
|                                          |                                  | Total Recoveries                   |        |        | 419    |      |        |        | 510    |      |        |      | 248    |   |        |      | 412    |   |        |      | 675    |  
|                                          |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |     
|Net charge-offs                           |                                  |                                    | (2,177 | )      |        |      | (2,005 | )      |        |      | (1,670 | )    |        |   | (1,505 | )    |        |   | (1,472 | )   
|                                         
|                                         
|                                         
|                                         
|Changes incident to mergers               |                                  |                                    |       |        |        |      |       |        |        |      | 2,000  |      |        |   |       |      |        |   |       |     
|                                         
|                                         
|                                         
|                                         
|Provision charged to operations           |                                  |                                    | 3,237  |        |        |      | 2,371  |        |        |      | 2,535  |      |        |   | 2,903  |      |        |   | 3,321  |     
|                                          |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |     
|Balance at end of year                    |                                  | $                                  | 5,136  |        |        | $    | 5,502  |        |        | $    | 8,367  |      |        | $ | 9,765  |      |        | $ | 11,614 |     
|                                          |                                  |                                    |        |        |        |      |        |        |        |      |        |      |        |   |        |      |        |   |        |     
|Ratio of net charge-offs to average loans |                                  |                                    | 0.73   | %      |        |      | 0.60   | %      |        |      | 0.33   | %    |        |   | 0.24   | %    |        |   | 0.21   | %   
|                                         
|                                         
|                                         
|                                         
|Ratio of provision to average loans       |                                  |                                    | 1.09   | %      |        |      | 0.72   | %      |        |      | 0.50   | %    |        |   | 0.47   | %    |        |   | 0.47   | %   

Management believes that the ALL at
December 31, 2002 is sufficient to absorb losses inherent
in the loan portfolio as of that date based on the best
information available. This assessment involves uncertainty and
judgment; therefore, the adequacy of the ALL cannot be
determined with precision and may be subject to change in future
periods. In addition, bank regulatory authorities, as part of
their periodic examination of the Bank, may require additional
charges to the provision for loan losses in future periods if
the results of their review warrant.

Deposits

Total deposits were $840 million at
December 31, 2002, an increase of $33 million, or 4%, over
the prior year-end. Total average deposits for 2002 were
$806 million, an increase of $28 million, or 4%, over
2001. Average demand deposit accounts were $222 million for
2002, an increase of $37 million, or 20%, over 2001. This
increase is principally attributed to an increase in deposits
associated with Humboldts ISO merchant processing business
and new employee incentives designed to provide financial
rewards for increasing deposit levels for existing customers.
Average time deposits for 2002 were $252 million, as
compared with $306 million for 2001, a decrease of $54
million, or 18%. This decrease was principally attributed to
managements decision to discontinue the offering of
premium rate retail certificates of deposit at the former
Capitol Thrift & Loan branches starting in the fourth
quarter 2001. During 2002, the Bank experienced a

33



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reduction in such certificates of deposit of
approximately $39 million. Table 11 sets forth the
scheduled maturities of time deposits of $100,000 and greater at
December 31, 2002.


Table 11  Maturities of Time
Deposits of $100,000 and Greater

|                           |       |                        |        |         | 
|-------------------------- | ----- | ---------------------- | ------ | ------- | 
|                           |       | (Dollars in thousands)
|                          
|                          
|                          
|                          
|Three months or less       |       | $                      | 31,710 |        
|                          
|                          
|                          
|                          
|Three months to six months |       |                        | 16,247 |        
|                          
|                          
|                          
|                          
|Six months to one year     |       |                        | 23,340 |        
|                          
|                          
|                          
|                          
|Over one year              |       |                        | 31,446 |        
|                           |       |                        |        |        
|                           | Total |                        | $      | 102,743 | 
|                           |       |                        |        |        

As of December 31, 2002, Humboldt had
$76 million of brokered certificates of deposit
outstanding, most of which mature in less than one year. One
brokered issuance, in the amount of $10 million, matures in
June 2010. This deposit, which bears a fixed rate of 4.70%, was
paired with an interest rate swap to convert the rate to LIBOR
plus 7 basis points on a variable basis. The certificate of
deposit is callable at the Banks option and the swap is
callable by the counterparty after one year. Management expects
that brokered certificates of deposit will be used from time to
time in the future as an alternative source of funding.

Table 12 sets forth the scheduled maturities of
brokered certificates of deposit outstanding at
December 31, 2002.

Table 12  Maturities of Brokered
Certificates of Deposit

|                           |       |                        |        |        | 
|-------------------------- | ----- | ---------------------- | ------ | ------ | 
|                           |       | (Dollars in thousands)
|                          
|                          
|                          
|                          
|Three months or less       |       | $                      |       |       
|                          
|                          
|                          
|                          
|Three months to six months |       |                        | 55,558 |       
|                          
|                          
|                          
|                          
|Six months to one year     |       |                        | 10,000 |       
|                          
|                          
|                          
|                          
|Over one year              |       |                        | 10,000 |       
|                           |       |                        |        |       
|                           | Total |                        | $      | 75,558 | 
|                           |       |                        |        |       

Other Borrowings

At December 31, 2002, the Bank was a
shareholder in the Federal Home Loan Bank of San Francisco
(FHLB). Through this affiliation, advances secured
by investment securities and residential mortgage loans totaling
$63 million were outstanding as of year-end 2002 at rates
comparable to time deposits or overnight federal funds.
Management expects continued use of FHLB advances as a source of
short and long-term funding. The FHLB advances outstanding at
December 31, 2002 had fixed interest rates ranging from
1.52% to 7.44%. Approximately $50 million, or 80%, of the
FHLB advances mature prior to December 31, 2004. Additional
information regarding FHLB advances is provided in Note 9 of the
Notes to the Consolidated Financial Statements.

Humboldt had $20 million of Trust Preferred
Securities outstanding at December 31, 2001 and 2002. The
Trust Preferred Securities were issued by special-purpose
subsidiaries of Humboldt as part of private pooled offerings to
institutional investors. Table 13 presents information about
Humboldts Trust Preferred Securities.

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Table 13  Trust Preferred
Securities

|              |  |                        |        |      |  |          |           |      |  |  |               |  |  |  |               | 
|------------- |  | ---------------------- | ------ | ---- |  | -------- | --------- | ---- |  |  | ------------- |  |  |  | ------------- | 
|              |  |                        |        |      |  | Maturity |           | Call
|Issue Date    |  | Amount                 |        | Rate |  | Date     |           | Date
|              |  |                        |        |      |  |          |           |     
|              |  |                       
|              |  | (Dollars in thousands)
|             
|             
|             
|             
|March 2000    |  | $                      | 5,150  |      |  |          | 10.875%   |      |  |  | March 2030    |  |  |  | March 2010    | 
|             
|             
|             
|             
|February 2001 |  | $                      | 5,000  |      |  |          | 10.200%   |      |  |  | February 2031 |  |  |  | February 2011 | 
|             
|             
|             
|             
|December 2001 |  | $                      | 10,000 |      |  |          | Floating* |      |  |  | December 2031 |  |  |  | December 2006 | 



---



|  |                                                                    
|- | -------------------------------------------------------------------
|* | Floating rate based on three-month LIBOR plus 360
    basis points.

As of December 31, 2002, all of the Trust
Preferred Securities outstanding qualified as Tier I capital for
regulatory purposes. Additional information regarding the terms
of the Trust Preferred Securities is provided in Note 10 of the
Notes to the Consolidated Financial Statements.

As of December 31, 2002, Humboldt Bancorp
had an outstanding balance of $3.7 million on a revolving
credit facility that matures in October 2003. If not paid in
full prior to maturity or refinanced through another lender, any
balance due at maturity will be converted into an amortizing
term loan. Humboldt Bancorp had outstanding at December 31,
2002 a balance of $1.3 million on an amortizing term loan.
This loan has monthly payments of principal and interest, and
matures in October 2004. Humboldt Bancorp also had outstanding
as of December 31, 2002 a balance of approximately $202,000
on an amortizing term loan that matures in April 2003.

BFS had, as of December 31, 2002, an
obligation in the amount of approximately $1.2 million that
is structured so the sole source of repayment (of principal and
interest) is cash flows arising out of retained interest assets
related to certain lease-backed securitizations. Since the
retained interest assets were written-off during the second
quarter of 2001, this liability will eventually be recovered as
a gain either as cash flows are received in connection with the
retained interests and passed to the lender, or when it is
determined that the cash flows from retained interests will not
be sufficient to repay the debt.

Liquidity and Cash Flow

The objective of Humboldts liquidity
management is to maintain the Banks ability to meet the
day-to-day cash flow requirements of its customers who either
wish to withdraw funds or require funds to meet their credit
needs. Humboldt must manage its liquidity position to meet the
needs of its customers while maintaining an appropriate balance
between assets and liabilities to meet the return on investment
expectations of its shareholders. Humboldt monitors the sources
and uses of funds on a daily basis to maintain an acceptable
liquidity position. In addition to liquidity from core deposits
and repayments and maturities of loans and investments, the Bank
can utilize established credit lines, sell securities under
agreements to repurchase, secure FHLB advances or purchase
overnight Federal Funds.

Humboldt Bancorp is a company separate and apart
from the Bank. It must provide for its own liquidity.
Substantially all of Humboldt Bancorps revenues are
obtained from dividends declared and paid by the Bank. There are
statutory and regulatory provisions that could limit the ability
of the Bank to pay dividends to Humboldt Bancorp. Management
believes that such restrictions will not have an impact on the
ability of Humboldt Bancorp to meet its ongoing cash obligations.

As disclosed in Humboldts Consolidated
Statements of Cash Flows, net cash provided by operating
activities was approximately $23 million during 2002. The
major sources of cash provided by operating activities are net
income and the increase in interest payable and other
liabilities. Net cash used in investing activities of
$97 million consisted primarily of a net increase in loans
of $96 million and securities purchases of
$112 million funded largely by sales, maturities and pay
downs of securities of $106 million. Net cash provided by
financing activities provided the remainder of funding sources
for 2002. The $55 million of net cash provided by financing
activities consisted primarily of a $33 million net
increase in deposits and a net increase in borrowings of
$24 million.

35



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##### Table of Contents



As of December 31, 2002, the Bank had
$23.5 million in available federal funds lines of credit
and approximately $88 million in secured borrowing
availability from the FHLB. Humboldt Bancorp had borrowing
availability of $4.3 million under two lines of credit as
of December 31, 2002. Commitments to extend credit are
agreements to lend to a customer as long as there is no
violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many
of the commitments are expected to expire without being drawn
upon the total commitment amounts do not necessarily represent
future cash requirements. Commitments to extend credit, credit
card arrangements, and standby letters of credit as of
December 31, 2002 were approximately $153 million,
$14 million and $2 million respectively.

Management expects the Banks liquidity
position to remain satisfactory during 2003. However, the
planned exit from the merchant processing business will have an
adverse impact on liquidity, since approximately
$68 million of deposits held as merchant loss reserves will
be transferred to other financial institutions prior to March
2004. Management expects that wholesale funding sources,
including brokered certificates of deposit, will be used to
replace these outflows on a short-term basis while initiatives
to increase core deposits are being implemented.

Capital Resources

Stockholders equity at December 31,
2002 was $78 million, an increase of $13 million, or
21%, from December 31, 2001. The increase in
stockholders equity during 2002 was principally due to the
retention of $11.3 million, or approximately 93% of net
income for the year, and an increase in other comprehensive
income of approximately $3.0 million. Book value per share
as of December 31, 2002 was $6.18.

The Board of Governors of the Federal Reserve
System has issued guidelines for the implementation of
risk-based capital requirements by U.S. banks and bank holding
companies. These risk-based capital guidelines take into
consideration risk factors, as defined by regulators, associated
with various categories of assets, both on and off balance
sheet. Under the guidelines, capital strength is measured in two
tiers, which are used in conjunction with risk-adjusted assets
to determine the risk based capital ratios. The guidelines
require an 8% total risk-based capital ratio, of which 4% must
be Tier I capital. Humboldts Tier I capital, which
consists of stockholders equity and qualifying
trust-preferred securities less other comprehensive income,
goodwill and deposit-based intangibles, totaled $88 million
at December 31, 2002. Tier II capital components include
supplemental capital components such as a qualifying allowance
for loan losses and qualifying subordinated debt. Tier I capital
plus Tier II capital components is referred to as Total
Risk-based Capital, and was $99 million at
December 31, 2002. The percentage ratios, as calculated
under the guidelines, were 10.18% and 11.43% for Tier I and
Total Risk-based Capital, respectively, at December 31,
2002. A minimum leverage ratio is required in addition to the
risk-based capital standards and is defined as period end
stockholders equity and qualifying trust preferred
securities, less other comprehensive income, goodwill and
deposit-based intangibles, divided by average assets as adjusted
for goodwill and other intangible assets.

Although a minimum leverage ratio of 4% is
required for the highest-rated bank holding companies which are
not undertaking significant expansion programs, the Federal
Reserve Board requires a bank holding company to maintain a
leverage ratio greater than 4% if it is experiencing or
anticipating significant growth or is operating with less than
well-diversified risks in the opinion of the Federal Reserve
Board. The Federal Reserve Board uses the leverage and
risk-based capital ratios to assess capital adequacy of banks
and bank holding companies. Humboldts leverage ratios at
December 31, 2001 and 2002 were 8.45%, and 8.73%,
respectively.

Humboldt initiated the payment of a quarterly
cash dividend in June 2002 and paid total cash dividends of
$886,000 during 2002. Any decision to pay cash dividends in the
future will be based on Humboldts results of operations,
growth expectations, financial condition, regulatory constraints
and other factors considered important by the Board of Directors.

All three of the capital ratios of the Bank
currently exceed the minimum ratios required at
December 31, 2002 as defined by federal regulation.
Management monitors these ratios to ensure that the Bank remains

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within regulatory guidelines. Further information
regarding the actual and required capital ratios of Humboldt and
the Bank is provided in Note 20 in the Notes to the Consolidated
Financial Statements


On February 6, 2002, Humboldt announced a
common stock repurchase program that authorized the repurchase
of up to 600,000 shares of common stock in open market or
private transactions. Table 14 below presents the number of
shares repurchased and average price paid for the first
authorization during 2002:

Table 14  Shares
Repurchased

|                   |  |                       |         |          |  |               |        |              |  |          |        |  |  |   |       |  |  |   |         | 
|------------------ |  | --------------------- | ------- | -------- |  | ------------- | ------ | ------------ |  | -------- | ------ |  |  | - | ----- |  |  | - | ------- | 
|                   |  |                       |         |         
|                   |  | For the Quarter Ended |         |         
|                   |  |                       |         |         
|                   |  | March 31,             |         | June 30, |  | September 30, |        | December 31, |  | Four    
|                   |  | 2002                  |         | 2002     |  | 2002          |        | 2002         |  | Quarters
|                   |  |                       |         |          |  |               |        |              |  |         
|Shares repurchased |  |                       | 254,640 |          |  |               | 84,480 |              |  |          | 86,040 |  |  |   | 9,000 |  |  |   | 434,160 | 
|                  
|                  
|                  
|                  
|Average price paid |  | $                     | 8.31    |          |  | $             | 10.95  |              |  | $        | 13.37  |  |  | $ | 10.91 |  |  | $ | 9.88    | 

Additionally, on July 17, 2002, Humboldt
announced a second common stock repurchase program that
authorized repurchase of up to 1.2 million shares of common
stock in open market or private transactions. No shares were
repurchased under the second authorization during 2002. Both of
the repurchase programs may be modified, suspended or terminated
at any time without notice. The extent to which Humboldt
repurchases its shares and the timing of such purchases will
depend upon market conditions and other corporate considerations.

Quantitative and Qualitative Disclosures about
Market Risk

The absolute level and volatility of interest
rates can have a significant impact on Humboldts
profitability. The objective of interest rate risk management is
to identify and manage the sensitivity of net interest income to
changing interest rates to achieve Humboldts overall
financial objectives. Based on economic conditions, asset
quality and various other considerations, management establishes
tolerance ranges for interest rate sensitivity and manages
within these ranges. Humboldts net interest income and the
fair value of its financial instruments are influenced by
changes in the level of interest rates. Humboldt manages its
exposure to fluctuations in interest rates through policies
established by Asset/ Liability Management Committee
(ALCO). The ALCO meets periodically and has
responsibility for developing asset/liability management policy,
formulating and implementing strategies to improve balance sheet
positioning and/or earnings and reviewing interest rate
sensitivity. The Board of Directors reviews and approves the
asset/liability management policy on an annual basis and reviews
the results of the interest rate risk analyses prepared for the
ALCO.

Management utilizes an interest rate simulation
model to estimate the sensitivity of net interest income to
changes in market interest rates. Such estimates are based upon
a number of assumptions for each scenario, including the level
of balance sheet growth, deposit repricing characteristics and
the rate of prepayments. Interest rate sensitivity is a function
of the repricing characteristics of Humboldts interest
earning assets and interest bearing 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 during the
life of the instruments. Interest rate sensitivity management
focuses on the maturity structure of assets and liabilities and
their repricing characteristics during periods of changes in
market interest rates. Effective interest rate sensitivity
management seeks to ensure that both assets and liabilities
respond to changes in interest rates within an acceptable
timeframe, thereby minimizing the impact of interest rate
changes on net interest income. Interest rate sensitivity is
measured as the difference between the volumes of assets and
liabilities in Humboldts current portfolio that are
subject to repricing at various time horizons: immediate; one to
three months; four to twelve months; one to five years; over
five years, and on a cumulative basis. The differences are known
as interest sensitivity gaps. Table 15 sets forth interest
sensitivity gaps for these different intervals as of
December 31, 2002.

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Table 15  Interest Sensitivity
Gap

|                                         |       |                                |         |         |  |          |         |         |  |       |         |         |  |   |         |         |  |   |         |         | 
|---------------------------------------- | ----- | ------------------------------ | ------- | ------- |  | -------- | ------- | ------- |  | ----- | ------- | ------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                         |       |                               
|                                         |       | Interest Sensitivity in Months
|                                         |       |                               
|                                         |       | 0 to 3                         |         | 4 to 12 |  | 13 to 60 |         | Over 60 |  | Total
|                                         |       |                                |         |         |  |          |         |         |  |      
|                                         |       |                               
|                                         |       | (Dollars in thousands)        
|                                        
|                                        
|                                        
|                                        
|Earning Assets:                          |       |                                |         |         |  |          |         |         |  |       |         |         |  |   |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Net loans                                |       | $                              | 375,961 |         |  | $        | 132,664 |         |  | $     | 213,497 |         |  | $ | 26,912  |         |  | $ | 749,034 |        
|                                        
|                                        
|                                        
|                                        
|Investment securities                    |       |                                | 16,566  |         |  |          | 45,433  |         |  |       | 97,511  |         |  |   | 21,961  |         |  | $ | 181,471 |        
|                                        
|                                        
|                                        
|                                        
|Interest-bearing deposits with banks     |       |                                | 202     |         |  |          |        |         |  |       |        |         |  |   |        |         |  |   | 202     |        
|                                         |       |                                |         |         |  |          |         |         |  |       |         |         |  |   |         |         |  |   |         |        
|                                         | Total |                                | $       | 392,729 |  |          | $       | 178,097 |  |       | $       | 311,008 |  |   | $       | 48,873  |  |   | $       | 930,707 | 
|                                         |       |                                |         |         |  |          |         |         |  |       |         |         |  |   |         |         |  |   |         |        
|Interest-Bearing Liabilities:            |       |                                |         |         |  |          |         |         |  |       |         |         |  |   |         |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Interest-bearing deposits                |       | $                              | 239,274 |         |  | $        | 196,819 |         |  | $     | 77,174  |         |  | $ | 99,754  |         |  | $ | 613,021 |        
|                                        
|                                        
|                                        
|                                        
|Borrowings                               |       |                                | 3,822   |         |  |          | 36,786  |         |  |       | 26,722  |         |  |   | 2,527   |         |  | $ | 69,857  |        
|                                        
|                                        
|                                        
|                                        
|Trust Preferred Securities               |       |                                |        |         |  |          |        |         |  |       |        |         |  |   | 20,150  |         |  |   | 20,150  |        
|                                         |       |                                |         |         |  |          |         |         |  |       |         |         |  |   |         |         |  |   |         |        
|                                         | Total |                                | $       | 243,096 |  |          | $       | 233,605 |  |       | $       | 103,896 |  |   | $       | 122,431 |  |   | $       | 703,028 | 
|                                         |       |                                |         |         |  |          |         |         |  |       |         |         |  |   |         |         |  |   |         |        
|Interest rate swap contracts             |       | $                              | (50,000 | )       |  | $        |        |         |  | $     | 40,000  |         |  | $ | 10,000  |         |  | $ |        |        
|                                        
|                                        
|                                        
|                                        
|Interest rate sensitivity gap            |       | $                              | 99,633  |         |  | $        | (55,508 | )       |  | $     | 247,112 |         |  | $ | (63,558 | )       |  | $ | 227,679 |        
|                                        
|                                        
|                                        
|                                        
|Cumulative interest rate sensitivity gap |       | $                              | 99,633  |         |  | $        | 44,125  |         |  | $     | 291,237 |         |  | $ | 227,679 |         |  |   |         |        
|                                        
|                                        
|                                        
|                                        
|Cumulative Gap / total assets            |       |                                | 11      | %       |  |          | 5       | %       |  |       | 31      | %       |  |   | 24      | %       |  |   |         |        

As shown in the preceding table, during the first
year 68% of interest bearing liabilities will reprice compared
with 61% of all interest earning assets. Changes in the mix of
earning assets or supporting liabilities can either increase or
decrease the net interest margin without affecting interest rate
sensitivity. In addition, the interest rate spread between an
asset and its supporting liability can vary significantly while
the timing of repricing for both the asset and the liability
remains the same, thus impacting net interest income. This
characteristic is referred to as basis risk and generally
relates to the possibility that the repricing characteristics of
short-term assets tied to Humboldts prime lending rate are
different from those of short-term funding sources such as
certificates of deposit. Varying interest rate environments can
create unexpected changes in prepayment levels of assets and
liabilities that are not reflected in the interest rate
sensitivity analysis. These prepayments may have significant
impact on Humboldts net interest margin. Because of these
factors, an interest sensitivity gap analysis may not provide an
accurate assessment of Humboldts exposure to changes in
interest rates.

Humboldt utilizes an interest rate simulation
model to monitor and evaluate the impact of changing interest
rates on net interest income. The estimated impact on
Humboldts net interest income over a time horizon of one
year as of December 31, 2002 is indicated in Table 16. The
interest rate simulation assumes a parallel and sustained shift
in market interest rates ratably over a twelve month period and
no change in the composition or size of Humboldts balance
sheet. For example, the up 200 basis points scenario
is based on a theoretical increase in market rates of 16.7 basis
points per month for twelve months. In addition, the simulation
includes the impact of $70 million in interest rate swap
contracts that are described below.

Table 16

|                      |  |                                     |      |            |  |  |      |   
|--------------------- |  | ----------------------------------- | ---- | ---------- |  |  | ---- | --
|                      |  | Increase (Decrease) in Net Interest |      | Percentage
|Scenario              |  | Income from Base Scenario           |      | Change    
|                      |  |                                     |      |           
|                      |  |                                    
|                      |  | (Dollars in thousands)             
|                     
|                     
|                     
|                     
|Up 100 basis points   |  | $                                   | 472  |            |  |  | 1.0  | % 
|                     
|                     
|                     
|                     
|Up 200 basis points   |  | $                                   | 972  |            |  |  | 2.1  | % 
|                     
|                     
|                     
|                     
|Down 100 basis points |  | $                                   | (631 | )          |  |  | (1.4 | )%

Based on the simulation model net income should
increase slightly when rates increase and shrink somewhat when
rates fall. This is because of the concentration of variable
rate and short-term loans in

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Humboldts portfolio. However, there can be
no assurance that fluctuations in interest rates will not have a
material adverse impact on Humboldt.


To assist in achieving a desired level of
interest rate sensitivity, Humboldt has entered into off-balance
sheet contracts that are considered derivative financial
instruments. Derivative financial instruments can be a cost and
capital effective means of modifying the repricing
characteristics of on-balance sheet assets and liabilities. The
following table presents Humboldts derivative contracts as
of December 31, 2002:

|              |  |          |        |      |  |          |       |          |  |       |      |            |  |               |  |            |  |                 |  |   |       |  
|------------- |  | -------- | ------ | ---- |  | -------- | ----- | -------- |  | ----- | ---- | ---------- |  | ------------- |  | ---------- |  | --------------- |  | - | ----- | -
|Issue         |  | Notional |        | Rate |  | Rate     |       | Maturity |  | Hedge |      | Hedged     |  | Fair         
|Date          |  | Amount   |        | Paid |  | Received |       | Date     |  | Type  |      | Instrument |  | Value        
|              |  |          |        |      |  |          |       |          |  |       |      |            |  |              
|January 2002  |  | $        | 25,000 |      |  |          | 4.25% | (1)      |  |       | 6.72 | %          |  | January 2005  |  | Cash Flow  |  | Loans           |  | $ | 1,016 |  
|             
|             
|             
|             
|July 2002     |  | $        | 25,000 |      |  |          | 4.25% | (2)      |  |       | 6.30 | %          |  | July 2005     |  | Cash Flow  |  | Loans           |  | $ | 829   |  
|             
|             
|             
|             
|December 2002 |  | $        | 10,000 |      |  |          | 1.45% | (3)      |  |       | 4.50 | %          |  | June 2010     |  | Fair Value |  | Callable CD     |  | $ | 49    |  
|             
|             
|             
|             
|December 2001 |  | $        | 10,000 |      |  |          | 8.42% | (4)      |  |       | 4.98 | %          |  | December 2006 |  | Cash Flow  |  | Trust Preferred |  | $ | (739  | )



---



|    |                                              
|--- | ---------------------------------------------
|(1) | Variable rate based on prime                 
|   
|(2) | Variable rate based on prime                 
|   
|(3) | Variable rate based on LIBOR + 7 basis points
|   
|(4) | Fixed rate                                   

Additional information about the derivative
instruments is provided in Note 11 of the Notes to the
Consolidated Financial Statements.

Humboldt records all derivative financial
instruments at fair value on the balance sheet. Humboldts
derivative financial instruments are classified as fair value or
cash flow hedges. Fair value hedges recognize currently in
earnings both the impact of change in the fair value of the
derivative financial instrument and the offsetting impact of the
change in fair value of the hedged asset or liability. The
change in fair value of cash flow hedges is recognized in other
comprehensive income to the extent that the derivative meets the
value correlation requirements for being considered highly
effective. Management expects that all derivative
contracts will meet the requirements for classification as
highly effective for the term of each contract.

Humboldts policy requires all derivative
financial instruments be used only for asset/liability
management through the hedging of specific transactions or
positions, and not for trading or speculative purposes.
Management believes that the risk associated with using
derivative financial instruments to mitigate interest rate risk
sensitivity is minimal and should not have any material
unintended impact on Humboldts financial condition or
results of operations.

Impact of
Inflation, Deflation and Changing Prices

A financial institutions asset and
liability structure is substantially different from that of an
industrial firm in that primarily all assets and liabilities of
a bank are monetary in nature, with relatively little
investments in fixed assets or inventories. Inflation has an
important impact on the growth of total assets and the resulting
need to increase equity capital at higher than normal rates in
order to maintain an appropriate equity to assets ratio.
Management believes the impact of inflation on financial results
depends on Humboldts ability to react to changes in
interest rates and, by such reaction, reduce the inflationary
impact on performance. Humboldt has an asset/liability
management program which attempts to manage interest rate
sensitivity. In addition, periodic reviews of banking services
and products are conducted to adjust pricing in view of current
and expected costs.

With the continued economic weakness experienced
by the US economy during 2002 and historically low market
interest rates, the potential for a deflationary economic
environment has been publicized. Although the Federal Reserve
Bank has indicated that deflation is unlikely and that, if
deflation were detected, swift action would be taken to
stimulate spending and the economy. During a period of
deflation, prices fall and real short-term interest rates are
negative, and consumers and businesses generally tend to defer
purchases of goods and services waiting for prices to fall
further, which can exacerbate recessionary conditions. A
deflationary

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economic environment would adversely impact
financial institutions, including Humboldt, through the decline
in demand for additional loans, contraction of the net interest
margin and potentially higher loan losses.


Discontinued Operations

BFS was originally capitalized in 1996 with
$2,000,000 contributions from both Humboldt Bancorp and Tehama
Bancorp. Upon the completion of the Tehama Bancorp merger in
March 2001, Humboldt became the sole shareholder of BFS. During
the first quarter of 2001, Humboldts Board of Directors
completed a strategic review of BFS, which principally acquired
and serviced small ticket leases on a nationwide basis. This
review was initiated in response to a number of factors,
including the increased regulatory burden associated with BFS
being a wholly owned subsidiary after completion of the Tehama
Bancorp merger, future capital needs of BFS to support its
growth and reliance upon the lease-backed securities market for
liquidity. As a result of this review, Humboldt adopted a plan
to discontinue the operations of BFS by sale of the company and
engaged an investment banking firm to facilitate the sale during
the first quarter of 2001. A valuation reserve of $700,000, net
of tax, was recorded during the first quarter of 2001 based on
an estimate of the value of BFS as a going concern. The
operating results of BFS are included, net of tax, in the income
statement as income (loss) from discontinued operations.
During the second quarter of 2001 Humboldt was notified by the
investment banker that the prospects for the sale of BFS as a
going concern were unlikely. In response, Humboldt adopted a
plan to wind-down the operations of BFS in an orderly manner.
This plan included the immediate termination of all lease and
loan acquisition activities. In connection with the wind-down
plan, Humboldt recognized a loss on discontinued operations, net
of tax, of $13.5 million during the second quarter of 2001.

The following is a summary of the major
components of the wind-down charge (dollars in thousands):

|                                                 |                         |   |        |        | 
|------------------------------------------------ | ----------------------- | - | ------ | ------ | 
|                                                
|                                                
|                                                
|                                                
|Write-off of retained interests/servicing assets |                         | $ | 11,798 |       
|                                                
|                                                
|                                                
|                                                
|Provision for lease/loan losses                  |                         |   | 4,679  |       
|                                                
|                                                
|                                                
|                                                
|Lease/loan market value adjustments              |                         |   | 1,580  |       
|                                                
|                                                
|                                                
|                                                
|Professional fees                                |                         |   | 470    |       
|                                                
|                                                
|                                                
|                                                
|Other                                            |                         |   | 1,315  |       
|                                                
|                                                
|                                                
|                                                
|Tax Effect                                       |                         |   | (5,848 | )     
|                                                 |                         |   |        |       
|                                                 | Total wind-down expense |   | $      | 13,994 | 
|                                                 |                         |   |        |       

During the third quarter BFS sold approximately
$5,800,000 of lease receivables to an unrelated third party and
paid down a like amount of bank debt. Since a valuation reserve
was provided during the second quarter, there was no gain or
loss recorded on the sale. Humboldt Bancorp agreed to guarantee
certain representations and warranties with respect to the
underlying leases subject to the sale. In addition, the
servicing responsibilities of BFS for approximately 5,400 leases
under certain securitization servicing agreements were
transferred to a third party effective August 31, 2001.

As of December 31, 2001, BFS had total
assets of $7,577,000, which included cash of $1,634,000, lease
receivables of $1,085,000, lease-backed notes of $4,143,000,
deferred tax assets of $600,000 and other assets of $115,000.
Total liabilities as of December 31, 2001 were $8,992,000
and included, non-bank secured borrowings of $5,960,000,
security deposits of $1,242,000, lease and loan payment
servicing liabilities of $866,000, wind down accruals of
$800,000 and other liabilities of $124,000.

As of December 31, 2002, BFS had total
assets of $993,000, which included cash of $568,000 and deferred
tax assets of $425,000. Total liabilities as of
December 31, 2002 were $1,046,000, and included security
deposits of $1,025,000 and other liabilities of $21,000. These
amounts are recorded net in other assets as of December 31,
2002.

In addition to the assets of BFS, certain assets
of Humboldt Bancorp which were acquired from or on behalf of BFS
were included as assets related to discontinued operations.
During the fourth quarter of 2001, Humboldt Bancorp agreed to
assume certain debt of BFS, which was previously guaranteed, in
exchange for

40



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##### Table of Contents



ownership of approximately $7,000,000 of
automobile loans that secured the borrowing. In addition,
Humboldt Bancorp agreed to repurchase approximately $2,000,000
of automobile loan contracts that were originated by BFS and
sold to an unaffiliated financial institution during the fourth
quarter of 2001. As of December 31, 2001, Humboldt Bancorp
had net automobile loans acquired from BFS and repurchased from
third parties of approximately $9,000,000. During the second
quarter of 2002, Humboldt Bancorp completed the sale of the
loans and certain balances previously charged-off to a third
party.


As of December 31, 2001 BFS had borrowings
from two unrelated non-bank lenders totaling $5,960,000. Neither
of these two borrowings was guaranteed by Humboldt Bancorp. One
of the borrowings was originally structured as a loan to an
unconsolidated, bankruptcy-remote subsidiary of BFS as a
commercial paper conduit facility for funding the acquisition of
lease contracts. This facility matured on March 31, 2001
and was not extended by the lender. As of December 31,
2001, the balance outstanding on this loan was $884,000. This
loan was paid in full during the second quarter of 2002.

The second non-bank borrowing was obtained in
February 2001 in connection with the issuance of term
leased-backed notes. The placement agent was able to place
approximately $4,600,000 million of the Class C
leased-backed notes with a non-affiliated investor; however, due
to certain restrictions contained in the indenture, the
transaction had to be structured as a secured borrowing. The
result of the transaction on the balance sheet of BFS was the
establishment of an asset for the Class C leased-backed
notes and a related liability for $4,600,000. This secured
borrowing agreement also contained a provision whereby BFS was
permitted, for a limited period of time, to retain the monthly
principal and interest cash flows received on the leased-backed
notes. These retained cash flows were converted to a
subordinated note secured by retained interest assets of BFS.
The principal portion of the cash flows was applied to reduce
the $4,600,000 million liability and along with the
interest portion were added to the subordinated debt. As of
December 31, 2001 the Class C secured borrowing
totaled $3,911,000 and the subordinated borrowing totaled
$1,165,000.

During the first quarter of 2002, BFS and the
non-affiliated investor executed an agreement whereby the
investor took certain actions that permitted the transfer of
ownership of the Class C leased-backed notes to an
unrelated third party in satisfaction of the $3,911,000 of
related debt. This agreement also provided for the transfer of
the $1,165,000 to a new subordinated loan in favor of the third
party. This new subordinated loan will bear interest at 12%
compounded annually, with repayment of principal and interest
tied solely to the receipt, if any, of cash flows from retained
interest cash flows received by BFS in the future. In the event
no cash flows are received from the retained interests, BFS has
no further obligation under the terms of the loan agreement and
will recognize a pre-tax gain for the carrying amount of the
loan. If cash flows from retained interests are received, BFS
will recognize a pre-tax gain for the amount received since the
retained interest assets are were written-off in June 2001.

During the second quarter of 2001, Humboldt
guaranteed three BFS borrowings from two commercial banks in
consideration for modification of the loan terms and elimination
of certain financial covenants. During the fourth quarter of
2001, Humboldt directly assumed the three borrowings, two of
which were originally related to the financing of certain
automobile loan contracts in the amounts of $6,422,000 and
$2,123,000, respectively, and a deficiency balance related to a
loan that was previously secured by lease contracts for
$300,000. In connection with the assumption, the loan for
$2,123,000 was modified in a manner that the automobile loan
contract collateral was released.

During the first quarter of 2002, Humboldt sold
the automobile loan contracts to a third party and used the
proceeds to pay in full the loan that was secured by the
contracts. (The unsecured deficiency balance loan was paid in
full during the fourth quarter of 2002. As of December 31,
2002, the remaining unsecured loan had a balance of $1,356,000.
This loan has scheduled monthly payments of principal and
interest and matures in October 2004. Additional information on
these borrowings is included in Note 9 to the Consolidated
Financial Statements.

During the second quarter of 2002, the remaining
employees of BFS were terminated and operations ceased. A loss
on discontinued operations of $276,000, net of tax, was recorded
during the second quarter. No other gain or loss on discontinued
operations was recorded during 2002.

41



---



##### Table of Contents



In conducting its business, BFS formed three
subsidiaries that are considered Special Purpose
Entities or SPEs. These subsidiaries were
formed in accordance with legal requirements and were, at
formation, not subject to consolidation on the financial
statements of BFS.

|                            |  |                                                                                                                                                                                                                                                                                       
|--------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Subsidiary Name             |  | Primary Purpose                                                                                                                                                                                                                                                                       
|                            |  |                                                                                                                                                                                                                                                                                       
|BFS Funding Corporation     |  | Issuance of lease-backed notes funded by a
    commercial paper conduit. The line of credit from the commercial
    paper conduit was not renewed upon maturity in March 2001 and
    the subsidiarys assets and related debt were
    reconsolidated on to the balance sheet of BFS.
|BFS Funding Company, LLC    |  | Issuance of $75,000,000 of term lease-backed
    notes to institutional investors in March 2000.                                                                                                                                                                                      
|BFS Funding Company II, LLC |  | Issuance of $60,058,000 of term lease-backed
    notes to institutional investors in February 2001.                                                                                                                                                                                   

BFS Funding Company, LLC and BFS Funding Company
II, LLC are considered qualifying SPEs under SFAS
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.

All retained interest assets related to the
lease-backed notes issued by BFS Funding Company LLC and BFS
Funding Company II, LLC were written off during the second
quarter of 2001. At December 31, 2002, Humboldt Bancorp
owned the Class C notes issued in the 2000 securitization
for which there is no active market. The 2000 Class C
lease-backed note were carried at a value of $3,031,000 as of
December 31, 2002 and will not receive any payments of
interest or principal until the holders of the Class A and
Class B notes are paid in full. Management expects that the
principal and interest payments on the 2000 Class C
lease-backed notes will be received during 2004. As described
above, during the first quarter of 2002, an agreement was
executed resulting in the transfer of the 2001 Class C
lease-backed notes to an unaffiliated third party in
consideration for reduction of related debt owed to the
purchaser. No gain or loss was recorded in connection with the
transfer.




Item
7A.     Quantitative and Qualitative
Disclosures About Market Risk

Information regarding this item is provided under
the heading Quantitative and Qualitative Disclosures about
Market Risk contained in Managements Discussion and
Analysis (Item 7).

42



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##### Table of Contents








|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

INDEPENDENT AUDITORS REPORT

The Board of Directors 
 Humboldt Bancorp and Subsidiaries:

We have audited the accompanying consolidated
balance sheets of Humboldt Bancorp and Subsidiaries (the
Company) as of December 31, 2001, and 2002, and the related
consolidated statements of income, changes in stockholders
equity and cash flows for the two years then ended. These
consolidated financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. 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 2001 and 2002 consolidated
financial statements referred to above present fairly, in all
material respects, the financial position of Humboldt Bancorp
and Subsidiaries as of December 31, 2001 and 2002, and the
results of their operations and their cash flows for the two
years ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.

We also audited the combination of the
accompanying consolidated financial statements as of
December 31, 2000 and for the year then ended, after
restatement for the 2001 pooling-of-interests transaction; in
our opinion, such consolidated financial statements have been
properly combined on the basis described in Note 2 to the
consolidated financial statements.



| |             
| | ------------
| | /s/ KPMG LLP

Sacramento, California

January 24, 2003, except


for Note 25, which is as of


March 13, 2003


43



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors 
 Humboldt Bancorp:

We have audited the accompanying consolidated
balance sheet of Humboldt Bancorp (Bancorp) and Subsidiaries as
of December 31, 2000, and the related consolidated
statements of operations, stockholders equity and cash
flows for the year then ended. 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
auditing standards generally accepted in the United States of
America. 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 2000 financial statements
(before restatement) referred to above present fairly, in all
material respects, the financial position of Humboldt Bancorp
and Subsidiaries as of December 31, 2000, and the results
of its operations and its cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States of America.



| |                         
| | ------------------------
| | /s/ RICHARDSON & COMPANY

Richardson & Company

Sacramento, California


January 12, 2001


44



---



##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors and Shareholders 
 Tehama Bancorp and Subsidiary

We have audited the consolidated balance sheet of
Tehama Bancorp and subsidiary as of December 31, 2000, and
the related consolidated statements of income, changes in
shareholders equity and cash flows for the year then
ended, prior to the restatement (and, therefore, are not
presented herein) for the merger with Humboldt Bancorp on
March 9, 2001, which was accounted for as a pooling of
interests (see Note 2 to the restated financial
statements). These consolidated financial statements are the
responsibility of the Companys management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. 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 audit
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the consolidated financial position of Tehama Bancorp
and subsidiary as of December 31, 2000, and the
consolidated results of their operations and their cash flows
for the year then ended, in conformity with accounting
principles generally accepted in the United States of America.



| |                    
| | -------------------
| | /s/ PERRY-SMITH LLP

Sacramento, California

January 26, 2001


45



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

December 31, 2001 and 2002


|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |         |           | 
|-------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ------- | ------- | ------- | - | ------- | ------- | --------- | 
|                                                                                                                           |                                                                                                                                                   | 2001                                           |         | 2002   
|                                                                                                                           |                                                                                                                                                   |                                                |         |        
|                                                                                                                           |                                                                                                                                                   |                                               
|                                                                                                                           |                                                                                                                                                   | (Dollars in thousands)                        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|ASSETS                                                                                                                    
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Cash and due from banks                                                                                                    |                                                                                                                                                   | $                                              | 54,567  |         |         | $ | 35,156  |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Interest-bearing deposits in other banks                                                                                   |                                                                                                                                                   |                                                | 920     |         |         |   | 202     |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Investment securities available-for-sale                                                                                   |                                                                                                                                                   |                                                | 172,473 |         |         |   | 181,471 |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Loans                                                                                                                      |                                                                                                                                                   |                                                | 664,332 |         |         |   | 760,648 |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Less: allowance for loan losses                                                                                            |                                                                                                                                                   |                                                | 9,765   |         |         |   | 11,614  |        
|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                           |                                                                                                                                                   | Net loans                                      |         |         | 654,567 |   |         |         | 749,034   | 
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Premises and equipment, net                                                                                                |                                                                                                                                                   |                                                | 19,270  |         |         |   | 16,593  |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Net assets of discontinued operations                                                                                      |                                                                                                                                                   |                                                | 6,669   |         |         |   |        |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Accrued interest receivable and other assets                                                                               |                                                                                                                                                   |                                                | 50,451  |         |         |   | 49,094  |        
|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                           |                                                                                                                                                   | TOTAL ASSETS                                   |         | $       | 958,917 |   |         | $       | 1,031,550 | 
|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|LIABILITIES                                                                                                               
|Deposits                                                                                                                   |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                           | Noninterest-bearing                                                                                                                               |                                                | $       | 213,092 |         |   | $       | 227,406 |          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                           | Interest-bearing                                                                                                                                  |                                                |         | 593,994 |         |   |         | 613,021 |          
|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                           |                                                                                                                                                   | Total deposits                                 |         |         | 807,086 |   |         |         | 840,427   | 
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Accrued interest payable and other liabilities                                                                             |                                                                                                                                                   |                                                | 21,539  |         |         |   | 23,268  |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Borrowed funds                                                                                                             |                                                                                                                                                   |                                                | 45,560  |         |         |   | 69,857  |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|Guaranteed Preferred Beneficial Interests in
    Companys Junior Subordinated Debentures (Trust Preferred
    Securities) |                                                                                                                                                   |                                                | 20,150  |         |         |   | 20,150  |        
|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                           |                                                                                                                                                   | TOTAL LIABILITIES                              |         |         | 894,335 |   |         |         | 953,702   | 
|                                                                                                                          
|Stockholders Equity                                                                                                       |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                           | Preferred stock, no par value; 20,000,000 shares
    authorized, no shares issued and outstanding in 2001 and 2002                                |                                                |         |        |         |   |         |        |          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                           | Common stock, no par value; 100,000,000 shares
    authorized, 12,552,955 shares in 2001 and 12,604,157 shares in
    2002 issued and outstanding |                                                |         | 67,459  |         |   |         | 66,345  |          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                           | Retained earnings (accumulated deficit)                                                                                                           |                                                |         | (3,265  | )       |   |         | 8,103   |          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                          
|                                                                                                                           | Accumulated other comprehensive income, net                                                                                                       |                                                |         | 388     |         |   |         | 3,400   |          
|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                          
|                                                                                                                           |                                                                                                                                                   | TOTAL STOCKHOLDERS EQUITY                     |         |         | 64,582  |   |         |         | 77,848    | 
|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |        
|                                                                                                                          
|                                                                                                                           |                                                                                                                                                   | TOTAL LIABILITIES AND STOCKHOLDERS
    EQUITY |         | $       | 958,917 |   |         | $       | 1,031,550 | 
|                                                                                                                           |                                                                                                                                                   |                                                |         |         |         |   |         |        

The accompanying notes are an integral part of
these consolidated financial statements.

46



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2000,
2001, 2002


|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |        |       |        |        | 
|----------------------------------- | ------------------------------------------------------------ | ------------------------------ | -------------------------- | ------------------------------------------------------- | ----- | ------ | ------ | ------- | ----- | ------ | ------ | ------ | ----- | ------ | ------ | 
|                                    |                                                              | 2000                           |                            | 2001                                                    |       | 2002  
|                                    |                                                              |                                |                            |                                                         |       |       
|                                    |                                                              |                               
|                                    |                                                              | (Dollars in thousands)        
|INTEREST INCOME                     |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                   
|                                   
|                                   
|                                   
|                                    | Interest and fees on loans                                   |                                | $                          | 48,562                                                  |       |        | $      | 55,971  |       |        | $      | 56,010 |      
|                                    | Interest and dividends on investment securities              |                                |                            |                                                         |       |        |        |         |       |        |        |        |      
|                                   
|                                   
|                                   
|                                   
|                                    |                                                              | Taxable                        |                            |                                                         | 7,440 |        |        |         | 6,989 |        |        |        | 6,652 |       
|                                   
|                                   
|                                   
|                                   
|                                    |                                                              | Exempt from Federal income tax |                            |                                                         | 1,557 |        |        |         | 1,571 |        |        |        | 1,425 |       
|                                   
|                                   
|                                   
|                                   
|                                    |                                                              | Dividends                      |                            |                                                         | 224   |        |        |         | 136   |        |        |        | 219   |       
|                                   
|                                   
|                                   
|                                   
|                                    | Interest on federal funds sold                               |                                |                            | 1,684                                                   |       |        |        | 1,468   |       |        |        |       |      
|                                   
|                                   
|                                   
|                                   
|                                    | Interest on deposits in other banks                          |                                |                            | 49                                                      |       |        |        | 30      |       |        |        | 39     |      
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                | Total Interest Income      |                                                         |       | 59,516 |        |         |       | 66,165 |        |        |       | 64,345 |       
|INTEREST EXPENSE                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                   
|                                   
|                                   
|                                   
|                                    | Interest on deposits                                         |                                |                            | 23,154                                                  |       |        |        | 25,203  |       |        |        | 13,632 |      
|                                   
|                                   
|                                   
|                                   
|                                    | Interest on borrowed funds                                   |                                |                            | 1,728                                                   |       |        |        | 3,138   |       |        |        | 4,005  |      
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                | Total Interest Expense     |                                                         |       | 24,882 |        |         |       | 28,341 |        |        |       | 17,637 |       
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                |                            | NET INTEREST INCOME                                     |       |        | 34,634 |         |       |        | 37,824 |        |       |        | 46,708 | 
|                                   
|                                   
|                                   
|                                   
|                                    | Provision for loan losses                                    |                                |                            | 2,535                                                   |       |        |        | 2,903   |       |        |        | 3,321  |      
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                |                            | NET INTEREST INCOME AFTER PROVISION FOR LOAN
    LOSSES |       |        | 32,099 |         |       |        | 34,921 |        |       |        | 43,387 | 
|OTHER INCOME                        |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                   
|                                   
|                                   
|                                   
|                                    | Fees and other income                                        |                                |                            | 19,054                                                  |       |        |        | 24,731  |       |        |        | 20,058 |      
|                                   
|                                   
|                                   
|                                   
|                                    | Service charges on deposit accounts                          |                                |                            | 3,236                                                   |       |        |        | 3,521   |       |        |        | 3,030  |      
|                                   
|                                   
|                                   
|                                   
|                                    | Net gain on sale of loans                                    |                                |                            | 691                                                     |       |        |        | 1,269   |       |        |        | 2,172  |      
|                                   
|                                   
|                                   
|                                   
|                                    | Net investment securities (loss) gain                        |                                |                            | (117                                                    | )     |        |        | 206     |       |        |        | 887    |      
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                | Total Other Income         |                                                         |       | 22,864 |        |         |       | 29,727 |        |        |       | 26,147 |       
|OTHER EXPENSES                      |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                   
|                                   
|                                   
|                                   
|                                    | Salaries and employee benefits                               |                                |                            | 21,662                                                  |       |        |        | 25,612  |       |        |        | 25,247 |      
|                                   
|                                   
|                                   
|                                   
|                                    | Net occupancy and equipment expense                          |                                |                            | 5,039                                                   |       |        |        | 5,875   |       |        |        | 6,492  |      
|                                   
|                                   
|                                   
|                                   
|                                    | Merger related expenses                                      |                                |                            |                                                        |       |        |        | 3,531   |       |        |        |       |      
|                                   
|                                   
|                                   
|                                   
|                                    | Other expenses                                               |                                |                            | 14,782                                                  |       |        |        | 18,856  |       |        |        | 20,819 |      
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                | Total Other Expenses       |                                                         |       | 41,483 |        |         |       | 53,874 |        |        |       | 52,558 |       
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                | Income Before Income Taxes |                                                         |       | 13,480 |        |         |       | 10,774 |        |        |       | 16,976 |       
|                                   
|                                   
|                                   
|                                   
|                                    | Provision for income taxes                                   |                                |                            | 4,453                                                   |       |        |        | 3,789   |       |        |        | 4,437  |      
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                |                            | NET INCOME CONTINUING OPERATIONS                        |       |        | 9,027  |         |       |        | 6,985  |        |       |        | 12,539 | 
|DISCONTINUED OPERATIONS             |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                   
|                                   
|                                   
|                                   
|                                    | (Loss) from discontinued operations, net of tax              |                                |                            | (7                                                      | )     |        |        |        |       |        |        |       |      
|                                   
|                                   
|                                   
|                                   
|                                    | Loss on wind down of discontinued operations, net
    of tax |                                |                            |                                                        |       |        |        | (13,994 | )     |        |        | (276   | )    
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    |                                                              |                                |                            | NET INCOME (LOSS)                                       |       | $      | 9,020  |         |       | ($     | 7,009  | )      |       | $      | 12,263 | 
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|EARNING (LOSS) PER SHARE  BASIC:   |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                   
|                                   
|                                   
|                                   
|                                    | Continuing Operations                                        |                                | $                          | 0.75                                                    |       |        | $      | 0.56    |       |        | $      | 1.00   |      
|                                   
|                                   
|                                   
|                                   
|                                    | Discontinued Operations                                      |                                | $                          | 0.00                                                    |       |        | ($     | 1.12    | )     |        | ($     | 0.02   | )    
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    | Net Income (loss)                                            |                                | $                          | 0.75                                                    |       |        | ($     | 0.56    | )     |        | $      | 0.98   |      
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|EARNING (LOSS) PER SHARE  DILUTED: |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                   
|                                   
|                                   
|                                   
|                                    | Continuing Operations                                        |                                | $                          | 0.71                                                    |       |        | $      | 0.54    |       |        | $      | 0.96   |      
|                                   
|                                   
|                                   
|                                   
|                                    | Discontinued Operations                                      |                                | $                          | 0.00                                                    |       |        | ($     | 1.08    | )     |        | ($     | 0.02   | )    
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       
|                                    | Net Income (loss)                                            |                                | $                          | 0.71                                                    |       |        | ($     | 0.54    | )     |        | $      | 0.94   |      
|                                    |                                                              |                                |                            |                                                         |       |        |        |         |       |        |        |       

The accompanying notes are an integral part of
these consolidated financial statements.

47



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY

For the years ended December 31, 2000 (as
restated), 2001 (as restated), and 2002


|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |       |  
|----------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------- | ------ | ------------ | - | -------- | ---------- | ------------- |  | ------ | ------ | ----- |  | -- | ------ | - |  | -- | ----- | ----- | - | - | ------ | ----- | -
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            | Accumulated   |  |       
|                                                                                                |                                                                                                                                                    |                        |        | Common Stock |   |          |            | Other         |  |       
|                                                                                                |                                                                                                                                                    | Comprehensive          |        |              |   | Retained |            | Comprehensive |  |       
|                                                                                                |                                                                                                                                                    | Income                 |        | Shares       |   | Amount   |            | Earnings      |  | Income |        | Total
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |      
|                                                                                                |                                                                                                                                                    |                       
|                                                                                                |                                                                                                                                                    | (Dollars in thousands)
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|BALANCE, DECEMBER 31, 1999                                                                      |                                                                                                                                                    |                        |        |              |   |          | 8,076,524  |               |  | $      | 43,818 |       |  | $  | 9,532  |   |  | ($ | 1,207 | )     |   | $ | 52,143 |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|10% stock dividend                                                                              |                                                                                                                                                    |                        |        |              |   |          | 472,879    |               |  |        | 6,018  |       |  |    | (6,018 | ) |  |    |       |       |   |   |       |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Fractional shares purchased                                                                     |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    | (7     | ) |  |    |       |       |   |   | (7     | )    
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Sale of stock, net of issuance costs                                                            |                                                                                                                                                    |                        |        |              |   |          | 640,000    |               |  |        | 7,309  |       |  |    |        |   |  |    |       |       |   |   | 7,309  |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Directors fee, stock options exercised and
    related tax benefit                              |                                                                                                                                                    |                        |        |              |   |          | 115,934    |               |  |        | 582    |       |  |    |        |   |  |    |       |       |   |   | 582    |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Stock issuance in connection with acquisition                                                   |                                                                                                                                                    |                        |        |              |   |          | 46,974     |               |  |        | 568    |       |  |    | (55    | ) |  |    |       |       |   |   | 513    |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Comprehensive income:                                                                           |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Net Income                                                                                      |                                                                                                                                                    | $                      | 9,020  |              |   |          |            |               |  |        |        |       |  |    | 9,020  |   |  |    |       |       |   |   | 9,020  |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Other comprehensive loss, net of tax:                                                                                                              |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |       |  
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Unrealized holding gains on securities
    available-for-sale arising during the year, net of taxes of
    $1,491 and reclassification adjustments |                        |        | 2,279        |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       | 2,279 |   |   |        | 2,279 |  
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|Total Comprehensive Income                                                                      |                                                                                                                                                    | $                      | 11,299 |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|BALANCE, DECEMBER 31, 2000                                                                      |                                                                                                                                                    |                        |        |              |   |          | 9,352,311  |               |  | $      | 58,295 |       |  | $  | 12,472 |   |  | $  | 1,072 |       |   | $ | 71,839 |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|10% Stock Dividend                                                                              |                                                                                                                                                    |                        |        |              |   |          | 938,374    |               |  | $      | 8,719  |       |  | ($ | 8,719  | ) |  |    |       |       |   |   |        |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Dissenters Payments                                                                             |                                                                                                                                                    |                        |        |              |   |          | (18,133    | )             |  |        | (220   | )     |  |    |        |   |  |    |       |       |   |   | (220   | )    
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Fractional shares purchased                                                                     |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    | (9     | ) |  |    |       |       |   |   | (9     | )    
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Restricted stock awards                                                                         |                                                                                                                                                    |                        |        |              |   |          | 1,385      |               |  |        | 13     |       |  |    |        |   |  |    |       |       |   |   | 13     |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Directors fee, stock options exercised and
    related tax benefit                              |                                                                                                                                                    |                        |        |              |   |          | 186,859    |               |  |        | 652    |       |  |    |        |   |  |    |       |       |   |   | 652    |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Comprehensive income:                                                                           |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Net (loss)                                                                                      |                                                                                                                                                    | ($                     | 7,009  | )            |   |          |            |               |  |        |        |       |  |    | (7,009 | ) |  |    |       |       |   |   | (7,009 | )    
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Other comprehensive loss, net of tax:                                                                                                              |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |       |  
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Unrealized holding (loss) on securities
    available-for-sale arising during the year net of taxes of $369
    and reclassifications adjustments  |                        |        | (684         | ) |          |            |               |  |        |        |       |  |    |        |   |  |    |       | (684  | ) |   |        | (684  | )
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|Total Comprehensive (loss)                                                                      |                                                                                                                                                    | ($                     | 7,693  | )            |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|BALANCE, DECEMBER 31, 2001                                                                      |                                                                                                                                                    |                        |        |              |   |          | 10,460,796 |               |  | $      | 67,459 |       |  | ($ | 3,265  | ) |  | $  | 388   |       |   | $ | 64,582 |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|6 for 5 Stock Split                                                                             |                                                                                                                                                    |                        |        |              |   |          | 2,092,159  |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Fractional shares purchased                                                                     |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    | (9     | ) |  |    |       |       |   |   | (9     | )    
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Shares Repurchased                                                                              |                                                                                                                                                    |                        |        |              |   |          | (434,160   | )             |  |        | (4,289 | )     |  |    |        |   |  |    |       |       |   |   | (4,289 | )    
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Shares issued in connection with various employee
    and director plans including tax benefits |                                                                                                                                                    |                        |        |              |   |          | 485,362    |               |  |        | 3,175  |       |  |    |        |   |  |    |       |       |   |   | 3,175  |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Cash Dividend Declared                                                                          |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    | (886   | ) |  |    |       |       |   |   | (886   | )    
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Comprehensive income:                                                                           |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|Net Income                                                                                      |                                                                                                                                                    | $                      | 12,263 |              |   |          |            |               |  |        |        |       |  |    | 12,263 |   |  |    |       |       |   |   | 12,263 |      
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Other comprehensive income, net of tax:                                                                                                            |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |       |  
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                               
|                                                                                                | Unrealized holding gain on securities
    available-for-sale arising during the year net of taxes of $1108
    and reclassifications adjustments   |                        |        | 3,012        |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       | 3,012 |   |   |        | 3,012 |  
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|Total Comprehensive Income                                                                      |                                                                                                                                                    | $                      | 15,275 |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      
|BALANCE, DECEMBER 31, 2002                                                                      |                                                                                                                                                    |                        |        |              |   |          | 12,604,157 |               |  |        | 66,345 |       |  |    | 8,103  |   |  |    | 3,400 |       |   |   | 77,848 |      
|                                                                                                |                                                                                                                                                    |                        |        |              |   |          |            |               |  |        |        |       |  |    |        |   |  |    |       |       |   |   |        |      

The accompanying notes are an integral part of
these consolidated financial statements.

48



---



##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

For the years ended December 31, 2000,
2001, and 2002


|                                                   |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |          |        |       |         |  
|-------------------------------------------------- | -------------------------------------------------------------------------------------------- | ----------------------------------------- | -------------------------------------------------- | ------------------------------------------------------ | ------ | ------- | ------- | -------- | ------- | ------- | -------- | -------- | ------ | ----- | ------- | -
|                                                   |                                                                                              | 2000                                      |                                                    | 2001                                                   |        | 2002   
|                                                   |                                                                                              |                                           |                                                    |                                                        |        |        
|                                                   |                                                                                              |                                          
|                                                   |                                                                                              | (Dollars in thousands)                   
|OPERATING ACTIVITIES                               |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net income (loss)                                                                            |                                           | $                                                  | 9,020                                                  |        |         | $       | (7,009   | )       |         | $        | 12,263   |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Adjustments to reconcile net income
    (loss) to net cash provided by operating activities: |                                           |                                                    |                                                        |        |         |         |          |         |         |          |          |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              |                                           | Discontinued operations                            |                                                        |        | 7       |         |          |         | 13,994  |          |          |        | 276   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              |                                           | Provision for loan losses                          |                                                        |        | 2,535   |         |          |         | 2,903   |          |          |        | 3,321 |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              |                                           | Depreciation and Amortization                      |                                                        |        | 2,642   |         |          |         | 4,087   |          |          |        | 5,456 |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              |                                           | Loss (gain) on sale of investments                 |                                                        |        | 117     |         |          |         | (206    | )        |          |        | (887  | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              |                                           | (Gain) on sale of foreclosed real estate           |                                                        |        | (17     | )       |          |         |        |          |          |        |      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              |                                           | Decrease in loans held for sale                    |                                                        |        | 1,822   |         |          |         | 373     |          |          |        |      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              |                                           | Increase in interest receivable and other assets   |                                                        |        | (10,810 | )       |          |         | (13,382 | )        |          |        | (210  | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              |                                           | Increase in interest payable and other liabilities |                                                        |        | 2,368   |         |          |         | 5,785   |          |          |        | 2,762 |        
|                                                   |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                   |                                                                                              |                                           |                                                    | NET CASH PROVIDED BY OPERATING ACTIVITIES              |        |         | 7,684   |          |         |         | 6,545    |          |        |       | 22,981  |  
|INVESTING ACTIVITIES                               |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net (increase) decrease in interest-bearing
    deposits with banks                          |                                           |                                                    | (151                                                   | )      |         |         | (749     | )       |         |          | 718      |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net decrease in federal funds sold                                                           |                                           |                                                    | 14,875                                                 |        |         |         | 13,000   |         |         |          |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from maturities and sales of investment
    securities available-for-sale           |                                           |                                                    | 38,247                                                 |        |         |         | 63,645   |         |         |          | 106,173  |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from maturities of investment securities
    held-to-maturity                       |                                           |                                                    | 1,617                                                  |        |         |         | 14,707   |         |         |          |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of investment securities
    available-for-sale                                    |                                           |                                                    | (18,771                                                | )      |         |         | (111,318 | )       |         |          | (112,325 | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of investment securities
    held-to-maturity                                      |                                           |                                                    | (4,776                                                 | )      |         |         | (465     | )       |         |          |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net increase in loans                                                                        |                                           |                                                    | (105,287                                               | )      |         |         | (82,701  | )       |         |          | (95,616  | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchases of premises and equipment                                                          |                                           |                                                    | (8,367                                                 | )      |         |         | (3,999   | )       |         |          | (1,804   | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Investing activities related to discontinued
    operations                                  |                                           |                                                    | (2,000                                                 | )      |         |         | (13,145  | )       |         |          | 3,795    |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Purchase of other real estate                                                                |                                           |                                                    | (15                                                    | )      |         |         |         |         |         |          |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from the sale of foreclosed real estate
    and other assets                        |                                           |                                                    | 1,051                                                  |        |         |         | 995      |         |         |          | 2,071    |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net cash paid in acquisition of subsidiary                                                   |                                           |                                                    | (10,923                                                | )      |         |         |         |         |         |          |         |       
|                                                   |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                   |                                                                                              |                                           |                                                    | NET CASH USED BY INVESTING ACTIVITIES                  |        |         | (94,500 | )        |         |         | (120,030 | )        |        |       | (96,988 | )
|FINANCING ACTIVITIES                               |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net increase in deposits                                                                     |                                           |                                                    | 47,730                                                 |        |         |         | 94,279   |         |         |          | 33,341   |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Net increase (decrease) in borrowed funds                                                    |                                           |                                                    | 37,115                                                 |        |         |         | (1,790   | )       |         |          | 24,297   |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash dividends on common stock                                                               |                                           |                                                    |                                                       |        |         |         |         |         |         |          | (886     | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Repurchase of common stock                                                                   |                                           |                                                    |                                                       |        |         |         |         |         |         |          | (4,289   | )     
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from issuance of Trust Preferred
    Securities                                     |                                           |                                                    | 5,150                                                  |        |         |         | 15,000   |         |         |          |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from issuance of common stock                                                       |                                           |                                                    | 8,459                                                  |        |         |         | 665      |         |         |          |         |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Dissenters payments                                                                          |                                           |                                                    |                                                       |        |         |         | (220     | )       |         |          |          |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Proceeds from exercise of stock options                                                      |                                           |                                                    |                                                       |        |         |         |         |         |         |          | 2,142    |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Fractional shares purchased                                                                  |                                           |                                                    | (7                                                     | )      |         |         | (9       | )       |         |          | (9       | )     
|                                                   |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                   |                                                                                              | NET CASH PROVIDED BY FINANCING ACTIVITIES |                                                    |                                                        | 98,447 |         |         |          | 107,925 |         |          |          | 54,596 |      
|                                                   |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                   |                                                                                              |                                           |                                                    | NET INCREASE (DECREASE) IN CASH AND DUE FROM
    BANKS |        |         | 11,631  |          |         |         | (5,560   | )        |        |       | (19,411 | )
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash and due from banks at beginning of year                                                 |                                           |                                                    | 48,496                                                 |        |         |         | 60,127   |         |         |          | 54,567   |       
|                                                   |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                   |                                                                                              |                                           |                                                    | CASH AND DUE FROM BANKS AT END OF YEAR                 |        | $       | 60,127  |          |         | $       | 54,567   |          |        | $     | 35,156  |  
|                                                   |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |                                                                                              |                                           |                                                    |                                                        |        |         |         |          |         |         |          |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Cash paid during the year for:                                                               |                                           |                                                    |                                                        |        |         |         |          |         |         |          |          |       
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              | Interest expense                          |                                                    | $                                                      | 24,470 |         |         | $        | 28,596  |         |          | $        | 17,679 |      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                              | Income taxes                              |                                                    |                                                        | 7,586  |         |         |          | 4,541   |         |          | $        | 2,500  |      

The accompanying notes are an integral part of
these consolidated financial statements.

49



---



##### Table of Contents






HUMBOLDT BANCORP AND SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS





December 31, 2001 and 2002




|         |                                
|-------- | -------------------------------
|Note 1  | Significant Accounting Policies

Business:Humboldt Bancorp (Humboldt) is a bank holding
company whose principal activity is the ownership and management
of its wholly-owned subsidiary, Humboldt Bank
(Bank). During 2002, Humboldt merged its Tehama
Bank, Capitol Valley Bank and Capitol Thrift & Loan
subsidiaries into Humboldt Bank. There were no purchase
accounting adjustments made in connection with this charter
consolidation. Humboldt and the Bank are subject to regulation,
supervision and regular examination by the Federal Reserve Bank,
the California Department of Financial Institutions and the
Federal Deposit Insurance Corporation. The regulations of these
agencies govern most aspects of the Banks business. The
accounting and reporting policies of Humboldt Bancorp and
Subsidiaries conform with accounting principles generally
accepted in the United States of America. In addition, certain
2000 and 2001 amounts have been reclassified to conform to the
2002 presentation format.

Principles of
Consolidation:The consolidated
financial statements include the accounts of Humboldt and its
wholly owned subsidiaries. All material intercompany accounts
and transactions have been eliminated.

Nature of
Operations:The Bank provides
general commercial banking services at 19 locations located
throughout Northern California. These banking services include
accepting deposit accounts (demand, time and savings), and
making secured and unsecured loans to businesses and
individuals. Other significant business operations of Humboldt
include merchant credit card transaction processing for
businesses throughout the United States.

Significant Management
Estimates:The preparation of
financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates. For the Bank, the significant accounting
estimate is the allowance for loan losses. See Allowance
for Loan Losses below.

Investment
Securities:Securities are
classified as held-to-maturity if Humboldt has both the intent
and ability to hold those debt securities to maturity regardless
of changes in market conditions, liquidity needs or changes in
general economic conditions. These securities are carried at
cost adjusted for amortization of premium and accretion of
discount, computed by the effective interest method over their
contractual lives. Humboldt did not have any securities
classified as held to maturity at December 31, 2001 or 2002.

Securities are classified as available-for-sale
if Humboldt intends to hold those debt securities for an
indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available-for-sale
would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of
assets and liabilities, liquidity needs, regulatory capital
considerations and other similar factors. Securities
available-for-sale are carried at fair value. Unrealized holding
gains or losses are included in other comprehensive income as a
separate component of stockholders equity, net of tax.
Realized gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings. Unrealized
losses due to fluctuations in fair value of securities held to
maturity or available for sale, are recognized through earnings
when it is determined that a permanent decline in value has
occurred. Humboldt did not have any securities classified as
trading securities during 2001, or 2002. Premiums and discounts
are amortized or accreted over the life of the related
investment security as an adjustment to yield using the
effective interest method. Dividend and interest income are
recognized when earned.

Loans Held for
Sale:Humboldt sells or transfers
loans, including the guaranteed portion of Small Business
Administration (SBA)-loans (with servicing retained)
for cash proceeds equal to the principal amount of loans, with
yield rates to the investor based upon the current market rates.
Humboldt records an asset representing the right to service
loans for others when it sells a loan and retains the servicing
rights. The

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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


carrying value of loans is allocated between the
loan and the servicing rights, based on their relative fair
values. Fair value of servicing rights is estimated by
discounting estimated future cash flows from servicing using
discount rates that approximate current market rates and using
estimated prepayment rates. The servicing rights are carried at
the lower of cost or market and are amortized in proportion to,
and over the period of, the estimated net servicing income,
assuming prepayments.

For purposes of evaluating and measuring
impairment, servicing rights are based on a discounted cash flow
methodology, current prepayment speeds and market discount rate.
Any impairment is measured as the amount by which the carrying
value of servicing rights for a stratum exceeds its fair value.
At December 31, 2002, an impairment adjustment was recorded for
$600,000 and was included with fees and other income on the
income statement. Included in total loans was approximately
$28.0 million and $34.4 million of SBA loans at
December 31, 2001 and 2002, respectively.

A premium over the adjusted carrying value is
received upon the sale of the guaranteed portion of an SBA loan.
Humboldts investment in an SBA loan is allocated among the
sold and retained portions of the loan based on the relative
fair value of each portion at the time of loan origination,
adjusted for payments and other activities. Because the portion
retained does not carry an SBA guarantee, part of the gain
recognized on the sold portion of the loan may be deferred and
amortized as a yield enhancement on the retained portion in
order to obtain a market equivalent yield.

During the third quarter of 2002, Humboldt sold
its residential servicing rights portfolio to a third party for
cash consideration of approximately $2.4 million. A loss of
approximately $259,000 was recorded in connection with this sale.

Loans held for sale are recorded at the lower of
cost or market determined on an aggregate basis. Humboldt had no
loans held for sale as of December 31, 2001 and 2002
respectively.

Loans:Loans
are stated at the amount of unpaid principal, less the allowance
for losses, net deferred loan fees and costs and unearned
income. Interest on loans is accrued and credited to income
based on the principal amount outstanding. Unearned income on
installment loans is recognized as income over the term of the
loans using a method that approximates the interest method.

Loan origination fees and certain direct
origination and acquisition costs are capitalized and recognized
as an adjustment of the yield on the related loan. Amortization
is discontinued when the loan is placed on nonaccrual status.

Allowance for Loan
Losses:The allowance is
maintained at a level, which, in the opinion of management, is
adequate to absorb probable losses inherent in the loan
portfolio. Management determines the adequacy of the allowance
based upon reviews of individual loans, recent loss experience,
current economic conditions, the risk characteristics of the
various categories of loans and other relevant factors. The
allowance is based on estimates, and ultimate losses may vary
from the current estimates. These estimates are evaluated on a
regular basis and, as adjustments become necessary, they are
reported in earnings in the periods in which they become known.
Loans and leases deemed uncollectible are charged to the
allowance. Provisions for losses and recoveries on loans and
leases previously charged off are added to the allowance.

Loans are considered impaired, based on current
information and events, if it is probable that the Bank will be
unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan
agreement. Allowances on impaired loans are established based on
the present value of expected future cash flows discounted at
the loans effective interest rate, or for collateral-dependent
loans, on the fair value of the collateral. Cash receipts on
impaired loans are used to reduce principal.

Income Recognition on Impaired and
Nonaccrual Loans:Loans, including
impaired loans, are classified as nonaccrual if collection of
principal or interest is considered doubtful, generally if they
are past due as to maturity or payment of principal or interest
for a period of more than 90 days, unless such loans are
well-

51



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


secured and in the process of collection. If a
loan or a portion of a loan is classified as doubtful or is
partially charged off, the loan is classified as nonaccrual.
Loans that are on a current payment status or past due less than
90 days may also be classified as nonaccrual if repayment
in full of principal and/or interest is in doubt.

Loans may be returned to accrual status when all
principal and interest amounts contractually due (including
arrearages) are brought fully current, and there is a sustained
period of repayment performance by the borrower, in accordance
with the contractual terms of interest and principal.

While a loan is classified as nonaccrual and the
future collectibility of the recorded balance is doubtful,
collections of interest and principal are generally applied as a
reduction to principal outstanding. Uncollected accrued interest
on nonaccrual loans is reversed against interest income. When
the future collectibility of the recorded balance is expected,
interest income may be recognized on a cash basis.

Merchant Bankcard
Processing:Merchant Bankcard
revenue is based on the volume of transactions processed and is
recorded on a cash basis.

Premises and
Equipment:Premises and equipment
are stated at cost, less accumulated depreciation. The provision
for depreciation is computed by the straight-line method over
the estimated useful lives of the related assets. The useful
lives of buildings and improvements are estimated to be fifteen
to thirty years. The useful lives of furniture, fixtures and
equipment are estimated to be three to ten years. Leasehold
improvements are amortized over the life of the related lease,
or the life of the asset, whichever is shorter. When assets are
sold or otherwise disposed of, the cost and related accumulated
depreciation and amortization are removed from the accounts, and
any resulting gain or loss is recognized in income for the
period. The cost of maintenance and repairs is charged to
expense as incurred.

Other Real Estate
Owned:Other real estate owned
represents real estate which Humboldt has taken control of in
partial or full satisfaction of loans. At the time of
foreclosure, other real estate owned is recorded at the lower of
the carrying amount of the loan or fair value less costs to
sell, which becomes the propertys new basis. Any
write-downs based on the assets fair value at date of
acquisition are charged to the allowance for loan losses. After
foreclosure, management periodically performs valuations and the
real estate is carried at the lower of their new cost basis or
fair value net of estimated costs to sell. Revenue and expenses
from operations and subsequent adjustments to the carrying
amount of the property are included in income (loss) on
other real estate owned.

In some instances, Humboldt makes loans to
facilitate the sales of other real estate owned. Management
reviews all sales for which it is the lending institution for
compliance with sales treatment under provisions established by
SFAS No. 66, Accounting for Sales of Real Estate.

Intangible
Assets:Intangible assets, which
are included in other assets, are comprised of goodwill and core
deposit intangibles acquired in business combinations. In July
2001, the Financial Accounting Standards Board
(FASB) issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Accounting for
Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 and specifies
criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported
apart from goodwill. SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be
amortized after 2001, but instead be periodically evaluated for
impairment.

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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


For comparison purposes, the following table
reconciles Humboldts reported earnings to earnings
adjusted for goodwill amortization:

|                                  |                       |                                              |   |       |  |      |   |        |   |  |   |        | 
|--------------------------------- | --------------------- | -------------------------------------------- | - | ----- |  | ---- | - | ------ | - |  | - | ------ | 
|                                  |                       | 2000                                         |   | 2001  |  | 2002
|                                  |                       |                                              |   |       |  |     
|                                  |                       |                                             
|                                  |                       | (Dollars in thousands except per share data)
|Net Income                       |                       |                                              |   |       |  |      |   |        |   |  |   |       
|                                 
|                                 
|                                 
|                                 
|                                  | As reported           |                                              | $ | 9,020 |  |      | $ | (7,009 | ) |  | $ | 12,263 | 
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill Amortization |                                              |   | 15    |  |      |   | 263    |   |  |   |       | 
|                                  |                       |                                              |   |       |  |      |   |        |   |  |   |       
|                                  | Adjusted              |                                              | $ | 9,035 |  |      | $ | (6,746 | ) |  | $ | 12,263 | 
|                                  |                       |                                              |   |       |  |      |   |        |   |  |   |       
|Basic earnings (loss) per share   |                       |                                              |   |       |  |      |   |        |   |  |   |       
|                                 
|                                 
|                                 
|                                 
|                                  | As reported           |                                              | $ | 0.75  |  |      | $ | (0.56  | ) |  | $ | 0.98   | 
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill amortization |                                              |   |      |  |      |   | 0.02   |   |  |   |       | 
|                                  |                       |                                              |   |       |  |      |   |        |   |  |   |       
|                                  | Adjusted              |                                              | $ | 0.75  |  |      | $ | (0.54  | ) |  | $ | 0.98   | 
|                                  |                       |                                              |   |       |  |      |   |        |   |  |   |       
|Diluted earnings (loss) per share |                       |                                              |   |       |  |      |   |        |   |  |   |       
|                                 
|                                 
|                                 
|                                 
|                                  | As reported           |                                              | $ | 0.71  |  |      | $ | (0.54  | ) |  | $ | 0.94   | 
|                                 
|                                 
|                                 
|                                 
|                                  | Goodwill amortization |                                              |   |      |  |      |   | 0.02   |   |  |   |       | 
|                                  |                       |                                              |   |       |  |      |   |        |   |  |   |       
|                                  | Adjusted              |                                              | $ | 0.71  |  |      | $ | (0.52  | ) |  | $ | 0.94   | 
|                                  |                       |                                              |   |       |  |      |   |        |   |  |   |       

Intangible assets with definite useful lives are
required to be amortized over their respective estimated useful
lives to their estimated residual values, and also reviewed for
impairment. Humboldt was required to adopt the provisions of
SFAS No. 141 immediately upon issuance and SFAS
No. 142 effective January 1, 2002. Accordingly, any
goodwill and any intangible asset determined to have an
indefinite useful life acquired in a purchase business
combination is no longer amortized, but is evaluated at least
annually for impairment in accordance with the appropriate
accounting literature. Humboldt was also required to reassess
the useful lives and residual values of all such intangible
assets and make any necessary amortization period adjustments by
the end of the first interim period and recognize any impairment
loss measured as of the date of adoption as the cumulative
effect of a change in accounting principle in the period.
Humboldt did not have any transitional impairment losses.
Humboldts goodwill and core deposit intangible is recorded
with accrued interest receivables and other assets on the
balance sheet.

The following table summarizes Humboldts
goodwill and core deposit intangible assets as of January 1
and December 31, 2002:

Goodwill & Core Deposit
Intangibles

|                         |     |                        |        |           |  |            |       |              |  |   |      |      |   |   |        |       | 
|------------------------ | --- | ---------------------- | ------ | --------- |  | ---------- | ----- | ------------ |  | - | ---- | ---- | - | - | ------ | ----- | 
|                         |     | January 1,             |        |           |  |            |       | December 31,
|                         |     | 2002                   |        | Additions |  | Reductions |       | 2002        
|                         |     |                        |        |           |  |            |       |             
|                         |     |                       
|                         |     | (Dollars in thousands)
|                        
|                        
|                        
|                        
|Goodwill                 |     | $                      | 525    |           |  | $          | 3,432 |              |  | $ |     |      |   | $ | 3,957  |      
|                        
|                        
|                        
|                        
|Accumulated amortization |     |                        | (263   | )         |  |            |      |              |  |   |     |      |   |   | (263   | )    
|                         |     |                        |        |           |  |            |       |              |  |   |      |      |   |   |        |      
|                         | Net |                        | $      | 262       |  |            | $     | 3,432        |  |   |      |     |   |   | $      | 3,694 | 
|                         |     |                        |        |           |  |            |       |              |  |   |      |      |   |   |        |      
|Core deposit intangibles |     | $                      | 6,069  |           |  |            |      |              |  |   |     |      |   | $ | 6,069  |      
|                        
|                        
|                        
|                        
|Accumulated amortization |     |                        | (3,764 | )         |  |            |      |              |  |   | (503 | )    |   |   | (4,267 | )    
|                         |     |                        |        |           |  |            |       |              |  |   |      |      |   |   |        |      
|                         | Net |                        | $      | 2,305     |  |            |       |             |  |   |      | (503 | ) |   | $      | 1,802 | 
|                         |     |                        |        |           |  |            |       |              |  |   |      |      |   |   |        |      

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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


At December 31, 2002, the estimated
amortization of core deposit intangibles, in thousands of
dollars, annually through 2007 is $393,000, $297,000, $297,000,
$225,000, and $169,000 respectively. The weighted average
amortization period for core deposit intangibles is
6.5 years.

Derivative Financial
Instruments:All derivative
instruments (including certain derivative instruments
embedded in other contracts) are recognized in the consolidated
balance sheet at fair value. Humboldts policy dictates
that the accounting treatment for gains or losses from changes
in the derivative instruments fair value is contingent on
whether the derivative instrument qualifies as a hedge. On the
date Humboldt enters into a derivative contract, Humboldt
designates the derivative instruments as (1) a hedge of the
fair value of a recognized asset or liability or of an
unrecognized firm commitment (fair value hedge), (2) a
hedge of a forecasted transaction or of the variability of cash
flows to be received or paid related to a recognized asset or
liability (cash flow hedge) or (3), a hedge for trading,
customer accommodation or not qualifying for hedge accounting
(free-standing derivative instruments). For a fair value hedge,
changes in the fair value of the derivative instrument and
changes in the fair value of the hedged asset or liability or of
an unrecognized firm commitment attributable to the hedged risk
are recorded in current period net income. For a cash flow
hedge, changes in the fair value of the derivative instrument to
the extent that it is effective are recorded in other
comprehensive income, net of tax, within shareholders
equity and subsequently reclassified to net income in the same
period(s) that the hedged transaction impacts net income. For
free-standing derivative instruments, changes in the fair values
are reported in current period net income. Humboldt formally
documents the relationship between hedging instruments and
hedged items, as well as the risk management objective and
strategy for undertaking any hedge transaction. This process
includes linking all derivative instruments that are designated
as fair value or cash flow hedges to specific assets and
liabilities on the balance sheet or to specific forecasted
transactions. Humboldt also formally assesses both at the
inception of the hedge and on an ongoing basis, whether the
derivative instruments used are highly effective in offsetting
changes in fair values or cash flows of hedged items. If it is
determined that the derivative instrument is not highly
effective as a hedge, hedge accounting is discontinued.

Investments in Limited
Partnerships:Humboldt owns
approximately 99% interests in two limited partnerships that own
and operate affordable housing projects. Investment in these
projects serves as an element of the Banks compliance with
the Community Reinvestment Act and provides tax benefits in the
form of deductions for operating losses and tax credits. The tax
credits may be used to reduce taxes currently payable or may be
carried back one year or forward twenty years to recapture or
reduce taxes. Humboldt uses the equity method of accounting for
the partnerships operating results and tax credits are
recorded in the years they became available to reduce income
taxes. Under FASB Interpretation No. 46, the Company
believes that these two limited partnerships could be defined as
variable interest entities and therefore be required to
consolidate for all reporting periods beginning after
June 15, 2003. The total assets of these two partnerships
consist primarily of multi-family housing and amounted to
$3.9 million as of December 31, 2002. The
Companys total amount of exposure to loss is limited to
our investment of $947,000 as of December 31, 2002.

Income Taxes:Provisions for income taxes are based on amounts reported in the
statement of income (after exclusion of non-taxable income such
as interest on state and municipal loans and securities) and
include deferred taxes on temporary differences in the
recognition of income and expense for tax and financial
statement purposes.

Deferred taxes are computed using the asset and
liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
assets and liabilities and their respective tax bases. 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. Deferred tax assets are recognized for

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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


deductible temporary differences and tax credit
carryforwards, and then a valuation allowance is established to
reduce that deferred tax asset if it is more likely than
not that the related tax benefits will not be realized.

Earnings Per
Share:Basic earnings per share is
computed by dividing net income by the weighted average number
of common shares outstanding during the period, after giving
retroactive effect to stock dividends and splits. Diluted
earnings per share is computed similar to basic earnings per
share except that the denominator is increased to include the
number of additional common shares that would have been
outstanding if the dilutive potential common shares had been
issued. Included in the denominator is the dilutive effect of
stock options and warrants computed under the treasury stock
method.

Off-Balance-Sheet Financial
Instruments:In the ordinary
course of business, the Bank issues commitments to extend
credit, commitments under credit card arrangements and standby
letters of credit.

Cash and
Equivalents:For the purpose of
presentation in the consolidated Statement of Cash Flows, cash
and cash equivalents include cash, balances due from banks and
certificates of deposit with maturity dates of 90 days or
less. Cash and due from banks include amounts the Bank is
required to maintain to meet certain average reserve and
compensating balance requirements of the Federal Reserve Bank.
The total requirements at December 31, 2001, and 2002, were
$13,128,000, and $3,222,000, respectively. This decrease is
attributed to a change in the method of classification of
certain deposit accounts adopted during 2002.

Stock-Based
Compensation:Humboldt has various
stock-based compensation plans that authorize the granting of
stock options, restricted stock and other stock-based awards to
eligible employees and directors. For all periods shown in this
report, these plans are accounted for under the intrinsic value
method as prescribed in APB Opinion No. 25, Accounting
for Stock Issued to Employees. Under this method,
compensation expense is recorded on the date of grant only if
the current market price of the underlying stock exceeded the
exercise price. Accordingly, no compensation expense was
recognized for the issuance of stock options granted under any
of the various plans for the years ended December 31, 2000
and 2001. A total of $47,000 was recognized as compensation
expense for the issuance of stock options for the year ended
December 31, 2002. SFAS No. 123, Accounting for
Stock-Based Compensation,encourages a fair
value based method of accounting for stock-based
compensation plans. Had compensation cost for Humboldts
stock option plans been determined based on the fair value at
the grant dates for awards under this plan

55



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


consistent with the method of SFAS No. 123,
net income and net income per share would have been adjusted to
the pro forma amounts indicated below (dollars in thousands):

Stock-Based Compensation Disclosure

|                                                                                                                              |                       |                                       |       |      |  |      |        |       |   |   |        |      | 
|----------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------------------------- | ----- | ---- |  | ---- | ------ | ----- | - | - | ------ | ---- | 
|                                                                                                                              |                       |                                      
|                                                                                                                              |                       | Year ended December 31,              
|                                                                                                                              |                       |                                      
|                                                                                                                              |                       | 2000                                  |       | 2001 |  | 2002
|                                                                                                                              |                       |                                       |       |      |  |     
|                                                                                                                              |                       |                                      
|                                                                                                                              |                       | (In thousands, except per share data)
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|Net income (loss), as reported                                                                                                |                       | $                                     | 9,020 |      |  | $    | (7,009 | )     |   | $ | 12,263 |     
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|Add: Stock-based employee compensation expense
    included in reported net income, net of tax effects                        |                       |                                       |      |      |  |      |       |       |   |   | 47     |     
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|Deduct: Stock-based employee compensation
    determined under fair value-based method for all awards, net of
    tax effects |                       |                                       | (352  | )    |  |      | (494   | )     |   |   | (675   | )   
|                                                                                                                              |                       |                                       |       |      |  |      |        |       |   |   |        |     
|Pro forma net income (loss)                                                                                                   |                       | $                                     | 8,668 |      |  | $    | (7,503 | )     |   | $ | 11,635 |     
|                                                                                                                              |                       |                                       |       |      |  |      |        |       |   |   |        |     
|Earnings (loss) per share:                                                                                                    |                       |                                       |       |      |  |      |        |       |   |   |        |     
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                              | Basic  as reported   |                                       | $     | 0.75 |  |      | $      | (0.56 | ) |   | $      | 0.98 | 
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                              | Basic  pro forma     |                                       | $     | 0.72 |  |      | $      | (0.60 | ) |   | $      | 0.93 | 
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                              | Diluted  as reported |                                       | $     | 0.71 |  |      | $      | (0.54 | ) |   | $      | 0.94 | 
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                             
|                                                                                                                              | Diluted  pro forma   |                                       | $     | 0.68 |  |      | $      | (0.58 | ) |   | $      | 0.90 | 

The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option pricing
model with the following weighted-average assumptions:

|                                                                              |  |      |      |      |  |      |      |   |  |   |      |  
|----------------------------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                                                              |  | 2000 |      | 2001 |  | 2002
|                                                                              |  |      |      |      |  |     
|Dividend yield                                                                |  |      | 2.1  | %    |  |      |     |   |  |   | 1.4  | %
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Expected life (years)                                                         |  |      | 7.6  |      |  |      | 9.0  |   |  |   | 6.0  |  
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Expected volatility                                                           |  |      | 29   | %    |  |      | 53   | % |  |   | 45   | %
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Risk-free rate                                                                |  |      | 6.59 | %    |  |      | 5.20 | % |  |   | 4.80 | %
|                                                                             
|                                                                             
|                                                                             
|                                                                             
|Weighted average grant date fair value of options
    granted during the year |  | $    | 2.30 |      |  | $    | 4.80 |   |  | $ | 4.76 |  

In December 2002, FASB issued SFAS No. 148,
Accounting for Stock-Based Compensation,an amendment of
SFAS No. 123.SFAS No. 148 encourages the
adoption of SFAS No. 123 by providing three alternative
methods of adoption and requires new periodic disclosures in
financial statements for companies that elect to continue to
account for stock options using APB No. 25. Humboldt has
elected to adopt SFAS No. 148 effective January 1,
2003 under the prospective application method. Management does
not expect the adoption of SFAS No. 123 will have a
material impact on Humboldts results of operations in 2003.



|         |                       
|-------- | ----------------------
|Note 2  | Mergers & Acquisitions

Effective March 9, 2001, Humboldt acquired,
for 4.48 million shares of its common stock and
approximately $220,000 in cash, all of the outstanding common
stock of Tehama Bancorp (Tehama), a one-bank holding
company, based in Red Bluff, California. Each share of Tehama
common stock was converted into and exchanged for 1.775 shares
of Humboldt common stock. The cash consideration paid was to
Tehama shareholders that exercised their dissenters
rights. This merger was accounted for as a pooling of interests
and, accordingly, all financial information contained in this
Report is has been restated to reflect the combination of
Humboldt and Tehama for all periods presented.

56



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The following is a reconciliation of the amounts
of net interest income and net earnings previously reported with
the restated amounts (in thousands):

|                    |  |      |        | 
|------------------- |  | ---- | ------ | 
|                    |  | 2000
|                    |  |     
|Net Interest Income |  |      |        | 
|                   
|                   
|                   
|                   
|As reported         |  | $    | 24,970 | 
|                   
|                   
|                   
|                   
|Tehama              |  |      | 9,664  | 
|                    |  |      |        | 
|As restated         |  | $    | 34,634 | 
|                    |  |      |        | 
|Net Income          |  |      |        | 
|                   
|                   
|                   
|                   
|As reported         |  | $    | 6,280  | 
|                   
|                   
|                   
|                   
|Tehama              |  |      | 2,740  | 
|                    |  |      |        | 
|As restated         |  | $    | 9,020  | 
|                    |  |      |        | 

In 2001, Humboldt recorded operating expenses
related to the merger and integration of Tehama in the amount of
$3,531,000 on a pre-tax basis. The following table presents the
major components of merger-related expenses (dollars in
thousands):

|                         |       |   |       |       | 
|------------------------ | ----- | - | ----- | ----- | 
|                        
|                        
|                        
|                        
|Severance & related      |       | $ | 655   |      
|                        
|                        
|                        
|                        
|Professional fees        |       |   | 1,664 |      
|                        
|                        
|                        
|                        
|Fixed asset depreciation |       |   | 441   |      
|                        
|                        
|                        
|                        
|System conversions       |       |   | 262   |      
|                        
|                        
|                        
|                        
|Other                    |       |   | 509   |      
|                         |       |   |       |      
|                         | Total |   | $     | 3,531 | 
|                         |       |   |       |      

The accrued liability for remaining expected
merger related expenses at December 31, 2001 and 2002 was
$219,000 and $0, respectively.

On April 7, 2000, Humboldt acquired Capitol
Thrift & Loan for approximately $11.9 million in cash
and a contingent obligation agreement totaling $4.6 million due
January 30, 2002. Under the terms of the agreement, the
repayment of principal was contingent upon performance of the
Capitol Thrift & Loan loan portfolio. The contingent
liability holders were paid $4.6 million in cash in full
satisfaction of the contingency liability on January 30,
2002. This final payment resulted in the elimination of negative
goodwill in the amount of approximately $1.2 million and
the creation of a goodwill asset in the amount of
$3.4 million.



|         |                        
|-------- | -----------------------
|Note 3  | Discontinued Operations

Bancorp Financial Services, Inc.
(BFS) was originally capitalized in 1996 with
$2,000,000 in contributions from both Humboldt Bancorp and
Tehama Bancorp. Upon the completion of the Tehama Bancorp merger
in March 2001, Humboldt became the sole shareholder of BFS.
During the first quarter of 2001, Humboldts Board of
Directors completed a strategic review of BFS, which principally
acquired and serviced small ticket leases on a nationwide basis.
This review was initiated in response to a number of factors,
including the increased regulatory burden associated with BFS
being a wholly owned subsidiary after completion of the Tehama
Bancorp merger, future capital needs of BFS to support its
growth and reliance upon the lease-backed securities market for
liquidity. As a result of this review, Humboldt adopted a plan
to discontinue the operations of BFS by sale of the company and
engaged an investment banking firm to facilitate the sale during
the first quarter of 2001. A valuation reserve of $700,000, net
of tax, was recorded during the first quarter of 2001 based on
an estimate of the value of BFS as a going concern. The
operating results of BFS are included, net of tax, in the income
statement as loss from discontinued operations.

57



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


During the second quarter of 2001 Humboldt was
notified by the investment banker that the prospects for the
sale of BFS as a going concern were unlikely. In response,
Humboldt adopted a plan to wind-down the operations of BFS in an
orderly manner. This plan included the immediate termination of
all lease and loan acquisition activities. In connection with
the wind-down plan, Humboldt recognized a loss on discontinued
operations, net of tax, of $13.5 million during the second
quarter of 2001.

The following is a summary of the major
components of the wind-down charge (dollars in thousands):

|                                                 |                         |   |        |        | 
|------------------------------------------------ | ----------------------- | - | ------ | ------ | 
|                                                
|                                                
|                                                
|                                                
|Write-off of retained interests/servicing assets |                         | $ | 11,798 |       
|                                                
|                                                
|                                                
|                                                
|Provision for lease/loan losses                  |                         |   | 4,679  |       
|                                                
|                                                
|                                                
|                                                
|Lease/loan market value adjustments              |                         |   | 1,580  |       
|                                                
|                                                
|                                                
|                                                
|Professional fees                                |                         |   | 470    |       
|                                                
|                                                
|                                                
|                                                
|Other                                            |                         |   | 1,315  |       
|                                                
|                                                
|                                                
|                                                
|Tax Effect                                       |                         |   | (5,848 | )     
|                                                 |                         |   |        |       
|                                                 | Total wind-down expense |   | $      | 13,994 | 
|                                                 |                         |   |        |       

During the third quarter of 2001, BFS sold
approximately $5,800,000 of lease receivables to an unrelated
third party and paid down a like amount of bank debt. Since a
valuation reserve was provided during the second quarter, there
was no gain or loss recorded on the sale. Humboldt Bancorp
agreed to guarantee certain representations and warranties with
respect to the underlying leases subject to the sale. In
addition, the servicing responsibilities of BFS for
approximately 5,400 leases under certain securitization
servicing agreements were transferred to a third party effective
August 31, 2001.

As of December 31, 2001, BFS had total
assets of $7,577,000, which included cash of $1,634,000, lease
receivables of $1,085,000, lease-backed notes of $4,143,000,
deferred tax assets of $600,000 and other assets of $115,000.
Total liabilities as of December 31, 2001 were $8,992,000
and included, non-bank secured borrowings of $5,960,000,
security deposits of $1,242,000, lease and loan payment
servicing liabilities of $866,000, wind down accruals of
$800,000 and other liabilities of $124,000.

As of December 31, 2002, BFS had total
assets of $993,000, which included cash of $568,000 and deferred
tax assets of $425,000. Total liabilities as of
December 31, 2002 were $1,046,000, and included security
deposits of $1,025,000 and other liabilities of $21,000. These
amounts are recorded net in other assets as of December 31,
2002.

In addition to the assets of BFS, certain assets
of Humboldt Bancorp which were acquired from or on behalf of BFS
were included as assets related to discontinued operations.
During the fourth quarter of 2001, Humboldt Bancorp agreed to
assume certain debt of BFS, which was previously guaranteed, in
exchange for ownership of approximately $7,000,000 of automobile
loans that secured the borrowing. In addition, Humboldt Bancorp
agreed to repurchase approximately $2,000,000 of automobile loan
contracts that were originated by BFS and sold to an
unaffiliated financial institution during the fourth quarter of
2001. As of December 31, 2001, Humboldt Bancorp had net
automobile loans acquired from BFS and repurchased from third
parties of approximately $9,000,000. During the second quarter
of 2002, Humboldt Bancorp completed the sale of the loans and
certain balances previously charged off to a third party.

As of December 31, 2001 BFS had borrowings
from two unrelated non-bank lenders totaling $5,960,000. Neither
of these two borrowings is guaranteed by Humboldt Bancorp. One
of the borrowings was originally structured as a loan to an
unconsolidated, bankruptcy-remote subsidiary of BFS as a
commercial paper conduit facility for funding the acquisition of
lease contracts. This facility matured on March 31, 2001
and was extended by the lender. As of December 31, 2001,
the balance outstanding on this loan was $884,000. This loan was
paid in full during the second quarter of 2002.

58



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The second non-bank borrowing was obtained in
February 2001 in connection with the issuance of term
leased-backed notes. The placement agent was able to place
approximately $4,600,000 million of the Class C
leased-backed notes with a non-affiliated investor; however, due
to certain restrictions contained in the indenture, the
transaction had to be structured as a secured borrowing. The
result of the transaction on the balance sheet of BFS was the
establishment of an asset for the Class C leased-backed
notes and a related liability for $4,600,000. This secured
borrowing agreement also contained a provision whereby BFS was
permitted, for a certain period of time, to retain the monthly
principal and interest cash flows received on the leased-backed
notes. These retained cash flows were converted to a
subordinated note secured by retained interest assets of BFS.
The principal portion of the cash flows was applied to reduce
the $4,600,000 million liability and along with the
interest portion were added to the subordinated debt. As of
December 31, 2001 the Class C secured borrowing
totaled $3,911,000 and the subordinated borrowing totaled
$1,165,000.

During the first quarter of 2002, BFS and the
non-affiliated investor executed an agreement whereby the
investor took certain actions that permitted the transfer of
ownership of the Class C leased-backed notes to an
unrelated third party in satisfaction of the $3,911,000 of
related debt. This agreement also provided for the transfer of
the $1,165,000 to a new subordinated loan in favor of the third
party. This new subordinated loan will bear interest at 12%
compounded annually, with repayment of principal and interest
tied solely to the receipt, if any, of cash flows from retained
interest cash flows received by BFS in the future. In the event
no cash flows are received from the retained interests, BFS has
no further obligation under the terms of the loan agreement and
will recognize a pre-tax gain for the carrying amount of the
loan. If cash flows from retained interests are received, BFS
will recognize a pre-tax gain for the amount received since the
retained assets were written off in June 2001.

During the second quarter of 2001, Humboldt
guaranteed three BFS borrowings from two commercial banks in
consideration for modification of the loan terms and elimination
of certain financial covenants. During the fourth quarter of
2001, Humboldt directly assumed the three borrowings, two of
which were originally related to the financing of certain
automobile loan contracts in the amounts of $6,422,000 and
$2,123,000, respectively, and a deficiency balance related to a
loan that was previously secured by lease contracts for
$300,000. In connection with the assumption, the loan for
$2,123,000 was modified in a manner that the automobile loan
contract collateral was released.

During the first quarter of 2002, Humboldt sold
the automobile loan contracts to a third party and used the
proceeds to pay in full the loan that was secured by the
contracts. The unsecured deficiency balance loan was paid in
full during the fourth quarter of 2002. As of December 31,
2002, the remaining unsecured loan had a balance of $1,297,000.
This loan has scheduled monthly payments of principal and
interest and matures in October 2004. Additional information on
these borrowings is included in Note 9.

During the second quarter of 2002, the remaining
employees of BFS were terminated and operations ceased. A loss
on discontinued operations of $276,000, net of tax, was recorded
during the second quarter of 2002. No other gain or loss on
discontinued operations was recorded during 2002.

59



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


In conducting its business, BFS formed three
subsidiaries that are considered Special Purpose
Entities or SPEs. These subsidiaries were
formed in accordance with legal requirements and were, at
formation, not subject to consolidation on the financial
statements of BFS.

|                            |  |                                                                                                                                                                                                                                                                                       
|--------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Subsidiary Name             |  | Primary Purpose                                                                                                                                                                                                                                                                       
|                            |  |                                                                                                                                                                                                                                                                                       
|BFS Funding Corporation     |  | Issuance of lease-backed notes funded by a
    commercial paper conduit. The line of credit from the commercial
    paper conduit was not renewed upon maturity in March 2001 and
    the subsidiarys assets and related debt were
    reconsolidated on to the balance sheet of BFS.
|BFS Funding Company, LLC    |  | Issuance of $75,000,000 of term lease-backed
    notes to institutional investors in March 2000.                                                                                                                                                                                      
|BFS Funding Company II, LLC |  | Issuance of $60,058,000 of term lease-backed
    notes to institutional investors in February 2001.                                                                                                                                                                                   

BFS Funding Company, LLC and BFS Funding Company
II, LLC are considered qualifying SPEs under SFAS
No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.

All retained interest assets related to the
lease-backed notes issued by BFS Funding Company LLC and BFS
Funding Company II, LLC were written off during the second
quarter of 2001. At December 31, 2002, Humboldt Bancorp
owned the Class C notes issued in the 2000 securitization
for which there is no active market. The 2000 Class C
lease-backed notes were carried at a value of $3,031,000 as of
December 31, 2002 and will not receive any payments of
interest or principal until the holders of the Class A and
Class B notes are paid in full. At December 31, 2002
the fair value of the Class C notes were determined based
on the projected cash flows using market assumptions for
discount rate and credit losses. Management expects that the
principal and interest payments on the 2000 Class C
lease-backed notes will be received during 2004. As described
above, during the first quarter of 2002, an agreement was
executed resulting in the transfer of the 2001 Class C
lease-backed notes to an unaffiliated third party in
consideration for reduction of related debt owed to the
purchaser. No gain or loss was recorded in connection with the
transfer.

60



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)







Note 4  Investment
Securities

The amortized cost of investment securities and
their approximate fair values at December 31 were as
follows:

|                   |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |         |         | 
|------------------ | ------------------------------------- | ------------------------ | - | ---------- | ------- | ---------- | - | ---------- | ----- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                   |                                       | Amortized                |   | Unrealized |         | Unrealized |   |           
|                   |                                       | Cost                     |   | Gains      |         | Losses     |   | Fair Value
|                   |                                       |                          |   |            |         |            |   |           
|                   |                                       |                         
|                   |                                       | (Dollars in thousands)  
|                  
|                  
|                  
|                  
|December 31, 2001: |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |        
|                  
|Available-for-sale |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |        
|                  
|                  
|                  
|                  
|                   | U.S. Government and agency securities |                          | $ | 2,772      |         |            | $ | 40         |       |  | $ |     |      |   | $ | 2,812   |        
|                  
|                  
|                  
|                  
|                   | Obligations of political subdivisions |                          |   | 29,272     |         |            |   | 910        |       |  |   |     |      |   |   | 30,182  |        
|                  
|                  
|                  
|                  
|                   | Collateralized mortgage obligations   |                          |   | 116,553    |         |            |   |           |       |  |   | (308 | )    |   |   | 116,245 |        
|                  
|                  
|                  
|                  
|                   | Mortgage-backed securities            |                          |   | 14,285     |         |            |   | 186        |       |  |   |     |      |   |   | 14,471  |        
|                  
|                  
|                  
|                  
|                   | Other asset-backed securities         |                          |   | 7,500      |         |            |   |           |       |  |   | (312 | )    |   |   | 7,188   |        
|                  
|                  
|                  
|                  
|                   | Equity securities                     |                          |   | 1,575      |         |            |   |           |       |  |   |     |      |   |   | 1,575   |        
|                   |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |        
|                   |                                       | Total available-for-sale |   | $          | 171,957 |            |   | $          | 1,136 |  |   | $    | (620 | ) |   | $       | 172,473 | 
|                   |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |        

|                   |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |         |         | 
|------------------ | ------------------------------------- | ------------------------ | - | ---------- | ------- | ---------- | - | ---------- | ----- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                   |                                       | Amortized                |   | Unrealized |         | Unrealized |   |           
|                   |                                       | Cost                     |   | Gains      |         | Losses     |   | Fair Value
|                   |                                       |                          |   |            |         |            |   |           
|December 31, 2002: |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |        
|                  
|Available-for-sale |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |        
|                  
|                  
|                  
|                  
|                   | U.S. Government and agency securities |                          | $ | 18,848     |         |            | $ | 78         |       |  | $ |     |      |   | $ | 18,926  |        
|                  
|                  
|                  
|                  
|                   | Obligations of political subdivisions |                          |   | 28,395     |         |            |   | 2,005      |       |  |   | (33  | )    |   |   | 30,367  |        
|                  
|                  
|                  
|                  
|                   | Collateralized mortgage obligations   |                          |   | 108,767    |         |            |   | 2,445      |       |  |   | (56  | )    |   |   | 111,156 |        
|                  
|                  
|                  
|                  
|                   | Mortgage-backed securities            |                          |   | 8,725      |         |            |   | 240        |       |  |   |     |      |   |   | 8,965   |        
|                  
|                  
|                  
|                  
|                   | Other asset-backed securities         |                          |   | 6,148      |         |            |   | 281        |       |  |   | (120 | )    |   |   | 6,309   |        
|                  
|                  
|                  
|                  
|                   | Equity securities                     |                          |   | 5,748      |         |            |   |           |       |  |   |     |      |   |   | 5,748   |        
|                   |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |        
|                   |                                       | Total available-for-sale |   | $          | 176,631 |            |   | $          | 5,049 |  |   | $    | (209 | ) |   | $       | 181,471 | 
|                   |                                       |                          |   |            |         |            |   |            |       |  |   |      |      |   |   |        

The maturities of investment securities at
December 31, 2002 were as follows:

|                     |                                         |                        |         |         |  |  |         |         | 
|-------------------- | --------------------------------------- | ---------------------- | ------- | ------- |  |  | ------- | ------- | 
|                     |                                         |                       
|                     |                                         | Available-for-Sale    
|                     |                                         |                       
|                     |                                         | Amortized              |         | Fair   
|                     |                                         | Cost                   |         | Value  
|                     |                                         |                        |         |        
|                     |                                         |                       
|                     |                                         | (Dollars in thousands)
|                    
|                    
|                    
|                    
|Amounts maturing in: |                                         |                        |         |         |  |  |         |        
|                    
|                    
|                    
|                    
|                     | Three months or less                    |                        |         |        |  |  |         |        | 
|                    
|                    
|                    
|                    
|                     | Over three months through twelve months |                        |         | 17,306  |  |  |         | 17,337  | 
|                    
|                    
|                    
|                    
|                     | After one year through three years      |                        |         | 7,139   |  |  |         | 7,163   | 
|                    
|                    
|                    
|                    
|                     | After three years through five years    |                        |         | 7,832   |  |  |         | 8,190   | 
|                    
|                    
|                    
|                    
|                     | After five years through fifteen years  |                        |         | 119,814 |  |  |         | 123,950 | 
|                    
|                    
|                    
|                    
|                     | After fifteen years                     |                        |         | 18,792  |  |  |         | 19,083  | 
|                    
|                    
|                    
|                    
|                     | Equity securities                       |                        |         | 5,748   |  |  |         | 5,748   | 
|                     |                                         |                        |         |         |  |  |         |        
|                     |                                         |                        | 176,631 |         |  |  | 181,471 |        
|                     |                                         |                        |         |         |  |  |         |        

61



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The amortized cost and fair value of
collateralized mortgage obligations and mortgage-backed
securities are presented by average life in the preceding table.
Expected maturities differ from contractual maturities because
borrowers may have the right to prepay underlying loans without
prepayment penalties.

Proceeds from sales of investment securities
available-for-sale during 2000, 2001, and 2002 were $17,835,000,
$52,707,000, and $81,550,000 respectively. Gross gains and
losses on those sales were $64,000 and $181,000 in 2000,
$501,000 and $295,000 in 2001, and $1,082,000, and $195,000 in
2002.

Investment securities with an amortized cost of
approximately $2,025,000 and $2,113,000, and an approximate
market value of $2,062,000 and $2,141,000, at December 31,
2001 and 2002, respectively, were pledged to meet the
requirements of the Federal Reserve and the U.S. Department
of the Treasury to secure customer tax payments. In addition,
investment securities with an amortized cost of approximately
$19,474,000 and $9,544,000, and an approximate market value of
$19,786,000 and $10,012,000, at December 31, 2001 and 2002,
respectively, were pledged to secure public deposits.
Furthermore, investment securities with an amortized cost of
approximately $50,099,000 and $104,613,000, and an approximate
market value of $50,818,000 and $107,359,000, at
December 31, 2001 and 2002, respectively, were pledged as
collateral for advances from the Federal Home Loan Bank. In
addition, investment securities with an amortized cost of
approximately $16,321,000 and $5,099,000, an approximate market
value of $16,753,000 and $5,257,000, at December 31, 2001
and 2002, respectively, were pledged to Visa and MasterCard to
secure the full performance of all of Humboldts payment
obligations to Visa and MasterCard in connection with
Humboldts Visa and MasterCard membership.




Note 5  Loans and Allowance
for Loan and Lease Losses

The components of loans and leases in the balance
sheets were as follows at December 31:

|                                                     |  |                        |         |      |  |   |         |  
|---------------------------------------------------- |  | ---------------------- | ------- | ---- |  | - | ------- | -
|                                                     |  | 2001                   |         | 2002
|                                                     |  |                        |         |     
|                                                     |  |                       
|                                                     |  | (Dollars in thousands)
|                                                    
|                                                    
|                                                    
|                                                    
|Real estate  construction and land
    development  |  | $                      | 65,021  |      |  | $ | 129,075 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Real estate  commercial and
    agricultural        |  |                        | 316,571 |      |  |   | 343,957 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Real estate  family and multifamily
    residential |  |                        | 109,559 |      |  |   | 105,647 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Commercial, industrial and agricultural              |  |                        | 103,421 |      |  |   | 121,538 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Installment and Other                                |  |                        | 69,027  |      |  |   | 61,531  |  
|                                                     |  |                        |         |      |  |   |         |  
|                                                     |  |                        | 663,599 |      |  |   | 761,748 |  
|                                                    
|                                                    
|                                                    
|                                                    
|Unearned Premiums (Discounts)                        |  |                        | 2,354   |      |  |   | 1,348   |  
|                                                    
|                                                    
|                                                    
|                                                    
|Deferred loan fees                                   |  |                        | (1,621  | )    |  |   | (2,448  | )
|                                                     |  |                        |         |      |  |   |         |  
|                                                     |  | $                      | 664,332 |      |  | $ | 760,648 |  
|                                                     |  |                        |         |      |  |   |         |  

At December 31, 2001, the recorded
investment in loans for which impairment had been recognized in
accordance with SFAS No. 114 totaled $1,374,000, with a
corresponding valuation allowance of $344,000. At
December 31, 2002, the recorded investment in loans for
which impairment had been recognized totaled $1,373,000, with a
corresponding valuation allowance of $342,000. For the years
ended December 31, 2000, 2001, and 2002, the average
recorded investment in impaired loans was approximately
$1,103,000, $1,014,000, and $1,448,000, respectively. In 2000,
2001, and 2002, Humboldt recognized $44,000, $56,000, and
$75,000, respectively, of interest on impaired loans (during the
portion of the year that they were impaired), all of which was
recognized on the cash basis. Nonaccrual loans totaled
$2,915,000 and $3,054,000 at December 31, 2001, and 2002
respectively. Foregone interest on nonaccrual loans was
approximately $96,000, $175,000 and $143,000 for the years ended
December 31, 2000, 2001, and 2002.

62



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The following table summarizes activity related
to the allowance for loan losses for the years ended
December 31:

|                                                                                                      |  |                        |        |      |  |      |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                                                      |  | 2000                   |        | 2001 |  | 2002
|                                                                                                      |  |                        |        |      |  |     
|                                                                                                      |  |                       
|                                                                                                      |  | (Dollars in thousands)
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Beginning balance                                                                                     |  | $                      | 5,502  |      |  | $    | 8,367  |   |  | $ | 9,765  |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Provision for loan losses                                                                             |  |                        | 2,535  |      |  |      | 2,903  |   |  |   | 3,321  |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Allowance of entities acquired through mergers
    accounted for under the purchase accounting method |  |                        | 2,000  |      |  |      |       |   |  |   |       |  
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Charge offs                                                                                           |  |                        | (1,918 | )    |  |      | (1,917 | ) |  |   | (2,147 | )
|                                                                                                     
|                                                                                                     
|                                                                                                     
|                                                                                                     
|Recoveries                                                                                            |  |                        | 248    |      |  |      | 412    |   |  |   | 675    |  
|                                                                                                      |  |                        |        |      |  |      |        |   |  |   |        |  
|Ending balance                                                                                        |  | $                      | 8,367  |      |  | $    | 9,765  |   |  | $ | 11,614 |  
|                                                                                                      |  |                        |        |      |  |      |        |   |  |   |        |  




Note 6  Premises and
Equipment

Components of premises and equipment included the
following at December 31:

|                                  |                                                 |                        |        |        |   |   |        |         |  
|--------------------------------- | ----------------------------------------------- | ---------------------- | ------ | ------ | - | - | ------ | ------- | -
|                                  |                                                 | 2001                   |        | 2002  
|                                  |                                                 |                        |        |       
|                                  |                                                 |                       
|                                  |                                                 | (Dollars in thousands)
|                                 
|                                 
|                                 
|                                 
|Land                              |                                                 | $                      | 2,466  |        |   | $ | 2,228  |        
|                                 
|                                 
|                                 
|                                 
|Buildings and improvements        |                                                 |                        | 13,110 |        |   |   | 12,182 |        
|                                 
|                                 
|                                 
|                                 
|Furniture, fixtures and equipment |                                                 |                        | 12,080 |        |   |   | 13,187 |        
|                                 
|                                 
|                                 
|                                 
|Leasehold improvements            |                                                 |                        | 932    |        |   |   | 1,050  |        
|                                  |                                                 |                        |        |        |   |   |        |        
|                                  |                                                 |                        | 28,588 |        |   |   | 28,647 |        
|                                 
|                                 
|                                 
|                                 
|                                  | Less: Accumulated depreciation and amortization |                        |        | (9,318 | ) |   |        | (12,054 | )
|                                  |                                                 |                        |        |        |   |   |        |        
|                                  |                                                 | $                      | 19,270 |        |   | $ | 16,593 |        
|                                  |                                                 |                        |        |        |   |   |        |        

Depreciation expense totaled $1,969,000,
$2,861,000 and $2,597,000 in 2000, 2001 and 2002.




Note 7  Mortgage Servicing
Rights

In August 2002, the Bank sold its residential
mortgage loan servicing portfolio to a third party for cash
consideration of $2,420,000. The Bank recognized a loss, net of
selling-related costs, of approximately $259,000 included in
Fees and Other income on the Income Statement. In connection
with this sale, the Bank adopted a program whereby the
residential mortgage loans are sold on a servicing
released basis.

The Bank recorded servicing assets related to the
sale of SBA loans in 2001 and 2002 of $162,000 and $821,000
respectively. The carrying value of the SBA servicing asset was
$766,000 and $716,000 as of December 31, 2001 and 2002
respectively. An impairment charge of $600,000 was recorded at
December 31, 2002 based on the fair value of the servicing
asset. No impairment was recorded at December 31, 2001. The
valuation analysis was provided by a third party using estimated
discount rates of 13-14%.

63



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)







Note 8  Interest-Bearing
Deposits

Interest-bearing deposits consisted of the
following at December 31:

|                                     |  |                        |         |      |  |   |         | 
|------------------------------------ |  | ---------------------- | ------- | ---- |  | - | ------- | 
|                                     |  | 2001                   |         | 2002
|                                     |  |                        |         |     
|                                     |  |                       
|                                     |  | (Dollars in thousands)
|                                    
|                                    
|                                    
|                                    
|Negotiable order of withdrawal (NOW) |  | $                      | 46,724  |      |  | $ | 52,052  | 
|                                    
|                                    
|                                    
|                                    
|Savings and money market             |  |                        | 234,740 |      |  |   | 224,908 | 
|                                    
|                                    
|                                    
|                                    
|Time, $100,000 and over              |  |                        | 109,476 |      |  |   | 102,743 | 
|                                    
|                                    
|                                    
|                                    
|Other time less than $100,000        |  |                        | 198,060 |      |  |   | 157,760 | 
|                                    
|                                    
|                                    
|                                    
|Brokered time deposits               |  |                        | 4,994   |      |  |   | 75,558  | 
|                                     |  |                        |         |      |  |   |         | 
|                                     |  | $                      | 593,994 |      |  | $ | 613,021 | 
|                                     |  |                        |         |      |  |   |         | 

Interest expense on these deposits for the years
ended December 31 is as follows:

|                              |  |                        |        |      |  |      |        |  |  |   |        | 
|----------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                              |  | 2000                   |        | 2001 |  | 2002
|                              |  |                        |        |      |  |     
|                              |  |                       
|                              |  | (Dollars in thousands)
|                             
|                             
|                             
|                             
|NOW                           |  | $                      | 375    |      |  | $    | 247    |  |  | $ | 111    | 
|                             
|                             
|                             
|                             
|Savings and money market      |  |                        | 4,704  |      |  |      | 6,268  |  |  |   | 3,249  | 
|                             
|                             
|                             
|                             
|Time, $100,000 and over       |  |                        | 6,249  |      |  |      | 6,513  |  |  |   | 4,095  | 
|                             
|                             
|                             
|                             
|Other time less than $100,000 |  |                        | 11,826 |      |  |      | 12,020 |  |  |   | 5,479  | 
|                             
|                             
|                             
|                             
|Brokered time deposits        |  |                        |       |      |  |      | 155    |  |  |   | 698    | 
|                              |  |                        |        |      |  |      |        |  |  |   |        | 
|                              |  | $                      | 23,154 |      |  | $    | 25,203 |  |  | $ | 13,632 | 
|                              |  |                        |        |      |  |      |        |  |  |   |        | 

The maturities of time deposits at
December 31, 2002 are as follows (dollars in thousands):

|                                        |  |   |         | 
|--------------------------------------- |  | - | ------- | 
|                                       
|                                       
|                                       
|                                       
|Three months or less                    |  | $ | 71,232  | 
|                                       
|                                       
|                                       
|                                       
|Over three months through twelve months |  |   | 187,531 | 
|                                       
|                                       
|                                       
|                                       
|Over one year through three years       |  |   | 72,933  | 
|                                       
|                                       
|                                       
|                                       
|Over three years                        |  |   | 4,365   | 
|                                        |  |   |         | 
|                                        |  | $ | 336,061 | 
|                                        |  |   |         | 

As of December 31, 2002, Humboldt had
$76 million of brokered certificates of deposit
outstanding, most of which mature in less than one year. One
brokered issuance, in the amount of $10 million, matures in
June 2010. This deposit, which bears a fixed rate of 4.70%, was
paired with an interest rate swap to convert the rate to LIBOR
plus 7 basis points on a variable basis. The certificate of
deposit is callable at the Banks option and the swap is
callable by the counterparty after one year. Management expects
that brokered certificates of deposit will be used from time to
time in the future as an alternative source of funding.




Note 9  Lines of Credit and
Borrowed Funds

The Bank has uncommitted federal funds lines of
credit agreements with four financial institutions in the
amounts of $23,500,000 and $23,000,000 as of December 31,
2001 and 2002 respectively. Availability of the lines is subject
to federal funds balances available for loan and continued
borrower eligibility. These lines are intended to support
short-term liquidity, and cannot be used for more than ten
consecutive business days or more than twelve times during a
given thirty day period. At December 31, 2001 and 2002
there were no borrowings outstanding under the agreements.

The Bank had advances from the Federal Home Loan
Bank (FHLB) as of December 31, 2002 totaling
$63,000,000. These advances are due at various maturity dates
ranging from January 1, 2003 to May 2, 2013,

64



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


and interest rates ranging from 1.01% to 7.44%.
The advances have various repayment schedules for both principal
and interest. The FHLB advances are collateralized by first
mortgage loans, mortgage-backed securities and FHLB stock.
Advances from the FHLB outstanding at December 31, 2002
mature as follows:

|           |  |             |        | 
|---------- |  | ----------- | ------ | 
|Year       |  | Amount     
|           |  |            
|           |  | (Dollars in
|           |  | thousands) 
|          
|          
|          
|          
|2003       |  | $           | 36,385 | 
|          
|          
|          
|          
|2004       |  |             | 13,677 | 
|          
|          
|          
|          
|2005       |  |             | 10,000 | 
|          
|          
|          
|          
|2006       |  |             |       | 
|          
|          
|          
|          
|2007       |  |             | 1,000  | 
|          
|          
|          
|          
|Thereafter |  |             | 1,872  | 
|           |  |             |        | 
|Total      |  | $           | 62,934 | 
|           |  |             |        | 

The total maturities noted in 2003 above include
$3,385,000 in FHLB overnight borrowings.

Humboldt has a line of credit with an
unaffiliated financial institution with a borrowing limit of
$7,000,000. This line is secured with stock of the Bank and
bears interest at a variable rate of Prime plus 75 basis points,
with interest payments due monthly. Principal is due at
maturity, in October 2003. Humboldt Bancorp paid an origination
fee of $52,500 in connection with this facility; this fee is
being amortized over the life of the loan. This facility had an
effective rate of 5.00% and an outstanding balance of
$3,700,000, at December 31, 2002.

Humboldt has an amortizing term loan with an
unaffiliated financial institution bearing a fixed rate of
6.625% that matures in October 2004. The balance of this note
was 1,297,000 at December 31, 2002. Humboldt also has
another amortizing term loan with an unaffiliated financial
institution bearing a variable rate of interest that matures in
March of 2003. The interest rate and balance at
December 31, 2002 was 7.5% and $202,000 respectively.

Bancorp has an unsecured line of credit with an
unaffiliated financial institution with a borrowing limit of
$1,000,000. This line bears interest at a variable rate of Prime
plus 125 basis points, with interest payments due monthly.
Principal is due at maturity, in April 2003. There was no
balance on this line as of December 31, 2001 and a balance
of $1,165,000 as of December 31, 2002.




Note 10  Trust Preferred
Securities

In March 2000, Humboldt formed a wholly owned
Delaware statutory business trust, HB Capital Trust I
(Capital Trust I), which issued $5,150,0000 of
guaranteed preferred beneficial interests in Humboldts
junior subordinated deferrable interest debentures (the
Trust Preferred Securities). These debentures
qualify as Tier 1 capital under Federal Reserve Board
guidelines. All of the common securities of Capital Trust I
are owned by Humboldt. The proceeds from the issuance of the
common securities and the Trust Preferred Securities were used
by Capital Trust I to purchase $5,310,000 of junior
subordinated debentures of Humboldt, which carry a fixed
interest rate of 10.875%. The debentures represent the sole
asset of Capital Trust I. The debentures and related
earnings statement effects are eliminated in Humboldts
financial statements. The Trust Preferred Securities accrue and
pay distributions semiannually at a fixed rate of 10.875% per
annum of the stated liquidation value of $1,000 per capital
security. Humboldt has entered into contractual arrangements
which, taken collectively, fully and unconditionally, guarantee
payment of: (i) accrued and unpaid distributions required
to be paid on the Trust Preferred Securities; (ii) the
redemption price with respect to any Trust Preferred Securities
called for redemption by Capital Trust I, and

65



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


(iii) payments due upon a voluntary or
involuntary dissolution, winding up or liquidation of Capital
Trust I. The Trust Preferred Securities are mandatorily
redeemable upon maturity of the debentures on March 8,
2030, or upon earlier redemption as provided in the indenture.
Humboldt has the right to redeem the debentures purchased by
Capital Trust I in whole or in part, on or after
March 8, 2010. As specified in the indenture, if the
debentures are redeemed prior to maturity, the redemption price
will be the principal amount, any accrued but unpaid interest,
plus a premium ranging from 5.438% in 2010 to 0.544% in 2019.

In February 2001, Humboldt formed a wholly owned
Connecticut statutory business trust, Humboldt Bancorp Statutory
Trust I (Statutory Trust I), which issued
$5,000,000 of guaranteed preferred beneficial interests in
Humboldts junior subordinated deferrable interest
debentures (the Trust Preferred Securities). These
debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. All of the common securities of Statutory
Trust I are owned by Humboldt. The proceeds from the
issuance of the common securities and the Trust Preferred
Securities were used by Humboldt Statutory Trust to purchase
$5,150,000 of junior subordinated debentures of Humboldt, which
carry a fixed interest rate of 10.20%. The debentures represent
the sole asset of Statutory Trust I. The debentures and
related earnings statement effects are eliminated in
Humboldts financial statements. The Trust Preferred
Securities accrue and pay distributions semiannually at a fixed
rate of 10.20% per annum of the stated liquidation value of
$1,000 per capital security. Humboldt has entered into
contractual arrangements which, taken collectively, fully and
unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the Trust Preferred
Securities; (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption by Statutory
Trust I, and (iii) payments due upon a voluntary or
involuntary dissolution, winding up or liquidation of Statutory
Trust I. The Trust Preferred Securities are mandatorily
redeemable upon maturity of the debentures in February 2031, or
upon earlier redemption as provided in the indenture. Humboldt
has the right to redeem the debentures purchased by Statutory
Trust I in whole or in part, on or after February 22,
2011. As specified in the indenture, if the debentures are
redeemed prior to maturity, the redemption price will be the
principal amount, any accrued but unpaid interest, plus a
premium ranging from 5.10% in 2011 to 0.51% in 2020. After
February 22, 2020, there is no premium for redemption.

In December 2001, Humboldt formed a wholly owned
Connecticut statutory business trust, Humboldt Bancorp Statutory
Trust II (Statutory Trust II), which
issued $10,000,000 of guaranteed preferred beneficial interests
in Humboldts junior subordinated deferrable interest
debentures (the Trust Preferred Securities). These
debentures qualify as Tier 1 capital under Federal Reserve
Board guidelines. All of the common securities of Statutory
Trust II are owned by Humboldt. The proceeds from the
issuance of the common securities and the Trust Preferred
Securities were used by Humboldt Statutory Trust to purchase
$10,300,000 million of junior subordinated debentures of
Humboldt, which carry a floating rate based on three-month LIBOR
plus 360 basis points. The debentures represent the sole asset
of Statutory Trust II. The debentures and related earnings
statement effects are eliminated in Humboldts financial
statements. The Trust Preferred Securities accrue and pay
distributions at a floating rate of three-month LIBOR plus 360
basis points per annum of the stated liquidation value of $1,000
per capital security. Humboldt has entered into contractual
arrangements which, taken collectively, fully and
unconditionally guarantee payment of: (i) accrued and
unpaid distributions required to be paid on the Trust Preferred
Securities; (ii) the redemption price with respect to any
Trust Preferred Securities called for redemption by Statutory
Trust II, and (iii) payments due upon a voluntary or
involuntary dissolution, winding up or liquidation of Statutory
Trust II. The Trust Preferred Securities are mandatorily
redeemable upon maturity of the debentures in December 2031, or
upon earlier redemption as provided in the indenture. Humboldt
has the right to redeem the debentures purchased by Statutory
Trust II in whole or in part, on or after December 18,
2006. As specified in the indenture, if the debentures are
redeemed prior to maturity, the redemption price will be the
principal amount, any accrued but unpaid interest. In order to
manage the interest rate risk associated with this Trust
Preferred Securities issuance, Humboldt entered into an interest
rate swap agreement with an unrelated third

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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


party that converted the floating rate to a fixed
rate of 8.42% for five years. Additional information about this
agreement is provided in Note 11.




Note 11  Derivative Financial
Instruments

Humboldt maintains an overall interest rate
risk-management strategy that incorporates the use of derivative
instruments to minimize significant unplanned fluctuations in
earnings that are caused by interest rate volatility. The
objective is to reduce Humboldts exposure to changes in
market interest rates by modifying the repricing characteristics
of certain balance sheet assets and liabilities through the use
of a derivative hedging instrument. Humboldt views this strategy
as a component of a comprehensive and prudent asset liability
management program.

Derivative instruments that are used as part of
Humboldts interest rate risk-management strategy consist
entirely of interest rate swap contracts. As a matter of policy,
Humboldt does not use highly leveraged derivative instruments
for interest rate risk management. Interest rate swaps generally
involve the exchange of fixed and variable rate interest
payments between two parties, based on a common notional
principal amount and maturity date.

Humboldt accounts for all derivative financial
instruments in accordance with SFAS No. 133, Accounting
for Certain Derivative Instruments and Certain Hedging
Activities, and SFAS No. 138, an amendment to SFAS
No. 133. Further information regarding the accounting
treatment is provided in Note 1. At December 31, 2002,
Humboldt had the following interest rate swap contracts (dollars
in thousands):

|              |  |          |        |           |  |          |         |               |  |            |      |                   |  |       |               |  |  |  |            |  |  |  |                 |  |  |   |       |  
|------------- |  | -------- | ------ | --------- |  | -------- | ------- | ------------- |  | ---------- | ---- | ----------------- |  | ----- | ------------- |  |  |  | ---------- |  |  |  | --------------- |  |  | - | ----- | -
|Issue         |  | Notional |        |           |  | Rate     |         |               |  |            |      |                   |  | Fair 
|Date          |  | Amount   |        | Rate Paid |  | Received |         | Maturity Date |  | Hedge Type |      | Hedged Instrument |  | Value
|              |  |          |        |           |  |          |         |               |  |            |      |                   |  |      
|January 2002  |  | $        | 25,000 |           |  |          | 4.25%(1 | )             |  |            | 6.72 | %                 |  |       | January 2005  |  |  |  | Cash Flow  |  |  |  | Loans           |  |  | $ | 1,016 |  
|             
|             
|             
|             
|July 2002     |  | $        | 25,000 |           |  |          | 4.25%(2 | )             |  |            | 6.30 | %                 |  |       | July 2005     |  |  |  | Cash Flow  |  |  |  | Loans           |  |  | $ | 829   |  
|             
|             
|             
|             
|December 2002 |  | $        | 10,000 |           |  |          | 1.45%(3 | )             |  |            | 4.70 | %                 |  |       | June 2010     |  |  |  | Fair Value |  |  |  | Callable CD     |  |  | $ | 49    |  
|             
|             
|             
|             
|December 2001 |  | $        | 10,000 |           |  |          | 8.42%(4 | )             |  |            | 4.98 | %                 |  |       | December 2006 |  |  |  | Cash Flow  |  |  |  | Trust Preferred |  |  | $ | (739  | )



---



|    |                                              
|--- | ---------------------------------------------
|(1) | Variable rate based on prime                 
|   
|(2) | Variable rate based on prime                 
|   
|(3) | Variable rate based on LIBOR + 7 basis points
|   
|(4) | Fixed rate                                   

As of December 2001 the Company had no amount
recorded in other assets for interest rate swaps as the
$10 million notional swap noted above was purchased in late
December of that same year. As of December 2002, the
Company had $1,155,000 recorded as the carrying value of
interest rate swaps included in other assets.

67



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)







Note 12  Fees and Other
Income

Fees and other income consisted of the following
for the years ended December 31:

|                                      |  |                        |        |      |  |      |        |  |  |   |        |  
|------------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | -
|                                      |  | 2000                   |        | 2001 |  | 2002
|                                      |  |                        |        |      |  |     
|                                      |  |                       
|                                      |  | (Dollars in thousands)
|                                     
|                                     
|                                     
|                                     
|Merchant bankcard processing fees     |  | $                      | 12,316 |      |  | $    | 16,484 |  |  | $ | 16,916 |  
|                                     
|                                     
|                                     
|                                     
|Lease residuals and rentals           |  |                        | 927    |      |  |      | 832    |  |  |   | 405    |  
|                                     
|                                     
|                                     
|                                     
|Credit card program fees              |  |                        | 259    |      |  |      | 252    |  |  |   | 29     |  
|                                     
|                                     
|                                     
|                                     
|Fees for customer services            |  |                        | 449    |      |  |      | 992    |  |  |   | 684    |  
|                                     
|                                     
|                                     
|                                     
|ATM Funding Income                    |  |                        | 3,081  |      |  |      | 2,983  |  |  |   | 825    |  
|                                     
|                                     
|                                     
|                                     
|Earnings on bank-owned life insurance |  |                        | 433    |      |  |      | 875    |  |  |   | 814    |  
|                                     
|                                     
|                                     
|                                     
|Loan and lease servicing fees         |  |                        | 552    |      |  |      | 363    |  |  |   | (413   | )
|                                     
|                                     
|                                     
|                                     
|Other                                 |  |                        | 1,037  |      |  |      | 1,950  |  |  |   | 798    |  
|                                      |  |                        |        |      |  |      |        |  |  |   |        |  
|                                      |  | $                      | 19,054 |      |  | $    | 24,731 |  |  | $ | 20,058 |  
|                                      |  |                        |        |      |  |      |        |  |  |   |        |  




Note 13  Other Expenses

Other expenses consisted of the following for the
years ended December 31:

|                                        |  |                        |        |      |  |      |        |  |  |   |        | 
|--------------------------------------- |  | ---------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                        |  | 2000                   |        | 2001 |  | 2002
|                                        |  |                        |        |      |  |     
|                                        |  |                       
|                                        |  | (Dollars in thousands)
|                                       
|                                       
|                                       
|                                       
|Merchant bankcard program               |  | $                      | 4,733  |      |  | $    | 5,599  |  |  | $ | 6,393  | 
|                                       
|                                       
|                                       
|                                       
|Professional and other outside services |  |                        | 1,871  |      |  |      | 2,709  |  |  |   | 3,954  | 
|                                       
|                                       
|                                       
|                                       
|Stationery, supplies and postage        |  |                        | 1,160  |      |  |      | 1,588  |  |  |   | 1,562  | 
|                                       
|                                       
|                                       
|                                       
|Telephone and travel                    |  |                        | 1,260  |      |  |      | 1,534  |  |  |   | 1,756  | 
|                                       
|                                       
|                                       
|                                       
|Amortization of core deposit intangible |  |                        | 684    |      |  |      | 876    |  |  |   | 503    | 
|                                       
|                                       
|                                       
|                                       
|Data processing and ATM fees            |  |                        | 565    |      |  |      | 874    |  |  |   | 801    | 
|                                       
|                                       
|                                       
|                                       
|Advertising                             |  |                        | 473    |      |  |      | 430    |  |  |   | 580    | 
|                                       
|                                       
|                                       
|                                       
|Other                                   |  |                        | 4,036  |      |  |      | 3,709  |  |  |   | 5,270  | 
|                                       
|                                       
|                                       
|                                       
|ATM funding loss                        |  |                        |       |      |  |      | 1,537  |  |  |   |       | 
|                                        |  |                        |        |      |  |      |        |  |  |   |        | 
|                                        |  | $                      | 14,782 |      |  | $    | 18,856 |  |  | $ | 20,819 | 
|                                        |  |                        |        |      |  |      |        |  |  |   |        | 

68



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)







Note 14  Income Taxes

The components of income tax expense included in
the statements of income were as follows for the years ended
December 31:

|                               |         |                        |        |        |   |      |        |        |   |   |        |        |  
|------------------------------ | ------- | ---------------------- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | -
|                               |         | 2000                   |        | 2001   |   | 2002
|                               |         |                        |        |        |   |     
|                               |         |                       
|                               |         | (Dollars in thousands)
|Currently payable              |         |                        |        |        |   |      |        |        |   |   |        |       
|                              
|                              
|                              
|                              
|                               | Federal |                        | $      | 4,947  |   |      | $      | 4,561  |   |   | $      | 7,345  |  
|                              
|                              
|                              
|                              
|                               | State   |                        |        | 1,736  |   |      |        | 1,338  |   |   |        | 374    |  
|                               |         |                        |        |        |   |      |        |        |   |   |        |       
|                               |         |                        | 6,683  |        |   |      | 5,899  |        |   |   | 7,719  |       
|                               |         |                        |        |        |   |      |        |        |   |   |        |       
|Deferred tax benefit           |         |                        |        |        |   |      |        |        |   |   |        |       
|                              
|                              
|                              
|                              
|                               | Federal |                        |        | (1,784 | ) |      |        | (1,626 | ) |   |        | (2,223 | )
|                              
|                              
|                              
|                              
|                               | State   |                        |        | (446   | ) |      |        | (484   | ) |   |        | (1,059 | )
|                               |         |                        |        |        |   |      |        |        |   |   |        |       
|                               |         |                        | (2,230 | )      |   |      | (2,110 | )      |   |   | (3,282 | )     
|                               |         |                        |        |        |   |      |        |        |   |   |        |       
|Net provision for income taxes |         | $                      | 4,453  |        |   | $    | 3,789  |        |   | $ | 4,437  |       
|                               |         |                        |        |        |   |      |        |        |   |   |        |       

A reconciliation of income taxes computed at the
federal statutory rate of 34% and the provision for income taxes
for the years ended December 31 are as follows:

|                                     |                                                               |                        |       |       |   |      |       |      |   |   |       |      |  
|------------------------------------ | ------------------------------------------------------------- | ---------------------- | ----- | ----- | - | ---- | ----- | ---- | - | - | ----- | ---- | -
|                                     |                                                               | 2000                   |       | 2001  |   | 2002
|                                     |                                                               |                        |       |       |   |     
|                                     |                                                               |                       
|                                     |                                                               | (Dollars in thousands)
|                                    
|                                    
|                                    
|                                    
|Income tax at Federal statutory rate |                                                               | $                      | 4,583 |       |   | $    | 3,663 |      |   | $ | 5,772 |     
|                                    
|                                    
|                                    
|                                    
|                                     | State franchise tax, less federal income tax
    benefit      |                        |       | 1,021 |   |      |       | 563  |   |   |       | (453 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Merger related Expenses                                       |                        |       |      |   |      |       | 386  |   |   |       |     |  
|                                    
|                                    
|                                    
|                                    
|                                     | Interest on municipal obligations exempt from
    Federal tax |                        |       | (530  | ) |      |       | (501 | ) |   |       | (442 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Interest on enterprise zone loans exempt from
    State tax   |                        |       | (72   | ) |      |       |     |   |   |       |     |  
|                                    
|                                    
|                                    
|                                    
|                                     | Life insurance earnings and expenses                          |                        |       | (291  | ) |      |       | (101 | ) |   |       | (223 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Low income housing credits                                    |                        |       | (141  | ) |      |       | (175 | ) |   |       | (136 | )
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax asset valuation allowance change                 |                        |       | (127  | ) |      |       | (23  | ) |   |       |     |  
|                                    
|                                    
|                                    
|                                    
|                                     | Other differences                                             |                        |       | 10    |   |      |       | (23  | ) |   |       | (81  | )
|                                     |                                                               |                        |       |       |   |      |       |      |   |   |       |     
|Provision for income taxes           |                                                               | $                      | 4,453 |       |   | $    | 3,789 |      |   | $ | 4,437 |     
|                                     |                                                               |                        |       |       |   |      |       |      |   |   |       |     

69



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The tax effects of temporary differences that
give rise to the components of the net deferred tax asset
recorded as an other asset as of December 31 were as
follows:

|                          |                                             |                                |   |       |        |   |   |        |        |  
|------------------------- | ------------------------------------------- | ------------------------------ | - | ----- | ------ | - | - | ------ | ------ | -
|                          |                                             | 2001                           |   | 2002 
|                          |                                             |                                |   |      
|                          |                                             |                               
|                          |                                             | (Dollars in                   
|                          |                                             | thousands)                    
|                         
|                         
|                         
|                         
|Deferred tax assets:      |                                             |                                |   |       |        |   |   |       
|                         
|                         
|                         
|                         
|                          | Allowance for loan and lease losses         |                                | $ | 3,334 |        |   | $ | 4,408  |       
|                         
|                         
|                         
|                         
|                          | Deferred loan fees                          |                                |   | 122   |        |   |   | 238    |       
|                         
|                         
|                         
|                         
|                          | State franchise taxes                       |                                |   | 393   |        |   |   | 243    |       
|                         
|                         
|                         
|                         
|                          | Depreciation                                |                                |   | 749   |        |   |   | 1,222  |       
|                         
|                         
|                         
|                         
|                          | Merchant Bankcard program                   |                                |   | 1,141 |        |   |   | 1,106  |       
|                         
|                         
|                         
|                         
|                          | Core deposit intangible amortization        |                                |   | 604   |        |   |   | 666    |       
|                         
|                         
|                         
|                         
|                          | Organization costs                          |                                |   | 81    |        |   |   | 41     |       
|                         
|                         
|                         
|                         
|                          | Deferred Compensation                       |                                |   | 3,747 |        |   |   | 4,931  |       
|                         
|                         
|                         
|                         
|                          | Other                                       |                                |   | 394   |        |   |   | 406    |       
|                          |                                             |                                |   |       |        |   |   |       
|                          |                                             | Total deferred tax assets      |   |       | 10,565 |   |   |        | 13,261 |  
|                         
|                         
|                         
|                         
|                          | Valuation allowance for deferred tax assets |                                |   | (241  | )      |   |   | (241   | )     
|                          |                                             |                                |   |       |        |   |   |       
|                          |                                             | Deferred tax assets recognized |   |       | 10,324 |   |   |        | 13,020 |  
|                         
|                         
|                         
|                         
|Deferred tax liabilities: |                                             |                                |   |       |        |   |   |       
|                         
|                         
|                         
|                         
|                          | Loan premium                                |                                |   | (971  | )      |   |   | (555   | )     
|                         
|                         
|                         
|                         
|                          | Unrealized securities holding gains         |                                |   | (386  | )      |   |   | (2,468 | )     
|                         
|                         
|                         
|                         
|                          | Federal Home Loan Bank stock dividends      |                                |   | (85   | )      |   |   | (131   | )     
|                         
|                         
|                         
|                         
|                          | Other                                       |                                |   | (597  | )      |   |   | (381   | )     
|                          |                                             |                                |   |       |        |   |   |       
|                          |                                             | Total deferred tax liabilities |   |       | (2,039 | ) |   |        | (3,535 | )
|                          |                                             |                                |   |       |        |   |   |       
|                          |                                             | Net deferred tax asset         |   | $     | 8,285  |   |   | $      | 9,485  |  
|                          |                                             |                                |   |       |        |   |   |       

Amounts presented for the tax effects of
temporary differences are based upon estimates and assumptions
and could vary from amounts ultimately reflected on
Humboldts tax returns. Accordingly, the variances from
amounts reported for prior years are primarily the result of
adjustments to conform to the tax returns as filed. A valuation
allowance has been established to reduce deferred tax assets to
the amount that is more likely than not to be realized.

Income taxes receivable were $1,038,000 and
$278,000 at December 31, 2001 and 2002, respectively and
were included in other assets.

70



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Note 15  Earnings per
Share

The following is a computation of basic and
diluted earnings per share for the years ended December 31,
which has been retroactively adjusted for stock dividends and
splits:

|                            |                                                        |                                                                            |                                                                                                                                          |        |        |      |   |        |        |     |   |        |        |     | 
|--------------------------- | ------------------------------------------------------ | -------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------- | ------ | ------ | ---- | - | ------ | ------ | --- | - | ------ | ------ | --- | 
|                            |                                                        | 2000                                                                       |                                                                                                                                          | 2001   |        | 2002
|                            |                                                        |                                                                            |                                                                                                                                          |        |        |     
|                            |                                                        |                                                                           
|                            |                                                        | (Dollars in thousands except                                              
|                            |                                                        | per share amounts)                                                        
|                           
|                           
|                           
|                           
|Basic earnings per share:   |                                                        |                                                                            |                                                                                                                                          |        |        |      |   |        |        |     |   |       
|                           
|                           
|                           
|                           
|                            | Weighted average shares outstanding                    |                                                                            |                                                                                                                                          | 12,037 |        |      |   | 12,464 |        |     |   | 12,503 |       
|                           
|                           
|                           
|                           
|                            | Net income (loss)                                      |                                                                            | $                                                                                                                                        | 9,020  |        |      | $ | (7,009 | )      |     | $ | 12,263 |       
|                           
|                           
|                           
|                           
|                            | Net income from continuing operations                  |                                                                            | $                                                                                                                                        | 9,027  |        |      | $ | 6,985  |        |     | $ | 12,539 |       
|                           
|                           
|                           
|                           
|                            | Basic earnings (loss) per share                        |                                                                            | $                                                                                                                                        | 0.75   |        |      | $ | (0.56  | )      |     | $ | 0.98   |       
|                           
|                           
|                           
|                           
|                            | Basic earnings per share  continuing
    operations   |                                                                            | $                                                                                                                                        | 0.75   |        |      | $ | 0.56   |        |     | $ | 1.00   |       
|                           
|                           
|                           
|                           
|Diluted earnings per share: |                                                        |                                                                            |                                                                                                                                          |        |        |      |   |        |        |     |   |       
|                           
|                           
|                           
|                           
|                            |                                                        | Weighted average shares outstanding                                        |                                                                                                                                          |        | 12,037 |      |   |        | 12,464 |     |   |        | 12,503 |    
|                           
|                           
|                           
|                           
|                            |                                                        |                                                                            | Net effect of the assumed exercise of stock
    options based on the treasury stock method using average market
    price for the period |        |        | 652  |   |        |        | 532 |   |        |        | 546 | 
|                            |                                                        |                                                                            |                                                                                                                                          |        |        |      |   |        |        |     |   |       
|                            |                                                        | Total weighted average shares and common stock
    equivalents outstanding |                                                                                                                                          |        | 12,689 |      |   |        | 12,996 |     |   |        | 13,049 |    
|                            |                                                        |                                                                            |                                                                                                                                          |        |        |      |   |        |        |     |   |       
|                            | Net income (loss)                                      |                                                                            | $                                                                                                                                        | 9,020  |        |      | $ | (7,009 | )      |     | $ | 12,263 |       
|                           
|                           
|                           
|                           
|                            | Net income from continuing operations                  |                                                                            | $                                                                                                                                        | 9,027  |        |      | $ | 6,985  |        |     | $ | 12,539 |       
|                           
|                           
|                           
|                           
|                            | Diluted earnings (loss) per share                      |                                                                            | $                                                                                                                                        | 0.71   |        |      | $ | (0.54  | )      |     | $ | 0.94   |       
|                           
|                           
|                           
|                           
|                            | Diluted earnings per share  continuing
    operations |                                                                            | $                                                                                                                                        | 0.71   |        |      | $ | 0.54   |        |     | $ | 0.96   |       

The following table presents options that were
outstanding for the years ended December 31, 2000, 2001,
and 2002, but were excluded from the calculation of diluted
earnings per share because the exercise price was greater than
the average market price of Humboldt common shares:

|                |                |           |  |                 |         |           |  |                 |                |           |  |  |         |  |  |   |                 |  |  |  |         | 
|--------------- | -------------- | --------- |  | --------------- | ------- | --------- |  | --------------- | -------------- | --------- |  |  | ------- |  |  | - | --------------- |  |  |  | ------- | 
|                |                |           |  |                
|2000            |                | 2001      |  | 2002           
|                |                |           |  |                
|Range of        |                | Number of |  | Range of        |         | Number of |  | Range of        |                | Number of
|Exercise Prices |                | Shares    |  | Exercise Prices |         | Shares    |  | Exercise Prices |                | Shares   
|                |                |           |  |                 |         |           |  |                 |                |          
|$               | 9.47 to $10.85 |           |  |                 | 126,108 |           |  | $               | 7.38 to $8.78  |           |  |  | 155,063 |  |  | $ | 9.96 to $11.56  |  |  |  | 216,345 | 
|                |                |           |  |                 |         |           |  | $               | 8.79 to $10.85 |           |  |  | 210,610 |  |  | $ | 11.57 to $14.94 |  |  |  | 55,000  | 

Humboldt had outstanding at December 31,
2000, 2001, and 2002, warrants for 130,680 shares issued in
connection with the acquisition of Silverado Merger Corporation
in 1999. The current exercise price of these warrants is $9.47.
The warrants were excluded from the calculation of diluted
earnings per share for 2000 and 2001 because the exercise price
exceeded the average market price of Humboldt common stock.

Note 16  Benefit
Plans

Retirement and Profit Sharing Plan:Humboldt has a defined
contribution/401(k) retirement plan covering substantially all
of the employees. During 2001, this plan was amended in order to
combine the Humboldt Employee Stock Bonus Plan into the 401(k)
plan in order to reduce the administrative burden of managing
the plans. Contributions to the plan are made at the discretion
of the Board of Directors in an amount not to exceed the maximum
amount deductible under the profit sharing plan rules of the
Internal Revenue Service. Employees may elect to have a portion
of their compensation contributed to the plan in conformity with
the requirements of Section 401(k) of the Internal Revenue
Code. Salaries and employee

71



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


benefits expense includes company contributions
to the retirement plan (inclusive of amounts contributed to the
former Employee Stock Bonus Plan) of $443,000 during 2000,
$642,000 during 2001, and $403,000 during 2002.

Postemployment Benefit Plans and Life
Insurance Policies:Humboldt has
purchased single premium life insurance policies in connection
with the implementation of salary continuation and deferred
compensation plans for certain key employees. The policies
provide protection against the adverse financial effects from
the death of a key employee and provide income to offset
expenses associated with the plans. The specified employees are
insured under the policies, but Humboldt is the owner and
beneficiary. At December 31, 2001 and 2002, the cash
surrender value of these policies totaled approximately
$15,091,000 and $15,613,000, respectively.

The plans are unfunded and provide for Humboldt
to pay the employees specified amounts for specified periods
after retirement and allow the employees to defer a portion of
current compensation in exchange for the Humboldts
commitment to pay a deferred benefit at retirement. If death
occurs prior to or during retirement, Humboldt will pay the
employees beneficiary or estate the benefits set forth in
the plans.

At December 31, 2001 and 2002, liabilities
recorded for the estimated present value of future salary
continuation and deferred compensation benefits totaled
approximately $5,948,000 and $6,384,000 respectively. Deferred
compensation is vested as to the amounts deferred. Humboldt
maintains a non-qualified salary continuation plan for certain
senior executive officers. Under these plans, Humboldt has
agreed to pay benefits for a ten to fifteen year period after
retirement so long as certain length of service vesting
requirements are met. The plan is informally linked to several
single premium universal life insurance policies that provide
life insurance on certain senior executive officers with
Humboldt named as the owner and beneficiary of these policies.
Salary continuation expense totaled $446,000, $765,000, and
$432,000 as of December 31, 2000, 2001, and 2002
respectively.

Director Fee Plan:Humboldt has adopted the Humboldt
Bancorp & Subsidiaries Director Fee Plan (Fee
Plan), as amended and restated effective December 17,
2002. The Fee Plan permits each director of Humboldt Bancorp or
the Banks to elect to receive directors fees in the form
of Humboldt common stock, cash, or a combination of Humboldt
common stock and cash, and to elect to defer the receipt of any
of the foregoing until the end of his term as a director. If
deferral is elected, the amount of the directors fees
shall be credited to an account on behalf of the director,
however, such crediting shall constitute a mere promise on the
part of the Humboldt to pay/distribute on this account. The
account is otherwise unsecured, unfunded and subject to the
general claims of creditors of Humboldt. The Fee Plan provides
for the issuance of up to 193,261 shares of Humboldt common
stock. The amount of such fees deferred in 2000, 2001, and 2002
totaled $65,000, $120,000, and $154,000, respectively. At
December 31, 2001 and 2002, the liability for amounts due
under this plan totaled $335,000 and $304,000 respectively, or
approximately 39,904 and 32,293 shares of stock, respectively,
based upon the fair market value of the stock at the time the
fee was earned.

Note 17  Stock Option
Plans

Humboldt had stock options outstanding under
various plans at December 31, 2001, including two plans
assumed in the merger with Tehama Bancorp. The stock option
plans provide for option grants to directors and key employees
to purchase shares of Humboldt common stock at a price based on
the fair market value on the date of grant. The 2001 Humboldt
Bancorp & Subsidiaries Equity Incentive Plan (2001
Plan) provides for grants of options, restricted stock and
stock appreciation rights. As of December 31, 2002, a total
of 16,837 options were available for grant from the 2001 Plan
and 12,880 options were available from the 1992 plan. No options
were available for grant from any other plan. Generally, the
options are granted for a term of ten years. Options granted to
directors typically are vested immediately and options granted
to employees vest ratably over three years. Options granted
under the Tehama Bancorp plans did not fully vest as a result of
the merger.

72



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


The following is a summary of stock options
outstanding and exercised under Humboldts various stock
option plans:

|                                 |  |           |           |                |  |           |      |                |  |           |           |                |  |   |      |  |  |  |           |   |  |   |       | 
|-------------------------------- |  | --------- | --------- | -------------- |  | --------- | ---- | -------------- |  | --------- | --------- | -------------- |  | - | ---- |  |  |  | --------- | - |  | - | ----- | 
|                                 |  |           |           |                |  |          
|                                 |  | 2000      |           | 2001           |  | 2002     
|                                 |  |           |           |                |  |          
|                                 |  | Number of |           | Weighted-Avg   |  | Number of |      | Weighted-Avg   |  | Number of |           | Weighted-Avg  
|                                 |  | Shares    |           | Exercise Price |  | Shares    |      | Exercise Price |  | Shares    |           | Exercise Price
|                                 |  |           |           |                |  |           |      |                |  |           |           |               
|Outstanding at beginning of year |  |           | 1,717,448 |                |  | $         | 4.13 |                |  |           | 1,868,806 |                |  | $ | 4.75 |  |  |  | 1,717,111 |   |  | $ | 5.20  | 
|                                
|                                
|                                
|                                
|Granted                          |  |           | 329,377   |                |  |           | 7.07 |                |  |           | 129,089   |                |  |   | 6.95 |  |  |  | 258,000   |   |  |   | 10.82 | 
|                                
|                                
|                                
|                                
|Exercised                        |  |           | (144,702  | )              |  |           | 2.48 |                |  |           | (230,602  | )              |  |   | 2.49 |  |  |  | (469,752  | ) |  |   | 4.56  | 
|                                
|                                
|                                
|                                
|Forfeited                        |  |           | (33,317   | )              |  |           | 5.71 |                |  |           | (50,182   | )              |  |   | 6.38 |  |  |  | (36,091   | ) |  |   | 5.67  | 
|                                 |  |           |           |                |  |           |      |                |  |           |           |                |  |   |      |  |  |  |           |   |  |   |       | 
|Outstanding at end of year       |  |           | 1,868,806 |                |  | $         | 4.75 |                |  |           | 1,717,111 |                |  | $ | 5.20 |  |  |  | 1,469,268 |   |  | $ | 6.38  | 
|                                 |  |           |           |                |  |           |      |                |  |           |           |                |  |   |      |  |  |  |           |   |  |   |       | 
|Options exercisable at year-end  |  |           | 1,488,406 |                |  | $         | 4.52 |                |  |           | 1,481,100 |                |  | $ | 5.13 |  |  |  | 1,208,157 |   |  | $ | 5.89  | 

The following table summarizes information about
fixed stock options outstanding at December 31, 2002 under
Humboldts various stock option plans:

|                 |       |                     |         |                     |  |                  |     |        |  |                  |       |      |  |  |         |           |  |   |       |      | 
|---------------- | ----- | ------------------- | ------- | ------------------- |  | ---------------- | --- | ------ |  | ---------------- | ----- | ---- |  |  | ------- | --------- |  | - | ----- | ---- | 
|                 |       |                     |         |                    
|                 |       | Options Outstanding |         | Options Exercisable
|                 |       |                     |         |                    
|                 |       |                     |         | Weighted-Average    |  |                  |     |       
|Range of         |       |                     |         | Remaining           |  | Weighted-Average |     |        |  | Weighted-Average
|Exercise Prices  |       | Number              |         | Contractual Life    |  | Exercise Price   |     | Number |  | Exercise Price  
|                 |       |                     |         |                     |  |                  |     |        |  |                 
|$1.494 to $ 4.18 |       |                     | 399,574 |                     |  |                  | 2.1 |        |  | $                | 2.72  |      |  |  | 396,760 |           |  | $ | 2.71  |     
|                
|                
|                
|                
|$ 4.19 to $ 6.88 |       |                     | 358,024 |                     |  |                  | 5.3 |        |  |                  | 4.82  |      |  |  | 272,464 |           |  |   | 4.90  |     
|                
|                
|                
|                
|$ 6.89 to $ 9.58 |       |                     | 440,325 |                     |  |                  | 6.8 |        |  |                  | 8.15  |      |  |  | 424,255 |           |  |   | 8.13  |     
|                
|                
|                
|                
|$ 9.59 to $12.28 |       |                     | 216,345 |                     |  |                  | 8.8 |        |  |                  | 10.16 |      |  |  | 96,345  |           |  |   | 10.42 |     
|                
|                
|                
|                
|$12.29 to $14.94 |       |                     | 55,000  |                     |  |                  | 9.5 |        |  |                  | 14.04 |      |  |  | 18,333  |           |  |   | 14.04 |     
|                 |       |                     |         |                     |  |                  |     |        |  |                  |       |      |  |  |         |           |  |   |       |     
|                 | Total |                     |         | 1,469,268           |  |                  |     | 5.6    |  |                  | $     | 6.38 |  |  |         | 1,208,157 |  |   | $     | 5.89 | 
|                 |       |                     |         |                     |  |                  |     |        |  |                  |       |      |  |  |         |           |  |   |       |     

Note 18  Related Party
Transactions

The Bank has entered into lending transactions
with related parties, which are defined as directors, executive
officers and related interests. The following is a summary of
the aggregate activity involving related party borrowers for the
years ended December 31, 2001 and 2002:

|                                       |  |                        |        |      |  |   |        |  
|-------------------------------------- |  | ---------------------- | ------ | ---- |  | - | ------ | -
|                                       |  | 2001                   |        | 2002
|                                       |  |                        |        |     
|                                       |  |                       
|                                       |  | (Dollars in thousands)
|                                      
|                                      
|                                      
|                                      
|Loans outstanding at beginning of year |  | $                      | 8,031  |      |  | $ | 7,264  |  
|                                      
|                                      
|                                      
|                                      
|Loan disbursements                     |  |                        | 1,771  |      |  |   | 964    |  
|                                      
|                                      
|                                      
|                                      
|Loan repayments                        |  |                        | (2,538 | )    |  |   | (3,779 | )
|                                       |  |                        |        |      |  |   |        |  
|Loans outstanding at end of year       |  | $                      | 7,264  |      |  | $ | 4,449  |  
|                                       |  |                        |        |      |  |   |        |  

Note 19  Commitments and
Contingent Liabilities

Lease Commitments:Humboldt leases 19 sites under
noncancellable operating leases. Four of the leases are
renewable for an additional five-year period, five of the leases
are renewable for two consecutive five-year periods, two of the
leases are renewable for three consecutive five-year periods,
and one of the leases is renewable for four consecutive
five-year periods. The leases contain varying requirements for
increases

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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


including adjustments based on the Consumer Price
Index with minimum increases of 2% and maximum increases of 10%.
Other leases have scheduled adjustments to the base rent.

As of December 31, 2002, future minimum
lease payments under noncancelable operating leases are as
follows (dollars in thousands):

|                                |  |   |       | 
|------------------------------- |  | - | ----- | 
|                               
|                               
|                               
|                               
|2003                            |  | $ | 650   | 
|                               
|                               
|                               
|                               
|2004                            |  |   | 595   | 
|                               
|                               
|                               
|                               
|2005                            |  |   | 558   | 
|                               
|                               
|                               
|                               
|2006                            |  |   | 523   | 
|                               
|                               
|                               
|                               
|2007                            |  |   | 434   | 
|                               
|                               
|                               
|                               
|Thereafter                      |  |   | 437   | 
|                                |  |   |       | 
|Total minimum lease commitments |  | $ | 3,197 | 
|                                |  |   |       | 

Rent expense for the years ended
December 31, 2000, 2001, and 2002 totaled $925,000,
$1,021,000, and $948,000 respectively. Rental income was
$403,000 in 2002. Future rental income is $414,000 annually
through November 2008.

Financial Instruments with Off-Balance-Sheet
Risk:Humboldts financial
statements do not reflect various commitments and contingent
liabilities which arise in the normal course of business and
which involve elements of credit risk, interest rate risk and
liquidity risk. These commitments and contingent liabilities are
commitments to extend credit, credit card arrangements and
standby letters of credit. A summary of Humboldts
commitments and contingent liabilities at December 31, 2002
is as follows:

|                             |  |                        |        |      |  |   |         | 
|---------------------------- |  | ---------------------- | ------ | ---- |  | - | ------- | 
|                             |  |                       
|                             |  | Contractual Amounts   
|                             |  |                       
|                             |  | 2001                   |        | 2002
|                             |  |                        |        |     
|                             |  |                       
|                             |  | (Dollars in thousands)
|                            
|                            
|                            
|                            
|Commitments to extend credit |  | $                      | 69,735 |      |  | $ | 153,178 | 
|                            
|                            
|                            
|                            
|Credit card arrangements     |  |                        | 7,680  |      |  |   | 13,685  | 
|                            
|                            
|                            
|                            
|Standby letters of credit    |  |                        | 2,727  |      |  |   | 2,144   | 

Commitments to extend credit, credit card
arrangements and standby letters of credit all include exposure
to some credit loss in the event of nonperformance of the
customer. Humboldts credit policies and procedures for
credit commitments and financial guarantees are the same as
those for extension of credit that are recorded on the balance
sheet. Because these instruments have fixed maturity dates, and
because many of them expire without being drawn upon, they do
not generally present any significant liquidity risk to Humboldt.

Commitments to extend credit are agreements to
lend to a customer as long as there is no violation of any
condition established in the contract. Commitments generally
have fixed expiration dates or other termination clauses and may
require payment of a fee. Humboldt evaluates each
customers credit worthiness on a case-by-case basis. The
amount of collateral obtained, if deemed necessary by Humboldt
upon extension of credit, is based on managements credit
evaluation of the customer. Collateral held varies but may
include accounts receivable, inventory, property, plant, and
equipment, certificates of deposits and income-producing
commercial properties.

Standby letters of credit are conditional
commitments issued by the Banks to guarantee the performance of
a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements. All
letters of credit are short-term guarantees with no guarantees
extending more than two years. The credit risk involved in
issuing letters of credit is essentially the same as that
involved in extending facilities to customers. Humboldt holds
assigned deposit accounts as collateral supporting those
commitments

74



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


for which collateral is deemed necessary. None of
these letters of credit were utilized during 2001 or 2002.
Humboldt did not incur any losses on its commitments in 2000,
2001, or 2002.

Merchant Credit and Debit Card Sales
Processing:Humboldt processes the
settlement of credit and debit card sales for merchants located
throughout the United States and Puerto Rico. The process
involves collecting funds from the card issuing bank and
crediting the merchant accounts in exchange for a merchant
discount and other processing fees. The more significant areas
of risk associated with this process includes the risk that
funds due from the card issuing bank will be uncollectible, that
significant fees may be assessed for violations of VISA or
MasterCard rules or that the merchant may be unable to absorb
charge-backs, deliver products due to insolvency or commit
fraud. To protect Humboldt from losses, merchant deposits of
$76,100,000 at December 31, 2001, and $68,736,000 at
December 31, 2002 and have been established by withholding
a percentage of merchant processing volume. Humboldt incurred
approximately $151,000 and $196,000, in net charge-offs related
to merchant credit card processing, during 2001 and 2002,
respectively.

Humboldt processed approximately $4.8 and
$5.1 billion of credit and debit card transactions for
merchants during 2001 and 2002, respectively. Humboldt also has
contractual agreements under which it processes merchant
bankcard services through independent service organizations
(ISOs). ISOs represent $4.4 billion of
Humboldts credit and debit card sales during 2002. Under
the terms of the ISO agreements, Humboldt is indemnified against
loss by the ISO.

Legal Proceedings:Various legal claims have arisen
during the normal course of business that, in the opinion of
management, will not result in material liability to Humboldt.

Note 20  Regulatory
Matters

The primary source of cash for Humboldt is
dividends received from the Bank. Banking regulations limit the
amount of cash dividends that may be paid without prior approval
of the Banks primary regulatory agency. Cash dividends are
limited by the California Financial Code to the lesser of
retained earnings, if any, or net income for the last three
years, net of the amount of any other capital distributions made
during such periods. As of December 31, 2002, $10,450,000
was available for cash dividend distributions from the Bank
without prior regulatory approval.

Humboldt and the Bank are subject to various
regulatory capital requirements as defined for banks and bank
holding companies. Failure to meet minimum capital requirements
can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could
have a direct material effect on Humboldts financial
statements.

As of December 31, 2002, the Bank was
categorized as well capitalized under the regulatory framework
for prompt corrective action. The regulatory definition of
prompt corrective action is not applicable to
Humboldt as a Bank Holding Company. However, the Federal Reserve
has established Regulation Y, which requires a Holding
Company to be well capitalized in order to qualify for expedited
approval of regulatory applications. For such purposes,
well capitalized is defined as a Tier 1
risk-based ratio of 6% or more and a total risk-based ratio
capital ratio greater than or equal to 4%. There are no
conditions or events since that notification that management
believes have changed the capital category of Humboldt or the
Bank. The following table provides a summary of the capital
amounts and ratios for Humboldt and the Bank as of
December 31, 2001 and 2002. Since Humboldt merged its
Capitol Valley Bank, Capitol Thrift & Loan, and

75



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Tehama Bank subsidiaries into Humboldt Bank
during 2002, the capital and related ratios for
December 31, 2001 have been adjusted to show the four banks
subsidiaries as one:

|                                         |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |      |  
|---------------------------------------- | ------------- | ------ | - | ---------------------- |  | ----------------- |  | ----------------- | - | ------ | - | ------ |  |  |  | --- | - |  | --- | ------ |  |  |  | ---- | -
|                                         |               |        |   |                        |  |                   |  |                   |   |       
|                                         |               |        |   |                        |  |                   |  | To Be Well       
|                                         |               |        |   |                        |  | For Capital       |  | Capitalized Under
|                                         |               |        |   | Adequacy               |  | Prompt Corrective
|                                         |               | Actual |   | Purposes               |  | Action Provisions
|                                         |               |        |   |                        |  |                  
|                                         |               | Amount |   | Ratio                  |  | Amount            |  | Ratio             |   | Amount |   | Ratio 
|                                         |               |        |   |                        |  |                   |  |                   |   |        |   |       
|                                         |               |        |   |                        |  |                  
|                                         |               |        |   | (dollars in thousands) |  |                  
|                                        
|                                        
|                                        
|                                        
|As of December 31, 2001:                 |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |     
|Total Capital (to Risk Weighted Assets)  |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |     
|                                        
|                                        
|                                        
|                                        
|                                         | Consolidated  |        | $ | 90,671                 |  |                   |  | 11.70             | % |        | $ | 61,916 |  |  |  | 8.0 | % |  | N/A
|                                        
|                                        
|                                        
|                                        
|                                         | Humboldt Bank |        | $ | 81,792                 |  |                   |  | 10.55             | % |        | $ | 60,234 |  |  |  | 8.0 | % |  | $   | 75,291 |  |  |  | 10.0 | %
|Tier I Capital (to Risk Weighted Assets) |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |     
|                                        
|                                        
|                                        
|                                        
|                                         | Consolidated  |        | $ | 80,996                 |  |                   |  | 10.45             | % |        | $ | 30,958 |  |  |  | 4.0 | % |  | N/A
|                                        
|                                        
|                                        
|                                        
|                                         | Humboldt Bank |        | $ | 73,060                 |  |                   |  | 9.43              | % |        | $ | 30,117 |  |  |  | 4.0 | % |  | $   | 45,175 |  |  |  | 6.0  | %
|Tier I Capital (to Average Assets)       |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |     
|                                        
|                                        
|                                        
|                                        
|                                         | Consolidated  |        | $ | 80,996                 |  |                   |  | 8.45              | % |        | $ | 38,348 |  |  |  | 4.0 | % |  | N/A
|                                        
|                                        
|                                        
|                                        
|                                         | Humboldt Bank |        | $ | 73,060                 |  |                   |  | 7.62              | % |        | $ | 39,240 |  |  |  | 4.0 | % |  | $   | 49,050 |  |  |  | 5.0  | %
|                                        
|                                        
|                                        
|                                        
|As of December 31, 2002:                 |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |     
|Total Capital (to Risk Weighted Assets)  |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |     
|                                        
|                                        
|                                        
|                                        
|                                         | Consolidated  |        | $ | 98,918                 |  |                   |  | 11.43             | % |        | $ | 69,247 |  |  |  | 8.0 | % |  | N/A
|                                        
|                                        
|                                        
|                                        
|                                         | Humboldt Bank |        | $ | 95,019                 |  |                   |  | 11.10             | % |        | $ | 68,462 |  |  |  | 8.0 | % |  | $   | 85,578 |  |  |  | 10.0 | %
|Tier I Capital (to Risk Weighted Assets) |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |     
|                                        
|                                        
|                                        
|                                        
|                                         | Consolidated  |        | $ | 88,089                 |  |                   |  | 10.18             | % |        | $ | 34,623 |  |  |  | 4.0 | % |  | N/A
|                                        
|                                        
|                                        
|                                        
|                                         | Humboldt Bank |        | $ | 84,310                 |  |                   |  | 9.85              | % |        | $ | 34,231 |  |  |  | 4.0 | % |  | $   | 51,347 |  |  |  | 6.0  | %
|Tier I Capital (to Average Assets)       |               |        |   |                        |  |                   |  |                   |   |        |   |        |  |  |  |     |   |  |     |        |  |  |  |     
|                                        
|                                        
|                                        
|                                        
|                                         | Consolidated  |        | $ | 88,089                 |  |                   |  | 8.73              | % |        | $ | 40,360 |  |  |  | 4.0 | % |  | N/A
|                                        
|                                        
|                                        
|                                        
|                                         | Humboldt Bank |        | $ | 84,310                 |  |                   |  | 8.47              | % |        | $ | 39,805 |  |  |  | 4.0 | % |  | $   | 49,757 |  |  |  | 5.0  | %

76



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|          |                                                                                  
|--------- | ---------------------------------------------------------------------------------
|Note 21  | Condensed Financial Information of the
    Humboldt Bancorp (Parent Company Only)

Condensed Balance Sheets

December 31, 2001 and 2002


|            |                                       |                                            |   |        |        |  |   |        |         | 
|----------- | ------------------------------------- | ------------------------------------------ | - | ------ | ------ |  | - | ------ | ------- | 
|            |                                       | 2001                                       |   | 2002  
|            |                                       |                                            |   |       
|Assets      |                                       |                                            |   |        |        |  |   |       
|           
|           
|           
|           
|            | Cash                                  |                                            | $ | 69     |        |  | $ | 1,245  |        
|           
|           
|           
|           
|            | Investment in subsidiaries            |                                            |   | 76,743 |        |  |   | 94,017 |        
|           
|           
|           
|           
|            | Net assets of discontinued operations |                                            |   | 6,669  |        |  |   |       |        
|           
|           
|           
|           
|            | Investment securities                 |                                            |   | 7,679  |        |  |   | 4,707  |        
|           
|           
|           
|           
|            | Other assets                          |                                            |   | 8,632  |        |  |   | 9,310  |        
|            |                                       |                                            |   |        |        |  |   |       
|            |                                       | Total assets                               |   | $      | 99,792 |  |   | $      | 109,279 | 
|            |                                       |                                            |   |        |        |  |   |       
|Liabilities |                                       |                                            |   |        |        |  |   |       
|           
|           
|           
|           
|            | Borrowed funds                        |                                            | $ | 10,317 |        |  | $ | 6,989  |        
|           
|           
|           
|           
|            | Trust preferred securities            |                                            |   | 20,150 |        |  |   | 20,150 |        
|           
|           
|           
|           
|            | Other liabilities                     |                                            |   | 4,743  |        |  |   | 4,292  |        
|            |                                       |                                            |   |        |        |  |   |       
|            |                                       | Total liabilities                          |   |        | 35,210 |  |   |        | 31,431  | 
|           
|           
|           
|           
|            | Stockholders equity                  |                                            |   | 64,582 |        |  |   | 77,848 |        
|            |                                       |                                            |   |        |        |  |   |       
|            |                                       | Total liabilities and shareholders equity |   | $      | 99,792 |  |   | $      | 109,279 | 
|            |                                       |                                            |   |        |        |  |   |       

Condensed Statements of Income

For the years ended December 31, 2000,
2001 and 2002


|                                                                        |  |      |        |      |  |      |         |   |  |   |         |  
|----------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                        |  | 2000 |        | 2001 |  | 2002
|                                                                        |  |      |        |      |  |     
|Dividends from subsidiaries                                             |  | $    | 7,660  |      |  | $    | 5,070   |   |  | $ | 14,837  |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Reimbursement from subsidiaries for allocated
    expenses              |  |      | 3,489  |      |  |      | 6,715   |   |  |   | 4,937   |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Other income                                                            |  |      | 561    |      |  |      | 499     |   |  |   | 6       |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Expenses                                                                |  |      | (6,736 | )    |  |      | (17,009 | ) |  |   | (11,008 | )
|                                                                        |  |      |        |      |  |      |         |   |  |   |         |  
|Income (loss) before taxes                                              |  |      | 4,974  |      |  |      | (4,725  | ) |  |   | 8,772   |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Tax (expense) benefit                                                   |  |      | 1,143  |      |  |      | 3,203   |   |  |   | 1,715   |  
|                                                                        |  |      |        |      |  |      |         |   |  |   |         |  
|Income (loss) before equity in undistributed
    income of subsidiaries |  |      | 6,117  |      |  |      | (1,522  | ) |  |   | 10,487  |  
|                                                                       
|                                                                       
|                                                                       
|                                                                       
|Equity in undistributed income (loss) of
    subsidiaries               |  |      | 2,903  |      |  |      | (5,487  | ) |  |   | 1,776   |  
|                                                                        |  |      |        |      |  |      |         |   |  |   |         |  
|Net income (loss)                                                       |  | $    | 9,020  |      |  | $    | (7,009  | ) |  | $ | 12,263  |  
|                                                                        |  |      |        |      |  |      |         |   |  |   |         |  

77



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Condensed Statements of Cash Flows

For the years ended December 31, 2000, 2001
and 2002


|                      |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |        |        |         |       | 
|--------------------- | ---------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ------------------------------------------------------- | ------------------------------- | ------ | ------- | ---- | ------- | ------ | ------- | --- | ------ | ------ | ------- | ----- | 
|                      |                                                                                                            | 2000                                                           |                                                         | 2001                            |        | 2002   
|                      |                                                                                                            |                                                                |                                                         |                                 |        |        
|Operating activities: |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       
|                     
|                     
|                     
|                     
|                      | Net income                                                                                                 |                                                                | $                                                       | 9,020                           |        |         | $    | (7,009  | )      |         | $   | 12,263 |       
|                     
|                     
|                     
|                     
|                      | Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating
    activities: |                                                                |                                                         |                                 |        |         |      |         |        |         |     |        |       
|                     
|                     
|                     
|                     
|                      |                                                                                                            | Return of (equity in) undistributed income of
    subsidiaries |                                                         |                                 | (2,902 | )       |      |         | 5,487  |         |     |        | (1,776 | )      
|                     
|                     
|                     
|                     
|                      |                                                                                                            | (Increase) decrease in other assets                            |                                                         |                                 | (2,734 | )       |      |         | (8,462 | )       |     |        | 6,817  |        
|                     
|                     
|                     
|                     
|                      |                                                                                                            | Increase (decrease) in other liabilities                       |                                                         |                                 | 301    |         |      |         | 4,072  |         |     |        | (505   | )      
|                      |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       
|                      |                                                                                                            |                                                                | Net cash provided by (used in) operating
    activities |                                 |        | 3,685   |      |         |        | (5,912  | )   |        |        | 16,799  |      
|                     
|                     
|                     
|                     
|Investing activities: |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       
|                     
|                     
|                     
|                     
|                      | Acquisition of Capitol Thrift and Loan (net of
    dividends)                                              |                                                                |                                                         | (9,675                          | )      |         |      |        |        |         |     |       |       
|                     
|                     
|                     
|                     
|                      | Investment in subsidiaries                                                                                 |                                                                |                                                         | (3,000                          | )      |         |      | (3,500  | )      |         |     | (6,844 | )     
|                     
|                     
|                     
|                     
|                      | Wind down of discontinued operations                                                                       |                                                                |                                                         | (2,000                          | )      |         |      | (13,145 | )      |         |     | (6,447 | )     
|                     
|                     
|                     
|                     
|                      | Purchase of available-for-sale securities                                                                  |                                                                |                                                         | (160                            | )      |         |      | (50     | )      |         |     | (800   | )     
|                     
|                     
|                     
|                     
|                      | Purchase of held-to-maturity securities                                                                    |                                                                |                                                         | (4,776                          | )      |         |      | (712    | )      |         |     |       |       
|                     
|                     
|                     
|                     
|                      | Proceeds from maturity of held-to-maturity
    securities                                                  |                                                                |                                                         | 1,092                           |        |         |      |        |        |         |     |       |       
|                     
|                     
|                     
|                     
|                      | Proceeds from maturity of available for sale
    securities                                                |                                                                |                                                         |                                |        |         |      |        |        |         |     | 3,772  |       
|                      |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       
|                      |                                                                                                            |                                                                | Net cash used in investing activities                   |                                 |        | (18,519 | )    |         |        | (17,407 | )   |        |        | (10,319 | )    
|                     
|                     
|                     
|                     
|Financing activities: |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       
|                     
|                     
|                     
|                     
|                      | Net increase (decrease) in borrowed funds                                                                  |                                                                |                                                         | 497                             |        |         |      | 7,820   |        |         |     | (3,328 | )     
|                     
|                     
|                     
|                     
|                      | Proceeds from issuance of trust preferred
    securities                                                   |                                                                |                                                         | 5,150                           |        |         |      | 15,000  |        |         |     |       |       
|                     
|                     
|                     
|                     
|                      | Repurchase of common stock                                                                                 |                                                                |                                                         |                                |        |         |      |        |        |         |     | (4,289 | )     
|                     
|                     
|                     
|                     
|                      | Cash dividends on common stock                                                                             |                                                                |                                                         |                                |        |         |      |        |        |         |     | (886   | )     
|                     
|                     
|                     
|                     
|                      | Cash paid for fractional shares                                                                            |                                                                |                                                         | (7                              | )      |         |      | (9      | )      |         |     | (9     | )     
|                     
|                     
|                     
|                     
|                      | Cash paid for dissenters shares                                                                            |                                                                |                                                         |                                |        |         |      | (220    | )      |         |     |       |       
|                     
|                     
|                     
|                     
|                      | Proceeds from issuance of common stock                                                                     |                                                                |                                                         | 8,403                           |        |         |      | 666     |        |         |     | 3,208  |       
|                      |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       
|                      |                                                                                                            |                                                                | Net cash provided by (used in) financing
    activities |                                 |        | 14,043  |      |         |        | 23,257  |     |        |        | (5,304  | )    
|                      |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       
|                      |                                                                                                            |                                                                |                                                         | Net (increase) decrease in cash |        |         | (791 | )       |        |         | (62 | )      |        |         | 1,176 | 
|                     
|                     
|                     
|                     
|                      | Cash at beginning of year                                                                                  |                                                                |                                                         | 922                             |        |         |      | 131     |        |         |     | 69     |       
|                      |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       
|                      |                                                                                                            |                                                                |                                                         | Cash at end of year             |        | $       | 131  |         |        | $       | 69  |        |        | $       | 1,245 | 
|                      |                                                                                                            |                                                                |                                                         |                                 |        |         |      |         |        |         |     |       

Note 22  Fair Values of
Financial Instruments

Statement of Financial Accounting Standards
No. 107, Disclosures about Fair Value of Financial
Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not
available, fair values are based on estimates using present
value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. In that
regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial

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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of
the Humboldt as a whole.

The estimated fair values of the Humboldts
financial instruments are as follows at December 31:

|                                         |  |                        |         |           |  |          |         |           |  |  |         |  |  |  |         | 
|---------------------------------------- |  | ---------------------- | ------- | --------- |  | -------- | ------- | --------- |  |  | ------- |  |  |  | ------- | 
|                                         |  |                        |         |          
|                                         |  | 2001                   |         | 2002     
|                                         |  |                        |         |          
|                                         |  |                        |         | Estimated |  |          |         | Estimated
|                                         |  | Carrying               |         | Fair      |  | Carrying |         | Fair     
|                                         |  | Amount                 |         | Value     |  | Amount   |         | Value    
|                                         |  |                        |         |           |  |          |         |          
|                                         |  |                       
|                                         |  | (Dollars in thousands)
|                                        
|                                        
|                                        
|                                        
|Financial assets:                        |  |                        |         |           |  |          |         |           |  |  |         |  |  |  |         | 
|                                        
|                                        
|                                        
|                                        
|Cash and due from banks                  |  |                        | 54,567  |           |  |          | 54,567  |           |  |  | 35,156  |  |  |  | 35,156  | 
|                                        
|                                        
|                                        
|                                        
|Interest-bearing deposits in other banks |  |                        | 920     |           |  |          | 920     |           |  |  | 202     |  |  |  | 202     | 
|                                        
|                                        
|                                        
|                                        
|Investment securities                    |  |                        | 172,473 |           |  |          | 172,473 |           |  |  | 181,471 |  |  |  | 181,471 | 
|                                        
|                                        
|                                        
|                                        
|Loans and leases, net                    |  |                        | 654,567 |           |  |          | 680,156 |           |  |  | 749,034 |  |  |  | 767,877 | 
|                                        
|                                        
|                                        
|                                        
|Interest rate swap contracts             |  |                        |        |           |  |          |        |           |  |  | 1,155   |  |  |  | 1,155   | 
|                                        
|                                        
|                                        
|                                        
|                                        
|Financial liabilities:                   |  |                        |         |           |  |          |         |           |  |  |         |  |  |  |         | 
|                                        
|                                        
|                                        
|                                        
|Deposits                                 |  |                        | 807,086 |           |  |          | 810,700 |           |  |  | 840,427 |  |  |  | 846,880 | 
|                                        
|                                        
|                                        
|                                        
|Borrowed funds                           |  |                        | 45,560  |           |  |          | 44,746  |           |  |  | 69,857  |  |  |  | 64,324  | 
|                                        
|                                        
|                                        
|                                        
|Trust preferred securities               |  |                        | 20,150  |           |  |          | 21,112  |           |  |  | 20,150  |  |  |  | 22,567  | 

The carrying amounts in the preceding table are
included in the balance sheet under the applicable captions.

The following methods and assumptions were used
by Humboldt in estimating its fair value disclosures for
financial instruments:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Cash and due from banks, interest-bearing
    deposits in other banks and federal funds
    sold:The carrying amount is a
    reasonable estimate of fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Investment
    securities:Fair values for investment
    securities are based on quoted market prices, where available.
    If quoted market prices are not available, fair values are based
    on quoted market prices of comparable instruments. The carrying
    amount of accrued interest receivable approximates its fair
    value.                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | Loans and leases held for
    sale:Fair values for loans and leases
    held for sale are based on quoted market prices or dealer
    quotes. If a quoted price is not available, fair value is
    estimated using quoted market prices for similar loans or leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | Loans and leases,
    net:For variable-rate loans that
    reprice frequently and fixed rate loans that mature in the near
    future, with no significant change in credit risk, fair values
    are based on carrying amounts. The fair values for other fixed
    rate loans are estimated using discounted cash flow analysis,
    based on interest rates currently being offered for loans with
    similar terms to borrowers of similar credit quality. Loan and
    lease fair value estimates include judgments regarding future
    expected loss experience and risk characteristics and are
    adjusted for the allowance for loan and lease losses. The
    carrying amount of accrued interest receivable approximates its
    fair value.
|
| | Deposits:The fair
    values disclosed for demand deposits (for example,
    interest-bearing checking accounts and passbook accounts) are,
    by definition, equal to the amount payable on demand at the
    reporting date (that is, their carrying amounts). The fair
    values for certificates of deposit are estimated using a
    discounted cash flow calculation that applies interest rates
    currently being offered on certificates to a schedule of
    aggregated contractual maturities on such time deposits. The
    carrying amount of accrued interest payable approximates fair
    value.                                                                                                                                       

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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Borrowed funds and trust preferred
    securities:The fair value of borrowed
    funds and trust preferred securities is estimated using a
    discounted cash flow calculation that applies interest rates
    currently being offered on similar debt instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| | Off-balance sheet
    instruments:Off-balance sheet
    instruments consist of commitments to extend credit, credit card
    arrangements, standby letters of credit and derivative
    contracts. The contract or notional amounts of Humboldts
    financial instruments with off-balance-sheet risk are disclosed
    in Note 19. Estimating the fair value of commitments to
    extend credit is not considered practicable due to the
    immateriality of the amounts of fees collected, which are used
    as a basis for calculating the fair value, on such instruments.
    The fair value of interest rate swap contracts is based on the
    discounted net present value of the swap using third party
    dealer quotes.

Note 23  Operating
Segments

Reportable operating segments are generally
defined as components of an enterprise for which discrete
financial information is available, whose operating results are
regularly reviewed by the organizations decision makers
and whose revenue from external customers is 10 percent or
more of total revenue. Humboldt has two reportable segments
under this definition, commercial banking and merchant bankcard
services. The commercial banking segment provides traditional
banking services such as checking, savings, time certificates of
deposit, loans, and lease financings. The merchant bankcard
segment processes the settlement of credit and debit card sales
for merchants and issues and maintains credit card accounts for
its customers. The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies. Humboldt evaluates performance based on profit or loss
from operations before income taxes. Humboldts reportable
segments are strategic business units that provide different
services that are carried out by separate departments. Included
in the commercial banking segment are all other operations of
Humboldt, excluding discontinued operations.

The following table includes segment profit,
including certain revenues and expenses, and segment assets as
of and for the year ended:

|                                     |  |                        |         |          |  |       |        |  |  |   |         | 
|------------------------------------ |  | ---------------------- | ------- | -------- |  | ----- | ------ |  |  | - | ------- | 
|                                     |  |                        |         | Merchant |  |      
|                                     |  | Commercial             |         | Bankcard |  |      
|                                     |  | Banking                |         | Services |  | Total
|                                     |  |                        |         |          |  |      
|                                     |  |                       
|                                     |  | (dollars in thousands)
|                                    
|                                    
|                                    
|                                    
|December 31, 2000:                   |  |                        |         |          |  |       |        |  |  |   |         | 
|                                    
|                                    
|                                    
|                                    
|Interest income                      |  |                        | 59,069  |          |  |       | 447    |  |  |   | 59,516  | 
|                                    
|                                    
|                                    
|                                    
|Interest expense                     |  |                        | 24,508  |          |  |       | 374    |  |  |   | 24,882  | 
|                                    
|                                    
|                                    
|                                    
|Interest income/(expense) allocation |  |                        | (1,543  | )        |  |       | 1,543  |  |  |   |        | 
|                                    
|                                    
|                                    
|                                    
|Provision for loan and lease losses  |  |                        | 2,378   |          |  |       | 157    |  |  |   | 2,535   | 
|                                    
|                                    
|                                    
|                                    
|Non-interest income                  |  |                        | 6,682   |          |  |       | 16,182 |  |  |   | 22,864  | 
|                                    
|                                    
|                                    
|                                    
|Non-interest expense                 |  |                        | 29,245  |          |  |       | 12,238 |  |  |   | 41,483  | 
|                                    
|                                    
|                                    
|                                    
|Segment profit, before taxes         |  |                        | 8,902   |          |  |       | 4,578  |  |  |   | 13,480  | 
|                                    
|                                    
|                                    
|                                    
|Segment assets                       |  | $                      | 791,300 |          |  | $     | 61,600 |  |  | $ | 852,900 | 

80



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                                     |  |                        |         |          |  |       |         |  |  |   |           | 
|------------------------------------ |  | ---------------------- | ------- | -------- |  | ----- | ------- |  |  | - | --------- | 
|                                     |  |                        |         | Merchant |  |      
|                                     |  | Commercial             |         | Bankcard |  |      
|                                     |  | Banking                |         | Services |  | Total
|                                     |  |                        |         |          |  |      
|                                     |  |                       
|                                     |  | (dollars in thousands)
|                                    
|                                    
|                                    
|                                    
|December 31, 2001:                   |  |                        |         |          |  |       |         |  |  |   |           | 
|                                    
|                                    
|                                    
|                                    
|Interest income                      |  |                        | 65,780  |          |  |       | 385     |  |  |   | 66,165    | 
|                                    
|                                    
|                                    
|                                    
|Interest expense                     |  |                        | 28,124  |          |  |       | 217     |  |  |   | 28,341    | 
|                                    
|                                    
|                                    
|                                    
|Interest income/(expense) allocation |  |                        | (1,611  | )        |  |       | 1,611   |  |  |   |          | 
|                                    
|                                    
|                                    
|                                    
|Provision for loan and lease losses  |  |                        | 2,836   |          |  |       | 67      |  |  |   | 2,903     | 
|                                    
|                                    
|                                    
|                                    
|Non-interest income                  |  |                        | 9,166   |          |  |       | 20,561  |  |  |   | 29,727    | 
|                                    
|                                    
|                                    
|                                    
|Non-interest expense                 |  |                        | 35,625  |          |  |       | 18,249  |  |  |   | 53,874    | 
|                                    
|                                    
|                                    
|                                    
|Segment profit, before taxes         |  |                        | 6,750   |          |  |       | 4,024   |  |  |   | 10,774    | 
|                                    
|                                    
|                                    
|                                    
|Segment assets                       |  | $                      | 856,466 |          |  | $     | 102,451 |  |  | $ | 958,917   | 
|                                    
|                                    
|                                    
|                                    
|                                    
|December 31, 2002:                   |  |                        |         |          |  |       |         |  |  |   |           | 
|                                    
|                                    
|                                    
|                                    
|Interest income                      |  |                        | 63,942  |          |  |       | 403     |  |  |   | 64,345    | 
|                                    
|                                    
|                                    
|                                    
|Interest expense                     |  |                        | 17,413  |          |  |       | 224     |  |  |   | 17,637    | 
|                                    
|                                    
|                                    
|                                    
|Interest income/(expense) allocation |  |                        | (1,155  | )        |  |       | 1,155   |  |  |   |          | 
|                                    
|                                    
|                                    
|                                    
|Provision for loan and lease losses  |  |                        | 3,169   |          |  |       | 152     |  |  |   | 3,321     | 
|                                    
|                                    
|                                    
|                                    
|Non-interest income                  |  |                        | 9,098   |          |  |       | 17,049  |  |  |   | 26,147    | 
|                                    
|                                    
|                                    
|                                    
|Non-interest expense                 |  |                        | 40,406  |          |  |       | 12,152  |  |  |   | 52,558    | 
|                                    
|                                    
|                                    
|                                    
|Segment profit, before taxes         |  |                        | 10,897  |          |  |       | 6,079   |  |  |   | 16,976    | 
|                                    
|                                    
|                                    
|                                    
|Segment assets                       |  | $                      | 948,331 |          |  | $     | 83,219  |  |  | $ | 1,031,550 | 

81



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##### Table of Contents



HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


Note 24  Quarterly Financial
Information (Unaudited)

The following table presents the summary results
for the stated eight quarters:

|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |   | 
|---------------------------------------------------------- | ----------------------- | ---------------------- | ------ | -------- | - | ------------- | ------- | ------------ | - | --------- | ------ | ---- |  | - | ------ | ---- |  | - | ------- | - | 
|                                                           |                         |                        |        |         
|                                                           |                         | For the quarter ended  |        |         
|                                                           |                         |                        |        |         
|                                                           |                         | March 31,              |        | June 30, |   | September 30, |         | December 31, |   |          
|                                                           |                         | 2001                   |        | 2001     |   | 2001          |         | 2001         |   | Four Qtrs
|                                                           |                         |                        |        |          |   |               |         |              |   |          
|                                                           |                         |                       
|                                                           |                         | (Dollars in thousands)
|                                                          
|                                                          
|                                                          
|                                                          
|Interest income                                            |                         | $                      | 16,763 |          |   | $             | 16,577  |              |   | $         | 16,492 |      |  | $ | 16,333 |      |  | $ | 66,165  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Interest expense                                           |                         |                        | 7,758  |          |   |               | 7,560   |              |   |           | 7,059  |      |  |   | 5,964  |      |  |   | 28,341  |  
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|Net interest income                                        |                         |                        | 9,005  |          |   |               | 9,017   |              |   |           | 9,433  |      |  |   | 10,369 |      |  |   | 37,824  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Provision for loan losses                                  |                         |                        | 794    |          |   |               | 583     |              |   |           | 509    |      |  |   | 1,017  |      |  |   | 2,903   |  
|                                                          
|                                                          
|                                                          
|                                                          
|Other income                                               |                         |                        | 7,039  |          |   |               | 7,287   |              |   |           | 7,431  |      |  |   | 7,970  |      |  |   | 29,727  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Other expenses                                             |                         |                        | 14,945 |          |   |               | 12,355  |              |   |           | 12,117 |      |  |   | 14,457 |      |  |   | 53,874  |  
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|Income before taxes                                        |                         |                        | 305    |          |   |               | 3,366   |              |   |           | 4,238  |      |  |   | 2,865  |      |  |   | 10,774  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Income taxes                                               |                         |                        | 217    |          |   |               | 1,047   |              |   |           | 1,454  |      |  |   | 1,071  |      |  |   | 3,789   |  
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|Net income from continuing operations                      |                         |                        | 88     |          |   |               | 2,319   |              |   |           | 2,784  |      |  |   | 1,794  |      |  |   | 6,985   |  
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|Income (loss) from discontinued operations,
    net of tax |                         |                        | (1,062 | )        |   |               | (13,532 | )            |   |           |       |      |  |   | 600    |      |  |   | (13,994 | )
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|Net income                                                 |                         | $                      | (974   | )        |   | $             | (11,213 | )            |   | $         | 2,784  |      |  | $ | 2,394  |      |  | $ | (7,009  | )
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|Earnings (loss) per share  basic:                         |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Continuing Operations   |                        | $      | 0.01     |   |               | $       | 0.19         |   |           | $      | 0.22 |  |   | $      | 0.14 |  |   |         |   | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Discontinued Operations |                        |        | (0.09    | ) |               |         | (1.09        | ) |           |        | 0.00 |  |   |        | 0.05 |  |   |         |   | 
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|                                                           | Net income (loss)       |                        | $      | (0.08    | ) |               | $       | (0.90        | ) |           | $      | 0.22 |  |   | $      | 0.19 |  |   |         |   | 
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|Earnings (loss) per share 
    diluted:                   |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Continuing Operations   |                        | $      | 0.01     |   |               | $       | 0.18         |   |           | $      | 0.21 |  |   | $      | 0.14 |  |   |         |   | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Discontinued Operations |                        |        | (0.09    | ) |               |         | (1.08        | ) |           |        | 0.00 |  |   |        | 0.04 |  |   |         |   | 
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  
|                                                           | Net income (loss)       |                        | $      | (0.08    | ) |               | $       | (0.90        | ) |           | $      | 0.21 |  |   | $      | 0.18 |  |   |         |   | 
|                                                           |                         |                        |        |          |   |               |         |              |   |           |        |      |  |   |        |      |  |   |         |  

82



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HUMBOLDT BANCORP AND SUBSIDIARIES




NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |   | 
|---------------------------------------------------------- | ----------------------- | --------------------------------------------- | ------ | -------- |  | ------------- | ------ | ------------ | - | --------- | ------ | ---- |  | - | ------ | ---- |  | - | ------ | - | 
|                                                           |                         |                                               |        |         
|                                                           |                         | For the quarter ended                         |        |         
|                                                           |                         |                                               |        |         
|                                                           |                         | March 31,                                     |        | June 30, |  | September 30, |        | December 31, |   |          
|                                                           |                         | 2002                                          |        | 2002     |  | 2002          |        | 2002         |   | Four Qtrs
|                                                           |                         |                                               |        |          |  |               |        |              |   |          
|                                                           |                         |                                              
|                                                           |                         | (Dollars in thousands, except per share data)
|                                                          
|                                                          
|                                                          
|                                                          
|Interest income                                            |                         | $                                             | 15,407 |          |  | $             | 15,802 |              |   | $         | 16,404 |      |  | $ | 16,732 |      |  | $ | 64,345 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Interest expense                                           |                         |                                               | 4,625  |          |  |               | 4,428  |              |   |           | 4,456  |      |  |   | 4,128  |      |  |   | 17,637 |  
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|Net interest income                                        |                         |                                               | 10,782 |          |  |               | 11,374 |              |   |           | 11,948 |      |  |   | 12,604 |      |  |   | 46,708 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Provision for loan losses                                  |                         |                                               | 446    |          |  |               | 642    |              |   |           | 1,103  |      |  |   | 1,130  |      |  |   | 3,321  |  
|                                                          
|                                                          
|                                                          
|                                                          
|Other income                                               |                         |                                               | 6,698  |          |  |               | 7,365  |              |   |           | 6,872  |      |  |   | 5,212  |      |  |   | 26,147 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Other expenses                                             |                         |                                               | 13,400 |          |  |               | 13,679 |              |   |           | 13,032 |      |  |   | 12,447 |      |  |   | 52,558 |  
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|Income before taxes                                        |                         |                                               | 3,634  |          |  |               | 4,418  |              |   |           | 4,685  |      |  |   | 4,239  |      |  |   | 16,976 |  
|                                                          
|                                                          
|                                                          
|                                                          
|Income taxes                                               |                         |                                               | 1,096  |          |  |               | 1,281  |              |   |           | 1,108  |      |  |   | 952    |      |  |   | 4,437  |  
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|Net income from continuing operations                      |                         |                                               | 2,538  |          |  |               | 3,137  |              |   |           | 3,577  |      |  |   | 3,287  |      |  |   | 12,539 |  
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|Income (loss) from discontinued operations,
    net of tax |                         |                                               |       |          |  |               | (276   | )            |   |           |       |      |  |   |       |      |  |   | (276   | )
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|Net income (loss)                                          |                         | $                                             | 2,538  |          |  | $             | 2,861  |              |   | $         | 3,577  |      |  | $ | 3,287  |      |  | $ | 12,263 |  
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|Earnings (loss) per share  basic:                         |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Continuing Operations   |                                               | $      | 0.20     |  |               | $      | 0.25         |   |           | $      | 0.29 |  |   | $      | 0.26 |  |   |        |   | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Discontinued Operations |                                               |        |         |  |               |        | (0.02        | ) |           |        |     |  |   |        |     |  |   |        |   | 
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|                                                           | Net income (loss)       |                                               | $      | 0.20     |  |               | $      | 0.23         |   |           | $      | 0.29 |  |   | $      | 0.26 |  |   |        |   | 
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|Earnings (loss) per share 
    diluted:                   |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Continuing Operations   |                                               | $      | 0.20     |  |               | $      | 0.24         |   |           | $      | 0.27 |  |   | $      | 0.25 |  |   |        |   | 
|                                                          
|                                                          
|                                                          
|                                                          
|                                                           | Discontinued Operations |                                               |        |         |  |               |        | (0.02        | ) |           |        |     |  |   |        |     |  |   |        |   | 
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  
|                                                           | Net income (loss)       |                                               | $      | 0.20     |  |               | $      | 0.22         |   |           | $      | 0.27 |  |   | $      | 0.25 |  |   |        |   | 
|                                                           |                         |                                               |        |          |  |               |        |              |   |           |        |      |  |   |        |      |  |   |        |  

Note 25  Subsequent
Events

On March 13, 2003, the Bank completed the
sale of its proprietary merchant bankcard operations to an
affiliate of First National Bank Holding Company
(FNB) for $32 million in cash. Humboldt expects
to recognize an after-tax gain of approximately $18 million
in connection with this sale during the first quarter of 2003.
Under the terms of the agreement, FNB has entered into a
five-year lease for approximately 18,000 square feet of office
space in a building owned by the Bank. In addition, the Bank
will continue to provide FNB with sponsorship to VISA and
Mastercard for a period of up to six months after closing, with
FNB providing full indemnification for any losses incurred. At
the point FNB no longer requires sponsorship by the Bank,
approximately $12 million of deposits associated with
merchant loss reserves will be transferred to a financial
institution selected by FNB.

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|        |                                                                                              
|------- | ---------------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial
    Disclosure.

Effective September 4, 2001, Richardson
& Companys appointment as principal accountant was
terminated and KPMG LLP was engaged as principal accountants.
The decision to change accountants was approved by the audit
committee and the full board of directors of Humboldt.

During Humboldts fiscal years ended
December 31, 2000 and 2001, and the subsequent interim
period preceding the dismissal through September 4, 2001,
there were no disagreements with Richardson & Co. on any
matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to Richardson & Companys
satisfaction would have caused it to make a reference to the
subject matter of the disagreements in connection with its
reports. Further, none of the reportable events
described under Item 304(a)(1)(v) of Regulation S-K
occurred within Humboldts two most recent fiscal years and
the subsequent interim period through September 4, 2001.

The audit report of Richardson & Company on
the consolidated financial statements of Humboldt and
subsidiaries as of and for the fiscal years ended
December 31, 2000 and 1999, did not contain any adverse
opinion or disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope, or accounting
principles.

During Humboldts the fiscal years ended
December 31, 1999 and 2000, and the subsequent interim
period through September 4, 2001, Humboldt did not consult
with KPMG LLP regarding any of the matter or events set forth in
Item 304(a)(2)(i) and (ii) or Regulation S-K.




PART III



|         |                                                        
|-------- | -------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant.

Humboldt intends to file a definitive proxy
statement for the 2003 Annual Meeting of Shareholders (the
Proxy Statement) with the Securities and Exchange
Commission within 120 days of December 31, 2002.
Information regarding directors of Humboldt Bancorp will appear
under the caption Election of Directors in the Proxy
Statement and is incorporated herein by reference. Information
regarding compliance with Section 16(a) of the Securities
Exchange Act of 1934, as amended, and executive officers will
appear under the captions Executive
Compensation  Section 16(a) Principal
Shareholders and Share Ownership of Management and Directors in
the Proxy Statement and is incorporated herein by reference.



|        |                        
|------- | -----------------------
|Item 11 | Executive Compensation.

Information regarding executive compensation will
appear under the captions Compensation of Directors,
Executive Compensation in the Proxy Statement and is
incorporated herein by reference.



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management.

Information regarding security ownership of
certain beneficial owners and management and Humboldts
various equity compensation plans will appear under the caption
Principal Shareholders and Share Ownership of Management
and Directors in the Proxy Statement and is incorporated
herein by reference.



|         |                                                    
|-------- | ---------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions.

Information regarding certain relationships and
related transactions will appear under the caption Certain
Transactions in the Proxy Statement and is incorporated
herein by reference.



|         |                         
|-------- | ------------------------
|Item 14. | Controls and Procedures.

Within the 90 days prior to the date of this
Form 10-K, Humboldt carried out an evaluation, under the
supervision and with the participation of Humboldts
management, including Humboldts President and Chief
Executive Officer along with Humboldts Chief Financial
Officer, of the effectiveness of the design and operation of
Humboldts disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based

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##### Table of Contents



upon that evaluation, Humboldts President
and Chief Executive Officer along with Humboldts Chief
Financial Officer concluded that Humboldts disclosure
controls and procedures are effective in timely alerting them to
material information relating to Humboldt (including its
consolidated subsidiaries) required to be included in this
Form 10-K.


There have been no significant changes in
Humboldts internal controls or other factors, which could
significantly affect internal controls subsequent to the date
that Humboldt carried out its evaluation.




PART IV



|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)1. Financial Statements

The following documents are located in Part 8 of
this report:

Report of Independent Auditors

Consolidated Balance Sheets at December 31,
2001 and 2002

Consolidated Statements of Income for the years
ended December 31, 2000, 2001, and 2002


| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Changes in
    Stockholders Equity for years ended December 31,
    2000, 2001, and 2002

Consolidated Statements of Cash Flows for the
years ended December 31, 2000, 2001, and 2002


Notes to Consolidated Financial Statements

2. Financial Statement Schedules

All financial statement schedules are omitted, as
the required information is not applicable or included in the
notes to the financial statements.

3. Exhibits and Reports on
Form 8-K

(b) A Report on Form 8-K was filed on
October 8, 2002, disclosing the termination of a definitive
agreement between Humboldt and iPayment Holding and receipt by
Humboldt of a non-refundable $1 million termination fee. A
copy of the press release announcing the termination was
included as an exhibit to the Form 8-K.

(c) Exhibits Required by Item 601 of
Regulation S-K

| |      |   |  |                                                                                                                                                                                                                          
| | ---- | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1  |   |  | Amended and Restated Articles of Incorporation of
    Humboldt Bancorp (Incorporated by reference to the
    Companys Form 10-KSB for the fiscal year ended
    December 31, 1996, previously filed with the Commission)
| | 3.2  |   |  | Bylaws of Humboldt Bancorp (Incorporated by
    reference to the Companys Form 10-KSB for the fiscal
    year ended December 31, 1996, previously filed with the
    Commission)                                        
| | 3.3  |   |  | Amended and Restated Articles of Incorporation
    for Humboldt Bancorp filed June 10, 2002.                                                                                                                             
| | 3.4  |   |  | Amended and Restated Bylaws dated May 16,
    2002.                                                                                                                                                                      
| | 10.1 |   |  | Amended Employment Agreement with Theodore S.
    Mason (Incorporated by reference to the Companys
    Form 10-K for the fiscal year ended December 31, 1996,
    and previously filed with the Commission)             
| | 10.2 |   |  | Director Fee Plan (Incorporated by reference to
    the Companys Form 10-K for the fiscal year ended
    December 31, 1998, and previously filed with the Commission)                                                   
| | 10.2 | A |  | Humboldt Bancorp and Subsidiaries Director Fee
    Plan (Second Amendment and Restatement)                                                                                                                               
| | 10.3 |   |  | Amended Humboldt Bancorp Stock Option Plan
    (Incorporated by reference to the Companys Form 10-K
    for the fiscal year ended December 31, 1998, and previously
    filed with the Commission)                      

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##### Table of Contents



| |      |   |  |                                                                                                                                                                                                                                                                  
| | ---- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.4 |   |  | Salary Continuation Agreement with Theodore S.
    Mason (Incorporated by reference to the Companys
    Form 10-K for the fiscal year ended December 31, 1998,
    and previously filed with the Commission)                                                    
| | 10.8 |   |  | Director-Shareholders Agreement in Global
    Bancorp and Humboldt Bank Merger (Previously filed on
    November 12, 1999, with the Companys filing on
    Form S-4 (File No. 333-90925))                                                                      
| | 10.9 |   |  | Affiliates Agreement with Global Bancorp
    (Previously filed on November 12, 1999, with the
    Companys filing on Form S-4 (File No. 333-90925))                                                                                                            
| | 10.1 | 0 |  | Trust Indenture in connection with certificates
    of interest in a promissory note for the Global Bancorp merger
    (Previously filed on November 12, 1999, with the
    Companys filing on Form S-4 (File No. 333-90925))                                   
| | 10.1 | 1 |  | Deferred Compensation Agreement with Theodore S.
    Mason (Previously filed on November 12, 1999, with the
    Companys filing on Form S-4 (File No. 333-90925))                                                                                               
| | 10.1 | 4 |  | Plan of Reorganization with Silverado Merger Co.
    (Previously filed on November 12, 1999, with the
    Companys filing on Form S-4 (File No. 333-90925))                                                                                                     
| | 10.1 | 5 |  | Global Bancorp Loan Purchase Agreement
    (Previously filed on February 7, 2000, with the
    Companys pre-effective amendment no. 1 to Form S-4
    (File No. 333-90925))                                                                                     
| | 10.1 | 6 |  | Affiliates Agreement signed by Tehama
    Bancorp affiliates in connection with the Tehama Bancorp Merger
    (Previously filed on November 14, 2000, with the
    Companys filing on Form S-4 (File No. 333-49866))                                           
| | 10.1 | 7 |  | Humboldt Bancorp Stock Option Agreement to
    purchase Tehama Bancorp common stock (Previously filed on
    November 14, 2000, with the Companys filing on
    Form S-4 (File No. 333-49866))                                                                  
| | 10.1 | 8 |  | Tehama Bancorp Stock Option Agreement to purchase
    Humboldt Bancorp common stock (Previously filed on
    November 14, 2000, with the Companys filing on
    Form S-4 (File No. 333-49866))                                                                  
| | 10.1 | 9 |  | Humboldt Bancorp Indenture  Junior
    subordinated debt securities (Filed on November 14, 2000,
    with the Companys Form 10-Q for the quarter ended
    September 30, 2000)                                                                                 
| | 10.2 | 0 |  | Amended and Restated Declaration of Trust for
    junior subordinated debt securities (Filed on November 14,
    2000, with the Companys Form 10-Q for the quarter
    ended September 30, 2000)                                                                
| | 10.2 | 1 |  | 2001 Humboldt Bancorp and Subsidiaries Equity
    Incentive Plan (Previously filed with the Companys proxy
    statement dated April 13, 2001 filed with the Commission on
    April 14, 2001)                                                                  
| | 10.2 | 2 |  | Change in control severance agreement dated
    April 12, 2002 by and between Humboldt Bancorp and Patrick
    J. Rusnak. (Incorporated by reference to the Humboldts
    Form 10-Q for the quarter ended March 31, 2002 filed
    with the SEC on May 15, 2002)
| | 10.2 | 3 |  | Employment agreement dated April 14, 2002 by
    and between Humboldt Bancorp and Robert M. Daugherty
    (Incorporated by reference to the Humboldts Form 10-Q
    for the quarter ended March 31, 2002 filed with the SEC on
    May 15, 2002)                
| | 10.2 | 4 |  | First Amendment to Employment Agreement between
    Humboldt Bancorp and Robert M. Daugherty (Incorporated by
    reference to the Humboldts Form 10-Q for the quarter
    ended March 31, 2002 filed with the SEC on May 15,
    2002).                        
| | 10.2 | 5 |  | Employment Agreement dated June 24, 2002
    between Humboldt Bancorp and Patrick J. Rusnak (Incorporated by
    reference to Exhibit 10.1 of Humboldts Form 10-Q
    for the quarter ended June 30, 2002 filed with the SEC on
    August 19, 2002).           
| | 10.2 | 6 |  | Employment Agreement dated June 24, 2002
    between Humboldt Bancorp and Mark P. Wardlow (Incorporated by
    reference to Exhibit 10.2 of Humboldts Form 10-Q
    for the quarter ended June 30, 2002 filed with the SEC on
    August 19. 2002).             
| | 10.2 | 7 |  | Employment Agreement dated June 24, 2002
    between Humboldt Bancorp and Mark A. Francis (Incorporated by
    reference to Exhibit 10.3 of Humboldts Form 10-Q
    for the quarter ended June 30, 2002 filed with the SEC on
    August 19, 2002).             
| | 10.2 | 8 |  | Employment Agreement dated June 24, 2002
    between Humboldt Bancorp and Gene F. M. Bell (Incorporated by
    reference to Exhibit 10.4 of Humboldts Form 10-Q
    for the quarter ended June 30, 2002 filed with the SEC on
    August 19, 2002).             

86



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| |      |   |  |                                                                
| | ---- | - |  | ---------------------------------------------------------------
| | 10.2 | 9 |  | Executive Salary Continuation Agreement for
    Mark A. Francis
| | 21.1 |   |  | Subsidiaries of Humboldt Bancorp are:                          

|                                    |  |                       
|----------------------------------- |  | ----------------------
|Subsidiary Name                     |  | State of Incorporation
|                                    |  |                       
|Humboldt Bank                       |  | California            
|HB Capital Trust I                  |  | Delaware              
|Humboldt Bancorp Statutory Trust I  |  | Connecticut           
|Humboldt Bancorp Statutory Trust II |  | Connecticut           
|Bancorp Financial Services, Inc.    |  | California            

Humboldt Bancorp owns either directly or
indirectly 100% of the voting stock of each subsidiary listed
above.

| |      |  |  |                                  
| | ---- |  |  | ---------------------------------
| | 23.1 |  |  | Consent of KPMG LLP              
| | 23.2 |  |  | Consent of Richardson and Company
| | 23.3 |  |  | Consent of Perry-Smith LLP       

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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, on the 28th day of
March, 2003.



| |                                          
| | -----------------------------------------
| | HUMBOLDT BANCORP                         
|
| | /s/ ROBERT M. DAUGHERTY                  
| |                                          
| | Robert M. Daugherty                      
| | President and Chief Executive
    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.

|                                           |  |                                                                                                                  |  |                |  | 
|------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------- |  | -------------- |  | 
|                                           |  |                                                                                                                  |  |               
|Signature                                  |  | Title                                                                                                            |  | Date          
|                                           |  |                                                                                                                  |  |               
|                                          
|/s/ ROBERT M. DAUGHERTYRobert M. Daugherty |  | President, Chief Executive Officer and Director
    (Principal Executive Officer)                                |  | March 28, 2003
|                                          
|/s/ PATRICK J. RUSNAKPatrick J. Rusnak     |  | Executive Vice President, Chief Financial Officer
    and Secretary (Principal Financial and Accounting Officer) |  | March 28, 2003
|                                          
|/s/ RONALD F. ANGELLRonald F. Angell       |  | Director                                                                                                         |  | March 28, 2003
|                                          
|/s/ RICHARD CLAUSSENRichard Claussen       |  | Director                                                                                                         |  | March 28, 2003
|                                          
|/s/ GARY L. EVANSGary L. Evans             |  | Director                                                                                                         |  | March 28, 2003
|                                          
|/s/ GARRY D. FISHGarry D. Fish             |  | Director                                                                                                         |  | March 28 2003 
|                                          
|/s/ GARY C. KATZGary C. Katz               |  | Director                                                                                                         |  | March 28, 2003
|                                          
|/s/ JOHN W. KOEBERERJohn W. Koeberer       |  | Director                                                                                                         |  | March 28, 2003
|                                          
|Theodore S. Mason                          |  | Director                                                                                                         |  | March 28, 2003
|                                          
|/s/ STEVEN R. MILLSSteven R. Mills         |  | Director                                                                                                         |  | March 28, 2003

88



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|                                   |  |          |  |                |  | 
|---------------------------------- |  | -------- |  | -------------- |  | 
|                                   |  |          |  |               
|Signature                          |  | Title    |  | Date          
|                                   |  |          |  |               
|                                  
|/s/ KELVIN H. MOSSKelvin H. Moss   |  | Director |  | March 28, 2003
|                                  
|/s/ GARY L. NAPIERGary L. Napier   |  | Director |  | March 28 2003 
|                                  
|Tom Weborg                         |  | Director |  | March 28, 2003
|                                  
|/s/ JOHN R. WINZLERJohn R. Winzler |  | Director |  | March 28, 2003

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CERTIFICATION

I, Robert M Daugherty, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Humboldt Bancorp;                                                                                                                                                                                                                                                                    
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                        



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



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

Date:     March 28,
2003



| |                                          
| | -----------------------------------------
| | /s/ ROBERT M. DAUGHERTY                  
| |                                          
| | Robert M. Daugherty                      
| | President and Chief Executive
    Officer

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CERTIFICATION

I, Patrick J. Rusnak, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this annual report on
    Form 10-K of Humboldt Bancorp;                                                                                                                                                                                                                                                                    
|
| | 2. | Based on my knowledge, this annual report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    annual report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this annual report,
    fairly present in all material respects the financial condition,
    results of operations and cash flows of the registrant as of,
    and for, the periods presented in this annual report;                       
|
| | 4. | The registrants other certifying officer
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                        



| |    |                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this annual report is being prepared;
|
| | b) | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) | presented in this annual report our conclusions
    about the effectiveness of the disclosure controls and
    procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and                                                                                                                                                    



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

Date:     March 28,
2003



| |                        
| | -----------------------
| | /s/ PATRICK J. RUSNAK  
| |                        
| | Patrick J. Rusnak      
| | Chief Financial Officer

91



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##### Table of Contents



EXHIBIT INDEX

| |      |   |  |                                                                                                                                                                                                                               
| | ---- | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1  |   |  | Amended and Restated Articles of Incorporation of
    Humboldt Bancorp (Incorporated by reference to the
    Companys Form 10-KSB for the fiscal year ended
    December 31, 1996, previously filed with the Commission)     
| | 3.2  |   |  | Bylaws of Humboldt Bancorp (Incorporated by
    reference to the Companys Form 10-KSB for the fiscal
    year ended December 31, 1996, previously filed with the
    Commission)                                             
| | 3.3  |   |  | Amended and Restated Articles of Incorporation
    for Humboldt Bancorp filed June 10, 2002.                                                                                                                                  
| | 3.4  | . |  | Amended and Restated Bylaws dated May 16,
    2002.                                                                                                                                                                           
| | 10.1 |   |  | Amended Employment Agreement with Theodore S.
    Mason (Incorporated by reference to the Companys
    Form 10-K for the fiscal year ended December 31, 1996,
    and previously filed with the Commission)                  
| | 10.2 |   |  | Director Fee Plan (Incorporated by reference to
    the Companys Form 10-K for the fiscal year ended
    December 31, 1998, and previously filed with the Commission)                                                        
| | 10.2 | A |  | Humboldt Bancorp and Subsidiaries Director Fee
    Plan (Second Amendment and Restatement)                                                                                                                                    
| | 10.3 |   |  | Amended Humboldt Bancorp Stock Option Plan
    (Incorporated by reference to the Companys Form 10-K
    for the fiscal year ended December 31, 1998, and previously
    filed with the Commission)                           
| | 10.4 |   |  | Salary Continuation Agreement with Theodore S.
    Mason (Incorporated by reference to the Companys
    Form 10-K for the fiscal year ended December 31, 1998,
    and previously filed with the Commission)                 
| | 10.8 |   |  | Director-Shareholders Agreement in Global
    Bancorp and Humboldt Bank Merger (Previously filed on
    November 12, 1999, with the Companys filing on
    Form S-4 (File No. 333-90925))                                   
| | 10.9 |   |  | Affiliates Agreement with Global Bancorp
    (Previously filed on November 12, 1999, with the Companys
    filing on Form S-4 (File No. 333-90925))                                                                         
| | 10.1 | 0 |  | Trust Indenture in connection with certificates
    of interest in a promissory note for the Global Bancorp merger
    (Previously filed on November 12, 1999, with the Companys
    filing on Form S-4 (File No. 333-90925))
| | 10.1 | 1 |  | Deferred Compensation Agreement with Theodore S.
    Mason (Previously filed on November 12, 1999, with the
    Companys filing on Form S-4 (File No. 333-90925))                                                            
| | 10.1 | 4 |  | Plan of Reorganization with Silverado Merger Co.
    (Previously filed on November 12, 1999, with the
    Companys filing on Form S-4 (File No. 333-90925))                                                                  
| | 10.1 | 5 |  | Global Bancorp Loan Purchase Agreement
    (Previously filed on February 7, 2000, with the
    Companys pre-effective amendment no. 1 to Form S-4
    (File No. 333-90925))                                                  
| | 10.1 | 6 |  | Affiliates Agreement signed by Tehama
    Bancorp affiliates in connection with the Tehama Bancorp Merger
    (Previously filed on November 14, 2000, with the
    Companys filing on Form S-4 (File No. 333-49866))        
| | 10.1 | 7 |  | Humboldt Bancorp Stock Option Agreement to
    purchase Tehama Bancorp common stock (Previously filed on
    November 14, 2000, with the Companys filing on
    Form S-4 (File No. 333-49866))                               
| | 10.1 | 8 |  | Tehama Bancorp Stock Option Agreement to purchase
    Humboldt Bancorp common stock (Previously filed on
    November 14, 2000, with the Companys filing on
    Form S-4 (File No. 333-49866))                               
| | 10.1 | 9 |  | Humboldt Bancorp Indenture  Junior
    subordinated debt securities (Filed on November 14, 2000,
    with the Companys Form 10-Q for the quarter ended
    September 30, 2000)                                              
| | 10.2 | 0 |  | Amended and Restated Declaration of Trust for
    junior subordinated debt securities (Filed on November 14,
    2000, with the Companys Form 10-Q for the quarter
    ended September 30, 2000)                             
| | 10.2 | 1 |  | 2001 Humboldt Bancorp and Subsidiaries Equity
    Incentive Plan (Previously filed with the Companys proxy
    statement dated April 13, 2001 filed with the Commission on
    April 14, 2001)                               



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##### Table of Contents



| |      |   |  |                                                                                                                                                                                                                                                                  
| | ---- | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.2 | 2 |  | Change in control severance agreement dated
    April 12, 2002 by and between Humboldt Bancorp and Patrick
    J. Rusnak. (Incorporated by reference to the Humboldts
    Form 10-Q for the quarter ended March 31, 2002 filed
    with the SEC on May 15, 2002)
| | 10.2 | 3 |  | Employment agreement dated April 14, 2002 by
    and between Humboldt Bancorp and Robert M. Daugherty
    (Incorporated by reference to the Humboldts Form 10-Q
    for the quarter ended March 31, 2002 filed with the SEC on
    May 15, 2002)                
| | 10.2 | 4 |  | First Amendment to Employment Agreement between
    Humboldt Bancorp and Robert M. Daugherty (Incorporated by
    reference to the Humboldts Form 10-Q for the quarter
    ended March 31, 2002 filed with the SEC on May 15,
    2002).                        
| | 10.2 | 5 |  | Employment Agreement dated June 24, 2002
    between Humboldt Bancorp and Patrick J. Rusnak (Incorporated by
    reference to Exhibit 10.1 of Humboldts Form 10-Q
    for the quarter ended June 30, 2002 filed with the SEC on
    August 19, 2002).           
| | 10.2 | 6 |  | Employment Agreement dated June 24, 2002
    between Humboldt Bancorp and Mark P. Wardlow (Incorporated by
    reference to Exhibit 10.2 of Humboldts Form 10-Q
    for the quarter ended June 30, 2002 filed with the SEC on
    August 19. 2002).             
| | 10.2 | 7 |  | Employment Agreement dated June 24, 2002
    between Humboldt Bancorp and Mark A. Francis (Incorporated by
    reference to Exhibit 10.3 of Humboldts Form 10-Q
    for the quarter ended June 30, 2002 filed with the SEC on
    August 19, 2002).             
| | 10.2 | 8 |  | Employment Agreement dated June 24, 2002
    between Humboldt Bancorp and Gene F. M. Bell (Incorporated by
    reference to Exhibit 10.4 of Humboldts Form 10-Q
    for the quarter ended June 30, 2002 filed with the SEC on
    August 19, 2002).             
| | 10.2 | 9 |  | Executive Salary Continuation Agreement for
    Mark A. Francis                                                                                                                                                                                                  
| | 21.1 |   |  | Subsidiaries of Humboldt Bancorp are:                                                                                                                                                                                                                            

|                                    |  |                       
|----------------------------------- |  | ----------------------
|Subsidiary Name                     |  | State of Incorporation
|                                    |  |                       
|Humboldt Bank                       |  | California            
|HB Capital Trust I                  |  | Delaware              
|Humboldt Bancorp Statutory Trust I  |  | Connecticut           
|Humboldt Bancorp Statutory Trust II |  | Connecticut           
|Bancorp Financial Services, Inc.    |  | California            

Humboldt Bancorp owns either directly or
indirectly 100% of the voting stock of each subsidiary listed
above.

| |      |  |  |                                  
| | ---- |  |  | ---------------------------------
| | 23.1 |  |  | Consent of KPMG LLP              
| | 23.2 |  |  | Consent of Richardson and Company
| | 23.3 |  |  | Consent of Perry-Smith LLP