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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended March 31, 2003

OR

For the Transition Period from          to         

Commission file number 0-21656

HUMBOLDT BANCORP

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X]  NO [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined under Rule 12b-2 of the Exchange Act).

YES [X]   NO [   ]

Common stock, no par value: 12,360,094 shares
outstanding as of April 21, 2003

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INDEX

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HUMBOLDT BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
For the Period Ended March 31, 2003 and December 31, 2002
(in thousands)

See accompanying notes to the consolidated financial statements

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HUMBOLDT BANCORP AND SUBSIDIARIES
Consolidated Statements of Income (unaudited)
For the three months ended March 31, 2003 and 2002
(in thousands, except per share data)

See accompanying notes to the consolidated financial statements

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HUMBOLDT BANCORP AND SUBSIDIARIES
Consolidated Statement of Cash Flows (unaudited)
For the three months ended March 31, 2003 and 2002
(in thousands)

See accompanying notes to the consolidated financial statements

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HUMBOLDT BANCORP AND SUBSIDIARIES
Consolidated Statements of Other Comprehensive Income (unaudited)
For the three months ended March 31, 2003 and 2002
(in thousands)

See accompanying notes to the consolidated financial statements

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Humboldt Bancorp and Subsidiaries
Notes to Consolidated Financial Statements

Note 1 – Significant Accounting Policies

     The accounting and financial reporting policies of Humboldt and its subsidiaries conform to generally accepted accounting principles and general banking industry practices. The consolidated financial statements have not been audited and all material intercompany balances and transactions have been eliminated. A more detailed description of Humboldt’s accounting policies is included in the 2002 annual report filed on Form 10-K.

     In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are considered normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods. Certain amounts for the comparative periods of 2002 have been reclassified to conform to the 2003 presentation.

Note 2 – Per Share Data

     Basic earnings per share is computed by dividing net income available to common stockholders by the weighted average number shares of common stock outstanding during the period. Diluted net income per share is computed by dividing net income available to common stockholders and assumed conversions by the weighted average number of shares of common stock plus equivalent shares of common stock outstanding, including dilutive stock options. All per share information contained in this Quarterly Report have been restated to reflect the six-for –five stock split issued in August 2002. The following table provides reconciliation of the basic and dilutive earnings per share computations for the three months ended March 31, 2003 and 2002.

Earnings Per Share
(In thousands, except per share data)

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Note 3 – Sale of Proprietary Merchant Bankcard Operations

     On March 13, 2003, Humboldt completed the sale of Humboldt Bank’s proprietary merchant bankcard operations to Humboldt Merchant Services, LP, an affiliate of First National Bank Holding Company. Humboldt received $32 million in cash in connection with the sale and recognized an after-tax gain of $18.6 million during the first quarter of 2003.

Note 4 - Segment Information

     Through March 31, 2003, Humboldt operated in two principal industry segments: retail banking and merchant bankcard services. Humboldt’s core retail banking segment includes commercial, commercial real estate, construction, and permanent residential lending along with all depository activities. Although Humboldt’s proprietary merchant bankcard portfolio was sold to a third party during the first quarter of 2003, Humboldt will continue to provide sponsorship processing for three independent sales organizations (“ISOs”) under existing agreements and, in accordance with terms of a transition agreement related to the sale of the proprietary portfolio, for Humboldt Merchant Services, LP for a period of up to six months after March 13, 2003. Subsequent to March 31, 2003, one ISO agreement expired and the related sponsorship discontinued. The remaining agreements are expected to terminate by March 31, 2004. Additional information regarding these agreements is included in Humboldt 2002 Form 10-K under Part I.

Business Segments

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Note 5 - Stock-Based Compensation

     During the first quarter of 2003, Humboldt adopted the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), for stock-based compensation, effective as of January 1, 2003. Under the prospective method of adoption selected by Humboldt, stock-based employee compensation costs are recognized as awards granted, modified or settled. The following table presents the effect on net income and earnings per share as if the fair value based method had been applied to all outstanding and unvested awards in each period.

Stock-Based Compensation
(in thousands, except per share data)

Note 6 – Recent Accounting Pronouncements

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

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therefore, be required to consolidate for all reporting periods after June 15, 2003. Additional information regarding Investments in Limited Partnerships is provided in Note 1 of the Notes to the Consolidated Financial Statements in Humboldt’s 2002 Form 10-K.

Part I Item II
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

     This discussion contains forward-looking statements under the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Although Humboldt believes that the assumptions underlying the forward-looking statements contained in the discussion are reasonable, any of the assumptions could be inaccurate, and therefore, no assurance can be made that any of the forward-looking statements included in this discussion will be accurate. Factors that could cause actual results to differ from results discussed in forward-looking statements include, but are not limited to: economic conditions (both generally and in the markets where Humboldt operates); competition from other providers of financial services offered by Humboldt; government regulation and legislation; changes in interest rates; material unforeseen changes in the financial stability and liquidity of Humboldt’s credit customers; and other risks detailed in Humboldt’s filings with the Securities and Exchange Commission, all of which are difficult to predict and which may be beyond the control of Humboldt. Humboldt undertakes no obligation to revise forward-looking statements to reflect events or changes after the date of this discussion or to reflect the occurrence of unanticipated events.

Overview

     Humboldt Bancorp (“Humboldt”) is a bank holding company registered under the Bank Holding Company Act of 1956. Humboldt’s operations are primarily conducted by Humboldt Bank, a wholly-owned subsidiary that is chartered by the State of California. As of March 31, 2003, Humboldt had total assets of $1.1 billion, total loans of $755 million, total deposits of $870 million and total shareholders’ equity of $96 million.

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Summary of Critical Accounting Policies

     The Securities and Exchange Commission (“SEC”) recently issued disclosure guidance for “critical accounting policies.” The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods.

     Humboldt’s significant accounting policies are described in Note 1 in the Notes to the Consolidated Financial Statements for the year ended December 31, 2002 as filed on Form 10-K (the “Notes to the 2002 Consolidated Financial Statements”). Not all of these critical accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management believes that the following policies and those disclosed in the Notes to the 2002 Consolidated Financial Statements could be considered critical within the SEC definition.

Reserves and Contingencies

     Humboldt must manage and control certain inherent risks in the normal course of its business. These include, credit risk, fraud risk, operations and settlement risk, and interest rate risk. Humboldt has established reserves for risk of losses, including loan losses, tax contingencies and merchant bankcard losses. The allowance for loan losses represents Humboldt’s estimate of the probable losses that have occurred as of the date of the financial statements, as further described in Note 1 in the Notes to the 2002 Consolidated Financial Statements. Management believes that Humboldt has appropriately accrued for tax exposures. The allowance for merchant bankcard losses represents Humboldt’s estimate of probable losses that have occurred as of the date of the financial statements. In connection with the sale of Humboldt’s proprietary merchant bankcard portfolio during the first quarter of 2003, the portion of the reserve related to proprietary merchant processing was reduced to zero.

Derivative Financial Instruments

     Humboldt has a policy that provides for the use of derivative financial instruments to hedge interest rate risk. This policy permits the use of interest rate swaps, cap and floor contracts to hedge specific interest rate risk exposures as part of Humboldt’s asset/liability management process. This policy limits the notional amount of total derivative financial instruments to 15% of total assets. Note 1 in the Notes to the 2002 Consolidated Financial Statements contains additional information on accounting policies related to derivative financial instruments.

Discontinued Operations/Off-Balance Sheet Financing

     During the first quarter of 2001, Humboldt classified its leasing subsidiary, Bancorp Financial Services, Inc. (“BFS”) as a discontinued operation upon adoption of a plan to sell the subsidiary. During the second quarter of 2001, it was determined that a sale of BFS was unlikely and the plan was modified to wind-down the operations of BFS. Management believes that the wind-down of BFS meets the requirements for classification as a discontinued operation. Note 3 in the Notes to the 2002 Consolidated Financial Statements contains additional information about Discontinued Operations.

     Prior to its classification as a discontinued operation, BFS formed three subsidiaries that were not consolidated on the financial statements of BFS or Humboldt. These subsidiaries are commonly referred to as special purpose entities, or SPEs. As of March 31, 2003 and December 31, 2002, only two subsidiaries were not consolidated. Both of the remaining unconsolidated subsidiaries are considered “qualifying” SPEs that were formed for the sole purpose of issuing lease-backed notes to institutional investors. Additional information on these SPEs is provided in Note 3 in the Notes to the 2002 Consolidated Financial Statements.

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Revenue recognition

     Humboldt’s primary sources of revenue are interest income and fees received in connection with providing merchant bankcard processing services. Interest income is recorded on an accrual basis. Note 1 in the Notes to the 2002 Consolidated Financial Statements contains an explanation of the process for determining when the accrual of interest income is discontinued on impaired loans and under what circumstances loans are returned to an accruing status. Merchant bankcard revenue is recorded on a cash basis.

     An additional source of revenue for Humboldt is related to the gains recorded in connection with the sale of SBA loans for which Humboldt retains the right to service the loans. Recording of such gains involves the use of estimates and assumptions related to the expected life of the loans and future cash flows. Note 1 in the Notes to the 2002 Consolidated Financial Statements contains additional information regarding Humboldt’s accounting policy for revenue recorded in connection with the sale of SBA loans. Servicing rights resulting from the sale of loans are based upon estimates and are subject to the risk of prepayments.

Stock-based compensation

     Effective January 1, 2003, Humboldt elected to prospectively recognize compensation expense for stock options in accordance with the provisions of SFAS No. 123. Any stock options granted prior to this effective date will continue to be accounted for under the provisions of APB No. 25, generally without income statement recognition. Note 4 to the Consolidated Financial Statements for the quarterly periods ended March 31, 2003 and 2002 above presents a pro forma presentation of net income and earnings per share as if compensation expense were recognized for all unvested stock options. The calculation of compensation expense under SFAS No. 123 is determined by using the Black-Scholes option pricing model, which relies upon assumptions for expected future stock price volatility and cash dividends, and the expected life of the options. The ultimate value recognized by option holders may be significantly greater or less than the amount of compensation expense recognized by Humboldt.

Results of Operations

     For the three months ended March 31, 2003, Humboldt reported net income of $22.0 million, or $1.68 per diluted share, compared to a net income of $2.5 million, or $0.20 per diluted share, for the same period in 2002. The first quarter 2003 results included a non-recurring after-tax gain of approximately $18.6 million recognized in connection with the sale of Humboldt Bank’s proprietary merchant bankcard operations. Excluding the impact of this gain and related expenses, net income for the first quarter of 2003 was $3.4 million, or $0.26 per diluted share, an increase of 33% over the same period in 2002. The first quarter 2003 financial results, excluding the non-recurring items, produced a return on average assets and return on average shareholders’ equity of 1.32% and 16.3%, respectively.

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     The following table summarizes the components of income and expense for the three months ended March 31, 2003 and 2002 and the changes in those components for the periods presented.

Table 1 - Condensed Consolidated Statements of Income
(in thousands )

*Includes gain on sale of proprietary merchant bankcard operation, net of tax.

nm - not meaningful

Net Interest Income

     Net interest income is the largest source of Humboldt’s operating income. Net interest income was $11.7 million for the three months ended March 31, 2003, an increase of 9% over the comparable period in 2002. This increase is primarily attributable to increases in outstanding average interest earning assets over the comparable prior year period, offset by certain reductions in the net interest margin described below.

     For the three months ended March 31, 2003, the net interest margin (net interest income as a percentage of average interest earning assets) on a fully-tax equivalent basis was 5.09%, a decrease of 21 basis points as compared to the same period in 2002. The decrease in the net interest margin is primarily attributable to the impact of placing two loans on non-accrual status during the first quarter of 2003 (resulting in the reversal of approximately $207,000 of previously recognized interest income) and an increase in the average balance of federal funds sold.

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     The following table shows the relative impact of changes in average balances of interest earning assets and interest bearing liabilities, and interest rates earned (on a fully-tax equivalent basis) and paid by Humboldt on those assets and liabilities for the three month period ended March 31, 2003 and 2002:

Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis
Fully tax-equivalent basis
(in thousands)