UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2004

OR

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from ___________ to ___________

Commission file number 0-21656

HUMBOLDT BANCORP

(916)-677-1133

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: 15,285,288 shares
outstanding as of April 30, 2004

INDEX

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Part I. Item 1. Financial Statements

HUMBOLDT BANCORP AND SUBSIDIARIES

Consolidated Balance Sheets (unaudited)
As of March 31, 2004 and December 31, 2003
(in thousands, except share data)

See accompanying notes to the consolidated financial statements

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HUMBOLDT BANCORP AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)
(in thousands, except per share data)

See accompanying notes to the consolidated financial statements

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HUMBOLDT BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows (unaudited)
(in thousands)

See accompanying notes to the consolidated financial statements

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HUMBOLDT BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (unaudited)
(in thousands)

See accompanying notes to the consolidated financial statements

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Humboldt Bancorp and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

Note 1 — Significant Accounting Policies

     The accounting and financial reporting policies of Humboldt Bancorp and Subsidiaries conform with accounting principles generally accepted in the United States of America. All material intercompany balances and transactions have been eliminated. The consolidated financial statements have not been audited. A more detailed description of Humboldt’s accounting policies is included in the 2003 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 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 period. Certain amounts for the comparative periods of 2003 have been reclassified to conform to the 2004 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 earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Included in the denominator is the dilutive effect of stock options, warrants and unvested (“restricted”) stock, computed under the treasury stock method. The following table provides a reconciliation of the basic and diluted earnings per share computations for the three-month periods ended March 31, 2004 and 2003.

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

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Note 3 — Discontinued 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 a pre-tax gain of $29.8 million ($17.3 million after tax) during the first quarter of 2003. Humboldt continued to provide sponsorship processing under several existing Independent Sales Organization (“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 (including the gain recognized in connection with the sale of the Proprietary Portfolio) for all periods shown in this report have been reclassified as a discontinued operation in accordance generally accepted accounting principles. Effective January 28, 2004, Humboldt’s remaining ISO sponsorship agreement was terminated. The results of discontinued operations for the first quarter of 2004 were not material.

Note 4 — Operating Segments

     Reportable operating segments are generally defined as components of an enterprise for which discrete financial information is available, whose operating results are regularly reviewed by the organization’s decision makers and whose revenue from external customers is 10 percent or more of total revenue. Humboldt has only one reportable segment under this definition—commercial banking. The commercial banking segment provides traditional banking services such as checking, savings, time certificates of deposit and loans.

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Note 5 — Stock-Based Compensation

     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 are 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 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. 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 the consolidated financial statements, except as described below.

     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. Although the Federal Reserve stated in its July 2, 2003 Supervisory Letter that trust preferred securities will be treated as Tier 1 capital until notice is given to the contrary, the Supervisory Letter also indicates that the Federal Reserve will review the regulatory implications of any accounting treatment changes and will provide further guidance if necessary or warranted.

     The Bank has investments in three limited partnerships that operate qualified multi-family affordable housing projects and generate tax credits for the Bank. One of these investments was acquired as a part of the California Independent Bancorp (“CIB”) merger described in Note 7. The Bank’s interest in these partnerships was approximately

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$835,000 at March 31, 2004 and $800,000 at December 31, 2003. 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.

Note 7 — Mergers

California Independent Bancorp

     On January 6, 2004, Humboldt acquired all of the outstanding common stock of CIB of Yuba City, California, the parent company of Feather River State Bank, in an acquisition accounted for under the purchase method of accounting. The results of CIB’s operations have been included in the consolidated financial statements since that date. This merger was consistent with Humboldt’s refocus on its community bank franchise, and the unique fit of CIB’s branch locations within Humboldt’s defined footprint served to connect Humboldt’s branches in Roseville and Chico, California, with minimal overlap. The aggregate purchase price was $82.8 million, including $29.8 million of cash and Humboldt common stock and stock options valued at $53.0 million in the aggregate. The value of the 2.9 million Humboldt common shares issued was determined based on the $17.39 closing market price for Humboldt’s common stock on December 29, 2003. Outstanding CIB stock options were converted into approximately 195,000 Humboldt stock options, at a weighted average fair value of $10.7419 per option.

     As of December 31, 2003, CIB had total assets of $401 million, total loans of $197 million, total deposits of $342 million and total liabilities of $372 million. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition:

Fair Value of CIB Assets Acquired and Liabilities Assumed
(In thousands)

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     The core deposit intangible asset shown in the table above represents the value ascribed to the long-term deposit relationships acquired. This intangible asset is being amortized on a straight-line basis over five years. Amortization of the CIB core deposit intangible asset for the first three months of 2004 totaled $145,000. Goodwill represents the excess of the total purchase price paid for CIB over the fair values of the assets acquired, net of liabilities assumed. Goodwill is not amortized, but is evaluated for possible impairment at least annually and more frequently if events and circumstances indicate that the asset might be impaired. No impairment loss was recognized during the three months ended March 31, 2004.

     Following is pro forma presentation of the results for the combined companies as if the merger had occurred on January 1, 2003:

Pro Forma Financial Information
(In thousands, except per share data)

Umpqua Holdings Corporation

     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.

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Note 8 — Commitments and Contingent Liabilities

     Lease Commitments: Humboldt leases 19 sites under non-cancelable operating leases. Four of the leases are renewable for an additional five-year period, five are renewable for two consecutive five-year periods, two are renewable for three consecutive five-year periods, and one of the leases is renewable for four consecutive five-year periods. The leases contain varying requirements for increases, including adjustments based on the Consumer Price Index with minimum increases of 2% and maximum increases of 10%. Other leases have scheduled adjustments to the base rent.

     As of March 31, 2004, future minimum lease payments under noncancelable operating leases are as follows (dollars in thousands):

     Financial Instruments With Off-Balance-Sheet Risk: Humboldt’s financial statements do not reflect various commitments and contingent liabilities which arise in the normal course of business and which involve elements of credit risk, interest rate risk and liquidity risk. These commitments and contingent liabilities are commitments to extend credit, credit card arrangements and standby letters of credit. A summary of Humboldt’s commitments and contingent liabilities at March 31, 2004, is as follows (dollars in thousands):

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

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

     Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. All letters of credit are short-term guarantees with no guarantees extending more than two years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending credit facilities to customers. Humboldt holds assigned deposit accounts as collateral supporting those commitments for which collateral is deemed necessary. None of these letters of credit were utilized during 2003 or the first three months of 2004, and Humboldt did not incur any losses on its commitments during those periods.

     Legal Proceedings: 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.

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Note 9 – Junior Subordinated Debentures (Trust Preferred Securities)

     As of March 31, 2004, Humboldt had five wholly-owned trusts (“Trusts”) that were formed to issue trust preferred securities and related common securities of the Trusts. As a result of the adoption of FIN 46R, the Trusts have been deconsolidated. The $58,921,000 of junior subordinated debentures issued to the Trusts as of March 31, 2004 ($48,611,000 as of December 31, 2003) is reflected as junior subordinated debentures in the consolidated balance sheets. The common stock issued by the Trusts is recorded in other assets in the consolidated balance sheets at March 31, 2004 and December 31, 2003. Following are the terms of each debenture as of March 31, 2004:

     Approximately $51 million of the debentures issued to the Trusts, less the common securities of the Trusts, qualifies as Tier 1 capital as of March 31, 2004, under interim guidance issued by the Board of Governors of the Federal Reserve System (Federal Reserve Board).

Part I. Item 2.
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, 2004, Humboldt had total assets of $1.46 billion, total loans of $1.02 billion, total deposits of $1.14 billion and total shareholders’ equity of $155 million.

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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 for the year ended December 31, 2003 as filed on Form 10-K (the “Notes to the 2003 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 2003 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 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 2003 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 an amount exceeding recorded reserves, the financial impact will be reflected in the period in which the matter is resolved.

Derivative Financial Instruments

     Humboldt has an asset/liability management policy that provides for the use of derivative financial instruments to hedge interest rate risk. This policy permits the use of interest rate swap, cap and floor contracts to hedge specific interest rate risk exposures as part of Humboldt’s asset/liability management process. This policy limits the notional amount of total derivative financial instruments to 15% of total assets. Notes 1 and 11 in the Notes to the 2003 Consolidated Financial Statements contain additional information on accounting policies related to derivative financial instruments. No new derivative contracts have been entered into during the first three months of 2004.

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 met the requirements for classification as a discontinued operation. Note 3 in the Notes to the 2003 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, 2004 and 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 2003 Consolidated Financial Statements.

Revenue recognition

     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 the first quarter of 2003, fees received in connection with providing merchant bankcard processing services. (Merchant bankcard revenue and expenses are classified as discontinued operations in this quarterly report.) Interest income is recorded on an accrual basis. Note 1 in the Notes to the 2003 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.

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     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 2003 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.

Results of Operations

     For the three months ended March 31, 2004, Humboldt reported net income of $2.9 million, or $0.19 per diluted share, compared with $22.0 million, or $1.68 per diluted share for the same period in 2003. Net income for the first quarter of 2003 included a gain on the sale of the Bank’s proprietary merchant bankcard operation (see Note 3 to the Consolidated Financial Statements). Net income from continuing operations was $2.9 million, or $0.19 per diluted share, for the first three months of 2004, compared with $2.6 million, or $0.20 per diluted share, for the same period in 2003. The results for the first quarter of 2004 produced a return on average assets of 0.82% and a return on average stockholders’ equity of 7.8%.

     The following table summarizes the major components of income and expense for the three-month periods ended March 31, 2004 and 2003 and the changes in those components for the periods presented.

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

Net Interest Income

     Net interest income is the largest source of Humboldt’s operating income. Net interest income was $15.2 million for the three-month period ended March 31, 2004, an increase of $3.4 million, or 29% over the comparable period in 2003. This increase is attributable to growth in outstanding average interest earning assets and interest-bearing liabilities over the comparable prior year period, primarily due to the CIB acquisition on January 6, 2004. Earning assets acquired on that date totaled $360 million, and interest-bearing liabilities totaled $214 million.

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     For the three-month period ended March 31, 2004, the net interest margin (net interest income as a percentage of average interest earning assets) on a fully tax-equivalent basis was 4.94%, a decrease of 15 basis points as compared to the same period in 2003. The decrease in the net interest margin was also principally attributable the merger with CIB, which had a lower net interest margin than Humboldt, and the cost of the junior subordinated debentures issued in connection with the merger.

     The following tables show 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 periods ended March 31, 2004 and 2003:

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

(1)		Interest income on tax-exempt securities has been increased by 50% to reflect comparable interest on taxable securities.
(2)		Includes non-accrual loans.
(3)		Includes junior subordinated debentures.
(4)		Tax equivalent net interest income as a percentage of average earning assets.

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     The following table shows the relative impact on net interest income of changes in the average outstanding balances (volume) of earning assets and interest bearing liabilities and the rates earned and paid by Humboldt on such assets and liabilities for the three-month periods ended March 31, 2004 and 2003. Changes in interest income and expense that are not attributable specifically to either rate or volume are allocated proportionately between both variances.

Table 3 — Change in Interest Income and Expense on a Tax Equivalent Basis
Unaudited
(in thousands)

Provision for Loan Losses

     The provision for loan losses was $184,000, or 0.08% of average loans on an annualized basis, for the three months ended March 31, 2004, compared with $589,000, or 0.32% of average loans, for the same period in 2003. Net charge-offs for the three months ended March 31, 2004 were $137,000, or 0.06% of average loans on an annualized basis, compared to $224,000 or 0.12% of average loans for the same period in 2003. The ratio of allowance for loan losses to total loans was 1.60% at March 31, 2004, as compared to 1.59% at December 31, 2003.

     The provision for loan losses and allowance for loan losses reflect management’s consideration of the various risks in the loan portfolio. Additional discussion of loan quality and the allowance for loan losses is provided in the Asset Quality discussion section of this report. That discussion shows that net charge-offs for the first quarter of 2004 declined from the comparable quarter of 2003 and, notwithstanding the lower loan loss provision, the ratio of the allowance for loan losses to non-performing loans increased significantly from a year ago.

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Non-interest Income

     Non-interest income for the three-month period ended March 31, 2004 was $3.1 million, an increase of $0.8 million, or 35%, from the same period in 2003. This increase is principally attributable to the CIB acquisition.

     Service charges on deposit accounts totaled $1,416,000 for the three-month period ended March 31, 2004, an increase of $810,000, or 134%, over the comparable period in 2003. In addition to the CIB acquisition, this increase is also due to Humboldt’s introduction in June 2003 of a new overdraft privilege feature for certain consumer transaction accounts that resulted in increased overdraft charges.

     Total gains on the sale of loans for the three-month period ended March 31, 2004 were $587,000, a decrease of $106,000 from the same period in 2003. During the three-month period ended March 31, 2004, Humboldt recognized $278,000 in gains related to the sale of $6.9 million of SBA loans, compared with $403,000 in gains related to the sale of $7.6 million in SBA loans for the same period in 2003.

Table 4 — Non-Interest Income
(In thousands)

Non-interest Expense

     For the three-month period ended March 31, 2004, non-interest expense totaled $13.6 million, an increase of $3.8 million, or 39%, from the same period in 2003. This increase is principally attributable to the CIB acquisition, including $628,000 of expenses incurred related to the CIB merger and $230,000 of expenses related to the pending merger with Umpqua.

Table 5 — Non-Interest Expense
(In thousands)

nm = not meaningful

     Compensation expense for the three-month period ended March 31, 2004 was $7.4 million, an increase of $1,776,000, or 32%, from the same period in 2003, principally due to the CIB acquisition.

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     Total occupancy and equipment expense for the three-month period ended March 31, 2004 was $1.9 million, an increase of $537,000, or 39% from the same period in 2003. The increase is principally attributable to the CIB acquisition and approximately $300,000 of depreciation expense associated with Humboldt’s new core branch accounting and processing system which was implemented in June 2003.

     Total other non-interest expense for the three-month period ended March 31, 2004 was $3.5 million, an increase of $621,000, or 22%, from the same period in 2003, also principally attributable to the CIB acquisition.

Income Taxes

     Income tax expense for the three months ended March 31, 2004 was $1.6 million, compared with $1.0 million for the same period in 2003. The effective tax rate (income tax expense as a percentage of pre-tax income) for the three months ended March 31, 2004 was 34.7%, compared to 27.0% for the same period in 2003. The increase in the effective tax rates is principally attributable to the potential elimination of state tax benefits associated with HB Investment Trust, a real estate investment trust (“REIT”) subsidiary of Humboldt Bank. At the end of 2003 the California Franchise Tax Board announced that it will not recognize certain state tax benefits claimed by REIT taxpayers using tax strategies similar to that being used by Humboldt. As a result, Humboldt reversed in the fourth quarter of 2003 all state tax benefits associated with the REIT, which had been recorded in the first three quarters of 2003. Humboldt believes that it is adequately reserved for tax benefits recognized during 2002 and expects to defend its use of the structure.

Investment Securities

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

     Total average investment securities for the three-month period ended March 31, 2004 were $275 million, an increase of $92 million, or 51%, compared with the same period in 2003. The investment securities portfolio acquired in the CIB merger totaled $140 million. The average tax-equivalent yield on investment securities for the three-month period ended March 31, 2004 was 4.60%, an increase of 8 basis points from the same period in 2003.

Loans

     Total average loans for the three-month period ended March 31, 2004 were $968 million, an increase of $211 million, or 28%, over the same period in 2003. The average yield on loans for the three-month period ended March 31, 2004 was 6.73%, a decrease of 58 basis points from the same period in 2003. This decrease is attributable the downward repricing of Humboldt’s variable rate loans due to lower market interest rates and the reinvestment of cash flows arising from scheduled payments and prepayments of principal at lower market rates.

     Total loans at March 31, 2004 were $1,017 million, an increase of $252 million, or 33%, from year-end 2003. The loan portfolio acquired in the CIB merger totaled $201 million.

     In 2003, liquidity concerns related to the expected loss of approximately $70 million of core deposits in connection with the exit from the merchant bankcard business caused management to consciously limit loan growth. Humboldt stopped purchasing loan participations and lowered its “hold” position on loans participated to other banks, discontinued originating “transactional” commercial loans (i.e., those with no ongoing customer deposit relationship), and maintained its credit and pricing discipline on potential loans in the face of competitive pressures for long-term fixed rate loans. For 2004, management reexamined the Bank’s practices and selectively provided for adjustments to policies on loan pricing, transactional loans and retained amounts on larger credits. As a result, the loan growth for the first three months

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of 2004 includes approximately $50 million in net new loan originations subsequent to the acquisition of CIB. Management does not expect the changes in loan origination policies to result in material increases in credit or interest rate risk exposures.

Asset Quality

     Non-performing assets, which include non-accrual loans, loans past-due 90 days or more and still accruing interest and other real estate owned, totaled $13.0 million at March 31, 2004, as compared to $9.5 million at December 31, 2003 and $10.9 million at March 31, 2003. Total non-performing loans at March 31, 2004 were $9.8 million, as compared to $9.4 million at December 31, 2003 and $10.8 million at March 31, 2003.

     The increase in non-performing loans since December 31, 2003 is attributable to non-performing loans acquired in the CIB merger (approximately $2.2 million) and one $3.4 million agribusiness relationship placed on non-accrual during the quarter, partially offset by the payoff during the first quarter of a $5.8 million non-accrual loan for the expansion of a boutique hotel. Humboldt recognized a $0.1 million charge-off in connection with this loan settlement. Approximately $2.4 million of the nonperforming loans at March 31, 2004, consists of various loans to another agriculture-related business, of which approximately $2.0 million is backed by government guarantees. Included in non-performing assets at March 31, 2004, was an OREO property acquired in the CIB merger with a carrying value of $3.0 million. This property was sold subsequent to March 31, with the net sale proceeds in excess of the carrying value recorded as a reduction of goodwill acquired in the acquisition.

     Management classifies loans as non-accrual when principal or interest is 90 days or more past due and the loan is not sufficiently collateralized and in the process of collection. Once a loan is classified as non-accrual, it cannot be reclassified as an accruing loan until all principal and interest payments are brought current and the prospects for future payments in accordance with the loan agreement appear relatively certain. Foreclosed properties held as other real estate owned are recorded at the lower of Humboldt’s recorded investment in the loan or market value of the property less expected selling costs.

     The following table presents information about Humboldt’s non-performing assets, including quality ratios as of March 31, 2004, December 31, 2003 and March 31, 2003:

Table 6 — Non-Performing Assets
(in thousands)

     At March 31, 2004, Humboldt had approximately $7 million ($10 million at December 31, 2003) of outstanding loans that were not included in the non-performing or non-accrual categories, but for which management had knowledge that the borrowers had certain identified weaknesses based on Humboldt’s internal risk rating system. Although these weaknesses are serious enough for management to be uncertain of the borrowers’ ability to comply with the original repayment terms of the loans, no losses are anticipated at this time in connection with these loans based on current market

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conditions, cash flow generation and collateral values. These loans are subject to routine management review and are considered in determining the adequacy of the allowance for loan losses.

     The allowance for loan losses (“ALL”) at March 31, 2004 totaled $16.3 million, an increase of $4,105,000, or 34%, from December 31, 2003, due primarily to the acquisition of CIB. The ratio of ALL to total loans at March 31, 2004 was 1.60%, an increase of one basis point from December 31, 2003 and from March 31, 2003. At March 31, 2004 and 2003, the ratio of ALL to total non-performing loans was 166% and 111%, respectively.

     The following table provides an analysis of the changes in the ALL for the three-month periods ended March 31, 2004 and 2003:

Table 7 — Allowance for Loan Losses
(in thousands)

     Management believes that the ALL at March 31, 2004 is sufficient to absorb losses inherent in the loan portfolio. This assessment is based upon the best available information and does involve uncertainty and matters of judgment. Accordingly, the adequacy of the loan loss reserve cannot be determined with precision and could be susceptible to significant change in future periods.

Deposits and Borrowed Funds

     Total average deposits for the three-month period ended March 31, 2004 were $1.124 billion, an increase of $285 million, or 34%, over the same period in 2003. The average cost of interest bearing deposits for the three-month period ended March 31, 2004 was 1.12%, a decline of 77 basis points as compared to the first three months of 2003. This reduction is principally due to rate reductions made by Humboldt in response to lower market interest rates.

     As of March 31, 2004, Humboldt had $40 million of brokered certificates of deposit at an average cost of 2.51%. Of this total, $30 million are fixed-rate instruments that mature prior to December 31, 2004. One brokered issuance, in the amount of $10 million, matures in June 2010. This issuance is callable at Humboldt Bank’s option after one year and bears a fixed interest rate of 4.70%. Humboldt has synthetically converted this issuance to a floating rate based on LIBOR plus 7 basis points using an interest rate swap contract, which is callable by the counterparty after one year. Humboldt, in turn, has the option to call the related brokered certificates. Additional information regarding this swap contract is included in Table 9 below.

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     Total average borrowed funds, including the junior subordinated debentures, for the three months ended March 31, 2004 were $134 million, an increase of $45 million, or 51%, compared with the same period in 2003. The average cost of borrowed funds for the three-month period ended March 31, 2004 was 4.55%, down 1 basis point as compared to the same period in 2003.

Asset/Liability Management

     Humboldt’s financial performance is largely dependent upon its ability to manage market interest rate risk, which can be further defined as the exposure of Humboldt’s net interest income to fluctuations in interest rates. Since net interest income is the largest component of Humboldt’s revenue, management of interest rate risk is a priority. Humboldt’s interest rate risk management program includes a coordinated approach to managing interest rate risk and is governed by policies and Humboldt’s Asset and Liability Management Committee (“ALCO”). The ALCO meets regularly to evaluate the impact of market interest rates on the assets, liabilities, net interest margin, capital and liquidity of Humboldt and to determine the appropriate strategic plans to address the impact of these factors.

     Management monitors the sensitivity of net interest income to changes in market interest rates by utilizing a simulation model. This model measures net interest income sensitivity and volatility to interest rate changes based on assumptions which management believes are reasonable. Factors considered in the simulation model include actual maturities, estimated cash flows, repricing characteristics, and the relative sensitivity of assets and liabilities to changes in market interest rates. The simulation model considers other factors that can impact net interest income, including the mix of earning assets and liabilities, yield curve relationships, customer preferences and general market conditions. By utilizing the simulation model, management can project the impact of changes in interest rates on net interest income.

     The estimated impact on Humboldt’s net interest income over a one-year time horizon as of March 31, 2004 is presented in Table 8. The interest rate simulation assumes a parallel and sustained shift in market interest rates ratably over a twelve-month period and no change in the composition or size of Humboldt’s balance sheet. For example, the “up 200 basis points” scenario is based on a theoretical increase in market rates of 16.7 basis points per month over the ensuing 12 months.

Table 8 — Interest Rate Simulation

     The preceding interest rate simulation model does not represent a financial forecast and should not be relied upon as being indicative of future results. These hypothetical estimates are based on numerous assumptions and factors, including actual maturities, estimated cash flows, repricing characteristics, the relative sensitivity of assets and liabilities to changes in market interest rates, mix of earning assets and liabilities, yield curve relationships, customer preferences and general economic conditions. While assumptions and estimates are developed based upon current economic and local market conditions, Humboldt cannot make any assurances as to the predictive nature of these assumptions and estimates.

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     In order to assist with managing interest rate sensitivity, Humboldt has entered into off-balance sheet contracts that are considered derivative financial instruments. As of March 31, 2004, Humboldt had four such contracts, all of which are interest rate swap agreements. Table 9 presents information regarding the swap agreements as of March 31, 2004:

Table 9 — Interest Rate Swap Contracts
As of March 31, 2004

(1)		Variable rate based on prime rate
(2)		Variable rate based on prime rate
(3)		Variable rate based on 3 month LIBOR + 7 basis points
(4)		Fixed rate
(5)		Variable rate based on 3 month LIBOR + 3.6%, not to exceed 12.50%

     Each of Humboldt’s derivative financial instruments is classified as either a fair value or cash flow hedge. Fair value hedges recognize currently in earnings both the impact of the change in the fair value of the derivative financial instrument and the offsetting impact of the change in fair value of the hedged asset or liability. The change in fair value of cash flow hedges is recognized in other comprehensive income, net of associated tax effects.

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

Capital Resources and Liquidity

     Stockholders’ equity at March 31, 2004 was $155 million, an increase of $58 million, or 60%, from year-end 2003. Table 10 presents a summary of the changes in stockholders’ equity for the three-month period ended March 31, 2004:

Table 10 — Summary of Changes in Stockholders’ Equity
For the three months ended March 31, 2004

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     The following table shows Humboldt’s capital ratios, as calculated under regulatory guidelines, compared to the regulatory minimum capital ratio and the regulatory minimum capital ratio needed to qualify as a “well-capitalized” institution at March 31, 2004 and December 31, 2003:

Table 11 — Capital Ratios

     On February 6, 2002, Humboldt announced the authorization of a stock repurchase for up to 600,000 shares. This repurchase was completed during the first quarter of 2003. On July 22, 2002, Humboldt’s Board of Directors authorized a second stock repurchase for up to 1.2 million shares in connection with the planned sale of the Humboldt’s proprietary merchant bankcard operations. Approximately 500,000 shares remained available for repurchase under this authorization as of March 31, 2004. Under its Agreement with Umpqua, Humboldt has committed that it will not repurchase any shares. The following table presents the number of shares repurchased and average price paid by Humboldt for the three-month periods ended March 31, 2004 and 2003.

Table 12 — Share Repurchase Summary

     During the third quarter of 2003 Humboldt issued, through a wholly-owned statutory business trust, $27 million of guaranteed preferred beneficial interests in Humboldt’s junior subordinated debentures. Subject to certain limitations, these debentures qualify as regulatory capital under current guidelines. The proceeds received by Humboldt from the sale of the junior subordinated debentures were used to provide approximately 85% of the cash consideration for the acquisition of California Independent Bancorp (see Note 7 to the Consolidated Financial Statements). Further information on the junior subordinated debentures is included in Note 9 to the consolidated financial statements.

     The following table presents cash dividends paid by Humboldt for the three-month periods ended March 31, 2004 and 2003.

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Table 13 — Cash Dividends

     *Based on net income from continuing operations.

     Humboldt did not pay cash dividends prior to the second quarter of 2002. Although it is the intention of Humboldt to pay cash dividends on a quarterly basis, there is no assurance that any future cash dividends will be paid. The payment of cash dividends is subject to Federal regulatory requirements for capital levels and other restrictions. In addition, the cash dividends paid from Humboldt Bank to Humboldt Bancorp (the primary source of cash available for dividends by Humboldt Bancorp) is subject to both Federal and State regulatory requirements.

     Liquidity measures the ability to meet current and future cash flow needs as they become due. Maintaining an adequate level of liquid funds, at the most economical cost, is an important component of Humboldt’s asset and liability management program. Humboldt has several sources of available funding to provide the required level of liquidity, including deposits and short- and long-term borrowings. Like most banking organizations, Humboldt relies primarily upon cash inflows from financing activities (deposit gathering, short-term borrowing and issuance of long-term debt) in order to fund its investing activities (loan origination and securities purchases). The investing activity cash inflows such as loan payments and securities sales and prepayments are also a significant component of liquidity. Following is a summary of Humboldt’s contractual obligations extending beyond one year from March 31, 2004:

Table 14 — Long-Term Contractual Obligations