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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-21656

Humboldt Bancorp

916.783.2812

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

None

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

Common Stock, without par value

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes þ          No o

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

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

     The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30,2003, based on the closing price on that date of $14.94 per share was $180,928,000. The number of shares outstanding of Registrant’s common stock outstanding as of June 30, 2003 and February 27, 2004 were 12,110,302 and 15,176,242, respectively.

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PART I

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

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

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

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

Risk Factors

      An investment in Humboldt Bancorp’s common stock involves a degree of risk. In addition to the other information included in this annual report, including the matters addressed in Forward-Looking Statements above, you should carefully consider the matters described below.

Humboldt Bancorp recently acquired California Independent Bancorp. If Humboldt Bancorp is unable to integrate its operations successfully, Humboldt’s business and earnings may be negatively affected.

      The acquisition of California Independent Bancorp (“CIB”) involves the integration of companies that have previously operated independently and no assurance can be given that Humboldt will be able to integrate our operations without encountering difficulties including, without limitation, the loss of key employees and customers, the disruption of our respective ongoing businesses or possible inconsistencies in standards, controls, procedures and policies. Successful integration of CIB’s operations will depend primarily on Humboldt’s ability to consolidate operations, systems and procedures and to eliminate redundancies and costs. Estimated cost savings and revenue enhancements are projected to come from various areas that management has identified through the due diligence and integration planning process. The elimination and consolidation of

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

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

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

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

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

      The historical cost of options granted, although not recognized in our income statement for the year ending December 31, 2002, is presented in Note 1 of the Notes to the Consolidated Financial Statements incorporated by reference in this document and is calculated in the same manner as if such expense were recognized in the income statement in accordance with SFAS No. 148.

Shares eligible for future sale could have a dilutive effect.

      Shares of Humboldt common stock eligible for future sale could have a dilutive effect on the market for Humboldt common stock and could adversely affect market prices. As of February 27, 2004, there were 100,000,000 shares of Humboldt common stock authorized, of which 15,176,242 shares were outstanding.

Potential deterioration of local economic conditions could hurt our profitability.

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

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Our effective tax rate may increase.

      In December 2001, the Bank formed a Real Estate Investment Trust (“REIT”) subsidiary, HB Investment Trust (“HBIT”). The Bank owns 100% of the voting stock of HBIT and is the sole contributor of assets, which consist entirely of real estate secured loans originated and serviced by the Bank. Although HBIT was formed to provide flexibility in raising capital through the issuance of preferred stock, no preferred stock was issued as of December 31, 2003 for the purposes of raising capital. The Bank also benefited from a reduction in state income tax expense in 2002, because the Bank, acting upon advice from professional tax advisors, took the position that any consent dividends paid by HBIT to the Bank were not subject to state income tax.

      In 2003 the California Franchise Tax Board (“FTB”) announced that it will not recognize such state tax benefits. As a result, Humboldt did not record any state tax benefits associated with the REIT for 2003 and does not expect to record any REIT state tax benefits for 2004. Humboldt expects to defend its use of the REIT structure. However, in the event the FTB prevails in its interpretation of the California State Tax Code and that interpretation is made retroactive to 2002, Humboldt would be liable for state income taxes relative to the REIT for that year. Humboldt believes that it is adequately reserved for the tax benefit recognized during 2002.

The Bank faces strong competition.

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

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

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

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

General — Humboldt Bancorp and Humboldt Bank

      Humboldt Bancorp is a California corporation incorporated in January 1995. Humboldt is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended. As of December 31, 2003, Humboldt had total assets of $1.045 billion, total loans of $765 million, total deposits of $823 million and total shareholders’ equity of $97 million. For the year ended December 31, 2003, Humboldt reported net income of

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      During the first quarter of 2003, Humboldt completed the sale of its proprietary merchant bankcard operations and, over the remaining course of the year, substantially completed the wind down of its Independent Service Organization (“ISO”) sponsorship processing business. Effective with the fourth quarter of 2003, the results of operations for these businesses (collectively, “Merchant Bankcard”) were classified as a discontinued operation and are presented as such for all periods presented in this Annual Report. Additional information on Merchant Bankcard is contained in the “Discontinued Operations” sections of Parts I and II (Items 7 and 8) of this Annual Report.

      Bancorp Financial Services, Inc. (“BFS”) is a subsidiary of Humboldt that was founded jointly by Humboldt and Tehama Bancorp in 1996. Upon the completion of the merger with Tehama Bancorp in March 2001, BFS became a wholly-owned subsidiary of Humboldt. BFS was classified as a discontinued operation during 2001 and the final wind-down of its operations was completed during the second quarter of 2002. Additional information on BFS is contained in the “Discontinued Operations” sections of Parts I and II (Items 7 and 8) of this Annual Report.

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

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

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

Recent Developments

      On March 13, 2004, Humboldt and Humboldt Bank entered into a definitive Agreement and Plan of Reorganization (“Agreement”) with Umpqua Holdings Corporation (“Umpqua”) and Umpqua Bank. Under the terms of the Agreement, Humboldt will merge with and into Umpqua, with Umpqua the surviving corporation. The Agreement also provides for Humboldt Bank to be merged with and into Umpqua Bank, with Umpqua Bank the surviving entity.

      The Agreement provides for each outstanding Humboldt common share to be exchanged for one share of Umpqua common stock and for Humboldt’s outstanding stock options to be converted into Umpqua options on a one-for-one basis. Approximately 15.2 million Umpqua common shares are expected to be issued in connection with the merger, which is expected to qualify as a tax-free reorganization. In addition, Humboldt granted to Umpqua an option which, under certain circumstances, would permit Umpqua to acquire 3,022,666 shares of Humboldt’s common stock at an exercise price of $18.00 per share.

      The transaction is expected to be completed during the third quarter of 2004, subject to the satisfaction of customary conditions, including the favorable vote of Humboldt and Umpqua shareholders and the receipt of either regulatory approvals or waivers, as the case may be.

      On January 6, 2004, Humboldt completed its acquisition of California Independent Bancorp (“CIB”), the holding company for Feather River State Bank (“Feather River”). As of December 31, 2003, Feather River State Bank had total assets of $401 million, total loans of $202 million and total deposits of $342 million. Effective March 5, 2004, Feather River was merged with and into the Bank. However, the Bank will still operate certain branches under the name Feather State Bank, a division of Humboldt Bank.

      In accordance with the terms of the Agreement and Plan of Merger, Humboldt issued approximately 2.9 million shares of common stock and paid approximately $29.8 million in cash in exchange for all

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Market Area and Competition

      The market for banking and bank-related services is highly competitive. The Bank actively competes in its various market areas, which are principally in non-metropolitan areas of Northern California, with other providers of deposit and credit services. These competitors include other commercial banks, savings banks, savings and loan associations, credit unions, mortgage companies, and brokerage firms. The following table displays the market share percentage and rank for total deposits in each county where the Bank has operations. The table also indicates the ranking by deposit size in each of the local markets. All information in the table was obtained from the Federal Deposit Insurance Corporation (“FDIC”) Summary of Deposits as of June 30, 2003 (the most recent available information). Markets where the Bank has ceased operations since June 30, 2003 are not shown.

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

Lending and Credit Functions

      The Bank makes both secured and unsecured loans to individuals, firms, and corporations. Secured loans include first and second real estate mortgage loans. The Bank also makes direct and indirect installment loans to consumers. At December 31, 2003, consumer, real estate construction, real estate mortgage, and commercial & industrial loans represented approximately 7%, 17%, 58%, and 18% respectively, of the total loan portfolio. Specific risk elements associated with each of the lending categories include, but are not limited to:

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

      Inter-agency guidelines adopted by federal bank regulators mandate that financial institutions establish real estate lending policies with maximum allowable real estate loan-to-value limits, subject to an allowable

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      The current lending policy of the Bank is to make loans primarily to persons who reside, work, or own property in its primary market areas. Unsecured loans are generally made only to persons who maintain depository relationships with the Bank. Secured loans are made to persons who are well established and have net worth, collateral, and cash flow to support the loan. Exceptions to the policy are permitted on a case-by-case basis and require the approving officer to document in writing the reason for the exception. Policy exceptions made for borrowers whose total aggregate loans exceed the approving officer’s credit limit must be submitted to the Chief Credit Officer or the Bank Board of Directors for approval, depending upon the size of the loan. The Bank provides each lending officer with written guidelines for lending activities. Lending authority is delegated by the Board of Directors of the Bank to the Chief Credit Officer who, in turn, delegates limited lending authority levels to other loan officers. Loans in excess of individual officer credit authority must either be approved by a senior officer with sufficient approval authority (including the Chief Credit Officer) or be approved by the Loan Committee of the Bank’s Board of Directors.

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

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

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

      The Bank performs a quarterly analysis to determine the adequacy of the Allowance for Loan Losses (“ALL”). The ALL analysis segregates the loan portfolio into categories based on type of loan. These

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      All loans graded 7 and above and loans past due 30 days or more are assigned additional reserve factors based on management’s judgement. The aggregation of each of the components above provides for the analytical required reserve for each category. Combining the results of the analytical required reserve calculation for all loan categories provides the total required ALL.

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

      There is no current process used to measure or adjust for differences between the loss factors for adversely classified loans used in the ALL analysis and actual losses charged to the ALL because Humboldt’s actual loss experience over the past several years has been favorable. The difference between the actual ALL (as presented in the consolidated financial statements) and the allocated ALL represents the unallocated ALL. The unallocated ALL provides for coverage of credit losses inherent in the loan portfolio but not provided for in the ALL analysis and acknowledges the inherent imprecision of all loss prediction models. The unallocated ALL as of December 31, 2003 was approximately $500,000, or 4% of the total ALL.

      The ALL represents Humboldt’s estimate of the probable losses that have occurred as of the date of the financial statements, as further described in Note 1 in the Notes to the Consolidated Financial Statements. Management believes that the ALL was adequate as of December 31, 2003. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALL which could result in additional charges to the provision for loan losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan losses in future periods if the results of their review warrant.

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

Discontinued Operations

      In 1993, Humboldt established a merchant credit and debit card processing operation (“Merchant Bankcard Services”). From 1993 through 2002, the operation had grown steadily both in volume and scope of activities. In general, Merchant Bankcard Services operations involve collecting funds for, and crediting the accounts of, merchants for sales of merchandise and services to credit and debit card customers. Merchant Bankcard Services specializes in providing processing for first time merchants and small-to medium-sized merchants in the retail, telephone, mail order and Internet commerce industries. Merchant Bankcard Services

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      During the second quarter of 2002, Humboldt conducted a strategic review of its Merchant Bankcard Services and the risks and rewards associated with the business in general. The review concluded that Humboldt’s long-term shareholder value would be maximized by reducing the Company’s overall risk profile through the strategic sale its Merchant Bankcard Services and refocusing efforts on community banking. On March 13, 2003, the Bank completed the sale of the Proprietary Portfolio to an affiliate of First National Bank Holding Company called Humboldt Merchant Services, LP for $32 million in cash. In addition, on the sale date, Humboldt Merchant Services, LP assumed all liability for transactions processed on or before the closing date. Accordingly, the Bank no longer has an exposure to losses related to the Proprietary Portfolio.

      Humboldt continued to provide sponsorship processing under several existing ISO agreements during the remainder of 2003. As of December 31, 2003, substantially all of Humboldt’s processing under ISO agreements had ceased and, as a result, the Merchant Bankcard Processing results for 2003 (including the gain recognized in connection with the sale of the Proprietary Portfolio) and all prior periods shown in this Report were reclassified as a discontinued operation in accordance generally accepted accounting principles.

      Humboldt’s final ISO processing agreement terminated on January 28, 2004. All of Humboldt’s ISO agreements provide for full indemnification of Humboldt’s for any and all losses, damages or liabilities arising from ISO merchants (including legal defense costs).

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

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

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

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

Asset/ Liability Management

      Humboldt’s Asset/ Liability Management Committee (“ALCO”) is composed of the Chief Financial Officer, Treasurer, Chief Credit Officer, President and one board member. The ALCO meets periodically and is charged with managing the assets and liabilities of the Bank. ALCO attempts to manage asset growth, liquidity, and capital to maximize income and manage interest rate risk, and directs Humboldt’s acquisition

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Investment Policy

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

Economic Conditions

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

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

      In late 2000 and continuing into 2001, the State of California was subject to a deterioration in the ability of major utilities to provide energy for the State’s needs. These shortages resulted in increased costs and, during the summer of 2001, “rolling blackouts” during which electric service was interrupted in some areas for short periods. Although conservation efforts and increased generation capacity have alleviated electricity shortages, there is no assurance that future energy shortages will not have a significant adverse impact on the California economy. In early 2003, the State of California also announced a budget deficit of approximately $35 billion and plans to curtail spending in order to close the budget gap. On March 2, 2004, California voters approved certain ballot measures, including an economic recovery bond issue of up to $15 billion to pay off the State’s accumulated general fund deficit. The State continues to face fiscal challenges, of which the long-term impact on the State’s economy cannot be predicted with certainty. Although Humboldt is not directly dependent upon funding from the State of California, deterioration in the State’s financial condition could have an adverse impact on the prospects for continued economic growth and development.

Supervision and Regulation

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

      The regulations of the Federal Reserve Board, the FDIC, and the California Department of Financial Institutions govern most aspects of Humboldt’s and 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

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

      The BHC, and the Change in Bank Control Act of 1978, as amended, together with regulations of the FRB, require that, depending on the particular circumstances, either FRB approval must be obtained or notice must be furnished to the FRB and not disapproved prior to any person or entity acquiring “control” of a state member bank, such as the bank, subject to exemptions for some transactions. Control is conclusively presumed to exist if an individual or entity acquires 25% or more of any class of voting securities of the bank. Control is rebuttably presumed to exist if an entity acquires 10% or more but less than 25% of any class of voting securities and either the entity has registered securities under Section 12 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or no other person will own a greater percentage of that class of voting securities immediately after the transaction.

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

      The amount of FDIC assessments paid by each member institution is based on its relative risk of default as measured by regulatory capital ratios and other factors. The assessment rate currently ranges from $0.00 to $0.27 per $100.00 of deposits. At December 31, 2003, the Bank was classified in a manner that the assessment rate was zero.

      The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis in order to manage the BIF and SAIF to prescribed statutory target levels. An increase in the assessment rate could have material adverse effect Humboldt’s earnings, depending upon the amount of the increase.

      All FDIC-insured depository institutions must pay an annual assessment to provide funds for the payment of interest on bonds issued by the Financing Corporation, a federal corporation chartered under the

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      The FDIC may terminate the deposit insurance of any insured depository institution if it determines that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, order or any condition imposed in writing by, or pursuant to written agreement with, the FDIC. The FDIC may also suspend deposit insurance temporarily during the hearing process for a permanent termination of insurance if the institution has no tangible capital. The termination of deposit insurance for the Bank could have a material adverse effect on Humboldt’s results of operations and liquidity due to the likelihood that substantial deposit withdrawal activity would occur.

      The FRB and the FDIC have risk-based capital adequacy guidelines intended to provide a measure of capital adequacy that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets, and transactions, such as letters of credit and recourse arrangements, which are reported as off-balance-sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off-balance-sheet items are multiplied by one of several risk adjustment percentages, which range from 0.0% for assets with low credit risk, such as certain U.S. government securities, to 100.0% for assets with relatively higher credit risk, such as business loans.

      A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance-sheet items. The regulators measure risk-adjusted assets and off-balance-sheet items against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists of common stock, retained earnings, noncumulative perpetual preferred stock and minority interests in certain subsidiaries, less most other intangible assets. Tier 2 capital may consist of a limited amount of the allowance for loan and lease losses and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Since December 31, 1992, the FRB and the FDIC have required a minimum ratio of qualifying total capital to risk-adjusted assets and off-balance-sheet items of 8.0%, and a minimum ratio of Tier 1 capital to risk-adjusted assets and off-balance-sheet items of 4.0%.

      In addition to the risk-based guidelines, the FRB and FDIC require banking organizations to maintain a minimum amount of Tier 1 capital to average total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3.0%. It is unlikely, however, that an institution with a 3.0% leverage ratio would receive the highest rating by the regulators since a strong capital position is a significant part of the regulators’ ratings. For all banking organizations not rated in the highest category, the minimum leverage ratio is at least 100 to 200 basis points above the 3.0% minimum. Thus, the effective minimum leverage ratio, for all practical purposes, is at least 4.0% or 5.0%. In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the FRB and FDIC have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios.

      A bank that does not achieve and maintain the required capital levels may be issued a capital directive by the FDIC to ensure the maintenance of required capital levels. As discussed above, we are required to

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      Proposed accounting rules regarding special purpose entities (FIN 46) could disqualify trust preferred securities from Tier 1 capital status. In the event these capital instruments are no longer allowed to be included as Tier 1 capital, the capital position of Humboldt could be adversely affected. Since the net proceeds of these securities have been contributed to the bank in the form of equity capital, the bank’s regulatory capital ratios would not be affected. Junior subordinated debentures, representing Humboldt’s obligations to the Trusts relative to the issuance of trust preferred securities, made up 25% of Humboldt’s Tier 1 capital at December 31, 2003. Further detail on regulatory capital ratios is included in Note 20 of the Notes to the Consolidated Financial Statements.

      Humboldt initiated the payment of a quarterly cash dividend during the second quarter of 2002 of $0.021 per share, increasing to $0.025 per share effective the third quarter of 2002. Effective with the second quarter of 2003, the quarterly cash dividend was increased to $0.03 per share. Humboldt’s ability to obtain funds for the payment of cash dividends, if any, and for other cash requirements is dependent on the amount of dividends that may be declared by the Bank. California bank law provides that dividends may be paid from the lesser of retained earnings or net income of the bank for its last three years. Further, a California-chartered bank may not declare a dividend without the approval of the California Department of Financial Institutions if the total of dividends and distributions declared in a calendar year exceeds the greater of the bank’s retained earnings or net income for its last fiscal year or its current fiscal year. The Bank’s ability to pay dividends may also be limited by capital adequacy guidelines of the FDIC. Moreover, regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends if payment of dividends would constitute an unsafe and unsound banking practice. As of December 31, 2003, $27,800,000 was available for cash dividend distributions from the Bank to Humboldt without prior regulatory approval.

      The Federal Reserve Board’s policy statement governing payment of cash dividends provides that Humboldt should not pay cash dividends on common stock unless (i) net income for the past year is sufficient to fully fund the proposed dividends and (ii) the prospective rate of earnings retention is consistent with capital needs, asset quality and overall financial condition.

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

      Although CRA examinations occur on a regular basis, CRA performance evaluations are used principally in the evaluation of regulatory applications submitted by an institution. CRA performance evaluations are considered in evaluating applications for such events as mergers, acquisitions and applications to open new branches. As of the last CRA exam in October 2003, the Bank had a rating of “satisfactory.”

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

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

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

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

	•	Repeals historical restrictions on, and eliminates many federal and state law barriers to, affiliations among banks, securities firms, insurance companies, and other financial services providers;
	•	Provides a uniform framework for the functional regulation of the activities of banks, savings institutions and their holding companies;
	•	Broadens the activities that may be conducted by national banks, banking subsidiaries of bank holding companies and their financial subsidiaries;
	•	Provides an enhanced framework for protecting the privacy of consumer information;
	•	Adopts a number of provisions related to the capitalization, membership, corporate governance, and other measures designed to modernize the Federal Home Loan Bank system;

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	•	Modifies the laws governing the implementation of the Community Reinvestment Act, sometimes referred to as CRA; and
	•	Addresses a variety of other legal and regulatory issues affecting both day-to-day operations and long-term activities of financial institutions.

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

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

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

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

      On July 30, 2002, the President signed into law the Sarbanes-Oxley Act (“Sarbanes-Oxley”) of 2002 implementing legislative reforms intended to address corporate and accounting fraud. Sarbanes-Oxley applies to publicly reporting companies. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the bill restricts provision of both auditing and consulting services by accounting firms. To maintain auditor independence, any non-audit services being provided to an audit client will require pre-approval by the Humboldt’s audit committee members. In addition, the audit partners must be rotated.

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      Sarbanes-Oxley also requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under Sarbanes-Oxley, legal counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself.

      Longer prison terms and increased penalties will also be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives are restricted. Sarbanes-Oxley accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company’s securities within two business days of the change.

      Sarbanes-Oxley also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company’s financial statements for the purpose of rendering the financial statements materially misleading. Sarbanes-Oxley also requires the SEC to prescribe rules requiring inclusion of an internal control report and assessment by management in the annual report to shareholders. In addition, Sarbanes-Oxley requires that each financial report required to be prepared in accordance with (or reconciled to) accounting principles generally accepted in the United States of America and filed with the SEC reflect all material correcting adjustments that are identified by a “registered public accounting firm” in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the SEC.

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

Employees

      At December 31, 2003, Humboldt employed a total of 377 full-time equivalent employees. None of Humboldt’s employees are represented by a collective bargaining group, and management considers its relations with its employees to be good. Information regarding employment contracts for Humboldt’s executive officers is contained in the Proxy Statement for the 2004 Annual Meeting.

      The executive offices of Humboldt are located at 2998 Douglas Boulevard, Suite 330, Roseville, California. Humboldt leases this office space. As of December 31, 2003, the Bank conducted business at 19 facilities, 9 of which are leased. All facilities are in a good state of repair and appropriately designed for use as banking facilities. The Bank also performs operational functions at three locations, one which is owned and two which are leased. Note 6 of the Notes to the Consolidated Financial Statements contains additional information about properties.

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

      As previously disclosed in its Form 10-Q for the quarter ended September 30, 2003, the Bank is a party to a lawsuit brought by a merchant for whom the Bank’s merchant bankcard division processed credit card

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      On or about October 24, 2003, a Proxy Statement of Humboldt Bancorp was mailed to shareholders of record as of October 20, 2003 by the Board of Directors soliciting proxies for use at a Special Meeting of Shareholders held on December 15, 2003. At the meeting, shareholders were asked to approve the principal terms of the Agreement and Plan of Merger between Humboldt and California Independent Bancorp (“CIB”) pursuant to which CIB would merge with and into Humboldt (including the issuance of Humboldt common stock in connection with the merger) and to approve certain amendments to the Amended and Restated 2001 Humboldt Bancorp & Subsidiaries Equity Incentive Plan to expand eligibility for awards under the plan to all employees and officers.

      Proposal 1 — To approve the principal terms of the Agreement and Plan of Merger with CIB:

      Proposal 2 — To approve an amendment to the Amended and Restated 2001 Humboldt Bancorp & Subsidiaries Equity Incentive Plan:

      Humboldt’s common stock is traded on the Nasdaq National Market System (“NASDAQ”) under the symbol “HBEK.” The table below reflects the high and low closing sales prices for Humboldt’s common stock as reported by NASDAQ. As of December 31, 2003, there were 100,000,000 and 20,000,000 shares, respectively, of Humboldt common stock and preferred stock authorized for issuance. As of December 31, 2003, there were 12,194,646 shares of common stock outstanding; Humboldt has never issued preferred stock.

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      The stock prices below for the first, second and third quarters of 2002 have been adjusted to reflect the 6-for-5 stock split issued in August 2002. The following quotes reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

      As of February 27, 2003 there were approximately 2,102 shareholders, not including those held in street name by brokerage firms. As of December 31, 2003, a total of 1,100,642 options and 95,398 warrants for Humboldt Bancorp common stock were outstanding. Additional information on Humboldt’s options is available in Note 17 of the Notes to the Consolidated Financial Statements.

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

      On February 6, 2002, as amended on July 17, 2002, the Board of Directors authorized the repurchase of up to 1.7 million shares of Humboldt common stock. No shares were repurchased during the fourth quarter of 2003.

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*	Excludes the impact of discontinued operations and merger-related expenses.

**	All per-share data has been adjusted for the 6-for-5 stock split in 2002 and the 10% stock dividends in 2001 and 2000, and the 5-for-2 stock split in 1999.

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Executive Summary

      At December 31, 2003, Humboldt had total consolidated assets of $1.045 billion, total net loans of $753 million, total deposits of $823 million and stockholders’ equity of $97 million. For the year ended December 31, 2003, Humboldt reported net income of $29.1 million, or $2.28 per diluted share, and net income from continuing operations of $10.2 million, or $0.80 per diluted share. The gain on discontinued operations of $18.9 million after tax, or $1.48 per diluted share, resulted from the sale of the merchant bankcard operation during the first quarter of 2003 and its operations prior to the sale. The merchant bankcard processing business is discussed in detail below under the heading “Discontinued Operations” and in Note 3 of the Notes to the Consolidated Financial Statements.

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

      2003 was a year of substantive change for Humboldt Bancorp. During the year Humboldt:

	•	completed the exit from the merchant bankcard processing business, realizing a $30 million pre-tax gain on the sale, while preserving the employment for over 70 individuals
	•	completed the sale or closure of several branches outside of Northern California
	•	completed the conversion of our core processing systems to a platform that can support future growth and acquisitions, and
	•	entered into a definitive agreement to acquire California Independent Bancorp, parent of Feather River State Bank, closing the transaction on January 6, 2004.

      With the California Independent Bancorp transaction closed, Humboldt’s management is in a position to focus and execute on one business — community banking.

      Ongoing profitability has been negatively impacted by the exit from the merchant bankcard business. However, management believes that the company’s risk profile is substantially improved.

      At the beginning of 2003, liquidity was a management concern due to the pending loss of merchant bankcard deposits. In light of this and concerns about prospects for deterioration in local economic conditions, management took certain actions to reduce potential credit risk. These steps included lowering the Bank’s “hold” position on larger credits and no longer originating loans that were transactional in nature (that is, loans that did not provide for at least some depository relationship). Humboldt also experienced an unprecedented level of payoffs during 2003, as management maintained pricing discipline on long-term fixed rate lending in the face of intense competitive pressures. The net impact was essentially no loan growth for the entire year. The positive side of this is that the net interest margin held up better than expected, at just over 5% for the year on a fully-tax-equivalent basis.

      Credit quality remains a top priority for Humboldt’s management as it focuses on community banking. Non-performing asset levels spiked during the first quarter of 2003 as two large loans — one for expansion of a boutique hotel and the other agriculture-related — were placed on non-accrual. The hotel loan, representing $5.5 million, or 59% of the year-end non-performing loans, was paid off subsequent to December 31, 2003, resulting in a $0.1 million charge-off that will be reported for 2004. Tight controls were maintained on credit quality during 2003. Net charge-offs for 2003 were 12 basis points, down from 21 basis points in 2003. Management believes this is a direct reflection of Humboldt’s focus on credit quality and the continued economic vitality of its market areas.

      Core deposit growth for 2003 exceeded management’s expectations and is a result of actions taken when the decision was made to exit the merchant processing business during the summer of 2002. During 2003, Humboldt lost about $70 million of deposits — mostly non-interest-bearing demand accounts — with the sale of the proprietary bankcard processing operation and termination of ISO sponsorships. Through sales efforts,

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      The net interest margin, on a fully-tax-equivalent basis, for 2003 was 5.02%, down 29 basis points from 2002. Humboldt remains asset sensitive, although the merger with California Independent Bancorp will dampen slightly that asset sensitivity. With about 50% of the combined loan portfolio tied to the prime rate, and an average cost of deposits of about 1%, management does not expect any margin expansion until the Federal Reserve starts to raise short-term interest rates again.

      Non-interest income for 2003 totaled $9.0 million, a decrease of $0.6 million from 2002. Management has begun replacing the lost merchant bankcard revenue with increased service charge income, principally related to an “overdraft protection privilege” product, and increased revenue related to the sale or brokering of SBA loans. In 2004, management expects significantly increased SBA and mortgage banking revenues. On the mortgage side, the focus will be on leveraging relationships with builders, offering niche products, taking advantage of the strong new housing markets such as Placer County, California, and exploring new delivery channels. Refinancing of residential mortgages is not expected to be a priority.

      The financial results for 2003 do not reflect any recognition of state tax benefits related to the company’s real estate investment trust (“REIT”), due to the recent California Franchise Tax Board announcement on REIT tax strategies. The combined federal and state effective tax rate for continuing and discontinued operations in 2003 was 37.8%. This rate is significantly higher than 2002 due to the change in the REIT benefit and the fact that pretax income was significantly higher as a result of the merchant bankcard gain. Management is currently evaluating options with respect to the voluntary compliance programs available for banks that have claimed a state tax benefit arising from a REIT consent dividend and will make a decision by the compliance deadline of April 15, 2004. Management believes that the benefit taken in 2002 is adequately reserved.

Summary of Critical Accounting Policies

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

      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 and tax contingencies. The allowance for loan losses represents Humboldt’s estimate of the probable losses that have occurred as of the date of the financial statements, as further described in Note 1 in the Notes to the Consolidated Financial Statements. Management believes that Humboldt has appropriately accrued for tax exposures.

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

      Humboldt has a policy that provides for the use of derivative financial instruments to hedge interest rate risk. This policy permits the use of interest rate swap, cap and floor contracts to hedge specific interest rate risk

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

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

      Humboldt’s primary sources of revenue are interest income from loans and investment securities and, prior to the sale of the merchant bankcard operation in 2003, fees received in connection with providing merchant bankcard processing services. (Merchant bankcard revenue and expenses are classified as discontinued operations in this annual report.) Interest income is recorded on an accrual basis. Note 1 in the Notes to the Consolidated Financial Statements contains an explanation of the process for determining when the accrual of interest income is discontinued on impaired loans and under what circumstances loans are returned to an accruing status. Merchant bankcard revenue was recorded on a cash basis.

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

Summary of Recent Accounting Pronouncements

      In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities and, in December 2003, issued Revised Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest Entities, which replaced FIN 46. Variable interest entities are 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. We adopted the disclosure provisions of FIN 46 effective December 31, 2002. On December 31, 2003, Humboldt adopted FIN 46R for all existing VIEs. The adoption of FIN 46 and FIN 46R did not have a material effect on our financial statements.

      Historically, issuer trusts that issued trust preferred securities have been consolidated by their parent companies and trust preferred securities have been treated as eligible for Tier 1 capital treatment by bank holding companies under Federal Reserve rules and regulations relating to minority interests in equity accounts of consolidated subsidiaries. Applying the provisions of FIN 46R, Humboldt is no longer permitted to consolidate the issuer trusts, beginning on December 31, 2003. Although the Federal Reserve has stated in its July 2, 2003 Supervisory Letter that trust preferred securities will be treated as Tier 1 capital until notice is

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      The Bank has investments in two limited partnerships that operate qualified multi-family affordable housing projects and generate tax credits for the Bank. The Bank’s interest in these partnerships was approximately $800,000 at December 31, 2003 and $945,000 at December 31, 2002. The assets and liabilities of these partnerships consist primarily of apartment complexes and related debt. Because the partnership agreements dictate that the properties revert to the general partners at the end of each partnership, among other factors, the Bank continues to account for the investments under the equity method, and therefore the carrying value approximates its underlying equity in the net assets of the partnerships. Additional information regarding investments in limited partnerships is provided in Note 1 of the Notes to the Consolidated Financial Statements.

      In November 2002, the FASB issued FIN 45, which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of these recognition provisions will result in recording liabilities associated with certain guarantees provided by the Bank. The disclosure requirements of this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The effect of this Statement on Humboldt’s financial condition and results of operations was not material.

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

Income Statement Summary

      For the year ended December 31, 2003, net income was $29.1 million, or $2.28 per diluted share, and net income from continuing operations was $10.2 million, or $0.80 per diluted share. The results of continuing operations produced a return on average assets of 0.97% and a return on average shareholders’ equity of 11.1%.

      For 2002, net income was $12.3 million, or $0.94 per diluted share, and net income from continuing operations was $10.3 million, or $0.79 per diluted share. Humboldt recognized a net loss in 2001 of $7.0 million, or $0.54 per diluted share, and net income from continuing operations of $3.9 million, or $0.30 per diluted share. The loss from discontinued operations for 2001 was related to the wind-down of Humboldt’s leasing subsidiary, and totaled $14.0 million, or $1.07 per diluted share, partially offset by income of $3.1 million, or $0.23 per diluted share, from the discontinued operations of the merchant bankcard processing operation.

Net Interest Income

      Net interest income is the most significant source of Humboldt’s operating income. Net interest income for 2003 totaled $47.3 million, an increase of $0.6 million, or 1%, over 2002. Net interest income for 2002 totaled $46.7 million, an increase of $8.9 million, or 23% over 2001.

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

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Table of Contents

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

Table 1 — Average Rates and Balances