SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
                 ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the Fiscal Year Ended: December 31, 1998

                         Commission File Number: 0-27784

                                HUMBOLDT BANCORP
        (Exact name of small business issuer as specified in its charter)

       California                                        93-1175446
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
incorporation or organization)

                                701 Fifth Street
                               Eureka, California
                    (Address of principal executive offices)

                                      95501
                                   (Zip Code)

                                 (707) 445-3233
              (Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act:  NONE
Securities Registered Pursuant to Section 12(g) of the Act:  Common Stock -
                                                             No Par Value

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  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.

                                            X Yes         ___ No

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation  5(b),  and no  disclosure  will  be  contained,  to the  best of the
registrant's   knowledge,   in  definitive   proxy  or  information   statements
incorporated by reference in Part III of the Form 10-KSB. |_|

Issuer's revenues for the most recent fiscal year were:    $35,977,000

Aggregate  Market  Value  of the  voting  stock  held by  non-affiliates  of the
registrant as of December 31, 1998: $39,288,000

Number of shares of common stock outstanding at December 31, 1998 is: 1,787,954

Documents incorporated by reference:   NONE

                    This report includes a total of 46 pages
                            Exhibit Index on page 45

<PAGE>2



                                     PART 1

ITEM 1 - DESCRIPTION OF BUSINESS

General

        On November 10, 1995,  the  shareholders  of Humboldt  Bank (the "Bank")
approved a Plan of  Reorganization  by and  between  the Bank,  Humboldt  Merger
Bancorp,  and  Humboldt  Bancorp  (the  "Company")  whereby  the  Bank  became a
wholly-owned  subsidiary of the Company.  The  reorganization  became  effective
January  2,  1996.  Until such time as  Capitol  Valley  Bank (In  Organization)
commences  its  operations  (see  below),  the major  business  operation of the
Company continues to be conducted through its wholly-owned subsidiary,  Humboldt
Bank. The following discussion,  therefore, although presented on a consolidated
basis,  analyzes primarily the financial  condition and results of operations of
the Bank for the twelve month period ended  December 31, 1998.  Previously,  the
Bank filed its periodic  reports under the Securities  Exchange Act of 1934 with
the Federal Reserve Board.

        The Bank was incorporated as a California  state-licensed  bank on March
13, 1989, and began its operations in the Eureka/Humboldt  area of California on
September  13,  1989.  Until  the past  year,  the Bank had been a member of the
Federal Reserve System  ("FRS").  On May 12, 1998, the Bank withdrew as a member
of the FRS, and is now a state, non-member bank of the Federal Deposit Insurance
Corporation  ("FDIC").  The  deposits of the Bank remain  insured to the maximum
amount permitted by law by the FDIC.

        On January 22, 1993,  the Board of  Directors  of the Bank  approved the
Bank's  acquisition of the Arcata and  McKinleyville,  California  branches (the
"HomeFed  Branches"),  which had been  previously  owned and operated by HomeFed
Bank, F.A., San Diego,  California  ("HomeFed").  The two branches were acquired
directly from U.S. Bank of California  ("U.S.  Bank")  pursuant to an agreement,
dated January 22, 1993,  between  Humboldt Bank and U.S. Bank (the  "Agreement")
simultaneously  with U.S.  Bank's  acquisition  of 18 HomeFed  Branches from the
Resolution Trust Corporation ("RTC"). The HomeFed Branches had total deposits of
approximately $57 million at the time of the acquisition. Under the terms of the
Agreement,  Humboldt Bank agreed to acquire the HomeFed  Branches from U.S. Bank
for a purchase price of $1.2 million plus any additional  amounts required to be
paid under the Agreement and a related indemnity  agreement entered into between
U.S. Bank and the RTC. In connection with its approval of the acquisition of the
HomeFed Branches, the Federal Reserve Bank of San Francisco relied on the Bank's
commitment to raise at least $1 million of equity capital, $500,000 of which was
guaranteed  by the  directors  of the Bank.  On  September  22,  1993,  the Bank
completed the required stock offering by selling  186,155 shares of common stock
at $13.00 per share, totaling $2,420,000,  less expenses incurred in the sale of
$17,000, for a net capital infusion of $2,403,000.

        On June  15,  1994,  the  Board  of  Directors  of the  Bank  authorized
management to enter into negotiations for the acquisition of the Loleta,  Willow
Creek,  and  Weaverville,   California   branches  (the  "U.S.  Bank  Branches")
previously  owned and operated by U.S. Bank. The Board of Directors  voted final
approval of the  purchase  on January  18,  1995,  and the three  branches  were
acquired on February 9, 1995,  directly from U.S. Bank, pursuant to an agreement
dated August 17,  1994,  between  Humboldt  Bank and U.S.  Bank (the "U.S.  Bank
Agreement").  The U.S. Bank  Branches had total  deposits of  approximately  $26
million  and  total  loans  of  approximately   $1.8  million  at  the  time  of
acquisition.

        Under the terms of the U.S. Bank  Agreement,  the Bank agreed to acquire
the U.S. Bank Branches  from U.S.  Bank for a negotiated  deposit  premium based
upon average deposits excluding all Public Fund accounts, all Jumbo accounts and

<PAGE>3


interbranch  accounts for the three (3) calendar  months  preceding  the closing
date.

        On December  5, 1994,  the Bank  completed  a stock  offering by selling
185,715  shares of common stock at $14.00 per share  totaling  $2,600,000,  less
expenses  incurred  in the  sale  of  $50,000,  for a net  capital  infusion  of
$2,550,000.  The funds were used to increase  the Bank's  capital  levels and to
facilitate the U.S. Bank Branch purchase at a cost of approximately $787,000.

        On June 19, 1996, the Board of Directors authorized  management to enter
into negotiations for the acquisition of the Garberville, California Branch (the
"Garberville  Branch")  previously  owned and operated by First  Nationwide Bank
("First  Nationwide").  The  Board of  Directors  voted  final  approval  of the
purchase  on January  15,  1997,  and the branch  was  acquired  on May 9, 1997,
directly from First Nationwide, pursuant to an agreement dated December 6, 1996,
between Humboldt Bank and First Nationwide (the "First  Nationwide  Agreement").
The Garberville Branch had total deposits of approximately  $22.9 million at the
time of acquisition. Under the terms of the First Nationwide Agreement, the Bank
agreed to  acquire  the  Garberville  Branch  from First  Nationwide  Bank for a
negotiated  deposit  premium  based upon the  aggregate  amount of the  deposits
assumed by Humboldt Bank on the closing date.

        On  September  17, 1998,  the  Company's  Board of Directors  authorized
management to file an application with the appropriate  regulators to open a new
bank in Sacramento,  California. On November 25, 1998, the California Department
of  Financial  Institutions  approved  the  Company's  application  to establish
Capitol Valley Bank (In  Organization).  Approval of the new bank by the Federal
Reserve Bank and by the FDIC was still  pending as of December  31, 1998.  It is
anticipated  that  approval  by the  Federal  Reserve and by the FDIC will occur
early in 1999,  and that  Capitol  Valley Bank (In  Organization)  will open for
business shortly thereafter.

Humboldt Bank

        The Bank is locally  owned and operated and its primary  service area is
the communities of Northern California. The Bank's business is primarily focused
on servicing the banking  needs of these  communities.  Its  marketing  strategy
stresses the Bank's local  ownership and commitment to serving the banking needs
of individuals  living and working in the Bank's primary  service areas, as well
as the banking needs of local businesses,  including retail,  professional,  and
real estate related enterprises in those service areas. The Bank is not licensed
by the California  Department of Financial  Institutions as a trust company and,
therefore, it may not provide trust services.

        The Bank offers a broad range of services to individuals  and businesses
with an emphasis upon efficiency and personalized attention. The Bank provides a
full line of consumer services,  and also offers  specialized  services to small
businesses,  middle market  companies,  and professional  firms, such as courier
services and appointment banking. The Bank offers personal and business checking
and savings accounts (including individual interest-bearing negotiable orders of
withdrawal  ("NOW")  accounts  and/or  accounts  combining  checking and savings
accounts with automatic transfers), IRA and Keogh accounts, time certificates of
deposit, and direct deposit of social security,  pension, and payroll checks. It
also makes available commercial,  construction,  accounts receivable, inventory,
automobile,   home  improvement,   real  estate,  office  equipment,   leasehold
improvement,  lease  receivable  financing,  and other consumer loans (including
overdraft  protection  lines of credit),  drafts and standby  letters of credit,
credit card activities to both individuals and merchants,  and travelers' checks
(issued by an independent entity).

<PAGE>4

        The principal  office of the Bank is located in a building  owned by the
Bank at 701 Fifth Street, Eureka, California 95501, (707) 445-3233. The Bank has
branches at: (i) 1360 Main Street,  Fortuna,  California 95540,  (707) 725-7474;
(ii) 1063 G Street, Arcata, California 95521, (707) 822-5165; (iii) 2095 Central
Avenue,  McKinleyville,  California 95519, (707) 839-3281; (iv) 358 Main Street,
Loleta,  California 95551, (707) 733-5731;  (v) 39171 Highway 299, Willow Creek,
California 95573, (530) 629-2125; (vi) 409 Main Street, Weaverville,  California
96093,  (530)  623-5576;  and (vii) 915  Redwood  Drive,  Suite D,  Garberville,
California  95542,  (707)  923-2745.  The Bank's Lease,  SBA, Loan  Supervision,
Credit Card Issuing,  Compliance, and Real Estate Departments are located at 612
G Street, Eureka, California 95501, (707) 269-3134. The Bank's Merchant Bankcard
Department is located at 605 K Street, Eureka, California 95501, (707) 269-3207,
and its Heritage Club  Department is located at 2830 G Street,  Suite B, Eureka,
California 95501,  (707) 268-5110.  The Bank's Management  Information  Services
Department  is  located  at 539 G Street,  Suites  205,  206,  and 207,  Eureka,
California 95501, (707) 268-5104;  its Credit Department is located at 710 Fifth
Street,  Eureka,  California 95501, (707) 444-7813; and its Financial Department
is located at 555 H Street,  Suite B, Eureka,  California 95501, (707) 441-0223.
The  Bank's  Administration,  Alternative  Investment,  Central  Services,  Data
Processing,  Advertising and Marketing,  Facilities Management,  Operations, and
Human Resources  Departments are all located at the Bank's main  headquarters at
701 Fifth Street,  Eureka,  California 95501, (707) 445-3233.  The Bank formerly
had a  supermarket  branch  at West  Highway  299 &  Martin  Road,  Weaverville,
California  96093. On November 15, 1998, this branch was  consolidated  with the
other Weaverville  branch at 409 Main Street,  and the supermarket branch office
closed. The Company leases office space at 525 Fifth Street, Eureka,  California
95501 in order to donate the space as a community  service to the Redwood  Coast
Music Festivals for use as its headquarters.  The Company has leased premises at
1601 Douglas  Boulevard,  Roseville,  California  95661 for use when it opens by
Capitol Valley Bank (In Organization).

Savings and Deposit Activities

        The Bank offers customary banking services such as personal and business
checking,  savings  accounts,  time  certificates  of  deposit,  IRA,  and Keogh
accounts.  Most of the Bank's deposits are obtained from commercial  businesses,
professionals,  and  individuals  with high income or net worth. At December 31,
1998,  the Bank had a total of 33,299  accounts,  consisting  of  11,973  demand
deposit  accounts  with an average  balance  of  approximately  $10,022;  17,508
savings  and money  market  accounts  with an average  balance of  approximately
$2,795;  252 time  certificates  of $100,000 or more with an average  balance of
approximately $183,949; and 3,566 other time deposits with an average balance of
approximately  $19,483.  The Bank has not obtained any deposits  through deposit
brokers and has no present  intention of using brokered  deposits as a source of
funding. See "Management's Discussion and Analysis - Deposits."

<PAGE>5

Lending Activities

        The  Bank  concentrates  its  lending   activities  on  consumer  loans,
commercial loans,  lease receivable loans, real estate  construction  loans, and
other forms of real estate loans made primarily to businesses  and  individuals;
it has no foreign  loans.  The net loan and lease  portfolio  as of December 31,
1998,  totaled $186,038  million,  which represented 65.5% of total deposits and
58.1% of total assets. The table below shows the mix of the loan portfolio.

<TABLE>
<CAPTION>


                                      12/31/98              12/31/97             12/31/96
(Dollars in Thousands)                 AMOUNT        %       AMOUNT       %       AMOUNT      %
                                     ---------     -----   ---------    -----   ---------   -----

<S>                                    <C>         <C>       <C>        <C>      <C>        <C>  
Real Estate-Construction & Land Dev    20,667      11.3%     20,165     12.6%    21,205     14.5%
Real Estate-Residential 1-5            27,549      15.1%     27,205     16.9%    31,456     21.6%
Real Estate-Commercial & Ag            80,197      44.1%     65,772     41.0%    61,030     41.9%
Commercial, Industrial & Ag            33,981      18.7%     28,091     17.5%    20,559     14.1%
Lease Financing                         9,867       5.4%      8,732      5.4%     3,168      2.2%
Consumer Loans                          7,782       4.3%      9,502      5.9%     4,529      3.1%
State And Political Loans               1,512       0.8%        675      0.4%     2,875      2.0%
Other                                     585       0.3%        502      0.3%       850      0.6%
Total Gross Loans                     182,140       100%    160,644      100%   145,672      100%
Less Deferred Loan Fees                  (724)                 (809)               (765)
Less Allowance For Loan Losses         (3,055)               (2,371)             (2,146)
Total Net Loans                       178,361               157,464             142,761
Loans Held For Sale                     7,677                    48                  63
Total Loans And Leases                186,038               157,512             142,824

</TABLE>


Real Estate Loans

        As of December 31, 1998,  the Bank had  outstanding  real estate secured
construction  and land  development  loans totaling $20.7 million,  representing
11.3% of the  Bank's  gross  loan  portfolio.  The Bank  makes  loans to finance
construction  of  residential,  commercial,  and  industrial  properties  and to
finance land  development.  At December 31, 1998, the Bank had outstanding  real
estate secured non-farm  non-residential  loans totaling $79.5 million and loans
secured  by  farmland  totaling  $0.7  million.  The Bank  makes  loans to owner
occupied  businesses  for a  variety  of  purposes  including  working  capital,
refinance, purchase, etc.

Real Estate Banking Operations

        The Bank is engaged in originating real estate secured loans for sale to
institutional  investors in the secondary  market.  The Bank also  generated fee
income by servicing mortgage loans.

Loan Origination

        The Bank's real estate  secured loan  origination  activities  have been
focused  on  one-to-four  family,   owner-occupied   residences  in  California.
Underwriting  criteria  established  by investors in  adjustable  and fixed rate
single-family  residential loans generally include the following:  maturities of
15 to 30 years, a loan-to-value  ratio no greater than 90%, the liquidity of the
borrower's other assets,  and the borrower's  ability to service the debt out of
income.  Interest rates on adjustable rate loans are adjusted annually primarily
on the basis of the One-Year Treasury  Constant  Maturity Index.  Except for the
amount  of  the  loan,  the  underwriting  standards  of the investors generally

<PAGE>6


conform to certain  requirements  established by the Federal  National  Mortgage
Corporation  ("FNMA").  Loans sold in the secondary market are generally secured
by a first deed of trust.  Real estate loans  pending sale at December 31, 1998,
totaled $7.7 million.  The Bank may also elect,  from time to time, to portfolio
loans secured by  single-family  residences.  The total of portfolio real estate
loans was $7.9 million at December 31, 1998.

Loan Servicing

        The  Bank may  retain  the  servicing  on  loans  sold to  institutional
investors,  thereby generating ongoing servicing  revenues.  The Bank's mortgage
and SBA  servicing  portfolio  was $144.5  million at December  31,  1998.  Loan
servicing  includes  collection  and remitting  loan  payments,  accounting  for
principal and interest,  holding escrow (impound) funds for payment of taxes and
insurance,  making inspections as required of the mortgage premises,  collecting
amounts from  delinquent  mortgages,  supervising  foreclosures  in the event of
unremedied defaults, and generally administering the loans for investors to whom
they have been sold.  Management believes that the quality of its loan servicing
capability  is a factor  which  permits it to retain the  servicing  on loans it
sells in the secondary market.

        The Bank received fees for servicing  mortgage loans,  ranging generally
from .250% to .375% per annum on the declining  principal balances of the loans.
The average  service  fee  collected  by the Bank was .250  percent for the year
ended  December 31, 1998.  Servicing fees are collected and retained by the Bank
out of monthly mortgage payments.  The Bank's servicing  portfolio is subject to
reduction  because of normal  amortization  and  prepayment  or  liquidation  of
outstanding  loans.  Approximately  90.0% of the loans serviced by the Bank have
outstanding  balances of greater  than  $100,000,  and  approximately  10.0% are
adjustable rate mortgages (ARMs).

        The Bank accounts for revenue from the sale of loans where  servicing is
retained  in  conformity  with  the  requirements  of  Statements  of  Financial
Accounting  Standards  No.  65 and  the  Financial  Accounting  Standards  Board
Emerging  Issues Task Force Issue No. 88-11.  Gains and losses are recognized at
the time of sale by comparing sales price with carrying value. A premium results
when the interest rate on the loan,  adjusted for a normal service fee,  exceeds
the pass-through yield to the buyer.

        In general,  the value of the Bank's  loan  servicing  portfolio  may be
adversely  affected  as mortgage  interest  rates  decline and loan  prepayments
increase. It is anticipated that income generated from the Bank's loan servicing
portfolio will also decline in such an environment.  This negative effect on the
Bank's  income may be offset  somewhat by a rise in  origination  and  servicing
income attributable to new loan originations,  which historically have increased
in periods of low mortgage interest rates.

        The following  table sets forth the dollar amount of the Bank's mortgage
loan servicing portfolio.  Although the Bank intends to continue to increase its
servicing  portfolio,  such increases  will depend on market  conditions and the
availability of capital.

                                                          December 31, 1998
                                                          -----------------
                                                            (In thousands)

        Loan Servicing Portfolio:
        Loans originated by the Bank and sold:              $142.1 Million
        Loans originated by the Bank but awaiting funding:  $   7.7 Million


<PAGE>7


        The Bank also services a portfolio of SBA loans which is  anticipated to
increase during 1999.

        SBA Loans originated and serviced by Bank:  $   2.4 Million

        For the most part,  the SBA loans are tied to Prime and as a result they
are not as subject to early  payoff as a result of  declining  rates as are real
estate loans.

Commercial Loans

        As of  December  31,  1998,  the Bank had  commercial,  industrial,  and
agricultural  loans  totaling $34.0  million,  representing  18.7% of the Bank's
gross  loan   portfolio.   The  Bank  lends   primarily  to  businesses  and  to
professionals  and other  individuals  located in the  communities  of  Northern
California. The Bank offers a variety of commercial lending services,  including
revolving lines of credit, working capital loans,  equipment financing,  letters
of credit,  and inventory  financing.  Typically,  commercial loans are floating
rate obligations and are priced based on the Bank's reference rate.

        Commercial  loans are typically  secured by several types of collateral,
including qualifying accounts receivable, equipment, inventory, and real estate.
No single  commercial  account  customer  accounted  for more than 3.1% of total
gross loans at December 31, 1998.

Lease Receivable Loans

        As of December 31, 1998, the Bank had outstanding Lease Receivable Loans
totaling $9.9 million representing 5.4% of the Bank's Gross Loan Portfolio.  The
Bank makes Lease  Receivable  loans to finance  credit card swipe  machines  and
other small ticket  leases.  The dollar amount of each lease usually ranges from
under $2,000 to $100,000 and the term is approximately  three to five years. The
Bank may also generate leases which may be sold to other financial  institutions
on a non-recourse basis.

Consumer Loans

        As of December 31, 1998, consumer loans, including loans to individuals,
dealer auto loans,  business customers,  credit cards, and related plans totaled
$7.8  million,  or 4.3% of the Bank's  gross loan  portfolio.  Loans to purchase
automobiles  were $1.2 million or 15.3%,  mobile home and other  personal  loans
were $0.9 million or 11.8%, and credit cards and related plans were $5.7 million
or 72.9% of total consumer loans at December 31, 1998.

State and Political Loans

        As of December 31, 1998,  the Bank had state and  political  subdivision
loans  outstanding  totaling  $1.5  million  or 0.8% of the  Bank's  gross  loan
portfolio. These loans were to finance equipment, water system improvements, and
purchase land for sewage treatment.

Other Loans

        As of December 31, 1998, the Bank had  outstanding  other loans totaling
$0.6  million.  These loans  consist  mainly of  overdrafts of less than 30 days
duration.

<PAGE>8


Banking Services

        To retain existing customers and attract new customers,  the Bank offers
a broad range of services,  including automated teller machines, credit card and
merchant  bankcard  services,  ACH  services,  and daily  courier  services.  In
addition, the Bank maintains close relationships with its customers by providing
direct access to senior management during and after normal business hours, rapid
response to customer  requests,  and  specialized  market area  knowledge of the
communities in Northern California.

Human Resources

        At  December  31,  1998,  the Bank  employed  a total  of 250 full  time
equivalent employees, consisting of 85 salaried persons and 165 hourly persons.

Competition

        The Bank  actively  competes  for all types of  deposits  and loans with
other banks and financial  institutions  located in its service area.  Increased
deregulation of financial  institutions has increased  competition.  Many of the
Bank's competitors have greater financial resources and facilities than the Bank
and may offer certain services,  such as trust services,  that the Bank does not
presently  offer.  The  Bank's  strategy  for  meeting  competition  has been to
maintain  a sound  capital  base  and  liquidity  position,  employ  experienced
management,  and concentrate on particular segments of the market,  particularly
businesses  and  professionals,  by  offering  customers  a degree  of  personal
attention that, in the opinion of management, is not generally available through
the Bank's larger competitors.

Humboldt Bank Plaza

        On June 30, 1998, the Bank purchased from W.L. Simmons,  an unaffiliated
party,  approximately 29 acres of property located at 2500 Fifth Street, Eureka,
California  95501.  The property was purchased as a site for the future Humboldt
Bank  Plaza at a cost of  approximately  $2.9  million.  At June 30,  1998,  the
property contained a building partially leased to a pharmacy, a gas station, and
a trailer  park.  The gas station was sold for  $170,000 on August 4, 1998.  The
pharmacy holds a lease which expires  December 31, 1999,  which  obligated it to
pay monthly  rent of  $18,326.  The  trailer  park holds a lease  which  expires
September 9, 1999, which obligated it to pay monthly rent of $166.66, plus 12.5%
of its gross  rental  income and 0.5% of its  additional  revenues.  The Bank is
working with an architect  and a  construction  company on plans to renovate the
building  and the  parking  lot so that all of the Bank's  departments  that are
currently  leasing premises will be able to relocate to the Humboldt Bank Plaza.
The Bank anticipates that some of its departments will move in during the fourth
quarter of 1999.

Lease Company Subsidiary

        In January 1997, the Company contributed capital totaling $2,000,000 for
a 50% interest in Bancorp Financial Services,  a company making automobile loans
and small ticket  leases.  The dollar amount of each lease  usually  ranges from
$10,000 to $100,000, with a term generally of from three to five years. On April
1, 1998, Bancorp Financial Services became a subsidiary of Bancorp at a transfer
amount of  $2,084,833.  At December 31, 1998, the Company had recorded a gain on
this investment of $195,980.

<PAGE>9

Regulation of Humboldt Bancorp and Humboldt Bank

        The Company 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.  To the  extent  that the
following  information  describes  statutory  or  regulatory  provisions,  it is
qualified  in  its  entirety  by  reference  to  the  particular  statutory  and
regulatory provisions at issue.

        The Company is a registered  bank holding company under the Bank Holding
Company Act (BHC Act) and, as such, is subject to regulation,  supervision,  and
examination  by the Board of Governors of the Federal  Reserve Bank (FRB).  Bank
holding  companies  must file with the FRB an annual report and such  additional
reports as the FRB may require and are also subject to periodic  examinations by
the  FRB.  The  Bank,  as  a  California  state-licensed  bank,  is  subject  to
regulation,  supervision,  and periodic examination by the California Department
of Financial  Institutions (the  "Department") and the Federal Deposit Insurance
Corporation  (FDIC).  The Bank's deposits are insured by the FDIC to the maximum
amount  permitted  by law,  which is currently  $100,000  per  depositor in most
cases.  For this  protection,  the Bank  pays a  semi-annual  assessment  and is
subject to the rules and regulations of the FDIC pertaining to deposit insurance
and other matters.

        The  regulations of the FRB, the FDIC,  and the  Department  govern most
aspects of the Bank's  business 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. The Bank is also subject to the requirements and
restrictions of various  consumer laws and  regulations.  The FRB, the FDIC, and
the  Department  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 terminate deposit insurance,  and to appoint a
conservator or receiver under a variety of circumstances.  For instance,  if the
Bank were to experience either  significant loan losses or rapid growth in loans
or deposits,  or some other event resulting in a depletion or  deterioration  of
the Bank's  capital  account,  the  shareholders  might be  compelled by federal
banking  authorities  to invest  additional  capital in the Bank as necessary to
return the Bank's  capital  account to a  satisfactory  level.  The FRB also has
broad  enforcement  powers over bank holding  companies,  including the power to
impose substantial fines and other civil and criminal penalties.

        From  time to time,  legislation  is  enacted  which  has the  effect of
increasing  the  cost of  doing  business,  limiting  or  expanding  permissible
activities,  or  affecting  the  competitive  balance  between  banks  and other
financial  institutions.  Proposals to change the laws and regulations governing
the  operations  and  taxation  of banks and other  financial  institutions  are
frequently made in Congress, in the California legislature,  and by various bank
regulatory agencies. No prediction can be made as to the likelihood of any major
changes or the impact such changes might have on the Company or the Bank.

Impact of Economic Conditions and Monetary Policies

        The  earnings and growth of the Bank are and will be affected by general
economic  conditions,  both domestic and international,  and by the monetary and
fiscal policies of the United States  Government and its agencies,  particularly
the FRB.  One  function  of the FRB is to  regulate  the  money  supply  and the
national  supply  of  bank  credit  in  order  to  mitigate   recessionary   and
inflationary  pressures.  Among  the  instruments  of  monetary  policy  used to
implement these objects are open market transactions in United States Government

<PAGE>10

securities,  changes in the discount rate on member bank borrowings, and changes
in reserve requirements held by depository  institutions.  The monetary policies
of the FRB have had a significant  effect on the operating results of commercial
banks in the past and are expected to continue to do so in the future.  However,
the effect of such  policies  on the future  business  and  earnings of the Bank
cannot be accurately predicted.

Risk Management

        Beginning in 1996,  FRB  examiners  were  instructed  to assign a formal
supervisory   rating  to  the  adequacy  of  an  institution's  risk  management
processes,  including  its  internal  controls.  The  five  ratios  are  strong,
satisfactory,  fair, marginal,  and unsatisfactory.  The specific rating of risk
management  and  internal  controls  will  be  given  significant   weight  when
evaluating  management  under the bank (CAMELS) and bank holding company (BOPEC)
rating systems.

Capital Adequacy Guidelines

        The FRB has adopted  risk-based  capital  requirements  for member banks
which require a minimum risk- based capital ratio of 8% (at least 4% in the form
of Tier 1 Capital).  "Tier 1" capital  excludes  goodwill and consists of common
equity,  non-cumulative perpetual preferred stock, and minority interests in the
equity  accounts  of  consolidated  subsidiaries.  "Tier 2" capital  consists of
cumulative and limited-life preferred stock,  mandatory convertible  securities,
subordinated  debt and,  subject  to  certain  limitations,  allowance  for loan
losses.  General  loan  loss  reserves  may  make  up  no  more  than  1.25%  of
risk-weighted  assets at year ended  1998.  At  December  31,  1998,  the Bank's
general loan loss reserve was 111.0% of risk  weighted  assets and thus 11.0% of
the general loan loss reserve was not eligible for inclusion in Tier 2 capital.

        The  Tier 1  risk-based  capital  ratio of the  Company  and the Bank at
December 31, 1998, was 11.7% and 10.4%, respectively.

        The requirements made regulatory capital  requirements more sensitive to
the differences in risk profiles among banking  institutions,  took  off-balance
sheet  items  into  account  when  assessing  capital  adequacy,  and  minimized
disincentives to holding liquid low-risk assets.  In addition,  the requirements
required  some  banking  institutions  to  increase  the  level of their  common
shareholders'  equity.  The risk-based capital ratio of the Company and the Bank
at December 31, 1998, was 13.0% and 11.7%, respectively.

        In 1990, the FRB instituted  minimum leverage ratio guidelines for state
member banks.  Effective  January 1, 1991,  capital  leverage  ratio  guidelines
replaced  the FRB's  total  and  primary  capital  guidelines  for  Banks  which
previously  required the  maintenance of a minimum total capital to total assets
ratio of 6% and a minimum  primary capital to assets ratio of 5.5%. The leverage
ratio guidelines required maintenance of a minimum ratio of 3% Tier 1 capital to
total assets for the most highly  rated bank  organizations.  Institutions  that
were less  highly  rated,  anticipating  significant  growth or subject to other
significant risks were required to maintain capital levels ranging from 1% to 2%
above the 3% minimum.  At December 31, 1998,  the leverage  ratio of the Company
and the Bank was 8.1% and 7.2%,  respectively.  The Bank has not been advised by
any  regulatory  agency that it is deficient with respect to the Tier 1 leverage
ratio.

        The Company does not presently  expect  compliance  with the  risk-based
capital  requirements or leverage guidelines to have a materially adverse effect
upon the business of the Company.  See  "Management's  Discussion and Analysis -
Capital Resources."

<PAGE>11

Recent Legislation and Legislative Proposals

        Federal  and  state  laws  applicable  to  financial  institutions  have
undergone  significant changes in more recent years. The most significant recent
federal  legislative  enactment's  are the  Riegle-Neal  Interstate  Banking and
Branching Efficiency Act of 1994 and the Riegle-Neal  Community  Development and
Regulatory  Improvement Act of 1994. Other  legislation which has been or may be
proposed to the Congress or the California Legislature and regulations which may
be proposed by the FRB,  the FDIC,  and the  Banking  Department  may affect the
business of the Company and the Bank. It cannot be predicted whether any pending
or  proposed  legislation  or  regulations  will be adopted  or the effect  such
legislation  or  regulations  may have upon the  business  of the Company or the
Bank.

        On  September  23,  1994,  the  President  signed  into  law the  Riegle
Community Development and Regulatory Improvement Act of 1994 which covers a wide
range of topics,  including  small  business  and  commercial  real  estate loan
securitization,  money  laundering,  flood insurance,  consumer home equity loan
disclosure  and  protection,  as well as the  funding of  community  development
projects and regulatory relief. On September 29, 1994, the President signed into
law the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate  Banking Act"),  which  eliminated  many of the previously  existing
restrictions  to interstate  banking and branching.  The Interstate  Banking Act
permits  full  nationwide  interstate  banking  to  adequately  capitalized  and
adequately  managed  bank  holding  companies  without  regard to  whether  such
transaction is expressly  prohibited under the laws of the state. The Interstate
Banking Act's branching provisions permit full nationwide interstate bank merger
transactions to adequately capitalized and adequately managed banks.

        On September 28, 1995, Governor Pete Wilson signed into law the Caldera,
Weggeland,  and Killea California  Interstate  Banking and Branching Act of 1995
(the "Caldera Weggeland Act"). The Caldera Weggeland Act, which became effective
on October  2, 1995,  opted into the  Interstate  Banking  Act's bank  branching
provision,  and adopted other provisions  consistent with the Interstate Banking
Act.

Formerly Pending Matters

        On  June  23,  1997,  the  FRB of San  Francisco  conducted  a  Consumer
Compliance and Community Reinvestment Act Examination. The revised report of the
FRB was  issued  on  November  21,  1997,  indicating  that the  Bank was  rated
"unsatisfactory"  relative  to  consumer  compliance,  and  "Needs  to  Improve"
relative to the Community  Reinvestment Act ("CRA"). The Company filed an appeal
with the FRB of San Francisco  contesting the Community  Reinvestment Act rating
of "Needs to Improve." The appeal was based mainly upon the misinterpretation of
data by the  examiners  which  resulted  in a "Less than  Satisfactory"  rating.
Pursuant  to the  appeal  procedure,  the FRB  reversed  itself,  and  issued  a
favorable  ruling to the  Company.  The Company  does not  anticipate  that this
matter will have any impact upon the results of operations of the Bank.

        The Board of Directors,  after due deliberation,  made the decision that
withdrawing  from the Federal Reserve system would provide the Bank with greater
strategic  opportunities  for expansion and customer  services in the future. On
December 3, 1997, the Bank made a formal application to the FDIC to convert from
a state member bank to a state  non-member bank. At that time, the Bank notified
the FRB in San Francisco of its intent.  On May 12, 1998, the Bank completed its
conversion to a  state-chartered  non-member bank insured by the Federal Deposit
Insurance Corporation, and withdrew from the Federal Reserve system. The Company
does not  anticipate  that this  matter will have any impact upon the results of
operations of the Bank.

<PAGE>12

Currently Pending Matters

        On June 30, 1998, the Bank purchased  approximately 29 acres of property
located at 2500 Fifth  Street,  Eureka,  California  95501.  This  property  was
purchased  as  a  site  for  the  future  Humboldt  Bank  Plaza  at  a  cost  of
approximately  $2.9  million  dollars.  On the date of  purchase,  the  property
contained a building that was partially leased to a pharmacy, a gas station, and
a trailer park.  The gas station was sold on August 4, 1998,  for $170,000.  The
lease to the pharmacy  expires on December 31, 1999,  which lease was generating
rent at December 31, 1998,  of $18,326 per month.  The lease to the trailer park
expires on September 9, 1999,  which lease was  generating  rent at December 31,
1998,  of $166.66 per month plus 12.5% of gross  trailer park rental  income and
0.5% of  additional  revenues.  The  Bank is  working  with an  architect  and a
construction company on plans to renovate the building and the parking lot. Upon
completion  of the  project  all of the Bank's  departments  that are  currently
leasing  premises  will be  relocated  to the  Humboldt  Bank  Plaza.  The  Bank
anticipates that the first of its departments will commence moving in during the
fourth quarter of 1999.

        On September 17, 1998, the Board of Directors  authorized  management to
file an application with the appropriate  regulators to establish a de novo bank
in Sacramento.  The California Department of Financial Institutions approved the
Company's  application  to establish  Capitol Valley Bank (In  Organization)  on
November 25, 1998.  Approval by the Federal Reserve Bank and the Federal Deposit
Insurance  Corporation  was  still  pending  as  of  December  31,  1998.  It is
anticipated that approval from both of these agencies will be forthcoming in the
first half of 1999, and that Capitol Valley Bank (In Organization) will open for
business at that time.

Year 2000 Issue

General

        The Company formed a committee of senior company  personnel in late 1997
to address the issue of computer  programs  and  embedded  computer  chips being
unable to  distinguish  between the year 1900 and the year 2000.  The  committee
meets on a regular basis to evaluate,  review progress, and make recommendations
on the various  phases of the Year 2000 project.  The Company is satisfied  with
the  progress  made to date and is on track to complete  the project in time for
the Year 2000 date change.

Project

        The Company-wide project is divided into seven major phases

        1.     The Awareness Phase
        2.     The Assessment Phase
        3.     The Vendor, Customer and Employee Notification Phase
        4.     The Vendor and Customer Response Review Phase
        5.     The Testing Phase
        6.     The Contingency Phase
        7.     The Renovation Phase

        The Awareness Phase consisted of gaining executive level support for the
resources  necessary to perform  compliance  work, for  establishing a Year 2000
project  team  and  for  developing an overall strategy that encompassed the in-

<PAGE>13

house core  system.  In  addition,  it  covered  out-sourced  systems,  vendors,
customers,   suppliers  and  correspondents.   The  Awareness  Phases  is  fully
completed.

        The  Assessment  Phase  consisted  of  assessing  the size,  scope,  and
complexity of the problem,  detailing  the magnitude of the effort  necessary to
address the Year 2000  project and the  preparation  of a Year 2000 action plan.
This phase  identified all hardware,  software,  network,  ATM and various other
processing platforms, and customers and vendor interdependencies affected by the
year 2000-date  change.  The  assessment  went beyond  informational  systems to
include  environmental systems that are dependent on embedded microchips such as
security systems, elevators and vaults. The Assessment Phase is fully completed.

        The Vendor, Customer, and Employee Notification Phase consisted of the 
following:

        i. The mailing of letters to critical vendors requesting  information on
their Year 2000 compliance plans and readiness.

        ii. The mailing of letters to and personal  contact with major customers
(with special emphasis given key loan customers),  to ascertain their awareness,
preparations and compliance plans relative to the Year 2000 problem.

        iii.  Company staff members were guest speakers at several service clubs
in the area outlining the Year 2000 problem.

        iv.  Meetings  were held with all staff  members  within the  Company to
advise  them of the Year 2000  problem,  and the steps the Company was taking to
ensure compliance.

        v.  The  Company's  Year  2000  Policy  statement,   as  well  as  other
informational  items,  has been  made  available  to both  customers  and  other
interested parties.

        The Vendor, Customer, and Employee Notification Phases is completed. The
Company, however, will continue to keep vendors, customers and employees updated
on its compliance progress and general Year 2000 issues.

        The Vendor and Customer Response Review Phase is ongoing. The Company is
continuing  to follow up with vendors and  customers  who have not yet responded
and with those whose responses were deemed less than  satisfactory.  The Company
is continuing to require all loan officers to include in their loan  write-ups a
discussion  of the  customer's  Year 2000  preparedness.  The  Company is of the
opinion that this phase will be a continuing project throughout 1999.

        The Testing Phase is a multifaceted process that is critical to the Year
2000  project  and  inherent  in each phase of the project  plan.  This  process
includes the testing of incremental changes to hardware and software components.
In addition to testing upgraded components,  connections with other systems will
be verified to ensure that internal and external  users accept all changes.  The
committee  will assure the effective  and timely  completion of all hardware and
software testing prior to final implementation and will have ongoing discussions
with their vendors of their testing efforts.  The Company has prepared,  and the
Board of Directors has approved,  the Company's Year 2000 Test Plan.  Several of
the  necessary  test scripts are completed and the Company is ahead of federally
mandated  Y2K  timelines.  Additional  testing  is  contemplated  due to a major
upgrade to the Company's  core system which was completed in late December 1998.
The  Company's core  system  was tested in late December 1998, and, except for a

<PAGE>14

few unrelated minor  exceptions,  was found  compliant.  Additional tests of the
Company's core system will be completed by the second  quarter of 1999.  Several
of the ancillary  systems have been tested without  incident.  The Company is on
pace for the timely  completion  of the  necessary  testing as  required  by its
regulatory agencies.

        The Contingency  Phase will consist of a  comprehensive  plan to address
remediation  and business  resumption  functions  that rely on mission  critical
systems.  The initial version of the  Contingency  Plan will be submitted to the
Board of Directors  for approval on January 21,  1998.  The Company  anticipates
that the Contingency Plan will be a living  document,  which will be continually
updated as necessary throughout 1999.

        The Renovation Phase will consist of renovating,  replacing and retiring
non-compliant  systems,  as well as  evaluating  Year  2000  code  enhancements,
hardware  and  software  upgrades,  system  replacements  and  other  associated
changes.  The  Company  anticipates  that the  Renovation  Phase  will  continue
throughout 1999.

Costs

        The total cost  associated  with required  modifications  to become Year
2000  compliant  is not  expected  to be  material  to the  Company's  financial
position.  The  estimated  total cost of the Year 2000 project is  approximately
$750,000.  A minimal  amount,  other than time of the committee  members and for
testing was expended as of December 31, 1998.  The Company is also expensing and
reserving $10,000 a month for possible loan losses caused by Year 2000 problems.
The  reserve as of  December  31,1998,  was  $100,000  and will be  $220,000  by
December 31, 1999.

Risks

        The failure to correct  material Year 2000 problems  could result in the
interruption  in,  or a  failure  of,  certain  normal  business  activities  or
operations.  Such failures could  materially and adversely  affect the Company's
results of  operations,  liquidity and financial  condition.  Due to the general
uncertainty  inherent  in  the  Year  2000  problem,   resulting  in  part  from
uncertainty of the Year 2000  readiness of third party  suppliers and customers,
the  Company  is unable to  specifically  determine  at this  time  whether  the
consequences  of Year 2000 failures will have a material impact on the Company's
results of operations,  liquidity or financial  condition.  However, its ongoing
Year 2000 efforts are expected to  significantly  reduce the Company's  level of
uncertainty  about the Year 2000 problem and, in particular  about the Year 2000
compliance  and readiness of its critical  vendors.  The Company  believes that,
with implementation of new business systems, if necessary, and the completion of
the project as scheduled, the possibility of significant interruptions of normal
operations should be reduced to a minimum.

Recent Accounting Pronouncements

SFAS No. 125

     In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 125,  "Accounting  for  Transfers  and  Servicing  of  Financial  Assets and
Extinguishment of Liabilities."  SFAS No. 125 requires that, after a transfer of
financial  assets,  an entity  recognize the  financial and servicing  assets it
controls and the liabilities it has incurred,  derecognize financial assets when
control has been  surrendered,  and derecognize  liabilities when  extinguished.
SFAS No. 125 is intended to provide consistent  standards by which a company may
distinguish transfers of financial assets that are sales from transfers that are

<PAGE>15

secured borrowings. SFAS No. 125 applies to transfers and servicing of financial
assets and extinguishment of liabilities  occurring after December 31, 1996, and
is to be  applied  prospectively--earlier  or  retroactive  application  is  not
permitted. Implementation of SFAS No. 125, beginning on January 1, 1997, did not
have a significant effect on the financial condition or results of operations of
the Company.

SFAS No. 128

        In February  1997,  the FASB issued SFAS No. 128,  "Earnings Per Share,"
which (i) replaces the presentation of primary earnings per share ("EPS") with a
presentation of basic EPS; (ii) requires dual  presentation of basic and diluted
EPS on the face of the consolidated  statements of income  regardless of whether
basic and diluted EPS are the same; and (iii) requires a  reconciliation  of the
numerator and  denominator  used in computing  basic and diluted EPS.  Basic EPS
excludes dilution of common stock equivalents and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding  for the period.  Diluted EPS reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
exercised or  converted  into common stock or resulted in the issuance of common
stock that then shared in the  earnings  of the entity.  Diluted EPS is computed
similarly to fully diluted EPS pursuant to Accounting  Principles  Board Opinion
No. 15. SFAS No. 128 is effective  for financial  statements  issued for periods
ending after December 15, 1997,  including interim periods.  Earlier application
is not permitted. SFAS No. 128 requires restatement of all prior period EPS data
presented.

SFAS No. 129

        In February  1997,  the FASB also issued  SFAS No. 129,  "Disclosure  of
Information about Capital Structure." This pronouncement  established  standards
for the disclosure of  information  about an entity's  capital  structure and is
effective for financial  statements issued for periods ending after December 15,
1997.  The adoption of this  pronouncement  is expected to have no impact on the
financial statements of the Company.

SFAS No. 130

        In June 1997,  the FASB issued SFAS No.  130,  "Reporting  Comprehensive
Income."  SFAS No.  130  established  standards  for  reporting  and  display of
comprehensive  income  which is  defined  as the  change in equity of a business
enterprise during a period from nonowner sources.  SFAS No. 130 is effective for
years  beginning  after  December 15, 1997,  and  requires  reclassification  of
financial statements for all prior years presented. The adoption of SFAS No. 130
is expected to impact the presentation of financial information only.

SFAS No. 131

        In June 1997,  the FASB also  issued SFAS No.  131,  "Disclosures  about
Segments of an Enterprise and Related Information." SFAS No. 131 requires public
companies  to report  financial  and  descriptive  information  about  operating
segments in annual financial  statements and requires selected information about
operating  segments  to be  reported  in  interim  financial  reports  issued to
shareholders. Operating segment financial information is required to be reported
on the basis that it is used internally for evaluating  segment  performance and
allocation of resources.  SFAS No. 131 is effective for financial statements for
periods  beginning  after  December  15,  1997,  and  requires  presentation  of
comparative  information for prior periods  presented.  The adoption of SFAS No.
131 is  expected  to impact the way the Company  reports  information  about its
operations.

<PAGE>16

ITEM 2 - DESCRIPTION OF PROPERTIES

        The  Bank  owns a  building  located  at 701  Fifth  Street  in  Eureka,
California.  This  facility  houses the  Bank's  Eureka  branch,  as well as the
Company's  Administration,   Alternative  Investment,   Central  Services,  Data
Processing,  Advertising and Marketing,  Facilities Management,  Operations, and
Human Resources Departments.

        The Bank also owns branch  buildings  located at: (i) 1360 Main  Street,
Fortuna,  California;  (ii) 1063 G Street,  Arcata,  California;  and (iii) 2095
Central  Avenue,  McKinleyville,  California.  The Bank also owns a parking  lot
located at 404 H Street, Eureka, California.

        In 1994, the Bank purchased from the RTC a bank building  located at 612
G Street,  Eureka,  California.  This facility now houses the Bank's SBA, Lease,
Loan Supervision, Credit Card Issuing, Compliance, and Real Estate Departments.

        In early 1995, the Bank purchased the following  three  properties  from
U.S. Bank to operate as branches: (i) 358 Main Street, Loleta, California;  (ii)
39171  Highway  299,  Willow  Creek,  California;  and  (iii)  409 Main  Street,
Weaverville, California.

        The Bank  leases on a  month-to-month  basis  for a payment  of $650 per
month an  approximately  1,600 square foot building located at 525 Fifth Street,
Eureka,  California. The Company has donated, as a community service, the use of
this property to the Redwood Coast Music Festivals for its headquarters office.

        On March 1, 1996,  the  Company  executed a ten year  option to lease an
approximately  10,000 square foot, single story office building located at 605 K
Street, Eureka, California, to house the Company's Heritage Club Department, the
Merchant Bankcard Department,  and the Credit Card Issuing Department. The lease
commenced  on March 1,  1996,  and was for a period of ten years  with a monthly
lease payment of $4,500.  The lease also  contained an option to renew the lease
for two additional  five-year terms. The Heritage Club Department and the Credit
Card Issuing  Department  moved to other locations in 1998 and this facility now
houses only the Merchant Bankcard Department.

        On May 15,  1996,  the Company  executed a ten-year  option to lease 773
square feet in a Tops Sentry Market located at West Highway 299 and Martin Road,
Weaverville,  California, to house the Weaverville Supermarket Branch. The lease
commenced  on May 15,  1996,  and was for a period of ten years  with an initial
monthly  lease  payment of $1,725,  to  increase  to $2,030 per month when store
customer  count  reached  15,000.  The rent at November 1, 1998,  was $2,030 per
month.  The lease also contained an option to renew the lease for two additional
five-year  terms.  The Company  elected to close this office and  consolidate it
with the  Weaverville  branch on November 15, 1998.  The Company is  negotiating
with the landlord for the  cancellation  of the lease.  The Company  anticipates
these negotiations will be concluded in the first quarter of 1999.

        On  February 6, 1997,  the Company  executed a month to month lease with
Rainbow Mini Storage for space in which to store  Company  equipment  located at
639 West Clark Street,  Eureka,  California.  The lease commenced on February 6,
1997,  and two  additional  spaces  have  now been  leased.  The  total  monthly
lease-payment as of December 31, 1998, is $328.

<PAGE>17

        On May 9, 1997, the Company  assumed a lease on an  approximately  1,800
square foot building  located at 767 Redwood Drive,  Garberville,  California to
house the  Garberville  Branch.  On June  25,1998,  the lease was  terminated by
mutual consent with the landlord,  with the Company making a one time negotiated
payment of $15,600 to cover future monthly lease payments.

        On September 1, 1997, the Company  executed a ten-year lease with Sentry
III for an  approximately  3,100  square  foot  building  located at 915 Redwood
Drive,  Garberville,  California  to house  the  Garberville  Branch.  The lease
commenced  on  September  1,  1997,  and was for a period of ten  years  with an
initial monthly payment of $2,550. The lease also contains two five-year options
to extend the lease.

        On October 10, 1997,  the Company  executed a one year lease with ReProp
Investments,  Inc. for office space of approximately  1,945 square feet, located
at 555 H  Street,  Suite B and C,  Eureka,  California  to house  the  Financial
Department.  The lease  commenced on October 13, 1997, and terminated on October
31, 1998,  with a monthly  lease  payment of $1,945.  At December 31, 1998,  the
lease was month-to-month with a payment of $1,945.

        On November 28, 1997,  the Company  executed a month to month lease with
1991 Rev Trust c/o Bob Gardner for office  space of  approximately  1,100 square
feet,  located at 710 Fifth  Street,  Eureka,  California.  The lease  commenced
December 3, 1997,  with a sixty-day  notice to  terminate,  and a monthly  lease
payment of $475.  The Company  canceled this lease on July 10, 1998. On November
23,  1998,  the  Company  executed a ten month lease with 1991 Rev Trust c/o Bob
Gardner for office space of approximately 1,100 square feet at 710 Fifth Street,
Eureka,  California.  The lease  commenced  November 23, 1998, and terminates on
September 30, 1999,  with monthly lease payments of $500. This office houses the
Credit Department.

        On February 20, 1998,  the Company  executed a month to month lease with
Real Property  Management & Maintenance for office space located at 539 G Street
Eureka, California to house the Management Information Services Department.  The
lease commenced on March 1, 1998, with a monthly lease payment of $650.

        On July 22, 1998,  the Company  executed a one-year  lease with Noel and
Davenport for office space located at 2830 G Street, Eureka, California to house
the Heritage  Club.  The lease  commenced on July 20, 1998,  and  terminates  on
August 1, 1999,  with an option to renew for one  additional  year.  The monthly
lease payment is $1,300.

        On October 1, 1998,  the  Company  executed a ten year lease with Retail
Portfolio 30-1, LLC for office space of approximately  3,955 square feet located
at 1601 Douglas Boulevard, Roseville California. The lease commenced on November
3, 1998, will expire October 31, 2008, but may be extended for three  additional
terms of five years each. The initial  twelve-month  lease payment is $6,921.25,
which can be increased on November 3 of each year  thereafter  by the greater of
2% or the percentage increase in the Consumer Price Index.

        Rental  expense for all leases of premises was $269,000,  $128,000,  and
$94,000 for the years ended  December 31, 1998,  1997,  and 1996,  respectively.
Rental income for all leases of premises was $177,000,  $65,000, and $69,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.

<PAGE>18

ITEM 3 - LEGAL PROCEEDINGS

        The  Company is a party to claims and legal  proceedings  arising in the
ordinary  course  of  business.  After  taking  into  consideration  information
furnished  by legal  counsel to the Company as to the current  status of various
claims and  proceedings  to which the Company is a party,  management  is of the
opinion that the ultimate aggregate liability  represented thereby, if any, will
not have a  material  adverse  effect on the  financial  position  or results of
operations of the Company.

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

        None applicable.


                                     PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        Trades in the Company's common stock are made through Everen Securities,
Inc.,  Sutro and Company  (since July 1, 1997),  and Paine Webber (since July 1,
1997).  The Company's common stock is traded on the OTC Bulletin Board under the
symbol,  "HBEK". The Company is giving consideration to seeking a listing of its
common stock on the NASDAQ SmallCap market.

        For the year ended December 31, 1998, the Company was aware of 56 trades
of the Company's  common stock  totaling  40,900  shares of common  stock.  This
compared with 51 trades  totaling  104,932 shares of the Company's  stock in the
year ending December 31, 1997. Since all of those transactions were individually
negotiated between the buyer and seller through Everen  Securities,  Inc., Sutro
and Company,  or Paine Webber as  intermediary,  the Company was not informed of
the  exact   purchase  price  for  the  common  stock  sold  in  each  of  these
transactions.  The Company,  however,  was informed by Everen Securities,  Inc.,
Sutro and Company,  or Paine Webber of the high and low bid price for the common
stock  during the last two fiscal  years as follows,  but no  assurances  can be
given that these high and low bid prices  reflected  the actual  market value of
the  Company's  common  stock.  In  addition,   the  prices  indicated   reflect
inter-dealer prices, without retail mark-up, mark down or commission and may not
represent actual transactions.

                                     NUMBER OF
YEAR          QUARTER                 TRADES          HIGH BID        LOW BID
----          -------                ---------        --------        ------- 

-1997-      First Quarter                 5            $23.00          $21.13
            Second Quarter (1)            8            $29.00          $23.00
            Third Quarter                23            $31.00          $27.50
            Fourth Quarter               15            $31.25          $29.00

-1998-      First Quarter                15            $31.50          $28.00
            Second Quarter (2)           18            $32.50          $25.00
            Third Quarter                 7            $31.25          $27.00
            Fourth Quarter               16            $31.00          $24.00

(1)     During the second quarter of 1997, the Company declared a 10% stock 
        dividend.

(2)     During the second quarter of 1998, the Company declared a 10% stock 
        dividend.

<PAGE>19

        As of  December  31,  1998,  the  shares  of the  Company  were  held by
approximately  572 shareholders  compared to 582 shareholders as of December 31,
1997, not including those held in street name by several brokerage houses. As of
December 31, 1998, a total of 357,824  shares of the Company's  common stock are
subject to outstanding  options.  The Company is the sole shareholder of the one
share of Humboldt Bank common stock.

        The Company  distributed a 10% stock dividend on the common stock on May
30, 1996,  1997,  and 1998.  Because there is a minimal  trading  market for the
Company's  common stock,  the Company  cannot  determine the effect of the stock
dividends  on the market  value of the stock.  The Company has never  declared a
cash dividend on the common stock.  Payments of future dividends will be subject
to the  discretion  of the Board of Directors and will depend upon the Company's
earnings, financial condition, capital requirements, regulatory requirements and
such other factors, as the Board of Directors deems appropriate.

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS

Selected Financial Data

        The following  table sets forth certain  selected  financial data of the
Company (on a consolidated basis with the Bank) for the years ended December 31,
1998,  1997,  and 1996,  respectively,  and should be read in  conjunction  with
Management's Discussion and Analysis and with the financial statements presented
herein.

<TABLE>
<CAPTION>


Year Ended December 31:                                - 1998 -    - 1997 -     - 1996 -
-----------------------                                ---------   --------     --------
(Dollars in thousands except per share data)

<S>                                                   <C>          <C>         <C> 
Results of Operations:
    Interest Income                                     23,504      20,053       16,562
    Interest Expense                                     7,742       7,024        5,549
Net Interest Income:                                    15,762      13,029       11,013
    Provision for Loan Losses                            2,124         773          533
    Other Income                                        12,473       8,109        5,747
    Other Expense                                       19,578      15,496       11,325
    Income Before Income Taxes                           6,533       4,869        4,902
    Provision for Income Taxes                           2,517       1,611        1,926
Net Income:                                              4,016       3,258        2,976
Per Share Data (1):
    Net Income                                           $2.26       $1.88        $1.77
    Net Income Assuming Dilution                         $2.06       $1.68        $1.59
    Cash Dividend Declared                                 N/A         N/A          N/A
    Book Value Per Share                                $15.58      $14.94       $13.89
    Weighted Average Shares Outstanding              1,773,788   1,729,448    1,686,129
    Weighted Average Shares Outstanding - Diluted    1,951,623   1,943,745    1,870,732
Balance Sheet at December 31:
    Assets                                             319,975     284,087      214,738
    Loans                                              186,038     157,512      142,824
    Deposits                                           283,968     255,186      192,576
    Shareholders' Equity                                27,848      23,554       19,600

<PAGE>20

Financial Ratios:
    Return on Average Assets                              1.22        1.15         1.48
    Return on Average Shareholders' Equity               16.02       14.50        16.96
    Average Shareholders' Equity to Average Assets        7.64        7.93         8.80

</TABLE>

(1)  All share and share data have been retroactively  adjusted to reflect stock
     dividends.

        The following  discussion,  presented on a consolidated basis,  analyzes
the  financial  condition  and results of operations of the Company and the Bank
for the  twelve-month  period ended December 31, 1998. The discussion  should be
read in conjunction with the Company's financial  statements and notes presented
herein.

Summary of Operations

        The  Company  reported  net  income  of  $4,016,000  for the year  ended
December 31, 1998,  compared to $3,258,000 for the year ended December 31, 1997.
The increase in net income is attributable to an increase of $2,733,000 or 21.0%
in net interest income, an increase in other  non-interest  income of $4,364,000
or 53.8%.  These  increases  were offset by an increase  in  provision  for loan
losses of $1,351,000 or 174.8.0%,  an increase in other non interest  expense of
$4,082,000 or 26.3% and an increase in provision for income taxes of $906,000 or
56.2%.  The increase in net interest  income is  attributable to the substantial
increase in earning assets and a slight increase in the net interest yield.  The
increase in other non interest  income is  attributable  to increases in service
charges on deposit accounts,  increases in gains related to FNMA servicing,  and
substantial  increases in Lease  Department,  Merchant  Bankcard  Department and
Credit Card Issuing  Department income which was offset in part by a decrease in
gains on sale of loans and  investments.  The  increase  in other  non  interest
expense is  attributable  to increases in salaries  and employee  benefits,  net
occupancy and equipment expenses, data processing expense, stationery and supply
expense,  telephone  expense,  board  related  expense,  OREO  expense,  seminar
expense,  sundry loss expense,  non-local travel expense,  and Merchant Bankcard
expenses  which  were  offset in part by a  decrease  in other  outside  service
expense,  credit report expense, and Credit Card Issuing Department expense. The
increase in provision  for loan losses is  attributable  to an increase in loans
originated  and to an increase in loans  charged off by the Credit Card  Issuing
Department and Lease  Department.  The increase in provision for income taxes is
attributable to the increase in pre-tax income.

        The  Company  reported  net  income  of  $3,258,000  for the year  ended
December 31, 1997,  compared to $2,976,000 for the year ended December 31, 1996.
The increase in net income is attributable to an increase of $2,016,000 or 18.3%
in net  interest  income,  and an  increase  in  other  non-interest  income  of
$2,362,000 or 41.1%. These increases were offset by an increase in provision for
loan losses of $240,000  or 45.0% from 1996,  an increase in other non  interest
expense of $4,171,000 or 36.8%,  and a decrease in provision for income taxes of
$315,000 or 16.4%.  The increase in net interest  income is  attributable to the
substantial  increase  in  earning  assets  offset by a slight  decrease  in net
interest  yield.  The increase in other non interest  income is  attributable to
increases in service  charges on deposit  accounts,  fees for customer  services
plus substantial increases in Lease Department, Merchant Bankcard Department and
Credit Card Issuing  Department income which was offset in part by a decrease in
gains on sale of loans and  investments.  The  increase  in other  non  interest
expense is  attributable  to increases in salaries  and employee  benefits,  net
occupancy and equipment  expenses,  stationery and supplies,  telephone expense,
travel expense,  postage  expense,  other outside service  expense,  Credit Card
Issuing  Department and Merchant Bankcard expenses which was offset in part by a
decrease in FDIC expense and Data Processing expense. The increase  in provision

<PAGE>21

for loan losses is  attributable  to an increase in loans  originated  and to an
increase  in loans  charged-off  by the  Credit  Card  Issuing  Department.  The
decrease  in  provision  for income  taxes is  attributable  to the  increase in
pre-tax income,  which was offset by the effect of deferred taxes. While pre-tax
income  increased the  provision  for income taxes  decreased as a result of the
Company taking advantage of some deferred tax benefits.

Net Interest Income

        Net interest  income  represents the excess of interest  income and loan
fees earned by the Company on its earning assets over the interest  expense paid
on its interest  bearing  liabilities  and other  borrowed  money.  Net interest
income as a percentage of average  earning assets is referred to as net interest
margin. The levels of interest-earning  assets and interest-bearing  liabilities
as well as changes in interest  rates affect the level of net  interest  income.
During periods of rapidly changing interest rates, the Company's earnings can be
significantly  affected, as interest rates on the majority of its earning assets
reflect  changes in interest  rates  immediately,  while  interest rates paid on
liabilities,  such as time certificates of deposit,  change only at the maturity
of the deposit certificate.

        Net  interest  income  for  1998  totaled   $15,762,000   compared  with
$13,029,000 in 1997. The increase in net interest  income was  attributable to a
significant  increase in earning  assets and a slight  increase in net  interest
yield.  The yield on loans  increased by 0.20  percent,  over the same period in
1997 and the cost of deposits decreased 0.31 percent. The reference rate used by
the Company to price a  significant  portion of its loan  products  was 7.75% at
December 31, 1998,  and was 8.50% at December  31, 1997.  Total loans  comprised
66.0% of average earning assets in 1998 compared with 68.2% in 1997.

        Net  interest  income  for  1997  totaled   $13,029,000   compared  with
$11,013,000 in 1996. The increase in net interest  income was  attributable to a
significant  increase in earning assets  somewhat offset by a slight decrease in
net interest  yield.  The yield on loans decreased by 0.25 percent over the same
period in 1996 and the cost of deposits  decreased  0.04 percent.  The reference
rate used by the Company to price a significant portion of its loan products was
8.50% at  December  31,  1996.  The loan  portfolio  comprised  68.2% of average
earning assets in 1997 compared with 73.1% in 1996.

        Loan fees  included in net interest  income were  $1,366,000 at December
31, 1998, $729,000 at December 31, 1997, and $802,000 at December 31, 1996.



         [the remainder of this page has been intentionally left blank]

<PAGE>22

        Interest  income  may be  analyzed  by  segregating  the volume and rate
components of interest  income and interest  expense.  The following  table sets
forth an analysis of the increases and decreases in interest income and interest
expense in terms of changes in average  volume and  average  rates for the years
ending December 31, 1998 and 1997.

               ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSES
                      INCREASE (DECREASE) DUE TO CHANGE IN
                                 VOLUME AND RATE


<TABLE>
<CAPTION>


                                          1998 OVER 1997                  1997 OVER 1996
                                          -------------                   --------------
INCREASE/DECREASE
IN INTEREST INCOME:
(Dollars in Thousands)                 VOLUME      RATE     TOTAL       VOLUME      RATE      TOTAL
                                       ------      ----     -----       ------      ----     ------      
<S>                                    <C>          <C>     <C>          <C>         <C>      <C>  
Loans                                  2,451        350     2,801        1,842       346      2,188
Securities                             1,220       (516)      704          976        10        986
Fed Funds Sold                           (98)        (2)     (100)         213        25        238
Fed Reserve Stock                        -0-        -0-       -0-          -0-       -0-        -0-
Due From Banks Time                       13         33        46           63        16         79
Other Interest                           -0-        -0-       -0-          -0-       -0-        -0-
Total Increase/decrease                3,586       (135)    3,451        3,094       397      3,491

Increase/decrease in
Interest Expense:

Now & Super Now                           28        (11)       17           29        (2)        27
Savings                                   19        -0-        19           73       (29)        44
Money Market                              88       (201)     (113)         114        87        201
Certificates of Deposit                  795       (126)      669        1,106        95      1,201
Borrowed Funds                           174        (48)      126            3       -0-          3
Other                                    -0-        -0-       -0-           (1)      -0-         (1)
Total Increase/decrease                1,104       (386)      718        1,324       151      1,475
Total Change in Net Interest Income    2,482        251     2,733        1,770       246      2,016

</TABLE>


Provision for Loan and Lease Losses

        The  provision  for loan and lease losses which is charged to operations
is based on the  quality of the loan  portfolio,  the amount of net loan  losses
incurred  and  management's  estimate of  potential  future  losses  based on an
ongoing evaluation of the portfolio risk and economic conditions.

        The provision for loan and lease losses in 1998 was $2,124,000  compared
with $773,000 in 1997 and $533,000 in 1996.  The ratio of the allowance for loan
and lease losses to total gross loans and leases equaled 1.68%,  1.48% and 1.48%
at  December  31,  1998,  1997,  and 1996,  respectively.  The  increase  in the
provision from 1997 to 1998 is attributable  to an increase in loans  originated
and an increase in loans  charged-off by the Credit Card Issuing  Department and
the Lease Department. The increase in the provision from 1996 to 1997 was due to
an increase in loans  originated and to an increase in loans  charged-off by the
Credit Card Issuing Department.

<PAGE>23

        Net charged-off  loans were  $1,439,000,  $549,000 and $256,000 in 1998,
1997, and 1996,  respectively.  These amounts represented (0.82)%,  (0.36)%, and
(0.19)%, respectively, of average loans outstanding.

Non-Interest Income

        Non-interest  income  including  realized gains and losses on securities
for 1998 totaled $12,473,000, an increase of $4,364,000 or 53.8% from $8,109,000
earned in 1997. Service charges on deposit accounts increased $797,000 or 61.3%,
fees for customer services increased $2,561,000 or 45.3%, all other non-interest
income increased $912,000 or 86.8%,  Proportionate Income from Bancorp Financial
Services increased  $196,000 or 100% and realized gains on securities  decreased
$102,000 or 100% from the prior year.  The  increases  are  attributable  to the
activities of the Lease, Merchant Bankcard,  Credit Card Issuing and Alternative
Investment Departments, plus an increase in service charges on deposit accounts.
The  increase in gain on sale of loans is  attributable  in part to selling some
portfolio  loans  at a gain.  The  decrease  in gain on sale of  investments  is
attributable to fact that no investments were sold in 1998.

        Non-interest  income  including  realized gains and losses on securities
for 1997 totaled $8,109,000,  an increase of $2,362,000 or 41.1% from $5,747,000
earned in 1996. Service charges on deposit accounts increased $591,000 or 83.4%,
fees for  customer  services  increased  $2,626,000  or  61.3%,  net  investment
securities  gain/loss  decreased by $576,000 or 85.0%, and gain on sale of loans
decreased  by  $279,000  or  372.0%  from the  prior  year.  The  increases  are
attributable  to the  activities of the Lease,  Merchant  Bankcard,  Credit Card
Issuing  and  Alternative  Investment  Departments,  plus an increase in service
charges  on  deposit  accounts.  The  decrease  in  gain on  sale  of  loans  is
attributable  in part to selling some portfolio loans at a loss. The decrease in
gain on sale of investments is attributable to selling more  investments in 1996
than in 1997 to fund loans.

Non-Interest Expense

        Non-interest  expense  for  1998  totaled  $19,578,000  an  increase  of
$4,082,000 or 26.3% from 1997.  Salaries and employee  benefits  represented the
single largest  component of non-interest  expense:  $9,151,000 or 46.7% in 1998
and $6,806,000 or 43.9% in 1997.  Full time equivalent  employees  numbered 250,
209 and 175 on December 31, 1998, 1997, and 1996, respectively.

        Non-interest  expense  for 1997  totaled  $15,496,000,  an  increase  of
$4,171,000   or  36.8%  from  1996.   Non-interest   expense  for  1996  totaled
$11,325,000, an increase of $2,176,000 or 23.8% from 1995. Salaries and employee
benefits  represented  the single  largest  component of  non-interest  expense:
$6,806,000 or 43.9% in 1997, and $5,592,000 or 49.4% in 1996.

        Net  occupancy  and  equipment  expense  increased  $245,000  or 9.9% to
$2,711,000 in 1998. This increase can be attributed to increased maintenance and
repairs on older equipment,  and increased  rental expense,  partially offset by
increased rental income.

        Net  occupancy  and  equipment  expense  increased  $674,000 or 37.6% to
$2,466,000 in 1997.  This increase can be in part  attributable  to depreciation
expense  related to the purchase of an in-house  computer  system,  a local area
network and a wide area  network as well as the purchase of furniture & fixtures
and leasehold  improvements at the Garberville  Branch,  the Merchant  Bankcard,
Credit  Card  Issuing  departments  at  605 K Street,  Eureka,  California,  the

<PAGE>24


Cashiers  Department  at  555  H  Street,   Eureka,   California  and  increased
maintenance and repairs on older equipment.

        Other  expenses,   excluding  salaries  and  related  benefits  and  net
occupancy and  equipment  expenses,  increased  $1,492,000 or 24.0% in 1998 from
1997, and  $2,283,000 or 57.9% in 1997 from 1996,  primarily due to the merchant
credit card program in 1998 and the credit card program in 1997.  The  following
table  summarizes the significant  components of non-interest  expense for 1998,
1997, and 1996.

                              NON-INTEREST EXPENSE

<TABLE>
<CAPTION>


                                                         DOLLAR        %        DOLLAR       %
                                                         CHANGE     CHANGE      CHANGE     CHANGE
(Dollars In Thousands)    12/31/98  12/31/97  12/31/96    1998      VS 1997      1997      VS 1996
                          --------  --------  --------   ------     -------     ------     -------
<S>                     <C>         <C>       <C>       <C>        <C>         <C>        <C> 
Salaries & Related
  Benefits                 9,151     6,806     5,592      2,345       34.5%      1,214       21.7%
Fixed Assets               2,711     2,466     1,792        245        9.9%        674       37.6%
Prof. Services             1,123     1,342       693       (220)     (16.4)%       649       93.7%
Credit Card Program          346     1,021       170     (1,012)     (74.5)%       851      500.6%
Stationery, Supplies
  & Postage                  884       887       542         (3)      (0.3)%       345       63.7%
Intangible Expense           372       426       372        (54)     (12.7)%        54       14.5%
Merchant Credit
Card Program               2,665       822       434      2,180      449.5%        388       89.4%
FDIC & Other Ins.            186       164       480         22       13.4%       (316)     (65.8)%
Advertising                  247       265       235        (18)      (6.8)%        30       12.8%
Development                  249       242       129          7        2.9%        113       87.6%
Telephone & Travel           598       478       424        120       25.1%         54       12.7%
Data Processing/
  ATM Expense                324       170       199        154       90.6%        (29)     (14.6)%
Other Expense                723       407       263        316       77.6%        144       54.8%
TOTAL:                    19,578    15,496    11,325      4,082       26.3%      4,171       36.8%

</TABLE>


Provision for Income Taxes

        The provision  for income taxes totaled  $2,517,000 in 1998, an increase
of $906,000 or 56.2% from 1997,  and in 1997 totaled  $1,611,000,  a decrease of
$315,000 or 16.4% from 1996.  The  increase in 1998 and the  decrease in 1997 in
provision for income taxes was the result of increased  pre-tax income partially
offset by the Company's taking advantage of some deferred tax benefits. The 1998
effective tax rate of 38.5% and the 1997 effective tax rate of 33.1% on reported
income  was below the  expected  statutory  federal  rate of 34.0% and the state
franchise tax rate of 10.8% (net of the federal benefit)  principally because of
exemptions  for  Enterprise  Zone loans for state tax purposes,  exemptions  for
Municipal  obligations  for  federal  purposes,   Keyman  Insurance,  and  other
temporary differences.

Loans

        The Company  concentrates  its lending  activities in  commercial,  real
estate  construction,  real  estate  related  and  consumer  loans  made  almost
exclusively to individuals and businesses within Northern California  and  lease

<PAGE>25

receivables  and credit cards  throughout the nation.  At December 31, 1998, the
Company had total gross loans  outstanding  of $182.1 million and loans held for
sale of $7.7 million.  This represented 66.8% of total consolidated deposits and
59.3% of total  consolidated  assets of the Company.  At December 31, 1997,  the
Company had total gross loans  outstanding  of $160.6 million and loans held for
sale of $48 thousand.  This represented 63.0% of total consolidated deposits and
56.6% of total consolidated  assets. At December 31, 1996, the Company had total
gross  loans  outstanding  of  $145.7  million  and  loans  held for sale of $63
thousand.  This represented  75.7% of total  consolidated  deposits and 67.9% of
total consolidated assets.

        The Company offers a variety of commercial  lending services,  including
revolving lines of credit, working capital loans,  equipment financing,  letters
of credit and inventory financing. Typically, commercial loans are floating rate
obligations and priced based on the Company's  reference rate. The Company makes
loans to finance the  construction  of  residential,  commercial  and industrial
properties and to finance land acquisition and development. The Company's single
family real estate  construction  loans  typically have a maturity of up to nine
months and are  secured  by deeds of trust and  usually do not exceed 90% of the
appraised value of the home to be built. Land development loans typically have a
maturity  of twelve to  twenty-four  months;  have a  floating  rate tied to the
Company's  reference rate; usually do not exceed 75% of the appraised value; are
secured  by a  first  deed of  trust  and,  in the  case  of  corporations,  are
personally  guaranteed.  When the total amount of a loan would otherwise  exceed
the  Company's   legal  lending  limit,   the  Company  seeks  other   financial
institutions to facilitate the extension of credit. Real estate construction and
development loans as a percentage of total gross loans outstanding were 11.3% at
December 31, 1998, compared to 12.6% at December 31, 1997, and 14.5% at December
31, 1996.

        Risks  associated  with real estate  construction  and land  development
loans are generally  considered higher than risks associated with other forms of
lending in which commercial banks traditionally engage. The concentration in the
real  estate  construction  and  land  development  loan  portfolio  has been on
residential real estate  construction  loans. The California  economy  exhibited
signs  of  recovery  in 1997 and 1998  and  sales  of  single-family  residences
exhibited a small  upturn.  While the Company is  continuing to fund real estate
construction  and  land  development  commitments,   underwriting   requirements
continue to be conservative.

        Real  estate  residential  loans as a  percentage  of total  gross loans
outstanding  were 15.1% at December 31, 1998,  compared to 16.9% at December 31,
1997, and 21.6% at December 31, 1996.  The decrease in  residential  real estate
loans is  attributable  to the sale of portfolio loans during 1998 and 1997. The
higher  volume of  residential  real estate loans in 1996 is  attributable  to a
single-family residential loan promotion commenced in the last quarter of 1995.

        Real estate  commercial and agricultural  loans as a percentage of total
gross loans  outstanding  were 44.1% at December 31, 1998,  compared to 41.0% at
December 31, 1997,  and 41.9% at December 31, 1996.  The Company  entered into a
number of SBA  guaranteed  loans and has loans where SBA has a subordinate  lien
position. These loans are eligible for sale on the secondary market. The Company
chose to sell two such  loans in 1998 but did not to sell any such loans in 1997
or 1996. Additional SBA loans could be sold in 1999 if economically justified.

        Consumer loans include loans to individuals,  business customers, dealer
auto loans and credit card related plans.  Automobile loans were $1.2 million or
15.3%,  mobile home loans were $0.1  million or 1.6%,  personal  loans were $0.8
million or 10.2% and credit  cards and related  plans were $5.7 million or 72.9%

<PAGE>26

of total consumer loans at December 31, 1998. Automobile loans were $1.4 million
or 14.3%,  personal  loans were $0.7 million or 7.8%,  other consumer loans were
$0.1  million or 1.4% and credit  cards and related  plans were $7.3  million or
76.5% of total consumer loans at December 31, 1997.  Automobile  loans were $1.5
million or 34.0%,  dealer auto loans were $0.3 million or 5.5%,  personal  loans
were $0.5 million or 10.8%,  other  consumer loans were $43 thousand or 0.9% and
credit  cards and  related  plans were $2.2  million or 48.8% of total  consumer
loans at December 31, 1996.

        Lease  financing  loans were $9.9  million or 5.4% of total  gross loans
outstanding at December 31, 1998, $8.7 million or 5.4% at December 31, 1997, and
$3.2 million or 2.2% at December 31, 1996. The increase in Lease financing loans
in 1998 and 1997 is mostly attributable to small ticket leases purchases.

        Loans held for sale totaled  $7,677,000 at December 31, 1998, $48,000 at
December 31, 1997, and $63,000 at December 31, 1996, and represent single-family
residential  mortgage loans  originated by the Company.  Loans are classified as
held for sale when the  Company  is  waiting  to sell the loan in the  secondary
market to FNMA.

        The following  table sets forth certain trends in loans  outstanding and
the composition of the loan portfolio for 1998, 1997, and 1996.

<TABLE>
<CAPTION>


                                    12/31/98              12/31/97               12/31/96
(Dollars in Thousands)               AMOUNT       %        AMOUNT        %        AMOUNT      %
                                    --------    -----     --------     -----     --------   -----

<S>                                  <C>        <C>        <C>         <C>        <C>       <C>  
Real Estate-Const & Land Dev         20,667     11.4%      20,165      12.6%      21,205    14.5%
Real Estate-Residential 1-5          27,549     15.1%      27,205      16.9%      31,456    21.6%
Real Estate-Commercial & Ag          80,197     44.0%      65,772      41.0%      61,030    41.9%
Commercial, Industrial & Ag          33,981     18.7%      28,091      17.5%      20,559    14.1%
Lease Financing                       9,867      5.4%       8,732       5.4%       3,168     2.2%
Consumer Loans                        7,782      4.3%       9,502       5.9%       4,529     3.1%
State & Political Loans               1,512      0.8%         675       0.4%       2,875     2.0%
Other                                   585      0.3%         502       0.3%         850     0.6%
Total Gross Loans                   182,140      100%     160,644       100%     145,672     100%
Less Deferred Loan Fees                (724)                 (809)                  (765)
Less Allowance For Loan Losses       (3,055)               (2,371)                (2,146)
Total Net Loans                     178,361               157,464                142,761
Loans Held For Sale                   7,677                    48                     63
TOTAL LOANS AND LEASES              186,038               157,512                142,824

</TABLE>

<PAGE>27

        The  table  below   summarizes  the  maturity   and/or  next  re-pricing
opportunities of the Company's loan portfolio as of December 31, 1998.

<TABLE>
<CAPTION>


Loans Maturing and/or                            Closed End
Re-pricing Opportunity                           Loans 1-4           All Other
(Dollars in Thousands)                         Single Family      Loans and Leases            Total
                                               -------------      ----------------          --------      

<S>                                           <C>                <C>                       <C>   
3 Months Or Less                                     179                79,075               79,254
Over 3 Through 12 Months                             296                15,167               15,463
Over 1 Year Through 3 Years                        1,713                26,715               28,428
Over 3 Years Through 5 Years                       1,389                30,724               32,113
Over 5 Through 15 Years                            1,733                20,246               21,979
Over 15 Years                                     11,022                   834               11,856
Total Gross Loans                                 16,332               172,761              189,093

</TABLE>


        Commercial  loan totals in the above table include  numerous loans which
are secured by deed of trust which, for regulatory  purposes,  are considered as
Real Estate  Loans and shown as such in the table on page 26 dealing with "loans
outstanding and the composition of the loan portfolio" for 1998.

        The Company's rollover policy is that all maturing loans are reviewed on
a case-by-case  basis, new financial  statements are requested from the borrower
and an  in-depth  credit  analysis  is  performed  after  which  the loan may be
extended,  renewed,  restructured  or demand made for payment in full  depending
upon the circumstances.

Loan Concentrations

        At December 31, 1998,  1997, and 1996, the Company had no  concentration
of loans which exceeded 10% of total loans.

Allowance for Loan and Lease Losses

        The  allowance  for loan and lease losses is  maintained at a level that
management of the Company  considers  adequate for losses that can be reasonably
anticipated.  The  allowance is  increased by charges to operating  expenses and
reduced by net loans charged-off.  The level of the allowance for loan losses is
based on management's  evaluation of potential losses in the loan portfolio,  as
well as prevailing and anticipated economic conditions.

        Management  employs a  systematic  methodology  on a quarterly  basis to
determine  the amount of loan  losses to be  reported  and the  adequacy  of the
allowance  for current and future  losses.  Each loan is "graded" at the time of
origination, extension or renewal by the senior credit administrator. Grades are
assigned  a risk  factor,  which is  calculated  to assess the  adequacy  of the
allowance for loan losses.  Further,  management considers other factors such as
changes  in the  nature  and  volume of the loan  portfolio,  overall  portfolio
quality,  loan concentrations,  trends in the level of delinquent and classified
loans,  specific  problem  loans and  commitments,  and current and  anticipated
economic conditions.

<PAGE>28

Analysis of the Allowance for Loan and Lease Losses

        The following table summarizes the changes in the allowance for loan and
lease losses for the periods shown:

<TABLE>
<CAPTION>


YEAR ENDED DECEMBER 31:
(Dollars in Thousands)                                  - 1998 -         - 1997 -       - 1996 -
                                                        --------         --------       --------
<S>                                                      <C>              <C>            <C>  
Balance At Beginning Of Period:                          2,371            2,146          1,868
Charge-Offs:
Real Estate-Commercial & Ag                                  0                0              0
Real Estate-Residential 1-5                                (43)               0            (23)
Real Estate-Const & Land Dev                                 0                0              0
Real Estate-Non-Farm/Non-Residential                       (98)               0            (23)
Commercial, Industrial & Ag                               (191)            (193)          (122)
Lease Financing                                           (316)            (124)          (132)
Credit Cards                                              (956)            (475)             0
Consumer                                                   (25)             (11)           (29)
Other                                                       (5)              (7)           (45)

TOTAL:                                                  (1,634)            (810)          (374)

Recoveries:
Real Estate-Commercial & Ag                                  0                0              0
Real Estate-Residential 1-5                                  0                0              0
Real Estate-Const & Land Dev                                 0                0              0
Real Estate-Non-Farm/Non-Residential                         0                0              0
Commercial, Industrial & Ag                                 54              129             78
Lease Financing                                             24               34             34
Credit Cards                                               105               87              0
Consumer                                                     8                9              5
Other                                                        3                3              2

TOTAL:                                                     194              262            119

Net Charge-Offs:                                        (1,440)            (548)          (255)
Provision Charged To Operations                          2,124              773            533
Balance At End Of Period                                 3,055            2,371          2,146
Ratio Of Net Charge-Offs To Avg. Loans                    -0.82%           -0.36%         -0.19%
Average Loans                                          175,190          151,814        134,289

</TABLE>


        Charged-off  loans for the three years ended  December  31,  1998,  were
$2,818,000, of which $575,000 has been recovered.

Non-Performing Assets

        The Company's policy is to recognize interest income on an accrual basis
unless the full  collectibility  of principal and interest is  uncertain.  Loans
that are  delinquent 90 days or more,  unless well secured and in the process of
collection,  are placed on a cash basis and previously  accrued but  uncollected

<PAGE>29

interest is reversed against income. Thereafter, income is recognized only as it
is collected in cash. Collectibility is determined by considering the borrower's
financial  condition,  cash  flow,  quality  of  management,  the  existence  of
collateral or guarantees and the state of the local economy.

        The  following   table   provides   information   with  respect  to  all
non-performing assets.

<TABLE>
<CAPTION>


Non-Performing Assets at December 31:                 - 1998 -         - 1997 -        - 1996 -
 (Dollars in Thousands)                               --------         --------        --------

<S>                                                  <C>               <C>             <C>                              
Loans 90 days or more past due and still
  accruing                                               178              787             122
Non-accrual loans                                        311              838             218
Restructured Loans 30 days or more past due                0               23               0
Lease Financing 90 days or more past due                  63               56              37
Other Real Estate Owned                                  175              148             233
Total Non-Performing Assets                              727            1,852             610
Non-Performing Assets to Total
  Gross Loans Plus O.R.E.O.                             0.40%            1.15%           0.42%

</TABLE>


        The decrease in non-performing  assets at December 31, 1998, compared to
December 31,  1997,  is  attributable  to decreases in loans past due 90 days or
more and still accruing,  non-accrual  loans, and restructured  loans 30 days or
more past due partially  offset by increases in lease  financing loans and Other
Real Estate Owned. The increase in  non-performing  assets at December 31, 1997,
compared to December 31, 1996, is attributable to increases in loans past due 90
days or more and still accruing,  non-accrual loans,  restructured loans 30 days
or more past due and lease financing  loans,  partially  offset by a decrease in
Other Real Estate Owned.

        The table  below  shows the gross  interest  income that would have been
recorded at December  31, 1998,  if these loans had been  current in  accordance
with their  original  terms and had been  outstanding  throughout  the period or
since origination if new for part of the period; and the amount of interest that
was included in net income for the period.

<TABLE>
<CAPTION>


                                        1998                    1997                  1996
                                  Gross     Interest     Gross      Interest     Gross     Interest
(In Dollars)                      Income     Earned      Income      Earned      Income     Earned
                                 -------    --------    -------     --------    -------    -------- 

<S>                              <C>        <C>         <C>         <C>         <C>          <C>
Non-Accrual Loans                $56,269    $19,789     $68,100     $38,900     $22,400         0
90 Days Past Due
  Restructured Loans                   0          0           0           0           0         0
Other Real Estate Owned          $15,300          0     $15,300           0     $27,400         0

</TABLE>


        The lease  financing  and other loans that were past due 90 days or more
were all still accruing interest at their stated contract rate.

Potential Problem Loans

        In  management's  opinion,  other than the loans awaiting  charge-off in
January  1999,  there are no loans past due and still  accruing on December  31,
1998, that present significant exposure to the Company because they are all well

<PAGE>30

secured and in process of collection.  Of the $311,000 in non-accrual  loans and
$175,000 in O.R.E.O.,  management  feels confident that $461,000 will eventually
be collected.

        At  December  31,  1998,  there are no loans or other  interest  bearing
assets  classified for  regulatory  purposes as loss,  doubtful,  substandard or
special  mention  that (i)  represent or resulted  from trends or  uncertainties
which  management  anticipates  could have a material impact on future operating
results, liquidity or capital resources, or (ii) represented material credits or
assets about which  management had information that would cause serious doubt as
to the ability of the borrower to comply with the repayment terms.

Investment Portfolio

        The Company invests excess funds in a variety of instruments in order to
meet liquidity and profitability goals. A portion of available funds is invested
in liquid  investments such as overnight  federal funds. The balance is invested
in investment  securities such as U.S. Treasury and Agency securities (including
CMO's),  tax-exempt  municipal bonds,  corporate bonds and Federal Reserve Bank,
FHLB and FNMA stock, etc. See "Liquidity."

        The composition of the investment  portfolio is shown in the table below
at book and market  value.  On  November  16,  1995,  a  one-time  change to the
Company's  category   allocation  was  permitted  and  the  Company  elected  to
categorize all investments as "Available For Sale."

<TABLE>
<CAPTION>


                                  12/31/98              12/31/97              12/31/96
                                    BOOK       MARKET     BOOK       MARKET     BOOK       MARKET
(Dollars in Thousands)              VALUE      VALUE      VALUE      VALUE      VALUE      VALUE
                                  -------      ------   --------     ------   --------    -------

<S>                                 <C>        <C>        <C>         <C>       <C>         <C>  
US. Treasury Securities-AFS         3,000      3,013      2,996       3,007     3,056       3,105
US. Treasury Securities-HTM             0          0          0           0         0           0
US. Govt. Agencies-AFS                  0          0          0           0     1,002       1,011
US. Govt. Agencies-HTM                  0          0          0           0         0           0
Coll. Mort. Obligations-AFS        56,682     56,615     62,433      63,114    23,331      23,562
Coll. Mort. Obligations-HTM             0          0          0           0         0           0
Municipal Securities-AFS           16,227     17,110     12,190      12,771    10,172      10,499
Municipal Securities-HTM                0          0          0           0         0           0
Federal Reserve Bank Stock              0          0        446         446       446         446
Corporate Bonds                         0          0          0           0         0           0
Other Securities-AFS                1,062      1,064        840         842     1,309       1,310

TOTAL:                             76,971     77,802     78,905      80,180    39,316      39,933

Mark To Market Analysis
Available For Sale (AFS)           76,971     77,802     78,905      80,180    39,316      39,933
Held To Maturity (HTM)                  0          0          0           0         0           0

TOTAL PORTFOLIO:                   76,971     77,802     78,905      80,180    39,316      39,933

Unrealized Gain/Loss On
  Securities:
Available For Sale (AFS)              831                 1,275                   617
Held To Maturity (HTM)                  0                     0                     0

TOTAL UNREALIZED GAIN/LOSS            831                 1,275                   617

</TABLE>

<PAGE>31

        The table below  summarizes  the  maturity of the  Company's  investment
securities as of December 31, 1998:

<TABLE>
<CAPTION>


Available For Sale
Investments Maturing                 U.S.         U.S.                                   Equity
(Dollars In Thousands)            Treasuries    Agencies      C.M.O'S     Municipals   Securities   Total
                                  ----------    --------      -------     ----------   ----------   -----
<S>                               <C>           <C>        <C>            <C>         <C>        <C>  
3 Months Or Less                      999           0          1,398          280         1,062      3,739
Over 3 Through 12 Months            2,001           0         11,384            0             0     13,385
Over 1 Year Through 3 Years             0           0         35,821          235             0     36,056
Over 3 Through 5 Years                  0           0          6,019        1,238             0      7,257
Over 5 Through 15 Years                 0           0          2,060        8,324             0     10,384
Over 15 Years                           0           0              0        6,150             0      6,150
Total                               3,000           0         56,682       16,227         1,062     76,971
Unrealized Gain/Loss On
  Available For Sale Investments
  (Included in Figures Above)          13           0            (68)         883             3        831

</TABLE>

        The table  below  summarizes  the  Company's  investment  securities  by
weighted-average yield as of December 31, 1998.

<TABLE>
<CAPTION>


                                     U.S.           U.S.                                          Equity
Weighted Average Yield            Treasuries      Agencies        C.M.O'S       Municipals      Securities
----------------------            ----------      --------        -------       ----------      ----------

<S>                                  <C>            <C>            <C>             <C>             <C>  
3 Months Or Less                     6.04%          0.00%          9.08%           7.50%           6.22%
Over 3 Through 12 Months             6.20%          0.00%          4.16%           0.00%           0.00%
Over 1 Year Through 3 Years          0.00%          0.00%          4.80%           7.75%           0.00%
Over 3 Through 5 Years               0.00%          0.00%          4.21%           8.20%           0.00%
Over 5 Through 15 Years              0.00%          0.00%          4.60%           7.75%           0.00%
Over 15 Years                        0.00%          0.00%          0.00%           7.06%           0.00%
Total Portfolio                      6.15%          0.00%          4.71%           7.52%           6.22%

</TABLE>


        The yields shown for  municipal  securities  and equity  securities  are
calculated on a taxable equivalent basis.

        The  Company  has  followed an  investment  strategy  since late 1994 of
investing in well  structured,  relatively  short term  collateralized  mortgage
obligations  and longer  term  municipal  securities,  the later of which have a
tendency to lower the Company's income tax obligations.

        At  December  31,  1998,  the  book  value  of  collateralized  mortgage
obligations  totaled  $56.7  million,  a decrease  of $5.8  million or 9.2% from
December  31,  1997.  At December  31,  1997,  the book value of  collateralized
mortgage  obligations  totaled  $62.4  million,  an increase of $39.1 million or
167.6%  from  December  31,  1996.  The  decrease  in  1998 is  attributable  to
prepayments  and  the  increase  in  1997  is  attributable  to a  part  of  the
substantial increase in deposits being invested in this category.

        At December 31, 1998,  the book value of municipal  investments  totaled
$16.2  million,  an increase of $4.0 million or 33.1% from December 31, 1997. At
December  31,  1997,  the book  value of  municipal  investments  totaled  $12.2
million,  an increase  of $2.0  million or 19.8% from  December  31,  1996.  The
increase in 1998 is  attributable  to a slight  realignment  of the portfolio to
take  tax  advantage of  municipal investments  and  the  increase  in  1997  is

<PAGE>32

attributable to a part of the substantial increase in deposits being invested in
this category.

        At  December  31,  1998,  the book  value of U.S.  Treasury  investments
totaled $3.0  million,  an increase of $4 thousand or 0.1 percent from  December
31, 1997.  At December 31, 1997,  the book value of U.S.  Treasury,  investments
totaled  $3.0  million,  an increase of $60  thousand or 2.0% from  December 31,
1996.  The  small  increases  in both  1998  and 1997  are  attributable  to the
accretion of discount.

        At December  31,  1998,  1997,  and 1996,  the Company had no U.S Agency
investments.

        At  December  31,  1998,  the  book  value  of  the  following  issuer's
securities exceeded ten percent of the Company's capital.

ISSUER
(Dollars in Thousands)                     BOOK VALUE             MARKET VALUE
                                           ----------             ------------

U.S. Treasury                                 3,000                    3,013
FHLMC CMO's                                   9,726                    9,800
GNMA CMO's                                    9,646                    9,522
FNMA CMO's                                   18,681                   18,630
FRMAC CMO's                                  18,144                   18,173


Deposits

        Deposits,  including  non-interest-bearing  demand  deposits,  increased
$28.8  million,  from  $255.2  million  in 1997 to $284.0  million  in 1998,  an
increase of 11.3%. The table below outlines certain information regarding trends
in the Company's deposits for 1998, 1997, and 1996.

<TABLE>
<CAPTION>


DEPOSITS:                     12/31/98               12/31/97                 12/31/96
(Dollars in Thousands)         AMOUNT        %        AMOUNT           %       AMOUNT         %
                              --------    ------     --------       ------    --------     ------

<S>                            <C>         <C>        <C>            <C>       <C>          <C>  
Demand                         96,884      34.1%      70,767         27.7%     50,412       26.2%
NOW                            22,314       7.9%      21,575          8.5%     16,476        8.6%
Time-$100,000 and over         46,355      16.3%      40,643         15.9%     26,432       13.7%
Other Time                     69,478      24.5%      69,821         27.4%     57,951       30.1%
Savings & Money Market         48,936      17.2%      52,380         20.5%     41,305       21.4%
Total Deposits:               283,967     100.0%     255,186        100.0%    192,576      100.0%

</TABLE>

<PAGE>33

        The table below  indicates  the average  rates of interest  paid on each
deposit category.

                                         1998          1997           1996
                                         ----          ----           ----
Now Accounts                             0.94%         0.99%          1.01%
MMDA Accounts                            2.89%         3.57%          3.20%
Savings Accounts                         1.80%         1.80%          1.98%
Time Certificates of Deposit             5.34%         5.45%          5.33%


        At December 31, 1998, 1997, and 1996, time  certificates of deposit over
$100,000  were  16.3%,  15.9%,  and 13.7% of total  deposits  respectively.  The
Company  has  never  had  brokered  deposits  and does not  intend  to seek such
deposits.  All public time  certificates  of deposit  are from local  government
agencies located in Humboldt and Trinity Counties.

        Time  certificates  of  deposit  at December 31, 1998, had the following
maturity schedule:

(Dollars in Thousands)                            $100,000+          Others
                                                  ---------          ------

Three months or less                                23,592           23,423
Over three months through twelve months             20,209           37,313
Over one year through three years                    1,919            7,572
Over three years                                       635            1,170
TOTAL:                                              46,355           69,478

        At December 31, 1998,  certificates  of deposit over  $100,000  totaling
$43.8  million or 15.4% of total  deposits  were  scheduled to mature within one
year. At December 31, 1997, certificates of deposit over $100,000 totaling $37.1
million or 14.5% of total  deposits were scheduled to mature within one year. At
December 31, 1996,  certificates of deposit over $100,000 totaling $24.1 million
or 12.5% of total  deposits were  scheduled to mature within one year.  Although
the  Company  has not  experienced  seasonal  or  unusual  fluctuations  in this
component of the deposit  portfolio,  management  recognizes that these types of
deposits  may  represent a greater risk of interest  rate and volume  volatility
than small retail deposits.  Management believes that the presumed volatility of
such deposits presents an acceptable risk and withdrawal of such certificates of
deposit  would not have a  material  impact  on the  liquidity  position  of the
Company.

Interest Rate Sensitivity

        The  operating  income  and  net  income  of  the  Company  depend  to a
substantial  extent on "rate  differentials,"  i.e., the difference  between the
income the Company receives from loans, securities and other earning assets, and
the interest expense it pays on deposits and other liabilities.

        The interest rate  sensitivity  of the Company is measured over time and
is based on the Company's  ability to re-price its assets and  liabilities.  The
opportunity  to re-price  assets in the same dollar amounts and at the same time
as  liabilities   would  minimize  interest  rate  risk  in  any  interest  rate
environment.  The  difference  between  the  amount  of assets  and  liabilities
re-priced at the same time is referred to as the "gap." This gap  represents the
risk,  or  opportunity,  in  re-pricing.  If more  assets than  liabilities  are
re-priced  at a given time in a rising rate  environment,  net  interest  income
would  improve,  and in a declining rate environment,  net interest income would

<PAGE>34

deteriorate.  If more  liabilities  than  assets were  re-priced  under the same
conditions,  the opposite results would prevail.  The Company is asset sensitive
and its near term  performance  could be enhanced by rising rates and negatively
affected by falling rates in the next twelve months.

        The table below sets forth the distribution of re-pricing of the earning
assets and  interest-bearing  liabilities for the respective periods at December
31, 1998.

<TABLE>
<CAPTION>


Assets Or Liabilities                Due From
Which Mature Or Re-price               Banks           Fed       Investments
(Dollars In Thousands)                 Time           Funds       Ex Equity         Loans          Total
                                     ---------       ------      ------------     --------        -------
<S>                                <C>              <C>            <C>            <C>            <C>   
3 Months Or Less                         20           2,250          2,444          79,254         83,968
Over 3 Through 12 Months              3,000               0         12,835          15,463         31,298
Over 1 Year Through 3 Years               0               0         36,822          28,428         65,250
Over 3 Years Through 5 Years              0               0          7,299          32,113         39,412
Over 5 Through 15 Years                   0               0         10,958          21,979         32,937
Over 15 Years                             0               0          6,380          11,856         18,236

Total Assets                          3,020           2,250         76,738         189,093        271,101

                                      Time
                                    Interest        MMDA,        Certificates        Other
                                     Bearing       Savings &          Over         Borrowed
Liabilities                          Demand       Other Time       $100,000          Funds         Total
-----------                         ---------     ----------     -------------     --------       -------

3 Months Or Less                     22,314          72,359         23,592              21        119,686
Over 3 Through 12 Months                  0          37,313         20,209              65         56,187
Over 1 Year Through 3 Years               0           7,572          1,919             192          9,683
Over 3 Years                              0           1,170            635           3,124          4,929
Total Liabilities                    22,314         118,414         46,355           3,402        190,485

Interest Rate Sensitivity Gap                      Cumulative
------------------------------                     ----------
3 Months Or Less                    (35,718)        (35,718)
Over 3 Through 12 Months            (24,889)        (60,607)
Over 1 Year Through 3 Years          55,567          (5,040)
Over 3 Years                         85,656          80,616
Total                                80,616

</TABLE>

Liquidity

        The  Company's  liquidity is  primarily a  reflection  of its ability to
acquire funds to meet loan demand and deposit  withdrawals  and to service older
liabilities  as they come due. To augment  liquidity,  the Company has a Federal
Funds borrowing arrangement with two correspondent banks totaling $10.5 million.

        Additionally,  the Company is a member of the Federal Home Loan Bank and
through  membership  has the ability to pledge  qualifying  collateral for short
term (up to six months) and long-term (up to five years) borrowings.  Management
may  use  this  facility  to  fund  loan  advances  by  pledging   single-family
residential mortgages as qualifying collateral.

        The  liquidity  position  of the  Company  may be  expressed  as a ratio
defined as cash, due from banks,  federal funds sold,  interest bearing deposits
and  market  value  of  available for sale securities less book value of pledged

<PAGE>35

investments,  divided by total deposits. Using this definition,  at December 31,
1998,  the Company had a liquidity  ratio of 28.9% compared to 38.1% at December
31, 1997,  and 26.4% at December 31, 1996. The decrease in liquidity at December
31, 1998,  compared to December 31, 1997, is mainly attributable to the pledging
of   securities   for  certain   deposits  and  current  Visa  and  Master  Card
requirements.  The  increase in  liquidity  at December  31,  1997,  compared to
December 31, 1996, is attributable to a substantial increase in deposits.

        Part  of  the  Company's   normal  lending   activity   involves  making
commitments to extend credit.  One risk associated with the loan  commitments is
the demand on the Company's liquidity that would result if a significant portion
of the commitments  were  unexpectedly  funded at one time. The Company assesses
the  likelihood  of  projected  funding  requirements  by  reviewing  historical
patterns,  current and forecasted  economic  conditions  and  individual  client
funding  needs.  At  December  31,  1998,  the  Company  had  $54.5  million  in
undisbursed commitments. Further, management maintains unpledged U.S. Government
securities  that are  available to secure  additional  borrowings in the form of
reverse  repurchase  agreements.  At  December  31,  1998,  no  U.S.  Government
Treasuries or Agencies (at market value) were  available for reverse  repurchase
agreements,  however,  the Company had U.S.  Government  Agency CMO's (at market
value) of approximately $36.4 million which were unpledged.  Management believes
that this  provides  the Company  with the  necessary  liquid  assets to satisfy
funding  requirements  in  the  unlikely  event  of  substantially  higher  than
projected customer funding requirements.

Capital Resources

        Shareholders' equity increased to $27.8 million at December 31, 1998, an
increase of $4.3 million or 18.2%  compared  with $23.6  million at December 31,
1997,  which was an increase of $4.0  million or 20.4%  compared  with the $19.6
million at December 31, 1996.

        The following table sets forth the Company's actual  regulatory  capital
position as of December 31, 1998.

RISK-BASED CAPITAL RATIOS
(Dollars in thousands)                              AMOUNT           RATIO
                                                   -------          ------
Tier 1 Capital                                      26,131          11.73%
Tier 1 Minimum Requirement                          13,365           6.00%
Excess (Shortfall)                                  12,766           5.73%
Total Capital                                       28,883          12.97%
Total Capital Minimum Requirement                   22,274          10.00%
Excess (Shortfall)                                   6,609           2.97%
Risk-Adjusted Assets                               222,748


        At December 31, 1997 and 1996,  the Company's  risk-based  capital ratio
was 12.29% and 12.60% respectively.

        At December 31,1998,  1997, and 1996, the Company's  leverage-ratio  was
8.12%,  7.57% and 8.53%,  respectively.  No  regulatory  agency has  advised the
Company  that  it is  deficient  with  respect  to the  Tier  1  leverage-ratio.
Management is unaware of any current  recommendations by regulatory authorities,

<PAGE>

which, if implemented, would have a material  adverse impact on future operating
results, liquidity of capital resources.

Effects of Inflation

        Assets  and  liabilities  of  financial   institutions  are  principally
monetary in nature.  Accordingly,  interest rates, which generally move with the
rate of inflation,  have a potentially  significant  effect on the Company's net
interest income.  The Company attempts to limit inflation's  impact of rates and
net income margins through a continuing asset/liability management program.

        The  balance  sheet of the Company  (considered  apart from the Bank) at
December 31, 1998, contained the following items:

ASSETS:  (Dollars in Thousands)
   Cash On Deposit With Subsidiary                                          805
   Investment In Subsidiary Including Unrealized 
    Holding Gains                                                        26,929
   Organizational Costs                                                     197
   Total Assets:                                                         27,931
LIABILITIES:
   Accounts Payable                                                           2
   Deferred Taxes                                                            80
   Total Liabilities                                                         82
CAPITAL:
   Common Stock                                                          25,580
   Capital Surplus                                                          298
   Retained Earnings                                                      1,485
   Net Unrealized Holding Gains (Losses)                                    486
   Total Capital:                                                        27,849
   Total Liabilities and Capital                                         27,931

The Statement Of Income And Expense Of The Company At 
December 31, 1998, Contained The Following Items:

INCOME:
   Stock Transfer Fees                                                        3
   Dividends From Subsidiary                                              2,085
   Total Income:                                                          2,088
EXPENSES:
   Employee Profit Sharing                                                   20
   Miscellaneous                                                             13
   Stationery & Supplies                                                      7
   Legal Expense                                                             47
   Taxes Paid                                                                51
   Income Before Undistributed Income Of Subsidiary:                      1,950
   Equity In Undisbursed Income Of Subsidiary:                            2,066
   Net Income:                                                            4,016

<PAGE>37

       The Federal Reserve Bank regulations for bank holding  companies require
that net unrealized holding  gains/(losses) be included in the balance sheet for
the  parent  company  under  "Investment  in  Subsidiary"  whereas  the  audited
financial  statements prepared by our Certified Public Accountants do not.  That
amount of net unrealized gains in 1998 was $486,000.

        The $3,000 in stock  transfer fees was for fees charged  relative to the
transfer of ownership of Bancorp Stock Certificates. The employee profit sharing
expense of $20,000 relates to the accrual for profit sharing distributions.  The
miscellaneous  expenses of $13,000  relate to filing fees,  accounting  fees and
expenses  incurred with the 1998-proxy  solicitation.  The stationery & supplies
expense  of  $7,000  relates  to the write  down of the  stationery  and  supply
organizational  expense and the purchase of additional stock  certificates.  The
legal  expenses  of $47,000  relates to expenses  incurred  relative to the 1998
Annual Meeting,  regulatory matters and reporting, merger and acquisition issues
and stock option issues.  The tax expense of $51,000  relates to the accrual for
future  tax  payments.  For  additional  information,  please  refer to the 1998
audited financial statements.

ITEM 7 - FINANCIAL STATEMENTS

        Financial   statements  meeting  the  requirements  of  Item  310(a)  of
Regulation S-B are attached to this report.


ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE

        During the three most recent fiscal  years,  the Company has not changed
accountants  nor  had a  disagreement  with  its  accountants  with  respect  to
accounting principles or practices of financial statement disclosure.




         [the remainder of this page has been intentionally left blank]


<PAGE>38

                                    PART III

ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
         COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

        Board of Directors - Each of the  directors  has served as a director of
the  Company  and/or the Bank since the  initial  appointment  of  directors  in
September 1989,  except Lawrence  Francesconi and John McBeth who were appointed
in May 1991 and 1992,  respectively,  Marguerite  Dalianes who was  appointed in
March 1992,  Clayton R.  Janssen who was  appointed  in December  1993,  Michael
Renner who was appointed in November 1996, James O. Johnson who was appointed in
May  1997  and Edythe E. Vaissade and Jerry L. Thomas who were both appointed in
March 1998.

        Each of the directors has been elected to serve for the ensuing year and
until his or her  successor is elected and  qualified at the annual  stockholder
meeting of the Company on May 20, 1999.  The  directors,  their ages,  and their
principal occupations during the past five years are:

Ronald F. Angell         56   Attorney and Partner with the firm of Roberts, 
                              Hill, Bragg, Angell & Perlman.
Marguerite Dalianes      55   President, Dalianes Travel Service.
Gary L. Evans            56   Certified Public Accountant associated with the 
                              firm of Aalfs, Evans & Company.
Lawrence Francesconi     68   Retired Owner, Redwood Bootery.
Clayton R. Janssen       73   Attorney and Partner with the firm of Janssen, 
                              Malloy, Needham, Morrison & Koshkin LLP.
James O. Johnson         70   General Contractor and owner, Jim Johnson
                              Construction.
Theodore S. Mason        56   President and Chief Executive Officer of the 
                              Company and/or Bank since March 1989.
John McBeth              52   President, O & M Industries.
Michael Renner           46   President, Renner Petroleum.
Jerry L. Thomas          54   President and General Manager, Eureka Fisheries.
Edythe E. Vaissade       61   Retired Bank Executive.
John R. Winzler          68   Consulting engineer and President of Winzler & 
                              Kelly.

Former directors Abrahamsen and Dutra were appointed Director Emeritus status in
May 1998.

        Executive  Officers  - The  following  are the  names  of the  executive
officers of the Company and/or the Bank and certain information  concerning each
of them:

Theodore S. Mason        56   President and Chief Executive Officer of the 
                              Company since 1996 and the Bank since 1989.
Ronald V. Barkley        62   Senior Vice President and Loan Administrator of 
                              the Company since 1996 and the Bank since 1989.
Kenneth J. Musante       33   Vice President of the Company since 1996 and 
                              Manager of the Bank's Merchant Bankcard Department
                              since 1993.
Alan J. Smyth            65   Senior Vice President, Chief Financial Officer
                              and Secretary of the Company since 1996 and the 
                              Bank since 1989.
Paul A. Ziegler          40   Senior Vice President and Chief Administrative 
                              Officer of the Company  since 1996 and the
                              Bank since January 1994.

<PAGE>39

Former  executive  officer  Richard  Whitsell,  53, was  appointed  President of
Capitol Valley Bank (In organization) Sacramento California in December 1998.

        Pursuant to Section 16(a) of the  Securities  Exchange Act of 1934,  all
directors and officers have, to the best of our knowledge, filed Forms 3, 4, and
5 in a timely manner.

ITEM 10 - EXECUTIVE COMPENSATION

        As to the Company's  Chief  Executive  Officer and each other  executive
officer of the Company who received total  compensation in excess of $100,000 in
1998 (the "named executive  officers"),  the following table sets forth all cash
and  non-cash  compensation   (including  bonuses,  other  annual  compensation,
deferred  compensation,  and  options  granted)  received  from the  Company for
services performed in all capacities during the last three years.

<TABLE>
<CAPTION>


                                                                OTHER
                                                                ANNUAL       DEFERRED     OPTIONS
NAME                       YEAR       SALARY      BONUS(2)      COMP(3)       COMP(4)     GRANTED
----                       ----       ------      -------       -------      --------     -------

<S>                      <C>        <C>         <C>          <C>           <C>          <C> 
Theodore S. Mason (1)      1998      $125,000     $58,809       $2,434       $150,000      2,000
Theodore S. Mason          1997      $125,000     $45,990       $1,782       $125,000      2,000
Theodore S. Mason          1996      $105,000     $70,906       $1,658       $100,000      2,000
Alan J. Smyth              1998       $85,000     $12,932       $3,704        $90,000          0
Alan J. Smyth              1997       $85,000      $1,865       $2,107        $75,000      2,000
Alan J. Smyth              1996       $70,000     $68,017       $2,331        $50,000      1,000
Ronald V. Barkley          1998       $85,000     $35,550       $2,279        $45,000          0
Ronald V. Barkley          1997       $85,000     $34,991       $1,882        $60,000      2,000
Ronald V. Barkley          1996       $70,000     $12,926       $2,250        $45,000      1,000
Paul A. Ziegler            1998       $77,000     $51,340         $738              0          0
Paul A. Ziegler            1997       $77,000     $25,825         $554              0      5,000
Paul A. Ziegler            1996       $70,000     $24,600         $631              0      1,000

</TABLE>


(1)     Humboldt Bank entered into an employment agreement with Mr. Mason on May
        1, 1989,  whereby Mr. Mason agreed to serve as the Bank's  President and
        Chief  Executive  Officer.  The term of such  agreement  was extended on
        December 10, 1996, to January 1, 2001. Under the terms of the agreement,
        Mr.  Mason is entitled to receive a base salary of $125,000 per year and
        an incentive bonus based on a percentage  ranging from 4% to 2.5% of the
        Bank's pre-tax net profits  pursuant to an Incentive Bonus Plan.  During
        his term of employment,  Mr. Mason may be reimbursed for travel,  meals,
        entertainment  expenses,   service  to  charitable  organizations,   and
        membership in certain committees and other  organizations.  In addition,
        he is eligible for typical employee benefits such as paid vacation, sick
        leave,  medical  insurance,  and the use of an  automobile  owned by the
        Bank.

(2)     Includes  amounts  paid  to Mr.  Mason,  Mr. Smyth, Mr. Barkley, and Mr.
        Ziegler pursuant to the Bank's Incentive Bonus Plan.

(3)     Includes amounts imputed to Mr. Mason,  Mr. Smyth, Mr. Barkley,  and Mr.
        Ziegler as income for tax  purposes  pursuant  to the Bank's  automobile
        program and the Bank's life insurance program.

(4)     Includes  amounts of salary or bonus  deferred by Mr. Mason,  Mr. Smyth,
        and Mr. Barkley pursuant to the Bank's Deferred  Compensation  Plan. The
        amounts in this column are not included in the Salary and Bonus columns.

<PAGE>40

Benefit Plans

        Retirement  Plan: The Bank has a defined  contribution  retirement  plan
covering  substantially all of the Bank's employees.  Bank  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  benefits
expense  includes  Bank  contributions  to the  plan of  $189,000  during  1998,
$134,000 during 1997 and $98,000 during 1996.

        Director Fee Plan:  The Company has adopted the Humboldt  Bank  Director
Fee Plan (the "Fee Plan").  The Fee Plan permits each Bank  director to elect to
receive his/her  directors' fees in the form of Company common stock, cash, or a
combination  of Company common stock and cash, and to elect to defer the receipt
of any of the  foregoing  until the end of his/her term as a Bank  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 Bank and the Company to  pay/distribute  on this
account. The account is otherwise unsecured, unfunded and subject to the general
claims of creditors of the Bank and the Company.  The Fee Plan  provides for the
issuance of up to 40,000 shares of Company common stock. The amount of such fees
deferred in 1998 was $58,000,  in 1997 was $43,000,  and in 1996 was $20,000. At
December  31,  1998,  the  liability  for  amounts  due under this plan  totaled
$110,000 or approximately 4,800 shares of stock.

        Employee Stock Bonus Plan: The Company has an Employee Stock Bonus Plan,
which is funded annually at the sole discretion of the Board of Directors. Funds
are invested in Company stock,  when available,  and is purchased at the current
market price on behalf of all  employees  except the  executive  officers of the
Bank. The compensation cost recognized for 1998, 1997, and 1996 was $20,000 each
year.

        Post-employment  Benefit Plans and Life Insurance Policies: The Bank 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 an essential  employee and provide income to
offset expenses  associated with the plans. The specified  employees are insured
under the policies,  but the Bank is the owner and beneficiary.  At December 31,
1998,  1997,  and  1996,  the cash  surrender  value of these  policies  totaled
approximately $4,943,000, $4,810,000 and $4,583,000, respectively.

        The plans are  unfunded  and provide  for the Bank 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 Bank's commitment
to pay a deferred  benefit at  retirement.  If death  occurs  prior to or during
retirement,  the Bank will pay the employee's beneficiary or estate the benefits
set forth in the plans.

        At December  31,  1998,  1997,  and 1996,  liabilities  recorded for the
estimated present value of future salary continuation and deferred  compensation
benefits   totaled   approximately   $2,038,000,   $1,451,000,   and   $932,000,
respectively. Salary continuation benefits may be paid if termination is without
cause or due to a change in control of the Bank. Otherwise, no benefits are paid
upon termination. Deferred compensation is vested as to the amounts deferred. In
the  event  of  death  or  under  certain  other  circumstances,   the  Bank  is
contingently liable to make future payments greater than the amounts recorded as
liabilities.  Based on present  circumstances,  the Bank  does not  consider  it

<PAGE>41

probable that such a contingent  liability will be incurred or that in the event
of  death,  such a  liability  would be  material  after  consideration  of life
insurance benefits.

        Stock  Option Plan:  The Company has a stock option plan (the  "Humboldt
Bancorp  Stock  Option  Plan") under which  incentive  and  non-statutory  stock
options,  as defined under the Internal  Revenue Code,  may be granted.  Options
representing 165,911 shares of the Company's issued and outstanding no par value
common stock may be granted under the Humboldt  Bancorp Stock Option Plan by the
Board of Directors to directors,  officers,  and key, full-time  employees at an
exercise  price not less than the fair market value of the shares on the date of
grant.  As of December  31, 1998,  73,545  options  were  outstanding  under the
Humboldt  Bancorp Stock Option Plan.  Options may have an exercise period of not
longer  than  10  (ten)  years.  Incentive  stock options are subject to vesting
schedules  ranging  from  0  to  3  years,  and non-statutory stock options vest
immediately.  In  addition, 284,279 total options are outstanding as a result of
the Company's  assumption of  options  granted by  Humboldt Bank  prior  to  the
reorganization.

        The  following  tables set forth the  number of  options  granted to the
Company's executive officers during 1998 and the number and value of unexercised
options held by such executive officers as of the end of 1998.

                              Option Grants in 1998

<TABLE>
<CAPTION>


                                                                                  POTENTIAL
                                                                                 REALIZABLE
                                                                                  VALUE AT
                                                                               ASSUMED ANNUAL
                                % OF TOTAL                                     RATES OF STOCK
                                  OPTIONS                                           PRICE
                                GRANTED TO      EXERCISE                        APPRECIATION
                    OPTIONS      EMPLOYEES     PRICE PER      EXPIRATION       FOR OPTION TERM
       NAME         GRANTED       IN 1998        SHARE           DATE             5% / 10%
       ----         -------     ----------     ---------      -----------    ------------------
<S>                 <C>         <C>            <C>          <C>             <C>       
Theodore S. Mason     2000        100.0%         $19.77       May 9, 2008    $64,406 / $102,557

</TABLE>

                       Aggregated Option Exercises in 1998

<TABLE>
<CAPTION>


                                                          NUMBER OF              VALUE OF
                                                         UNEXERCISED            UNEXERCISED
                         SHARES                       OPTIONS AT YEAR-         IN-THE-MONEY
                        ACQUIRED         VALUE        END (EXERCISABLE/        (EXERCISABLE/
        NAME           ON EXERCISE      REALIZED       UNEXERCISABLE)         UNEXERCISABLE)
        ----           -----------      --------      -----------------     ------------------

<S>                      <C>            <C>            <C>                 <C>         
Theodore S. Mason        16,910         $99,938        51,078 / 4,700       $413,639 / $98,667
Alan J. Smyth             3,023         $16,234        29,839 / 1,984       $223,034 / $50,004
Ronald V. Barkley         3,000         $16,140        29,862 / 1,984       $233,158 / $40,004
Paul A. Ziegler            -0-            -0-           8,501 / 4,184       $109,069 / $100,504


</TABLE>


<PAGE>42


ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT

Securities Ownership of Certain Beneficial Owners

        Management of the Company knows of no person who owns,  beneficially  or
of record,  either  individually  or together  with  associates,  more than five
percent of the outstanding  shares of Humboldt  Bancorp Common Stock,  except as
set forth in the table below.  Unless  otherwise  indicated,  the persons listed
have sole voting and investment power over the shares beneficially owned.

        Francis & Dorothy Dutra Family Trust      91,740 Shares
        Francis A Dutra Custodian for J. Parker      380 Shares
        Francis A Dutra Custodian for K. Parker      380 Shares
                                                  ------
             Total                                92,500 Shares 5.17%
                                                  ======


              [The rest of this page is intentionally left blank.]


<PAGE>43

Securities Ownership of Management

        The following table compares,  as of December 31, 1998, the total number
of shares  outstanding  (1,787,954)  and options  exercisable  by March 1, 1999,
(251,377) and percentage of shares of Humboldt Bancorp outstanding Common Stock,
which are beneficially  owned,  directly or indirectly,  by (a) each of Humboldt
Bancorp directors and nominees for director;  (b) the Chief Executive Officer of
Humboldt and each of the Company's four executive  officers other than the Chief
Executive  Officer;  and (c) Humboldt Bancorp  directors and the named executive
officers as a group. The Company  identifies as its executive officers the Chief
Executive  Officer,  the Chief Financial Officer,  the Senior Loan Officer,  the
Chief  Administrative  Officer and the Manager of Merchant  Bankcard  who have a
significant  impact on the  overall  direction  of  financial  reporting  of the
Company.  The shares  "beneficially  owned" are determined  under Securities and
Exchange  Commission  Rules, and do not necessarily  indicate  ownership for any
other purpose. In general,  beneficial  ownership includes shares over which the
indicated  person has sole or shared voting or investment power and shares which
he/she has the right to acquire  within 60 days of  December  31,  1998.  Unless
otherwise  indicated,  the persons listed have sole voting and investment  power
over the shares beneficially owned.  Management is not aware of any arrangements
that may at a future date, result in a change of control of the Company.

<TABLE>
<CAPTION>

                                                           OPTIONS
                                           SHARES        EXERCISABLE
                                            HELD          BY 3/1/99          TOTAL           %
                                          --------       -----------        ------         ------ 
<S>                                        <C>              <C>             <C>             <C> 
Ronald F. Angell                           23,148           14,629          37,777          1.85
Marguerite Dalianes                         7,843           14,140          21,983          1.08
Gary L. Evans                              15,787           23,153          38,940          1.91
Lawrence Francesconi                       19,188           12,417          31,605          1.55
Clayton R. Janssen                         11,729           12,417          24,146          1.18
James O. Johnson                            5,807            2,100           7,907          0.39
John McBeth                                40,180            4,641          44,821          2.20
Michael Renner                             12,141            3,310          15,451          0.76
Jerry L. Thomas                             3,719            1,100           4,819          0.24
Edythe E. Vaissade                         12,237           25,242          37,479          1.84
John R. Winzler                            29,769           17,839          47,608          2.33
Theodore S. Mason                          25,478           52,771          78,249          3.84
Alan J. Smyth                               3,023           30,686          33,709          1.65
Ronald V. Barkley                           2,182           24,409          26,591          1.30
Paul A. Ziegler                                 0            9,348           9,348          0.46
All Directors and Executive Officers
(16 persons)                              213,213          251,377         454,590         22.78

</TABLE>

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The  Company  has and  expects to have in the  future,  in the  ordinary
course  of  business,  banking  transactions  with  certain  of  its  directors,
officers,  shareholders,  and  their  associates,  including  transactions  with
corporations  of which such  persons  are  directors,  officers  or  controlling
shareholders.  In the opinion of management,  such transactions  involving loans

<PAGE>44


have  been and will be  entered  into  with  such  persons  in  accordance  with
applicable laws and (1) in the ordinary course of business, (2) on substantially
the same terms, including interest rates and collateral,  as those prevailing at
the time for comparable  transactions  with other persons,  and (3) on terms not
involving  more than the  normal  risk of  collectibility  or  presenting  other
unfavorable  features.  For  additional  reference see Note "Q" of the Company's
Annual Report to Shareholders prepared by Richardson & Company.

ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

(a)     Exhibits

        The  exhibits  below are filed or  incorporated  by reference as part of
this report pursuant to Item 601 of Regulation S-B.

                                                                  Sequentially
Exhibit                                                              Numbered
Number           Exhibits                                              Page

  2.1     Plan of Reorganization and Merger Agreement*
  3.1     Articles of Incorporation*
  3.2     Bylaws*
  4.1     Copy of the Share Certificate for Common Shares*
 10.1     Amended Employment Agreement with Theodore S. Mason*
 10.2     Director Fee Plan**
 10.3     Amended Humboldt Bancorp Stock Option Plan**
 10.4     Salary Continuation Agreement with Theodore S. Mason
 10.5     Salary Continuation Agreement with Alan J. Smyth
 10.6     Salary Continuation Agreement with Ronald V. Barkley
 10.7     Salary Continuation Agreement with Paul A. Ziegler


(b)     Reports on Form 8-K

        No reports on Form 8-K were filed for the three  months  ended  December
31, 1998.

(c)     Independent Auditors Report dated January 15, 1999

*  Incorporated  by reference to the  Company's  Form 10-KSB for the fiscal year
ended December 31, 1996 and previously filed with the Commission.

** Incorporated by reference to the Company's Definitive Proxy Statement for the
Company's 1996 Annual Meeting  previously  filed with the Commission  (and, with
respect to the Stock Option Plan, as amended  pursuant to the terms set forth in
the Definitive Proxy Statement for the Company's 1998 Annual Meeting).


<PAGE>45

                                   SIGNATURES

        In  accordance  with  Section  13 or  15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                                   HUMBOLDT BANCORP


          3/22/99                            THEODORE S. MASON
Date:______________________________  By:______________________________________
                                         Theodore S. Mason
                                         President & Chief Executive Officer

        In  accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

THEODORE S. MASON                       ALAN J. SMYTH
-----------------------------------    ----------------------------------------
Theodore S. Mason, President, Chief    Alan J. Smyth, Senior Vice President &
Executive Officer & Director           Board Secretary
(Principal Executive Officer)          (Principal Financial Officer)

RONALD F. ANGELL                        MARGUERITE DALINANES
-----------------------------------    ----------------------------------------
Ronald F. Angell, Chairman of the      Marguerite Dalinanes, Director  
Board

GARY L. EVANS                           LAWRENCE FRANCESCONI
-----------------------------------    ----------------------------------------
Gary L. Evans, Director                Lawrence Francesconi, Director

CLAYTON R. JANSSEN                      JAMES O. JOHNSON
-----------------------------------    ----------------------------------------
Clayton R. Janssen, Director           James O. Johnson, Director

JOHN MCBETH                             MICHAEL RENNER
-----------------------------------    ----------------------------------------
John McBeth, Director                  Michael Renner, Director

JERRY L. THOMAS                         EDYTHE E. VAISSADE          
-----------------------------------    ----------------------------------------
Jerry L. Thomas, Director              Edythe E. Vaissade, Director

JOHN R. WINZLER
-----------------------------------
John R. Winzler, Director

<PAGE>F-1


                          INDEPENDENT AUDITOR'S REPORT



Board of Directors
Humboldt Bancorp and Subsidiary
Eureka, California


We have audited the accompanying consolidated balance sheets of Humboldt Bancorp
(Bancorp)  and  Subsidiary  as of December  31,  1998 and 1997,  and the related
consolidated statements of operations,  changes in stockholders' equity and cash
flows for each of the three years in the period ended  December 31, 1998.  These
financial  statements are the  responsibility of the Bancorp's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

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



January 15, 1999

<PAGE>F-2



                         HUMBOLDT BANCORP AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1998 and 1997
                             (dollars in thousands)


                                                            1998        1997
                                                           -------     ------
ASSETS
   Cash and due from banks                              $   28,626   $  21,442
   Interest-bearing deposits in other banks                  3,020       3,020
   Federal funds sold                                        2,250       3,520
   Investment securities, at fair value                     77,802      80,180
   Loans held for sale                                       7,677          48
   Loans and lease financing receivables, net              178,361     157,464
   Premises and equipment, net                               7,950       5,635
   Accrued interest receivable and other assets             14,289      12,778
                                                        ----------   ---------
                                   TOTAL ASSETS         $  319,975   $ 284,087
                                                        ==========   =========


LIABILITIES
   Deposits
      Noninterest-bearing demand                        $   96,884   $  70,767
      Interest-bearing                                     187,083     184,419
                                                        ----------   ---------
                                   Total Deposits          283,967     255,186
   Accrued interest payable and other liabilities            4,758       3,586
   Long-term debt                                            3,402       1,761
                                                        ----------   ---------
                                TOTAL LIABILITIES          292,127     260,533

   Commitments and contingencies (see accompanying notes)


STOCKHOLDERS' EQUITY
   Common stock, no par value; 20,000,000 shares
      authorized, 1,787,954 shares in 1998 and
      1,576,542 shares in 1997 issued and outstanding       25,580      20,495
   Additional paid-in capital                                  297         114
   Retained earnings                                         1,485       2,200
   Accumulated other comprehensive income                      486         745
                                                        ----------   --------- 
                         TOTAL STOCKHOLDERS' EQUITY         27,848      23,554
                                                        ----------   --------- 
                                TOTAL LIABILITIES AND
                                STOCKHOLDERS' EQUITY    $  319,975   $ 284,087
                                                        ==========   =========


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

<PAGE>F-3


                         HUMBOLDT BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF OPERATIONS

              For the years ended December 31, 1998, 1997 and 1996
                             (dollars in thousands)

<TABLE>
<CAPTION>

                                                                 1998          1997          1996          
                                                             ----------     ---------     --------- 
<S>                                                         <C>            <C>           <C>
INTEREST INCOME
   Interest and fees on loans and leases                     $   18,762     $  15,961     $  13,773
   Interest and dividends on investment securities
      Taxable                                                     3,239         2,700         1,687
      Exempt from Federal income tax                                739           569           577
      Dividends                                                      78            83           102
   Interest on federal funds sold                                   512           612           374
   Interest on deposits in other banks                              174           128            49
                                                             ----------     ---------     ---------
                                Total Interest Income            23,504        20,053        16,562
INTEREST EXPENSE
   Interest on deposits                                           7,565         6,973         5,501
   Interest on long-term debt and other borrowings                  177            51            48
                                                             ----------     ---------     --------- 
                                Total Interest Expense            7,742         7,024         5,549
                                                             ----------     ---------     --------- 
                                   NET INTEREST INCOME           15,762        13,029        11,013
   Provision for loan and lease losses                            2,124           773           533
                                                             ----------     ---------     --------- 
                             NET INTEREST INCOME AFTER
                                PROVISION FOR LOAN AND
                                          LEASE LOSSES           13,638        12,256        10,480
OTHER INCOME
   Fees and other income                                          9,731         6,911         4,285
   Service charges on deposit accounts                            2,097         1,300           709
   Net gain (loss) on sale of loans                                 645          (204)           75
   Net investment securities gains                                                102           678
                                                             ----------     ---------     --------- 
                                    Total Other Income           12,473         8,109         5,747
OTHER EXPENSES
   Salaries and employee benefits                                 9,151         6,806         5,592
   Net occupancy and equipment expense                            2,711         2,466         1,792
   Other expenses                                                 7,716         6,224         3,941
                                                             ----------     ---------     --------- 
                                    Total Other Expenses         19,578        15,496        11,325
                                                             ----------     ---------     --------- 
                              Income Before Income Taxes          6,533         4,869         4,902
   Provision for income taxes                                     2,517         1,611         1,926
                                                             ----------     ---------     --------- 
                                              NET INCOME     $    4,016     $   3,258     $   2,976
                                                             ==========     =========     =========

                                    NET INCOME PER SHARE          $2.26         $1.88         $1.77
                                                                  =====         =====         =====

                NET INCOME PER SHARE---ASSUMING DILUTION          $2.06         $1.68         $1.59
                                                                  =====         =====         =====
</TABLE>


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

<PAGE>F-4


                         HUMBOLDT BANCORP AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

              For the years ended December 31, 1998, 1997 and 1996
                             (dollars in thousands)


<TABLE>
<CAPTION>


                                                                                                     Accumulated
                                                                      Additional                         Other
                              Comprehensive        Common Stock         Paid-In        Retained      Comprehensive
                                 Income         Shares      Amount      Capital        Earnings          Income          Total
                              -------------     ------      ------    ----------       --------      -------------     ---------

<S>                           <C>           <C>          <C>           <C>           <C>              <C>             <C>       
Balance at January 1, 1996                    1,266,509   $   14,852                  $   1,268        $     815       $   16,935

10% stock dividend                              126,346        2,179                     (2,179)
Fractional shares purchased                                                                  (5)                               (5)
Stock options exercised                          17,912          148                                                          148
Net income                     $     2,976                                                2,976                             2,976
Other comprehensive income,
  net of tax:
  Unrealized holding losses
    on securities available-
    for-sale arising during
    the year, net of taxes
    of $323                           (454)
Other comprehensive income,
  net of tax                          (454)                                                                 (454)            (454)
                               -----------    ---------   ----------   ---------       --------         --------       ----------
Total comprehensive income     $     2,522
                               ===========
               BALANCE AT
        DECEMBER 31, 1996                     1,410,767       17,179                      2,060              361           19,600

10% stock dividend                              143,110        3,113                     (3,113)
Fractional shares purchased                                                                  (5)                               (5)
Stock options exercised                          22,665          203                                                          203
Tax benefit of stock options
  exercised                                                            $     114                                              114
Net income                     $     3,258                                                3,258                             3,258
Other comprehensive income,
  net of tax:
  Unrealized holding gains
    on securities available-
    for-sale arising during
    the year, net of taxes
    of $274                            384
                               -----------
Other comprehensive income,
   net tax                             384                                                                   384             384
                               -----------    ---------   ----------   ---------       --------         --------       ---------
Total comprehensive income     $     3,642
                               ===========
               BALANCE AT
        DECEMBER 31, 1997                     1,576,542      20,495          114          2,200              745          23,554

</TABLE>

                                   (Continued)


<PAGE>F-5



                         HUMBOLDT BANCORP AND SUBSIDIARY

     CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)

              For the years ended December 31, 1998, 1997 and 1996
                             (dollars in thousands)


<TABLE>
<CAPTION>


                                                                                                     Accumulated
                                                                      Additional                         Other
                              Comprehensive        Common Stock         Paid-In        Retained      Comprehensive
                                 Income         Shares      Amount      Capital        Earnings          Income          Total
                              -------------     ------      ------    ----------       --------      -------------     ---------

<S>                           <C>           <C>          <C>           <C>           <C>              <C>             <C>       

10% stock dividend                              160,110   $    4,723                  $  (4,723)
Fractional shares purchased                                                                  (8)                       $       (8)
Stock options exercised                          51,302          362                                         362 
Tax benefit of stock options
   exercised                                                            $    183                             183 
Net income                     $     4,016                                                4,016                             4,016
Other comprehensive income,
   net of tax:
   Unrealized holding losses
      on securities available-
      for-sale arising during
      the year, net of taxes
      of $185                         (259)
                               -----------  
Other comprehensive income,
   net of tax                         (259)                                                                 (259)           (259)
                               -----------    ---------   ----------   ---------       --------         --------       ---------

Total comprehensive income     $     3,757
               BALANCE AT      ===========
        DECEMBER 31, 1998                     1,787,954   $   25,580   $     297       $  1,485         $    486       $  27,848
                                              =========   ==========   =========       ========         =========      =========

</TABLE>


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


<PAGE>F-6


                         HUMBOLDT BANCORP AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              For the years ended December 31, 1998, 1997 and 1996
                             (dollars in thousands)


<TABLE>
<CAPTION>


                                                                1998              1997            1996         
                                                             ----------        ----------      ----------- 

<S>                                                        <C>               <C>             <C> 
OPERATING ACTIVITIES
   Net income                                               $     4,016        $    3,258      $     2,976
   Adjustments to reconcile net income to net
      cash provided by operating activities:
        Provision for loan and lease losses                       2,124               773              533
        Depreciation                                              1,586             1,565            1,041
        Gain on sale of investments                                                  (102)            (678)
        Amortization and other                                    1,517             1,390              916
        Equity in income of subsidiary                             (259)              (22)
        (Increase) decrease in loans held for sale               (7,629)               15            1,817
        Increase in interest receivable and
           other assets                                            (734)           (1,422)            (520)
        Increase in interest payable and other
           liabilities                                            1,355             1,913              122
                                                             ----------        ----------      ----------- 
                                    NET CASH PROVIDED BY
                                    OPERATING ACTIVITIES          1,976             7,368            6,207

INVESTING ACTIVITIES
   Net (increase) decrease in interest-
        bearing deposits with banks                                                (3,000)           1,100
   Net decrease (increase) in federal funds sold                  1,270             3,050           (1,100)
   Proceeds from maturities and sales
        of investment securities available-for-sale              28,169            22,261           33,235
   Purchases of investment securities available-for-sale        (27,967)          (62,711)         (19,935)
   Net increase in loans and leases                             (23,370)          (15,491)         (30,289)
   Purchases of premises and equipment                           (3,901)           (1,100)          (2,096)
   Investment in partnership/subsidiary                             (91)           (2,000)
   Proceeds from the sale of OREO                                   322               139
   Premium paid on deposits purchased                                              (1,040)
   Purchases of life insurance policies                                                             (2,337)
                                                             ----------        ----------      ----------- 
                                        NET CASH USED BY
                                    INVESTING ACTIVITIES        (25,568)          (59,892)         (21,422)
FINANCING ACTIVITIES
   Net increase in deposit accounts                              28,781            62,535           18,050
   Net proceeds from long-term debt and notes payable             1,700             1,000               22
   Payments on long-term debt and notes payable                     (59)              (14)             (34)
   Proceeds from issuance of common stock                           362               203              148
   Fractional shares purchased                                       (8)               (5)              (5)
                                                             ----------        ----------      ----------- 
                                    NET CASH PROVIDED BY
                                    FINANCING ACTIVITIES         30,776            63,719           18,181
                                                             ----------        ----------      ----------- 
                                    NET INCREASE IN CASH
                                      AND DUE FROM BANKS          7,184            11,195            2,966

   Cash and due from banks at beginning of year                  21,442            10,247            7,281
                                                             ----------        ----------      ----------- 
                                       CASH AND DUE FROM
                                    BANKS AT END OF YEAR    $    28,626        $   21,442      $    10,247
                                                            ===========        ==========      ===========
</TABLE>

                                   (Continued)

<PAGE>F-7


                         HUMBOLDT BANCORP AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

              For the years ended December 31, 1998, 1997 and 1996
                             (dollars in thousands)


<TABLE>
<CAPTION>


                                                                1998              1997            1996         
                                                             ----------        ----------      ----------- 

<S>                                                        <C>               <C>             <C> 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

   Cash paid during the year for:
      Interest expense                                      $     7,755        $    6,940      $     5,535
      Income taxes                                          $     2,830        $    1,809      $     2,666

SUPPLEMENTAL DISCLOSURES OF NONCASH ACTIVITIES:

   Stock dividend                                           $     4,723        $    3,113      $     2,179
   Net change in unrealized gains on securities
      available-for-sale                                    $      (444)       $      658      $      (777)
   Net change in deferred income taxes on
      unrealized gains on securities available-
      for-sale                                              $       185        $     (274)     $       323
   Deposit liabilities assumed in exchange
      for assets acquired in connection
      with purchase of branches                                                $       75
   Loans transferred to OREO                                $       349        $       54      $       233


</TABLE>


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


<PAGE>F-8


                         HUMBOLDT BANCORP AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                        December 31, 1998, 1997 and 1996


NOTE A--SIGNIFICANT ACCOUNTING POLICIES

Business:  Humboldt  Bancorp,  formed in 1995,  is a bank holding  company whose
principal   activity  is  the  ownership  and  management  of  its  wholly-owned
subsidiary,  Humboldt  Bank.  The Bank was  incorporated  on March 13,  1989 and
opened for business on September 13, 1989.  The Bank operates under a California
state charter and is subject to regulation,  supervision and regular examination
by the 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 the Bank  conform  with
generally  accepted  accounting  principles  and  general  practices  within the
banking industry.

Principles of Consolidation:  The consolidated  financial statements include the
accounts of the Bancorp and its wholly-owned subsidiary,  the Bank. All material
intercompany accounts and transactions have been eliminated.

Nature of  Operations:  The Bank is locally  owned and  operated and its primary
service area is the communities of Northern  California.  The Bank's business is
primarily  focused on  servicing  the banking  needs of  individuals  living and
working in the Bank's  primary  service  areas and local  businesses,  including
retail, professional and real estate related enterprises in those service areas.
The Bank offers a broad range of services to individuals  and businesses with an
emphasis upon efficiency and  personalized  attention.  The Bank provides a full
line of  consumer  services,  and  also  offers  specialized  services  to small
businesses,  middle market  companies,  and professional  firms, such as courier
services and appointment banking. The Bank offers personal and business checking
and savings accounts (including individual interest-bearing negotiable orders of
withdrawal  ("NOW")  accounts  and/or  accounts  combining  checking and savings
accounts with automatic transfers), IRA and Keogh accounts, time certificates of
deposit and direct deposit of social  security,  pension and payroll checks.  It
also makes available commercial,  construction,  accounts receivable, inventory,
automobile,   home  improvement,   real  estate,  office  equipment,   leasehold
improvement,  lease  receivable  financing and other consumer  loans  (including
overdraft  protection  lines of credit),  drafts and standby  letters of credit,
credit card activities to both individuals (including both secured and unsecured
credit cards) and  merchants and  travelers'  checks  (issued by an  independent
entity).

Use of Estimates:  The  preparation of financial  statements in conformity  with
generally accepted  accounting  principles 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.

Investment Securities: Securities are classified as held-to-maturity if the Bank
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 interest
method over their contractual lives.

Securities  are  classified  as  available-for-sale  if the Bank 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 the Bank's  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  reported as increases or  decreases  in  stockholders'  equity,  net of the
related deferred tax effect.  Realized gains or losses,  determined on the basis
of the cost of specific securities sold, are included in earnings.

<PAGE>F-9


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)

Loans and Leases Held for Sale:  The Bank sells mortgage  loans,  the guaranteed
portion  of  Small  Business  Administration  (SBA)-guaranteed  loans  and  loan
participations  (with  servicing  retained)  for  cash  proceeds  equal  to  the
principal  amount of loans,  participation  or leases  with  yield  rates to the
investor  based upon the current  market rate. In accordance  with  Statement of
Financial  Standards  (SFAS) No. 125,  Accounting for Transfers and Servicing of
Financial Assets and  Extinguishment  of Liabilities,  the Bank records an asset
representing  the right to  service  loans for  others  when it sells a loan and
retains the servicing  rights.  The total cost of  originating or purchasing the
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.

SFAS No. 125 also required the assessment of all  capitalized  servicing  rights
for  impairment  based on current  fair value of those  rights.  For purposes of
evaluating and measuring impairment,  the Bank stratifies servicing rights based
on the type and interest rates of the underlying  loans.  Impairment is measured
as the  amount by which the  servicing  rights for a stratum  exceed  their fair
value.

A  premium over the  adjusted  carrying  value is received  upon the sale of the
guaranteed  portion  of an SBA loan.  The  Bank'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.

Loans  and  leases  held for sale are  recorded  at the  lower of cost or market
determined on an aggregate basis.

Loans and Lease Financing Receivables: Loans and leases 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.

The  Bank's   leasing   operations   consist   principally  of  the  leasing  of
point-of-sale   terminals,   printers  for  credit  card  vouchers  and  related
equipment.  The Bank also has  purchased  small  equipment  leases from  Bancorp
Financial  Services,  a subsidiary of the Bancorp.  All of the Bank's leases are
classified  and  accounted  for as direct  financing  leases.  Under the  direct
financing  method of  accounting  for leases,  the total net rentals  receivable
under the  lease  contracts,  net of  unearned  income,  are  recorded  as a net
investment in direct  financing  leases,  and the unearned  income is recognized
each month as it is earned so as to produce a constant  periodic  rate of return
on the unrecovered investment.

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

Beginning  in 1997,  credit  card  origination  costs were  deferred  and netted
against the related credit card fee, if any, and the net amount was amortized on
a  straight-line  basis over the initial  privilege  period.  Fees  received and
marketing  costs  incurred in  connection  with  unsuccessful  efforts to create
credit  card  relationships  were  recorded  as  revenue  and  expense  when the
refundable  period  expired.   Amounts  paid  to  third-party  direct  marketing

<PAGE>F-10



                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)

specialists  related to successful  efforts to create credit card  relationships
were deferred and netted against related fees and all other amounts are recorded
as expenses in the period the services were  performed.  Annual service fees are
deferred and amortized over the credit card privilege period.

Allowance  for Loan and Lease  Losses:  The  allowance is  maintained at a level
which,  in the opinion of  management,  is adequate  to absorb  probable  losses
inherent in the loan,  including credit card receivables,  and lease portfolios.
Credit  losses  related to  off-balance-sheet  instruments  are  included in the
allowance  for loan and lease  losses  except if the loss meets the criteria for
accrual under  Statement of Financial  Accounting  Standard No. 5, in which case
the  amount is  accrued  and  reported  separately  as a  liability.  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 leases and other  pertinent  factors.  The
allowance is based on estimates,  and ultimate  losses may vary from the current
estimates.  These  estimates are reviewed  quarterly 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.
Credit card  receivables  are charged to the allowance when they become 120 days
past due.  Provisions for losses and  recoveries on loans and leases  previously
charged off are added to the allowance.

Commercial  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 and  Leases:  Loans and
leases,  including  impaired  loans and  leases,  are  generally  classified  as
nonaccrual  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.  If a loan or lease or a portion
of a loan or lease is  classified  as doubtful or is partially  charged off, the
loan or lease 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 and leases  may be  returned  to accrual  status  when all  principal  and
interest amounts contractually due (including arrearages) are reasonably assured
of  repayment  within an  acceptable  period of time,  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 or lease 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.  When the future
collectibility  of the  recorded  balance is  expected,  interest  income may be
recognized on a cash basis.

In the case where a  nonaccrual  loan or lease had been  partially  charged off,
recognition of interest on a cash basis is limited to that which would have been
recognized  on the  recorded  balance at the  contractual  interest  rate.  Cash
interest  receipts in excess of that amount are  recorded as  recoveries  to the
allowance  for loan and lease  losses  until prior  charge-offs  have been fully
recovered.


<PAGE>F-11

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Foreclosed Real Estate: Foreclosed real estate includes both formally foreclosed
property  and  in-substance   foreclosed   property.   In-substance   foreclosed
properties  are  those   properties  for  which  the  Bank  has  taken  physical
possession,  regardless of whether  formal  foreclosure  proceedings  have taken
place.  At the time of  foreclosure,  foreclosed  real estate is recorded at the
lower of the carrying amount or fair value less cost 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,
valuations  are  periodically  performed  by  management  and the real estate is
carried at the lower of their new cost basis or fair value minus 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 foreclosed real
estate.

Intangible   Assets:   The  premiums   paid  to  acquire  the  deposits  of  the
McKinleyville,   Arcata,  Weaverville,  Willow  Creek,  Loleta  and  Garberville
branches  were  allocated  to core deposit  intangibles  based on the results of
valuation  studies  performed  to  determine  the fair value of the deposit base
acquired.  Core  deposit  intangibles  are being  amortized  over the  estimated
remaining life of the related deposits.

Investment  in  Subsidiary:  The Bank,  along with another  bank,  have formed a
California  corporation,  Bancorp  Financial  Services,  Inc. for the purpose of
operating an equipment  leasing  company.  In January 1997, the Bank contributed
capital  totaling  $2,000,000  for a  50%  interest  in  this  corporation.  The
investment  is  accounted  for  using  the  equity  method.  During  1998,  this
investment was transferred to the Bancorp.

Income Taxes:  Provisions for income taxes are based on amounts  reported in the
statements of operations (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
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.

Advertising:  Advertising costs are charged to operations in the year incurred.

Net Income Per Share: Net income 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.   Net  income  per
share---assuming  dilution  is computed  similar to net income 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 computed under the treasury method.

<PAGE>F-12


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE A--SIGNIFICANT ACCOUNTING POLICIES (Continued)

Off-Balance-Sheet  Financial Instruments: In the ordinary course of business the
Bank has entered into off-  balance-sheet  financial  instruments  consisting of
commitments to extend credit,  commitments  under credit card  arrangements  and
standby  letters of credit.  Such  financial  instruments  are  recorded  in the
financial statements when they become payable.

Cash and Cash  Equivalents:  For the purpose of presentation in the Statement of
Cash Flows,  cash and cash  equivalents are defined as those amounts included in
the balance sheet caption "Cash and due from banks."


NOTE B--RESTRICTIONS ON CASH AND DUE FROM BANKS AND INTEREST-BEARING DEPOSITS IN
OTHER BANKS

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.  The total  requirements at December 31, 1998 and 1997 were $10,936,000
and $6,060,000, respectively.

Interest-bearing  deposits in other banks  totaling  $3,000,000  were pledged to
MasterCard  International  as of  December  31, 1998 and 1997 to secure the full
performance of all of the Bank's payment obligations to MasterCard in connection
with the Bank's MasterCard membership.


NOTE C--INVESTMENT SECURITIES

The amortized cost of investment securities and their approximate fair values at
December 31 were as follows (dollars in thousands):

<TABLE>
<CAPTION>


                                                  Amortized      Unrealized     Unrealized          Fair
                                                     Cost           Gains         Losses            Value
                                                  ---------      ----------     -----------         -----
<S>                                              <C>            <C>             <C>              <C>
December 31, 1998:

Available-for-Sale
   U.S. Government and agency securities           $   3,000      $       13                      $   3,013
   Municipal securities                               16,227             890     $         7         17,110
   Collateralized mortgage obligations issued
      by U.S. government agencies                     56,682             286             353         56,615
   Equity securities                                   1,062               2                          1,064
                                                   ---------      ----------     -----------      ---------

                    Total available-for-sale       $  76,971      $    1,191     $       360      $  77,802
                                                   =========      ==========     ===========      =========

</TABLE>

<PAGE>F-13

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE C--INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>


                                                  Amortized      Unrealized     Unrealized          Fair
                                                     Cost           Gains         Losses            Value
                                                  ---------      ----------     -----------         -----

<S>                                             <C>             <C>             <C>              <C>  
December 31, 1997:

Available-for-Sale
   U.S. Government and agency securities           $   2,996      $       11                      $   3,007
   Municipal securities                               12,190             581                         12,771
   Collateralized mortgage obligations issued
      by U.S. government agencies                     62,433             698     $        17         63,114
   Equity securities                                   1,286               2                          1,288
                                                   ---------      ----------     -----------      ---------
                    Total available-for-sale       $  78,905      $    1,292     $        17      $  80,180
                                                   =========      ==========     ===========      =========
</TABLE>


The  maturities  of  investment  securities at December 31, 1998 were as follows
(dollars in thousands):

                                                      Amortized         Fair
                                                        Cost            Value
                                                    ------------     ---------
Amounts maturing in:
      3 months or less                              $      2,677     $   2,444
      Over three months through twelve months             13,385        12,835
      After one year through three years                  36,056        36,822
      After three years through five years                 7,257         7,299
      After five years through fifteen years              10,384        10,958
      After fifteen years                                  6,150         6,380
      Equity securities                                    1,062         1,064
                                                    ------------     ---------
                                                    $     76,971     $  77,802
                                                    ============     =========

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

Proceeds from sales of  investment  securities  available-for-sale  during 1998,
1997 and 1996 were $445,550, $12,418,000, and $27,766,000,  respectively.  Gross
gains and losses on those sales were  $108,000  and $6,000 in 1997 and  $683,000
and  $5,000  in  1996,  respectively.  There  were no  gains  or  losses  on the
investment securities sold in 1998.

Investment  securities  with an amortized cost of  approximately  $3,000,000 and
$2,002,000  and an  approximate  market value of  $3,013,000  and  $2,009,000 at
December 31, 1998 and 1997, respectively,  were pledged to meet the requirements
of the  Federal  Reserve  and the U. S.  Department  of  Justice.  In  addition,
investment  securities  with an amortized cost of  approximately  $4,878,000 and
$5,084,000 approximate market value of $4,804,000 and $5,173,000 at December 31,
1998 and 1997,  respectively,  were  pledged  to secure  public  funds and other
deposits.   Furthermore,   investment  securities  with  an  amortized  cost  of
approximately  $5,289,000  and an  approximate  market  value of  $5,224,000  at
December  31, 1998 were  pledged as  collateral  for an advance from the Federal
Home Loan Bank. In addition,  investment  securities  with an amortized  cost of
approximately  $10,188,000  and $2,179,000  and an  approximate  market value of
$10,229,000 and $2,182,000 at December 31, 1998  and  1997,  respectively,  were

<PAGE>F-14


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE C--INVESTMENT SECURITIES (Continued)

pledged  to Visa and  Mastercard  to secure the full  performance  of all of the
Bank's payment  obligations to Visa and Mastercard in connection with the Bank's
Visa and Mastercard membership.


NOTE D--LOANS AND LEASE FINANCING RECEIVABLES, NET

The  components of loans and lease  financing  receivables in the balance sheets
were as follows at December 31 (dollars in thousands):
                                                             1998        1997
                                                          ---------   ---------

    Real estate--construction and land development        $  20,667   $  20,165
    Real estate--commercial and agricultural                 80,197      65,772
    Real estate--family and multifamily residential          27,549      27,205
    Commercial, industrial and agricultural                  35,493      28,766
    Lease financing receivables, net of unearned
      income of $1,896,000 and $1,395,000 in
      1998 and 1997, respectively                             9,867       8,732
    Credit card receivables                                   5,672       7,062
    Consumer loans, net of unearned income of $1,000
      and $15,000 in 1998 and 1997, respectively              2,110       2,440
    Other                                                       585         502
                                                          ---------   ---------
                                                            182,140     160,644
    Deferred loan fees                                         (724)       (809)
    Allowance for loan and lease losses                      (3,055)     (2,371)
                                                          ---------   ---------
                                                          $ 178,361   $ 157,464
                                                          =========   ========= 

The  maturity  and  repricing  distribution  of the loan and lease  portfolio at
December 31, 1998 and 1997, follows (dollars in thousands):

                                                             1998        1997
                                                          ---------   ---------


   Three months or less                                   $  71,990   $  76,777
   Over three months to twelve months                        15,463      10,904
   Over one year to three years                              28,428      24,119
   Over three years to five years                            32,113      16,517
   Over five years to fifteen years                          21,979      22,186
   Over fifteen years                                        11,856       9,303
                                                          ---------   ---------
                                                            181,829     159,806
   Nonaccrual loans                                             311         838
                                                          ---------   ---------
                                                          $ 182,140   $ 160,644
                                                          =========   =========

At  December  31,  1998  and  1997  approximately   $1,348,000  and  $2,449,000,
respectively,  of the Bank's  credit card  receivables  were  secured by savings
accounts.

<PAGE>F-15

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE D--LOANS AND LEASE FINANCING RECEIVABLES, NET (Continued)

At December 31, 1998, the recorded  investment in loans for which impairment has
been  recognized in accordance with Statement No. 114 totaled  $338,000,  with a
corresponding  valuation  allowance  of  $126,000.  At December  31,  1997,  the
recorded  investment in loans for which  impairment has been recognized  totaled
$748,000,  with a corresponding  valuation allowance of $166,000.  For the years
ended  December 31, 1998,  1997 and 1996,  the average  recorded  investment  in
impaired loans was approximately $515,000, $156,000 and $247,000,  respectively.
In 1998 the Bank  recognized  $41,000 of interest on impaired  loans (during the
portion of the year that they were  impaired),  of which  $21,000 was related to
impaired  loans for which interest  income was recognized on the cash basis.  In
1997 and 1996, the Bank recognized  $5,000 and $2,000,  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.

In addition,  at December 31, 1998, 1997 and 1996, the Bank had other nonaccrual
loans of approximately  $246,000,  $97,000 and $218,000 for which impairment had
not been  recognized.  If  interest on these  loans had been  recognized  at the
original  interest  rates,  interest  income would have increased  approximately
$16,000 in 1998, $5,000 in 1997 and $12,000 in 1996. The Bank has no commitments
to loan additional funds to the borrowers of impaired or nonaccrual loans.

The Bank receives fees for  servicing  retained on loans and leases sold.  Loans
and leases being  serviced by the Bank for others were as follows at December 31
(dollars in thousands):

                                          1998          1997            1996
                                      -----------   ------------     ---------- 

   Loans                              $   144,531   $    123,232     $  101,355
   Lease financing receivables                  2            701          3,078
   Credit                                                    904         
                                      -----------   ------------     ---------- 
                                      $   144,533   $    124,837     $  104,433
                                      ===========   ============     ==========

An  analysis  of the changes in the  allowance  for loan and lease  losses is as
follows for the years ended December 31 (dollars in thousands):

                                          1998          1997            1996
                                      -----------   ------------     ---------- 


Beginning balance                     $     2,371   $      2,146     $    1,868
  Provision for loan and lease losses       2,124            773            533
  Credit cards charged off                   (956)          (475)
  Leases charged off                         (316)          (124)          (132)
  Loans charged off                          (362)          (211)          (242)
  Credit card recoveries                      105             87
  Lease recoveries                             24             34             34
  Loan recoveries                              65            141             85
                                      -----------   ------------     ---------- 
Ending balance                        $     3,055   $      2,371     $    2,146
                                      ===========   ============     ==========

<PAGE>F-16


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE E--PREMISES AND EQUIPMENT

Components  of premises  and  equipment  included  the  following at December 31
(dollars in thousands):

                                               1998               1997        
                                            ----------         ----------

   Land                                     $    1,962         $    1,042
   Buildings and improvements                    5,168              3,269
   Furniture, fixtures and equipment             3,007              3,656
   Leasehold improvements                          203                  9
                                            ----------         ----------
                                                10,340              7,976
   Accumulated depreciation                     (2,390)            (2,341)
                                            ----------         ----------
                                            $    7,950         $    5,635
                                            ==========         ==========


NOTE F--INVESTMENT IN SUBSIDIARY

The  following  information  summarizes  the  activity  of the  subsidiary  from
inception in January 1997  through  November 30, 1997 and for the twelve  months
ended November 30, 1998 (in thousands):

                                               1998               1997        
                                            ----------         ----------


   Balance sheet
      Assets                                $   21,323         $   11,794
                                            ==========         ==========

      Liabilities                           $   16,761         $    7,750
      Equity                                     4,562              4,044
                                            ----------         ----------
                                            $   21,323         $   11,794
                                            ==========         ==========
   Income statement
      Revenues                              $    3,055         $    1,018
      Expenses                                   2,537                974
                                            ----------         ----------
         Net income                                518                 44
                                            x       50%        x       50%
                                            ----------         ----------
      Bancorp's share of net income         $      259         $       22
                                            ==========         ==========


NOTE G--TRANSFERS OF FINANCIAL ASSETS

During the year ended December 31, 1998, the Bank recorded $739,000 of servicing
rights  related to loans  originated  and sold.  Amortization  of the  servicing
rights was $141,000 for the year ended  December 31, 1998.  The  estimated  fair
value of the  servicing  assets  aggregated  $598,000 at December  31,  1998.  A
valuation  allowance  is  recorded  where the fair  value is below the  carrying
amount of the servicing  assets.  No valuation  allowance was needed at December
31, 1998.

<PAGE>F-17



                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE H--INTEREST-BEARING DEPOSITS

Interest-bearing  deposits consisted of the following at December 31 (dollars in
thousands):

                                              1998                1997
                                          -----------         ---------- 

Negotiable order of withdrawal (NOW)      $    22,314         $   21,575
Savings and money market                       48,936             52,380
Time, $100,000 and over                        46,355             40,643
Other time                                     69,478             69,821
                                          -----------         ----------
                                          $   187,083         $  184,419
                                          ===========         ==========

Interest expense on these deposits for the years ended December 31 is as follows
(dollars in thousands):

                                       1998         1997         1996          
                                     --------    ---------    ---------

 NOW                                 $    207    $     190    $     162
 Savings and money market               1,232        1,327        1,082
 Time, $100,000 and over                2,412        1,803        1,245
 Other time                             3,714        3,653        3,012
                                     --------    ---------    ---------
                                     $  7,565    $   6,973    $   5,501
                                     ========    =========    =========

The maturities of time deposits at December 31, 1998 are as follows  (dollars in
thousands):

   Three months or less                                     $  47,015
   Over three months through twelve months                     57,522
   Over one year through three years                            9,491
   Over three years                                             1,805
                                                            --------- 
                                                            $ 115,833
                                                            =========

NOTE I--LINE OF CREDIT

The Bank has  uncommitted  federal  funds  lines of credit  agreements  with two
financial institutions. The maximum borrowings available under the lines totaled
$10,500,000.  Availability  of this line is subject to  federal  funds  balances
available for loan and continued borrower  eligibility.  The line is 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, 1998 there were no borrowings outstanding under the agreements.

<PAGE>F-18


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE J--LONG-TERM DEBT

The Bank has three advances totaling  $3,402,000 from the Federal Home Loan Bank
(FHLB) at December  31,  1998.  The first  advance  totaling  $747,000 is due in
monthly  installments  of principal and  interest,  at 6.19%,  of  approximately
$5,000  through  February 15, 2004.  The second  advance of $1,000,000 is due at
maturity on December 31, 2007. Interest is due semi-annually at 6.18%. The third
advance  totaling  $1,655,000  is due in monthly  installments  of principal and
interest,  at 6.08%, of approximately  $14,000 through April 8, 2013. Investment
securities  with an amortized cost of $5,289,000 and  approximate  fair value of
$5,224,000  at  December  31,  1998,  were held as  collateral  for these  three
advances.  The Bank also had loans  with an  approximate  principal  balance  of
$1,991,000 at December 31, 1998 pledged as collateral for these advances.

Scheduled  principal  repayments of long-term debt, assuming no changes in their
terms,  for the five years ending  December 31, 2003 are as follows  (dollars in
thousands):

                    1999          $  86
                    2000             93
                    2001             99
                    2002            107
                    2003            114


NOTE K--FEES AND OTHER INCOME

Fees and other income consisted of the following for the years ended December 31
(dollars in thousands):

                                                1998         1997        1996 
                                             --------     --------    --------

Merchant credit card processing fees         $  6,177     $  3,906    $  2,508
Lease residuals and rentals                     1,575        1,306         752
Credit card program fees                        1,019          778         169
Fees for customer services                        346          291         287
Earnings on life insurance                        106          195         142
Loan and lease servicing fees                      87          346         370
Other (none exceeding 1% of revenues)             421           89          57
                                             --------     --------    --------
                                             $  9,731     $  6,911    $  4,285
                                             ========     ========    ======== 

<PAGE>F-19


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE L--OTHER EXPENSES

Other  expenses  consisted  of the  following  for the years  ended  December 31
(dollars in thousands):

                                             1998         1997          1996
                                          ----------    ---------     -------

Merchant credit card program              $    2,665    $     822     $   434
Professional and other outside services        1,122        1,342         693
Stationery, supplies and postage                 884          887         542
Telephone and travel                             598          478         424
Amortization of core deposit intangible          372          426         372
Credit card program                              346        1,021         170
Data processing and ATM fees                     324          170         199
Development                                      249          242         129
Advertising                                      247          265         235
FDIC and other insurance                         186          164         480
Other (none exceeding 1% of revenues)            723          407         263
                                          ----------    ---------     -------
                                          $    7,716    $   6,224     $ 3,941
                                          ==========    =========     =======

NOTE M--INCOME TAXES

The  components of income tax expense  included in the  statements of operations
were as follows for the years ended December 31 (dollars in thousands):

                                              1998          1997         1996
                                           ---------     ---------    ---------
Currently payable
  Federal                                  $   2,104     $   1,707    $   1,757
  State                                          735           602          624
                                           ---------     ---------    ---------
                                               2,839         2,309        2,381
Deferred tax benefit
  Federal                                       (394)         (606)        (324)
  State                                         (111)         (206)        (131)
                                           ---------     ---------    ---------
                                               2,839         2,309        2,381
                                                (505)         (812)        (455)
Tax benefit of exercised stock options
  recorded as additional paid in capital         183           114       
                                           ---------     ---------    ---------
Net provision for income taxes             $   2,517     $   1,611    $   1,926
                                           =========     =========    =========

<PAGE>F-20

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE M--INCOME TAXES (Continued)

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 (dollars in thousands):

                                                 1998       1997        1996
                                               --------   ---------   -------- 

Income tax at Federal statutory rate           $  2,221   $   1,655   $  1,667
  State franchise tax, less federal
    income tax benefit                              467         348        366
  Interest on municipal obligations exempt
    from Federal tax                               (227)       (176)      (193)
  Non statutory stock option expense                                       (91)
  Interest on enterprise zone loans exempt
    from State tax                                  (38)        (52)       (58)
  Life insurance earnings and expenses              (55)        (93)       (20)

  Deferred tax asset valuation allowance
    change                                          122         (99)       252
  Other differences                                  27          28          3 
                                               --------   ---------   -------- 
Provision for income taxes                     $  2,517   $   1,611   $  1,926
                                               ========   =========   ========

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 (dollars in thousands):

                                            1998        1997        1996       
                                           --------    -------    -------- 

Deferred tax assets:
  Allowance for loan and lease losses      $   944     $   795    $    769
  Nonqualified benefit plans                   984         681         429
  Deferred loan fees                           295         333         317
  State franchise taxes                        249         205         212
  Depreciation                                 525         397         179
  Merchant Bankcard program                    379         280         182
  Core deposit intangible amortization         186         115         107
  Deferred credit card fees                     84         110
  Other                                         88          53          37
                                           -------     -------     -------  
               Total deferred tax assets     3,734       2,969       2,232

  Valuation allowance for
    deferred tax assets                       (441)       (319)       (418)
                                           -------     -------     -------  

          Deferred tax assets recognized     3,293       2,650       1,814


<PAGE>F-21

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE M--INCOME TAXES (Continued)

                                            1998     1997        1996       
                                          -------   -------    --------  
Deferred tax liabilities:
  Unrealized securities holding gains     $   346   $   530    $    257
  Equity in income of subsidiaries            116         8
  FHLB stock dividends                         49        33
  Other                                        40        25          42
                                          -------   -------    -------- 
      Total deferred tax liabilities          551       596         299
                                          -------   -------    -------- 
              Net deferred tax asset      $ 2,742   $ 2,054    $  1,515
                                          =======   =======    ======== 

Amounts  presented for the tax effects of temporary  differences  are based upon
estimates and  assumptions and could vary from amounts  ultimately  reflected on
the Bank'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  payable were  $207,000 and $199,000 at December 31, 1998 and 1997,
respectively.  The income tax expense related to net investment securities gains
was $42,000 and $281,000 during 1997 and 1996,  respectively.  There were no net
investment gains during 1998.


NOTE N--EARNINGS PER SHARE

The following is a computation  of basic and diluted  earnings per share for the
years ended December 31 (dollars in thousands, except per share amounts):

                                              1998         1997         1996
                                           ----------   ----------   ---------- 
Basic:

Net income                                 $    4,016   $    3,258   $    2,976
                                           ==========   ==========   ==========
Weighted-average common shares outstanding  1,773,788    1,729,448    1,686,129
                                           ==========   ==========   ==========
Earnings per share                         $     2.26   $     1.88   $     1.77
                                           ==========   ==========   ==========

<PAGE>F-22

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE N--EARNINGS PER SHARE (Continued)



Diluted:

Net income:                         $     4,016   $     3,258    $     2,976
                                    ===========   ===========    ===========
Weighted-average common shares 
  outstanding                         1,773,788     1,729,448      1,686,129

Net effect of dilutive stock 
  options - based on the treasury 
  stock method using average 
  market price                          177,835       214,355        184,483
                                    -----------   -----------    -----------
Weighted-average common shares 
  outstanding and common stock 
  equivalents                         1,951,623     1,943,803      1,870,612
                                    ===========   ===========    ===========
Earnings per share - assuming 
  dilution                          $      2.06   $      1.68    $      1.59
                                    ===========   ===========    =========== 

Options  to  purchase  11,000  shares of common  stock at $28.18  per share were
outstanding  at December  31, 1997 but were not included in the  computation  of
diluted EPS because the  options'  exercise  price was greater  than the average
market price of the common shares. All options  outstanding at December 31, 1998
and 1996 were included in the computation of diluted EPS.


NOTE O--BENEFIT PLANS

Retirement  Plan: The Bank has a defined  contribution  retirement plan covering
substantially  all of the Bank's employees.  Bank  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 benefits expense includes Bank
contributions  to the plan of $189,000  during  1998,  $134,000  during 1997 and
$98,000 during 1996.

Director Fee Plan:  The Bancorp has adopted the Humboldt  Bank Director Fee Plan
(the "Fee Plan").  The Fee Plan  permits each Bank  director to elect to receive
his/her  director's  fees in the  form  of  Bancorp  common  stock,  cash,  or a
combination  of Bancorp common stock and cash, and to elect to defer the receipt
of any of the  foregoing  until the end of his/her term as a Bank  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 Bank and  Bancorp  to  pay/distribute  on this
account. The account is otherwise unsecured, unfunded and subject to the general
claims of  creditors  of the Bank and  Bancorp.  The Fee Plan  provides  for the
issuance of up to 40,000 shares of Bancorp common stock. The amount of such fees
deferred in 1998 and 1997 totaled $58,000 and $43,000, respectively. At December
31,  1998 and 1997,  the  liability  for  amounts  due under  this plan  totaled
$110,000 and $63,000,  respectively,  or approximately 4,800 and 3,000 shares of
stock.


<PAGE>F-23


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE O--BENEFIT PLANS (Continued)

Employee Stock Bonus Plan: The Bancorp has an Employee Stock Bonus Plan which is
funded  annually at the sole  discretion  of the Board of  Directors.  Funds are
invested in Bancorp  stock,  when  available,  and is  purchased  at the current
market price on behalf of all  employees  except the  executive  officers of the
Bank. The compensation  cost recognized for 1998, 1997 and 1996 was $20,000 each
year.


NOTE P--STOCK OPTION PLAN

At December 31, 1998, the Bancorp has a stock-based compensation plan consisting
of a fixed  stock  option plan which is  described  below.  The Bancorp  applies
Accounting  Principles  Board  Opinion  No. 25 and  related  Interpretations  in
accounting for its plan.  Accordingly,  no compensation cost has been recognized
for its stock option plan. Had compensation  cost for the Bancorp's stock option
plan been determined based on the fair value at the grant dates for awards under
this plan  consistent  with the method of SFAS No. 123, the Bancorp's net income
and net  income  per share  would have been  adjusted  to the pro forma  amounts
indicated below (dollars in thousands):

                                          1998          1997         1996
                                        -------       -------      ------- 
Net income
  As reported                           $ 4,016       $ 3,258      $ 2,976
  Pro forma                               3,716         3,194        2,946

Net income per share
  As reported                              2.26          1.88         1.77
  Pro forma                                2.09          1.85         1.75

Net income per share--assuming dilution
  As reported                              2.06          1.68         1.59
  Pro forma                                1.90          1.64         1.57

The Bancorp has a stock option plan under which incentive and nonstatutory stock
options,  as defined under the Internal  Revenue Code,  may be granted.  Options
representing 165,911 shares of the Bancorp's issued and outstanding no par value
common  stock  may be  granted  under  the  plan by the  Board of  Directors  to
directors,  officers and key, full-time  employees at an exercise price not less
than the fair market value of the shares on the date of grant.  Options may have
an exercise  period of not longer than 10 years and the options are subject to a
graded  vesting   schedule  of  33%  per  year  for  incentive   stock  options.
Nonstatutory  stock options vest immediately.  In addition,  284,279 options are
outstanding as a result of Bancorp's  assumption of options  granted by Humboldt
Bank prior to the reorganization.

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 used for grants in 1996, 1997 and 1998, respectively; dividend yield
of zero for all years;  expected  volatility of 9.40 percent for 1996, 10.69 for
1997 and 1998;  risk- free  interest  rates of 5.54 percent and 6.29 percent for
1996,  5.85  percent and 6.48 percent for 1997 and 5.95 percent for 1998 for the
incentive options; risk-free interest rates of 5.85 percent and 6.65 percent for
1996,  5.86  percent and 6.87 percent for 1997 and 5.94 percent and 5.02 percent
for 1998 for the  nonstatutory  options;  and expected lives of 10 years for the
incentive options for all years and 5 years for the nonstatutory options granted
in 1996 and 10 years for nonstatutory options granted in 1997 and 1998.

<PAGE>F-24

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE P--STOCK OPTION PLAN (Continued)

A summary of stock option  activity,  adjusted to give effect to stock dividends
follows:

<TABLE>
<CAPTION>


                                                Incentive Stock Options     
                                      1998                      1997                         1996                          
                          Weighted-                  Weighted-                   Weighted-
                           Average                    Average                     Average
                        Exercise Price    Shares   Exercise Price      Shares   Exercise Price    Shares
                        --------------    ------   --------------     -------   --------------    -------

<S>                     <C>             <C>         <C>            <C>         <C>              <C>
Shares under option at
   beginning of year      $    10.30      222,665    $    7.67        188,837    $    7.29         173,827

Options granted                26.82        2,200        23.87         36,465        12.02          15,304

Options exercised               5.53      (31,136)        9.36         (1,555)

Options expired                22.88         (481)       11.23         (1,082)        9.56            (294)
                                         --------                    --------                     --------
Shares under option at
   end of year                 11.22      193,248        10.30        222,665         7.67         188,837
                                         ========                    ========                     ========
Options exercisable at
   end of year                            162,478                     174,428                      161,612

Weighted-average
   fair value of options
   granted during the
   year                        12.01                     12.22                        7.05

</TABLE>

<PAGE>F-25


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE P--STOCK OPTION PLAN (Continued)


<TABLE>
<CAPTION>


                                              Nonstatutory Stock Options                                
                                      1998                      1997                         1996                          
                          Weighted-                  Weighted-                   Weighted-
                           Average                    Average                     Average
                        Exercise Price    Shares   Exercise Price      Shares   Exercise Price    Shares
                        --------------    ------   --------------     -------   --------------    -------

<S>                     <C>             <C>         <C>            <C>         <C>              <C>

Shares under option at
   beginning of year      $    10.55      175,753    $    9.00        189,519    $    8.03         187,110

Options granted                25.56       11,200        27.89         12,100        14.60          24,079

Options exercised               7.99      (22,377)        7.31        (25,866)        6.86         (21,670)
                                         --------                    --------                     --------
Shares under option at
   end of year                 11.92      164,576        10.55        175,753         9.00         189,519
                                         ========                    ========                     ========
Options exercisable at
   end of year                            164,576                     151,624                      136,843

Weighted-average fair value
   of options granted
   during the year             10.46                     13.72                        4.84

</TABLE>


The following table summarizes information about fixed stock options outstanding
at December 31, 1998:

                                               OPTIONS OUTSTANDING

    Range of
Weighted-Average        Weighted-Average       Remaining
Exercise Prices            Outstanding     Contractual Life    Exercise Price
-----------------       ----------------   ----------------    --------------

$5.38 to $8.88               156,524           3.4 years          $   6.93
$9.56 to $17.98              153,526           6.2 years             11.40
$25.00 to $28.18              47,774           9.2 years             27.11
                        ------------       
$5.38 to $28.18              357,824           6.4 years             11.54
                        ============     

                                             Options Exercisable          
    Range of                                        Number
Weighted-Average
Exercise Prices                      Exercisable               Exercise Price
----------------                     -----------               --------------
$5.38 to $8.88                           156,524                  $     6.93
$9.56 to $17.98                          139,800                       10.95
$25.00 to $28.18                          30,730                       26.95
                                        -------- 
$5.38 to $28.18                          327,054                       10.53
                                        ========  

<PAGE>F-26


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE Q--RELATED PARTY TRANSACTIONS

The Bank has entered into  transactions with its directors,  executive  officers
and  their  affiliates  and a  subsidiary  of the Bank  (related  parties).  The
following  is a  summary  of the  aggregate  activity  involving  related  party
borrowers at December 31, 1998 and 1997 (dollars in thousands):

                                          1998             1997         
                                        ---------       --------- 

Loans outstanding at beginning of year  $   6,218       $   3,624
Loan disbursements                          2,095           4,693
Loan repayments                            (1,862)         (2,099)
                                        ---------       ---------
Loans outstanding at end of year        $   6,451       $   6,218
                                        =========       =========

At December 31, 1998 and 1997,  commitments to related parties of  approximately
$605,000 and $1,245,000 were undisbursed.

Deposits received from directors and officers totaled  $1,531,000 and $2,013,000
at December 31, 1998 and 1997, respectively.

The Bank made payments totaling $73,000 in 1998,  $50,000 in 1997 and $23,000 in
1996 to a travel  business owned by a director.  Payments  under  contracts with
directors'  companies for premises  remodeling,  repair and engineering services
totaled $32,000 in 1998, $14,800 in 1997 and $17,000 in 1996. The Bank purchased
computer  equipment and office  furniture  from  businesses  owned by members of
executive officers' immediate families totaling $20,000 in 1998, $17,000 in 1997
and  $5,700  in 1996.  The  Bank  paid  fees  for  payroll  services  and  other
miscellaneous  expenses  totaling $4,000 in 1998,  $11,000 in 1997 and $7,000 in
1996 to a business  with  which a  director  is  associated.  In 1997,  the Bank
entered  into a long term lease for a branch  office  with a company  owned by a
director.  Payments  on the  lease  during  1998 and 1997  totaled  $31,000  and
$13,000.

During  1997,  the  Bancorp   purchased  leases  that  were  originated  by  its
subsidiary,  Bancorp  Financial  Services.  These  outstanding  lease receivable
balances,  net of  unearned  interest,  totaled  $5,403,000  and  $5,588,000  at
December 31, 1998 and 1997, respectively.


NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES

Postemployment Benefit Plans and Life Insurance Policies: The Bank 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 the Bank
is the owner and beneficiary.  At December 31, 1998 and 1997, the cash surrender
value  of  these  policies  totaled  approximately  $4,943,000  and  $4,810,000,
respectively.

The plans are unfunded and provide for the Bank 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 Bank's commitment to pay a
deferred benefit at retirement.  If death occurs prior to or during  retirement,
the Bank will pay the employee's beneficiary or estate the benefits set forth in
the plans.

<PAGE>F-27


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

At December 31, 1998 and 1997,  liabilities  recorded for the estimated  present
value of future salary continuation and deferred  compensation  benefits totaled
approximately  $2,038,000  and  $1,451,000,  respectively.  Salary  continuation
benefits  may be paid if  termination  is  without  cause or due to a change  in
control of the Bank.  Otherwise no benefits are paid upon termination.  Deferred
compensation  is vested  as to the  amounts  deferred.  In the event of death or
under  certain  other  circumstances,  the Bank is  contingently  liable to make
future  payments  greater  than the amounts  recorded as  liabilities.  Based on
present  circumstances,  the Bank  does not  consider  it  probable  that such a
contingent  liability  will be  incurred  or that in the event of death,  such a
liability would be material after consideration of life insurance benefits.

Lease  Commitments:  The Bank leases five sites  under  noncancelable  operating
leases expiring in August 1999,  September 1999,  February 2006,  September 2007
and October 2008.  The lease  expiring  August 1999 includes an option to extend
the lease for an  additional  term of one year.  The lease  expiring in February
2006 requires  adjustments  to the base rent after two years for changing  price
indices with a maximum annual increase of five percent and includes an option to
renew for two consecutive  five-year terms. The lease expiring September 2007 is
renewable for two consecutive  five-year  periods and requires  adjustment every
September 1 based on changing  price  indices but not less than 2% nor more than
10%. The lease  expiring  October 2008 requires  annual  adjustments to the base
rent every  November 3 of the greater of 2% or the  percentage  increases in the
Consumer  Price Index and includes an option to extend the term of the lease for
three consecutive five-year terms.

As of December 31, 1998,  future  minimum  lease  payments  under  noncancelable
operating leases are as follows (dollars in thousands):

                                                                   Lease
                                                                 Commitment
Year ended December 31:                                          ----------
        1999                                                      $   182
        2000                                                          171
        2001                                                          173
        2002                                                          176
        2003                                                          178
        Thereafter                                                    710
                                                                  -------
                              Total minimum lease commitments     $ 1,590
                                                                  =======

Rent  expense for the years  ended  December  31,  1998,  1997 and 1996  totaled
$269,000, $128,000 and $94,000, respectively.  Sublease rental income was $4,000
in 1997 and $14,000 in 1996.

Financial  Instruments  with   Off-Balance-Sheet   Risk:  The  Bank'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

<PAGE>F-28


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

liabilities  are  commitments to extend  credit,  credit card  arrangements  and
standby  letters of credit.  A summary of the Bank's  commitments and contingent
liabilities at December 31, is as follows (dollar in thousands):

                                                   Contractual Amounts
                                                1998               1997 
                                                ----               ----
  
     Commitments to extend credit           $    42,200         $   32,616
     Credit card arrangements                    12,299             10,695
     Standby letters of credit                    5,240              3,927

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.   The  Bank'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 the Bank.

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. The Bank evaluates each customer's  credit  worthiness
on a case-by-case basis. The amount of collateral obtained,  if deemed necessary
by the Bank 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.   At  December  31,  1998,  and  1997
approximately $1,300,000 and $1,484,000, respectively, of the Bank's undisbursed
credit card commitments were secured by deposit accounts.

Standby  letters of credit  are  conditional  commitments  issued by the Bank 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.  The
Bank holds assigned deposit accounts as collateral  supporting those commitments
for which  collateral is deemed  necessary.  The extent of  collateral  held for
those  commitments  at December 31, 1998 and 1997 varies from zero to 100%;  the
average amount collateralized is approximately 92% in 1998 and 37% in 1997. None
of these letters of credit were utilized during 1998 or 1997.

The Bank has not incurred any losses on its commitments in 1998, 1997 or 1996.

Merchant  Credit  and  Debit  Card  Sales  Processing:  The Bank  processes  the
settlement of credit and debit card sales for merchants  located  throughout the
continental United States,  Alaska, Hawaii 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
fines may be assessed for  violations  of VISA or  MasterCard  rules or that the
merchant  will  be  unable  to  absorb  chargebacks,  deliver  products  due  to
insolvency  or may commit  fraud.  To  protect  the Bank from  losses,  merchant
deposits  of  $46,935,000  at  December  31,  1998  have  been   established  by
withholding a percentage of merchant  processing  volume. In addition,  the Bank
has accrued a liability to cover losses, if  any,  in  excess  of  the  merchant

<PAGE>F-29


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE R--COMMITMENTS AND CONTINGENT LIABILITIES (Continued)

reserves of $954,000 and  $680,000 at December 31, 1998 and 1997,  respectively.
The Bank has incurred  approximately  $28,000 in losses  during 1998.  No losses
were incurred in 1997 or 1996. The Bank processed approximately $2.5 billion and
$1.5 billion of credit and debit card sales for merchants  during 1998 and 1997,
respectively.

Legal  Proceedings:  The  Bancorp  is a party to claims  and  legal  proceedings
arising in the  ordinary  course of business.  After  taking into  consideration
information  furnished by legal counsel to the Bancorp as to the current  status
of various claims and proceedings to which the Bancorp is a party, management is
of the opinion that the ultimate aggregate  liability  represented  thereby,  if
any,  will not have a  material  adverse  effect on the  financial  position  or
results of operations of the Bancorp.


NOTE S--CONCENTRATIONS OF CREDIT RISK

Most of the Bank's business  activity is with customers located within the State
of California,  primarily in Northern  California except for the merchant credit
card debit card sales  processing  as  discussed  in Note R. The  economy of the
Bank's primary service area is heavily  dependent on the area's major industries
which are timber, commercial fishing,  agriculture and tourism. General economic
conditions or natural disasters  affecting the primary service area or its major
industries could affect the ability of customers to repay loans and the value of
real property used as collateral.

In  addition  to the  types  of  loans  as set  forth  in Note D,  the  Bank has
concentrations in out-of-area  participation loans, motel loans and construction
loans.  The  distribution  of  commitments  to extend  credit  approximates  the
distribution  of loans  outstanding.  Standby  letters  of credit  were  granted
primarily to commercial  borrowers.  The Bank,  as a matter of policy,  does not
extend credit to any single borrower or group of related  borrowers on a secured
basis in excess of 25% of its unimpaired capital  (shareholders' equity plus the
allowance for loan and lease losses) and on an unsecured  basis in excess of 15%
of its unimpaired capital.

The Bank places its cash investments  primarily in financial  instruments backed
by  the  U.S.   Government  and  its  agencies  or  by  high  quality  financial
institutions or  corporations.  At December 31, 1998 and 1997,  approximately 9%
and 15%,  respectively,  of the Bank's net worth was  invested in federal  funds
sold to a New York  bank.  In  addition,  at  December  31,  1998,  the Bank had
deposits in federally  insured  banks in excess of federally  insured  limits by
$3,851,000.


NOTE T--REGULATORY MATTERS

Banking  regulations limit the amount of cash dividends that may be paid without
prior approval of the Bank's  regulatory  agency.  Cash dividends are limited to
the lesser of retained earnings, if any, or net income for the last three years,
net of the amount of any other  distributions  made to shareholders  during such
periods.  As of December 31, 1998,  $8,043,000  was  available for cash dividend
distribution without prior approval.

The Bank is subject to various regulatory capital  requirements  administered by
the federal banking  agencies.  Failure to meet minium capital  requirements can
initiate certain mandatory---and possible additional  discretionary---actions by
regulators  that,  if  undertaken,  could have a direct  material  effect on the

<PAGE>F-30



                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE T--REGULATORY MATTERS (Continued)

financial  statements.  Under capital  adequacy  guidelines  and the  regulatory
framework for prompt  corrective  action,  the Bank must meet  specific  capital
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain  off-balance-sheet  items as calculated under regulatory  accounting
practices.  The Bank's capital  amounts and  classification  are also subject to
qualitative judgments by the regulators about components,  risk weightings,  and
other factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below)  of  total  and  Tier  I  capital  (as  defined  in the  regulations)  to
risk-weighted assets (as defined), and of Tier I capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.

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

<TABLE>
<CAPTION>

                                                                                        To Be Well
                                                                                     Capitalized Under
                                                                For Capital          Prompt Corrective
                                           Actual            Adequacy Purposes             Action
Provisions                                 ------            -----------------       ------------------
----------                            Amount     Ratio        Amount     Ratio        Amount      Ratio             
                                      -----      -----        -----      -----        ------      -----
                                                                (in thousands)
<S>                               <C>          <C>          <C>          <C>       <C>          <C>
As of December 31, 1998:
  Total Capital
     (to Risk Weighted Assets)     $   25,683    11.66%     >$  17,617    >8.0%    >$  22,022    >10.0%
                                                            -             -        -             -
  Tier I Capital
     (to Risk Weighted Assets)     $   22,931    10.41%     >$   8,809    >4.0%    >$  13,213    > 6.0%
                                                            -             -        -             -
  Tier I Capital
     (to Average Assets)           $   22,931     7.23%     >$  12,690    >4.0%    >$  15,863    > 5.0%
                                                            -             -        -             -

As of December 31, 1997:
  Total Capital
     (to Risk Weighted Assets)     $   23,118    12.02%     >$  15,381    >8.0%    >$  19,226    >10.0%
                                                            -             -        -           -
  Tier I Capital
     (to Risk Weighted Assets)     $   20,747    10.79%     >$   7,690    >4.0%    >$  11,536    > 6.0%
                                                            -             -        -             -
  Tier I Capital
     (to Average Assets)           $   20,747     7.38%      >$ 11,238    >4.0%    >$  14,047    > 5.0%
                                                             -            -        -             -
</TABLE>


<PAGE>F-31

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY

Condensed  balance  sheets  as of  December  31,  1998 and 1997 and the  related
condensed  statements  of  operations  and cash flows for the three years in the
period ended December 31, 1998 for Humboldt  Bancorp  (parent  company only) are
presented as follows:

                            Condensed Balance Sheets

                                                December 31                   
                                   -----------------------------------
                                       1998                   1997         
                                       ----                   ---- 
Assets
  Cash                             $       805            $      504
  Other assets                             197                    13
  Investment in subsidiaries            26,443                22,292
                                   -----------            ---------- 
                                   $    27,445            $   22,809
                                   ===========            ==========

Liabilities
  Other liabilities                $        83

Stockholders' equity
  Common stock                          25,580            $   20,495
  Additional paid-in capital               297                   114
  Retained earnings                      1,485                 2,200
                                   -----------            ---------- 
                                   $    27,445            $   22,809
                                   ===========            ==========

                       Condensed Statements of Operations


<TABLE>
<CAPTION>

                                                             Year Ended December 31        
                                                  --------------------------------------------
                                                      1998              1997            1996    
                                                  -----------         --------       ---------
 
<S>                                               <C>                <C>            <C>
Dividends from subsidiaries                       $     2,085
Other income                                                3         $      2       $       1
Expenses                                                  (87)             (24)            (20)
                                                  -----------         --------       ---------
Income (loss) before taxes                              2,001              (22)            (19)
Tax (expense) benefit                                     (51)             106              (3)
                                                  -----------         --------       ---------
Income (loss) before equity in income of
  subsidiaries                                          1,950               84             (22)
Equity in undistributed income of subsidiaries          2,066            3,174           2,998
                                                  -----------         --------       ---------
Net income                                        $     4,016         $  3,258       $   2,976
                                                  ===========         ========       =========
</TABLE>

<PAGE>F-32

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE U--CONDENSED FINANCIAL INFORMATION OF THE PARENT COMPANY (Continued)

                       Condensed Statements of Cash Flows


<TABLE>
<CAPTION>

                                                                     Year Ended December 31        
                                                         --------------------------------------------
                                                              1998              1997            1996    
                                                          -----------         --------       ---------
 
<S>                                                    <C>                  <C>            <C>

Operating activities:
  Net income                                               $    4,016         $   3,258      $   2,976
  Adjustments to reconcile net income to net cash
    used by operating activities:
    Dividends from subsidiaries                                (2,085)
    Equity in undistributed income of subsidiaries             (2,066)           (3,174)        (2,998)
    Amortization                                                    4                 4              4
    Increase in other assets                                     (188)                             (21)
    Increase in other liabilities                                  83
                                                           ----------         ---------      ---------  
      Net cash (used) provided by operating activities           (236)               88            (39)

Investing activities:
  Reimbursement from subsidiary                                   183               114                        
                                                           ----------         ---------      ---------  
      Net cash provided by investing activities                   183               114

Financing activities:
  Proceeds from note payable                                                                        22
  Payments on note payable                                                                         (22)
  Cash paid for fractional shares                                  (8)               (5)            (5)
  Proceeds from issuance of common stock                          362               203            148
                                                           ----------         ---------      ---------  
      Net cash provided by financing activities                   354               198            143
                                                           ----------         ---------      ---------  

      Net increase in cash                                        301               400            104
      Cash at beginning of year                                   504               104
                                                           ----------         ---------      ---------  

      Cash at end of year                                  $      805         $     504      $     104
                                                           ==========         =========      =========

</TABLE>

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

<PAGE>F-33


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE V--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

The estimated fair values of the Bancorp's financial  instruments are as follows
at December 31 (dollars in thousands):


<TABLE>
<CAPTION>

                                                               1998                        1997                         
                                                  ---------------------------    --------------------------
                                                                   Estimated                    Estimated
                                                    Carrying          Fair        Carrying         Fair
                                                     Amount          Value         Amount         Value
                                                  ----------      -----------    -----------    -----------
<S>                                             <C>              <C>           <C>            <C> 
Financial assets:
   Cash and due from banks                        $   28,626      $    28,626    $    21,442    $    21,442
   Interest-bearing deposits in other banks            3,020            3,020          3,020          3,020
   Federal funds sold                                  2,250            2,250          3,520          3,520
   Investment securities                              77,802           77,802         80,180         80,180
   Loans and leases held for sale                      7,677            7,731             48             48
   Loans and lease financing receivables, net        178,361          178,386        157,464        157,085
   Accrued interest receivable                         1,779            1,779          1,699          1,699
   Cash surrender value of life insurance              4,943            4,943          4,810          4,810

Financial liabilities:
   Deposits                                          283,967          283,997        255,186        255,204
   Accrued interest payable                              306              306            319            319
   Long-term debt                                      3,402            3,402          1,761          1,761

</TABLE>


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 the Bancorp 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 lease financing  receivables,  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.
    The Bank's lease  portfolio has relatively  high fixed rates that usually do
    not fluctuate with market changes and,  therefore,  the carrying amount is a
    reasonable  estimate of the fair value.  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.

<PAGE>F-34


                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE V--FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)

    Cash surrender value of life insurance: The carrying amount 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.

    Long-term  debt:  The fair  value of  long-term  debt 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  commitments  consist of
    commitments to extend credit,  credit card  arrangements and standby letters
    of  credit.  The  contract  or  notional  amounts  of the  Bank's  financial
    instruments with  off-balance-sheet risk are disclosed in Note R. Estimating
    the fair value of these financial instruments 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.


NOTE W--SUBSEQUENT EVENTS

The Bancorp has filed an application  with its regulators to obtain  approval to
form a wholly-owned  subsidiary  bank in Roseville,  California and will provide
$4.5 million of initial capital.  Organization costs related to the formation of
this subsidiary totaled $188,251 through December 31, 1998.

The Bank is in the process of negotiating the sale of  approximately  $1,047,000
of its secured credit card portfolio.


NOTE X--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.  The Bancorp has two reportable segments under this definition,  retail
banking  and  credit  card  operations.  The  retail  banking  segment  provides
traditional banking services such as checking,  savings, IRA and Keogh accounts,
time  certificates  of deposit,  loans,  and lease  financings.  The credit card
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.   Each  segment  receives  an  allocation  of
administrative  expenses.  The Bancorp evaluates  performance based on profit or
loss from operations before income taxes. The Bancorp's  reportable segments are
strategic business units that provide different services that are carried out by
separate  departments.  Included  in the retail  banking  segment  are all other
operations of the Bancorp,  which include an investment in an equipment  leasing
company.

<PAGE>F-35

                         HUMBOLDT BANCORP AND SUBSIDIARY

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                        December 31, 1998, 1997 and 1996


NOTE X--OPERATING SEGMENTS (Continued)

The following table includes  segment  profit,  including  certain  revenues and
expenses,  and segment assets as of and for the year ended December 31, 1998 (in
thousands):

<TABLE>
<CAPTION>


                                                 Retail     Credit Card
                                                Banking     Operations    Total           
                                                --------    ----------- ---------

<S>                                            <C>          <C>         <C>      
Revenue from external customers                $   3,524    $   8,304   $  11,828
Interest revenue                                  22,339        1,165      23,504
Interest expense                                   7,593          149       7,742
Depreciation and amortization                      2,886          217       3,103
Segment profit, before taxes                       4,444        2,089       6,533
Other significant non-cash items:
 Additions to reserves for potential losses        1,240        1,183       2,423
Segment assets                                   262,301       57,674     319,975
Investment in equity method investees              2,281                    2,281

</TABLE>


The segment information for prior fiscal years is not available.