HUMBOLDT BANCORP - 10-K Annual Report

Back to GetFilings.com

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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
(Exact name of registrant as specified in its charter)

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

2440 SIXTH STREET
EUREKA, CALIFORNIA 95502
(Address and Zip Code of Principal Executive Offices)

(707) 445-3233
(Telephone Number)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, WITHOUT PAR VALUE

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

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

The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 1, 2002 based on the closing price on that date was
$92,311,000. The number of shares outstanding of Registrant's common stock
outstanding as of March 1, 2002 was 10,346,298.

DOCUMENTS INCORPORATED BY REFERENCE

Information required by Items 10 through 12 of Part III of this Form 10-K
are incorporated by reference to Humboldt Bancorp's proxy statement which will
be filed within 120 days of the end of the fiscal year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PART I

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

- The ability to attract new deposits and loans

- Competitive pricing factors

- Deterioration in economic factors that result in increased loan losses

- Market interest rate fluctuations

- Operational difficulties related to execution of Humboldt's strategic
plan

- Changes in the legal or regulatory requirements

- New technological developments

- The ability to recruit and retain top-level management and staff

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

ITEM 1. BUSINESS

GENERAL

Humboldt Bancorp ("Humboldt") is a California corporation incorporated in
January 1995. Humboldt is registered as a bank holding company under the Bank
Holding Company Act of 1956, as amended. As of December 31, 2001, Humboldt had
total assets of $958 million, total net loans of $655 million, total deposits of
$807 million and total shareholders' equity of $67 million. For the year ended
December 31, 2001, Humboldt reported a net loss of $6.0 million, or $0.55 per
diluted share.

Humboldt Bancorp had the following bank subsidiaries as of December 31,
2001:

Humboldt Bank, Tehama Bank, Capitol Valley Bank and Capitol Thrift & Loan
are collectively referred to as the "Banks" in this report. On January 1, 2002,
Capitol Thrift & Loan was merged into Capitol Valley Bank. Humboldt Bank has one
subsidiary, HB Investment Trust, which was formed as a Real Estate Investment
Trust ("REIT") organized under the laws of the State of Maryland on December 31,
2001. Humboldt Bank owns all of the outstanding common stock of HB Investment
Trust and is the sole contributor of real estate assets.

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. Additional information regarding BFS is contained under
the heading "Bancorp Financial Services -- Discontinued Operations" later in
this Report.

1

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

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

RECENT DEVELOPMENTS

On February 6, 2002, Humboldt announced a common stock repurchase program
under which a total of 500,000 shares, or approximately 4.8% of total shares
outstanding, could be repurchased. As of March 15, 2002, approximately 207,000
shares had been repurchased.

On March 8, 2002, Humboldt announced that it had filed for regulatory
approval to merge Capitol Valley Bank and Tehama Bank into Humboldt Bank. After
the merger, Humboldt Bank will operate branches under the trade names of Capitol
Valley Bank and Tehama Bank in the markets currently served by those banks.
Regulatory approval is expected by April 15, 2002 and the charter consolidation
is expected to be completed by June 30, 2002. Humboldt expects to incur
after-tax expenses of $300,000 in connection with the consolidation during the
second quarter of 2002.

MERGERS & ACQUISITIONS

On March 9, 2001, Humboldt acquired, for 3.73 million shares of its common
stock and approximately $300,000 in cash, all of the outstanding common stock of
Tehama Bancorp ("Tehama"), a one-bank holding company, based in Red Bluff,
California. Each share of Tehama common stock was converted into and exchanged
for 1.775 shares of Humboldt common stock. The cash consideration paid was to
Tehama shareholders that exercised their dissenters' rights. This merger was
accounted for as a pooling of interests and, accordingly, all financial
information contained in this Report is has been restated to reflect the
combination of Humboldt and Tehama for all periods presented.

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

MARKET AREA AND COMPETITION

The market for banking and bank-related services is highly competitive. The
Banks actively compete in their respective 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 each of the Banks and the
respective percentage of 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, 2001.
Since Capitol Thrift & Loan did not have a material market share in any

2

county in which it operates, only the deposits in Placer County are included in
the table below combined with Capitol Valley Bank:

In California generally, major banks and large regional banks 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 Banks make both secured and unsecured loans to individuals, firms, and
corporations. Secured loans include first and second real estate mortgage loans.
The Banks also make direct installment loans to consumers on both a secured and
unsecured basis. At December 31, 2001, Consumer, real estate construction, real
estate mortgage, and commercial & industrial loans represented approximately
10%, 10%, 64%, and 16% respectively, of Humboldt's total loan portfolio.
Specific risk elements associated with each of the lending categories include,
but are not limited to:

- Commercial & Industrial -- Industry concentrations; inability to monitor
the condition of collateral (inventory, accounts receivable and
vehicles); lack of borrower management expertise, increased competition;
use of specialized or obsolete equipment as collateral; insufficient cash
flow from operations to service debt payment.

- Real estate -- construction -- Inadequate collateral and long-term
financing agreements

- Real estate mortgage -- Changes in local economy affecting borrower's
employment; insufficient collateral value due to decline in property
value.

- Consumer -- Loss of borrower's employment; changes in local economy; the
inability to monitor collateral (vehicles, boats, and mobile homes)

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

CREDIT POLICY

The current lending policy of the Banks is to make loans primarily to
persons who reside, work, or own property in their primary market areas.
Unsecured loans are generally made only to persons who maintain depository
relationships with the Banks. 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-

3

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 Banks provide each lending officer with written guidelines
for lending activities. Lending authority is delegated by the Boards of
Directors of the Banks to loan officers, each of whom is limited in the amount
of secured and unsecured loans which he or she can make to a single borrower or
related group of borrowers. Loans in excess of individual officer credit
authority must either be approved by a senior officer with sufficient approval
authority or be approved by the Bank Board of Directors.

LOAN REVIEW AND ALLOWANCE FOR LOAN LOSS METHODOLOGY

The Loan Review Department of Humboldt reviews, or engages an independent
third party to review, each of the Banks' loan portfolios on a quarterly 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 of Humboldt, and the Boards of Directors of each of the Banks and
the Audit Committee of Humboldt Bancorp. If an individual loan or credit
relationship has a weakness identified during the review process, the risk
rating of the loan, or all loans comprising a credit relationship, will be
downgraded to a classification that most closely matches the current risk level.
The review process also provides for the upgrade of loans that show improvement
since the last review. Since each loan in a credit relationship may have a
different credit structure, collateral, and other secondary source of repayment,
different loans in a relationship can be assigned different risk ratings.

Under Humboldt's 8-grade loan grading system, which is essentially the same
as the grading system used by banking regulators, grades 1 through 3 are
considered "pass," or very acceptable credit quality that does not require
special monitoring. Grades 4 through 8 are indicative of higher risk loans that
require a greater level of management's attention. The entire 8-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 at one of the Banks. The five credit
ratings that require special management attention are:

- 4 (Watch) -- Loan is fundamentally sound, but weaknesses exist that could
cause future impairment, such as early indication of adverse trends in
the borrower's financial condition; borrower vulnerability to adverse
economic trends, competitive pressure or technological change; repayment
schedules that have extended principal amortization; or, collateral
values with narrow liquidation margins.

- 5 (Special Mention) -- Fundamentally sound loan that lacks certain
current documentation necessary to verify financial condition of the
borrower, such as current financial statements and tax returns.

- 6 (Substandard) -- 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.

- 7 (Doubtful) -- Specific weaknesses characterized by Substandard where
there is no strong secondary source of repayment and collection or
liquidation in full is unlikely. Insufficient information exists to
determine the amount of potential loss.

- 8 (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.

Humboldt performs a quarterly analysis to determine the adequacy of the
Allowance for Loan Losses ("ALL") for each of the Banks. The aggregation of the
ALL analyses for the Banks provides the consolidated analysis for Humboldt.

The ALL analysis segregates Humboldt's loan portfolio into 17 different
categories based on type of loan. These categories include commercial
construction, agricultural, government guaranteed, commercial real estate and
consumer loans. First, all loans in each category are assigned a reserve factor
of between 0% and 4.0% based on the inherent risk level of the category and
Humboldt's loss experience. Next, loans graded 6 or

4

higher in each category are assigned reserve factors based on the inherent risk
level of the category and Humboldt's loss experience:

All loans graded 4 or 5 are assigned an additional reserve factor of 0.125%
and loans past due 30 days or more are assigned an additional reserve factor of
0.25%. The aggregation of each of the components above provides for the
analytical required reserve for each category. Combining the results of the
analytical required reserve calculation for all 17 loan categories provides the
total required ALL.

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

There is no current process used to measure or adjust for differences
between the loss factors for adversely classified loans used in the ALL analysis
and actual losses charged to the ALL. The difference between the actual ALL (as
presented in the consolidated financial statements) and the allocated ALL
represents the unallocated ALL. The unallocated ALL provides for coverage of
credit losses inherent in the loan portfolio but not provided for in the ALL
analysis. The unallocated ALL as of December 31, 2001 was approximately
$500,000.

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, 2001. 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 Banks, may require additional charges to the provision for
loan losses in future periods if the results of their review warrant.

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

MERCHANT BANKCARD SERVICES

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

While these merchants vary in size, Humboldt's average typical merchant
generates approximately $50,000 in annual credit card charge volume. Humboldt
believes that there is a market for providing services to these merchants, who
are often overlooked by larger processors. For the year ended December 31, 2001,
no single merchant accounted for more than 0.7% of Merchant Bankcard Services'
total gross processing volume.

5

At December 31, 2001, the Merchant Bankcard Department provided processing
services to approximately 99,000 merchants.

INDEPENDENT SERVICE ORGANIZATION PROCESSING

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

As of December 31, 2001, Humboldt had six ISO processing agreements
covering a total of approximately 88,000 merchant accounts. The following table
presents the material ISO agreements by contract expiration date (processing
volume in millions):

For the year ended December 31, 2001, Humboldt processed $4.2 billion of
ISO merchant transactions.

Following a modification of the terms of an agreement with a merchant
processing ISO, Humboldt recorded revenue of $3.6 million during 2001. The
agreement, which was negotiated as part of Humboldt's ongoing merchant services
risk management process, provided for payment of this non-recurring fee in
consideration for providing the ISO with the ability to transfer processing of
its merchant accounts to another financial institution.

PROPRIETARY PROCESSING

In 1997, Humboldt began an additional unit within the Merchant Bankcard
Services where all servicing aspects of the relationship with the merchant are
performed by Humboldt, although Humboldt still relies on ISOs for solicitation
of some merchants. Humboldt categorizes these types of accounts as proprietary
accounts ("Proprietary"). For these additional services, Humboldt is able to
retain more income from the service and processing fees paid by the merchants
(approximately 4% of volume processed) than when an ISO is involved. However,
Humboldt assumes all risk of loss associated with Proprietary merchant accounts.

For the year ended December 31, 2001, Proprietary merchant accounts
represented $593 million, or 12%, of total gross processing volume, an increase
of 38% over 2000. There were approximately 10,700 Proprietary merchant accounts
at December 31, 2001. The merchant base is diversified, with no business
category representing more than 12% of total merchant accounts. At December 31,
2001, the largest business categories represented in the Proprietary portfolio
were retail specialty stores, card/gift shops, convenience stores and
restaurants.

Humboldt intends to continue to expand the Proprietary segment of its
business through direct sales efforts, ISO sales and the purchase of merchant
processing portfolios. During 2001, Humboldt paid a total of approximately
$720,000 for various merchant account portfolios. The value paid is classified
as an identifiable intangible and amortized over the expected life of the
acquired portfolio, generally 12 to 36 months.

MERCHANT BANKCARD SERVICES RISKS

There are unique risks associated with processing merchant credit and debit
card transactions. Many of the merchants accept consumers' credit card numbers
over the telephone and Internet. There are no signed

6

drafts and the entire process is handled electronically. Since consumers find
these transactions easier to dispute than transactions involving signed drafts,
the charge-back rates for services provided over the telephone and through the
Internet are generally higher. Humboldt views its risk management and fraud
avoidance practices as integral to its operations and overall success because of
potential liability for merchant fraud, charge backs and other losses. While the
first time and small to medium sized merchants may be potentially profitable
accounts, they are by definition high risk because of the lack of business
experience and consequently require close monitoring.

For ISO merchants, risk is mitigated by requiring merchant reserves and by
ISO reserves and guarantees. Reserves are demand deposit or time deposit account
balances with minimum required balances established by withholding a percentage
of processing volume. For the Proprietary account segment, risk management and
fraud control occur initially at the application stage when merchant
applications are reviewed against certain criteria to determine acceptance or
denial. Furthermore, Humboldt addresses these risks by actively monitoring all
merchants on a daily basis, employing an aggressive fraud control monitoring,
requiring personal guarantees for nearly all merchants and holding reserve
deposits for certain merchants.

In the event a consumer is dissatisfied with the merchandise or service, in
general, a merchant must accept a charge-back for a period of 120 days. The
merchant's checking account is debited with the charge-back if sufficient funds
exist; otherwise, the merchant's reserve funds are debited. If a merchant's
reserves are insufficient to fund the charge-back and an ISO is involved,
Humboldt looks to the applicable and available guarantee, if any, of the ISO. If
the merchant's reserve is exhausted and either (i) an ISO is involved but no
guarantee is applicable or available, or (ii) no ISO is involved, Humboldt uses
its internal reserves to fund the charge-back. Humboldt had $76 million of
deposit accounts related to merchant reserves as of December 31, 2001.
Approximately $73 million, or 96%, of the merchant deposits account balances
were in demand deposit accounts.

An allowance for losses is maintained in connection with Humboldt's
merchant bankcard processing activities. An analysis of the adequacy of the
allowance is performed on a quarterly basis. The analysis assigns risk factors
to processing volumes for each ISO and the Proprietary portfolio, based on the
financial strength of the ISO, loss experience, merchant chargeback experience
and other factors.

A summary of the activity in the Merchant Bankcard Services allowance for
losses account for the years ended December 31, 1999, 2000, and 2001 is set
forth in the table below (dollars in thousands):

ASSOCIATION RISKS

Merchant bankcard processing services are highly regulated by credit card
associations such as VISA and Mastercard. In order to participate in the credit
card programs, Humboldt must comply with the credit card association's rules and
regulations, which may change from time to time. In November 1999, VISA adopted
rule changes that required staged-in compliance by March 31, 2001. To become
compliant, Humboldt would have had to reduce its processing volume because its
chargeback percentage was in excess of what the new rules would have allowed. As
a result of these proposed regulations, Humboldt's merchant bankcard income
would have been reduced. In October 2000, VISA adopted a revised set of rules
that are less restrictive than the November 1999 rules and with which Humboldt
is in full compliance. There is no guarantee that the credit card associations
will not, at some future point, adopt more restrictive rules that could
adversely impact Humboldt.

7

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

ATM FUNDING

In 1996, Humboldt began its automated teller machine ("ATM") funding
operation by sponsoring ISOs that place and service ATMs in various public
places such as restaurants, convenience stores, and gas stations. ATM networks
require each ATM ISO to be sponsored by a chartered financial institution.
Humboldt sponsors these companies and provides cash for their ATMs under a
contractual agreement in exchange for a fee. Tehama Bank, prior to its
acquisition by Humboldt, also was active in ATM Funding and after completion of
the merger continued to provide ATM funding. At December 31, 2001, Humboldt's
ATM Funding operation had a total of $24 million in aggregate funding to 21
different ATM ISOs.

During the fourth quarter of 2001, Humboldt determined that an ATM ISO had
stolen approximately $5.0 million that was provided for funding ATMs.
Subsequently, law enforcement authorities recovered approximately $3.6 million
of the cash. A loss of $1.4 million before tax was recorded in connection with
the theft in 2001.

Humboldt's Audit Committee engaged an independent firm to conduct a process
control review of the ATM Funding operation during December 2001. A report was
issued to the Audit Committee during January 2002, and all recommendations were
immediately implemented. Humboldt is pursuing insurance claims against bond
coverage provided by the ATM ISO and also under the company's financial
institution bond.

In light of the cash theft and related loss, management reevaluated the
financial risks and rewards associated with ATM Funding and determined that
alternative uses of the ATM funding cash, such as funding loans, would provide a
more acceptable risk-adjusted return to Humboldt. Accordingly, a decision was
made during the first quarter of 2002 to begin the process of exiting the ATM
Funding business. By March 31, 2002, Humboldt expects to have its ATM Funding
program reduced to approximately $10 million of cash funded and to substantially
exit the business by June 30, 2002. The decision to terminate the ATM Funding
operation is not expected to have a material impact on Humboldt's results of
operations.

ASSET/LIABILITY MANAGEMENT

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

INVESTMENT POLICY

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

8

BANCORP FINANCIAL SERVICES -- DISCONTINUED OPERATIONS

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

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

The operating results of BFS are included, net of tax, in the income
statement as income (loss) from discontinued operations. For the year ended
December 31, 2001, Humboldt reported a loss on discontinued operations of $14.0
million.

Additional information on BFS is contained in Note 3 in the Notes to the
Consolidated Financial Statements.

ECONOMIC CONDITIONS, GOVERNMENT POLICIES AND LEGISLATION

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

The results of operations of the 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 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.

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
9

between banks and other financial services providers. Proposals to change the
laws and regulations governing the operations and taxation of banks, bank
holding companies, and other financial institutions and financial services
providers are frequently made in the U.S. Congress, in the state legislatures,
and before various regulatory agencies.

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

- Repeals historical restrictions on, and eliminates many federal and state
law barriers to, affiliations among banks, securities firms, insurance
companies, and other financial services providers;

- Provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;

- Broadens the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;

- Provides an enhanced framework for protecting the privacy of consumer
information;

- Adopts a number of provisions related to the capitalization, membership,
corporate governance, and other measures designed to modernize the
Federal Home Loan Bank system;

- Modifies the laws governing the implementation of the Community
Reinvestment Act, sometimes referred to as CRA; and

- Addresses a variety of other legal and regulatory issues affecting both
day-to-day operations and long-term activities of financial institutions.

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
10

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.

SUPERVISION AND REGULATION OF HUMBOLDT

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

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

REGULATION OF BANK HOLDING COMPANIES

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

FEDERAL DEPOSIT INSURANCE

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

The amount of FDIC assessments paid by each member institution is based on
its relative risk of default as measured by regulatory capital ratios and other
factors. The assessment rate currently ranges from $0.00 to $0.27 per $100.00 of
deposits. At December 31, 2001, all of the Banks, except for Capitol Thrift &
Loan, were classified in a manner that the assessment rate was zero. On January
1, 2002, Capitol Thrift & Loan was merged into Capitol Valley Bank and its
deposits are henceforth assessed as part of Capitol Valley Bank.

The FDIC may increase or decrease the assessment rate schedule on a
semi-annual basis in order to manage the BIF and SAIF to prescribed statutory
target levels. During the fourth quarter of 2001 and first quarter of 2002,
published reports indicated that the BIF was likely to fall below the statutory
target of 1.25%
11

of insured deposits during 2002 because of a recent increase in the number of
bank failures and growth in bank deposits. This would require the FDIC to
increase the assessment rate for BIF member banks. Although the amount of any
increase is not currently known, if the BIF remains under the prescribed
statutory target for one year all member banks will be charged $0.23 per $100.00
of deposits. For Humboldt, this would represent an additional pre-tax expense of
approximately $1.9 million annually. An increase in the assessment rate could
have a material adverse effect Humboldt's earnings, depending on the amount of
the increase.

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

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

CAPITAL ADEQUACY GUIDELINES

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

Undercapitalized depository institutions are subject to restrictions on
borrowing from the Federal Reserve System. In addition, undercapitalized
depository institutions are subject to growth limitations and are required to
submit capital restoration plans. An insured depository institution's holding
company must guarantee the capital plan, up to an amount equal to the lesser of
5% of the depository institution's assets at the time it becomes
undercapitalized or the amount of the capital deficiency when the institution
fails to comply with the plan, for the plan to be accepted by the applicable
federal regulatory authority. The federal banking agencies may not accept a
capital plan without determining, among other things, that the plan is based on
realistic assumptions and is likely to succeed in restoring the depository
institution's capital. If a depository institution fails to submit an acceptable
plan, it is treated as if it is significantly undercapitalized. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized and requirements to reduce total assets.
Critically undercapitalized depository institutions are subject to appointment
of a receiver or conservator, generally within 90 days of the date on which they
become critically undercapitalized.

12

In connection with Humboldt's organization of Capitol Valley Bank in March
1999, Humboldt Bank has committed to the FDIC that it will remain "well
capitalized" and that it will maintain minimum Tier I leverage capital ratios of
at least 6.5% for the initial 12 months of operation of Capitol Valley Bank,
6.8% for the next 12 months, and 7.2% for the third 12-month period. In
addition, Humboldt agreed to maintain a Tier I leverage capital ratio for
Capitol Valley Bank of at least 8.0% for its first three years of operation.

Humboldt believes that at December 31, 2001, all of the Banks had
sufficient capital to qualify as "well capitalized" under the regulatory
requirements above and that Humboldt Bank and Capitol Valley Bank had sufficient
capital to comply with the agreements above. Further detail on regulatory
capital ratios is included in Note 20 of the Notes to the Consolidated Financial
Statements.

In January 2001, the Basel Committee on Banking Supervision ("Committee")
proposed its second draft of a new capital adequacy framework. The Committee,
which was established in 1974, meets regularly four times a year. Countries are
represented on the Committee by their central bank. The current regulatory
capital standards described above were first promulgated by the Committee in
1988. The Committee does not possess any formal supranational supervisory
authority, and its conclusions do not, and were never intended to, have legal
force. Rather, it formulates broad supervisory standards and guidelines and
recommends statements of best practice in the expectation that individual
authorities will take steps to implement them through detailed
arrangements -- statutory or otherwise -- which are best suited to their own
national systems.

The new capital framework would consist of minimum capital requirements, a
supervisory review process and the effective use of market discipline. In its
proposal for minimum capital requirements, the Committee set out options from
which banks could choose depending on the complexity of their business and the
quality of their risk management. A standardized approach would refine the
current measurement framework and introduce the use of external credit
assessments to determine a bank's capital charge. Banks with more advanced risk
management capabilities could make use of an internal risk-rating based
approach. Under this approach, some of the key elements of credit risk, such as
the probability of default of the borrower, would be estimated internally by a
bank. The Committee is also proposing an explicit capital charge for operational
risk to provide for problems like internal systems failure. The supervisory
review aspect of the new framework would seek to ensure that a bank's capital
position is consistent with its overall risk profile and strategy. The
supervisory review process would also encourage early supervisory intervention
when a bank's capital position deteriorates. The third aspect of the new
framework, market discipline, would call for detailed disclosure of a bank's
capital adequacy in order to encourage high disclosure standards and to enhance
the role of market participants in encouraging banks to hold adequate capital.
Banks must also disclose how they evaluate their own capital adequacy.

In December 2001, the Committee announced that another version of the new
proposed capital framework would be issued sometime during 2002 after it
completes an assessment of the proposal's impact on the banking system. The new
standards are not expected to become effective prior to 2005. At this time,
Humboldt cannot predict whether the new capital adequacy framework will be
adopted or in what form, or the effect it would have on the financial condition
or results of operations of Humboldt or the Banks.

LIMITS ON DIVIDENDS AND OTHER PAYMENTS

Humboldt has never paid cash dividends, but has declared stock dividends
(Tehama declared and paid dividends in 1999). 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 Banks.
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 Banks' 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.

13

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.

COMMUNITY REINVESTMENT ACT

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

Although CRA examinations occur on a regular basis, CRA performance
evaluations are used principally in the evaluation of regulatory applications
submitted by an institution. CRA performance evaluations are considered in
evaluating applications for such things as mergers, acquisitions and
applications to open new branches. The following table presents the date of the
last CRA examination and the rating issued for the Banks:

The Financial Services Modernization Act of 1999 amended the CRA by
reducing the frequency of examinations for smaller banks (with assets of less
than $250 million) and by requiring disclosure by community groups as to the
amount of funds received from lenders and the manner those community groups used
those funds. These revisions are not expected to significantly impact the
application of CRA to Humboldt.

STATE REGULATION

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

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

EMPLOYEES

At December 31, 2001, Humboldt employed a total of 486 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 2002 Annual Meeting.

14

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Some of Humboldt's directors and executive officers and their immediate
families, as well as the companies in which they may have interests, have had
loans from the Banks in the ordinary course of the Banks' business. In addition,
the Banks expect to have loans with these persons in the future. In management's
opinion, all these loans and commitments to lend were made in the ordinary
course of business, were made in compliance with applicable laws on
substantially the same terms, including interest rates and collateral, as those
prevailing for comparable transactions with other persons of similar
creditworthiness and, in the opinion of management, did not involve more than a
normal risk of collectibility or present other unfavorable features. The
outstanding balance under extensions of credit by the Banks to directors and
executive officers and to the companies that these directors and executive
officers may have an interest was $11,224,000, $8,031,000 and $7,264,000, as of
December 31, 1999, 2000, and 2001 respectively.

ITEM 2. PROPERTIES

The executive offices of Humboldt are located at 2440 Sixth Street, Eureka,
California. Humboldt owns this property, which includes an office building of
approximately 90,000 square feet. As of December 31, 2001, Humboldt owned 13
other properties, 12 of which serve as branch bank offices. All other Humboldt
facilities occupy leased space.

In December 2001, Humboldt sold a property located in Napa, California that
served as a branch location and administrative headquarters of Capitol Thrift &
Loan. Upon completion of the sale, Humboldt entered into an agreement to lease
the property back from the new owner for a term of five months while the process
of relocating the branch is finalized. The administrative functions of Capitol
Thrift & Loan were consolidated into Capitol Valley Bank during the fourth
quarter of 2001.

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

ITEM 3. LEGAL PROCEEDINGS

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

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

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

15

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Since March 29, 2000, Humboldt's common stock has been traded on the Nasdaq
National Market System ("Nasdaq") under the symbol "HBEK." Previously,
Humboldt's common stock was quoted on the OTC Bulletin Board. The table below
reflects the high and low closing sales prices for Humboldt's common stock as
reported by Nasdaq and prior to that time, the high and low bid prices as quoted
on the OTC Bulletin Board. As of December 31, 2001 and 2000, there were
50,000,000 shares of Humboldt common stock authorized for issuance. Humboldt
Bancorp common stock has no par value.

No assurances can be given that the high and low prices shown below
reflected the actual market value of Humboldt's common stock. The high and low
prices have been adjusted to reflect the 10% stock dividends issued on February
7, 2000 and June 15, 2001. In addition, the prices indicated reflect
inter-dealer prices, without retail mark-up, mark down or commission and may not
represent actual transactions.

As of December 31, 2001 there were approximately 1,576 shareholders, not
including those held in street name by brokerage firms. As of December 31, 2001,
a total of 1,538,360 shares of Humboldt common stock underlie outstanding
options and warrants.

Humboldt has never declared a cash dividend on the common stock. Payment of
future dividends is at the discretion of the board of directors and subject to a
number of factors, including results of operations, general business conditions,
capital requirements, general financial condition, and other factors deemed
relevant by the board of directors. Further, our ability to issue cash dividends
is subject to meeting certain regulatory requirements. See "Supervision and
Regulation of Humboldt Bancorp."

16

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA(1)

- ---------------

(1) All financial results have been restated to reflect the merger with Tehama
Bancorp, which was accounted for as a pooling of interests. Financial
results also include the acquisition of Capitol Thrift and Loan effective
April 7, 2000.

(2) Excludes the impact of discontinued operations and merger-related expenses.

nm -- not meaningful
Refer to Humboldt Bancorp Report on Form 10-K for a complete set of Consolidated
Financial Statements.
17

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

Information regarding Management's Discussion and Analysis of Financial
Condition and Results of Operations appears on pages A-1 through A-23 under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and is incorporated herein by reference.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information regarding Quantitative and Qualitative Disclosures about Market
Risk appears on page A-18 through A-23 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quantitative and Qualitative Disclosure about Market Risk" and is
incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Information regarding Financial Statements and Supplementary Data appears
A-24 through A-62 under the captions "Consolidated Balance Sheets",
"Consolidated Statements of Operations", Consolidated Statements of Changes in
Stockholders' Equity", "Consolidated Statements of Cash Flows" and "Notes to
Consolidated Financial Statements" and is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

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

During Humboldt's two most recent fiscal years ended December 31, 2000 and
2999, and the subsequent interim period preceding the dismissal through
September 4, 2001, there were no disagreements with Richardson & Co. on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures, which disagreements if not resolved to Richardson
& Co.'s satisfaction would have caused it to make a reference to the subject
matter of the disagreements in connection with its reports.

None of the "reportable events" described under Item 304(a)(1)(v) of
Regulation S-K occurred within Humboldt's two most recent fiscal years and the
subsequent interim period through September 4, 2001.

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

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

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Humboldt intends to file a definitive proxy statement for the 2001 Annual
Meeting of Shareholders (the "Proxy Statement") with the Securities and Exchange
Commission within 120 days of December 31, 2001. Information regarding directors
of Humboldt Bancorp will appear under the caption "Election of Directors" in the
Proxy Statement and is incorporated herein by reference. Information regarding
compliance with Section 16(a) of the Securities Exchange Act of 1934, as
amended, and executive officers will appear under the captions "Executive
Compensation" -- Section 16(a) Principal Shareholders and Share Ownership of
Management and Directors in the Proxy Statement and is incorporated herein by
reference.

18

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information regarding security ownership of certain beneficial owners and
management will appear under the caption "Principal Shareholders and Share
Ownership of Management and Directors" in the Proxy Statement and is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) 1. Financial Statements

The following documents are filed as part of this report:

Report of Independent Auditors.............................. A-24
Consolidated Balance Sheets at December 31, 2000 and 2001... A-27
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000, and 2001......................... A-28
Consolidated Statements of Changes in Stockholders' Equity
for years ended December 31, 1999, 2000, and 2001......... A-29
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000, and 2001......................... A-30
Notes to Consolidated Financial Statements.................. A-31

2. Financial Statement Schedules

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

3. Exhibits See Item 14(c) below.

(b) No reports on Form 8-K were filed by Humboldt during the quarter ended
December 31, 2001.

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

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

- ---------------

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

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

(3) Incorporated by reference to the Company's Form 10-K for the fiscal year
ended December 31, 1998, and previously filed with the Commission.

(4) Previously filed on November 12, 1999, with the Company's filing on Form S-4
(File No. 333-90925).

(5) Previously filed on February 7, 2000, with the Company's pre-effective
amendment no. 1 to Form S-4 (File No. 333-90925).

(6) Filed on November 14, 2000, with the Company's Form 10-Q for the quarter
ended September 30, 2000.

(7) Previously filed on November 14, 2000, with the Company's filing on Form S-4
(File No. 333-49866).

(8) Previously filed on January 14, 2001, with the Company's filing on
pre-effective amendment no. 1 to Form S-4 (File No. 333-49866).

(d) Additional Financial Statements

Not applicable.

20

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchanged Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 25th day of
March, 2002.

HUMBOLDT BANCORP

BY: /s/ THEODORE S. MASON
------------------------------------
THEODORE S. MASON

PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

22

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

At December 31, 2001, Humboldt had total consolidated assets of $958
million, total net loans of $655 million, total deposits of $807 million and
stockholders' equity of $67 million. For the year ended December 31, 2001,
Humboldt reported a net loss of $6.0 million, or $0.55 per diluted share, and
net income from continuing operations of $8.0 million, or $0.74 per diluted
share. The loss on discontinued operations resulted from the wind-down of
Humboldt's leasing subsidiary, discussed in detail below under the heading
"Discontinued Operations."

All outstanding and weighted average share amounts presented in this report
have been restated to reflect the 10% stock dividends in 1997, 1998, 2000 and
2001, and a five-for-two stock split in 1999.

SIGNIFICANT TRANSACTIONS DURING 2001

On March 9, 2001, Humboldt acquired, for 3.73 million shares of its common
stock and $220,000 in cash, all of the outstanding common stock of Tehama
Bancorp ("Tehama"), a one-bank holding company, based in Red Bluff, California.
Each share of Tehama common stock was converted into and exchanged for 1.775
shares of Humboldt common stock. The cash consideration paid was to Tehama
shareholders that exercised their dissenters' rights. This merger was accounted
for as a pooling of interests and, accordingly, all financial information
contained in this Report is has been restated to reflect the combination of
Humboldt and Tehama for all periods presented.

During 2001, Humboldt formed two wholly owned statutory trusts, which
issued a total of $15 million of guaranteed preferred beneficial interests in
Humboldt's junior subordinated deferrable interest debentures ("Trust Preferred
Securities") to institutional investors. The Trust Preferred Securities qualify
as Tier 1 capital under Federal Reserve Board guidelines. All of the common
securities of the trusts are owned by Humboldt. The proceeds from the issuance
of the securities and the Trust Preferred Securities were used by the trusts to
purchase $15.5 million of junior subordinated debentures of Humboldt. The
proceeds received by Humboldt from the sale of the junior subordinated
debentures were used to repay line of credit borrowings of approximately $5.0
million, to repay principal and interest on the promissory notes issued in
connection with the acquisition of Capitol Thrift & Loan, to provide liquidity
for Bancorp Financial Services and for other corporate purposes. The debentures
represent the sole asset of the trusts. The debentures and related income
statement effects are eliminated in Humboldt's financial statements. Refer to
Note 10 of the Notes to the Consolidated Financial Statements for additional
information regarding the terms and structure of these Trust Preferred
Securities.

SIGNIFICANT TRANSACTIONS DURING 2000

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

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

HUMBOLDT IS DEPENDENT ON NON-TRADITIONAL BANKING INCOME FOR GROWTH

Because of limited growth in the Humboldt-Eureka area, a substantial
portion of Humboldt's revenue is derived from non-traditional activities,
especially merchant bankcard processing. Non-interest income comprised 32.2%,
27.7% and 31.0% of total revenues for the years ended December 31, 1999, 2000
and 2001, respectively. Humboldt's Merchant Bankcard Services operation focuses
on first-time merchants and smaller

A-1

merchants in the retail, telecommunications, mail order and Internet commerce
industries. Because these merchants do not have an established business record
and are located throughout the United States, they are a greater business risk
and they require more effort to monitor in the event the merchant experiences a
problem. A reduction in revenues from merchant bankcard processing would have an
adverse effect on Humboldt's net income.

DETERIORATION OF LOCAL ECONOMIC CONDITIONS COULD HURT OUR PROFITABILITY

Humboldt's banking operations are located in California, and, in
particular, Northern California. As a result of this geographic concentration,
financial results depend largely upon economic conditions in these areas.
Adverse local economic conditions in California, and, in particular, Northern
California, may have a greater adverse effect on our financial condition and
results of operations than if we were a larger, more geographically diverse bank
holding company.

PLANS TO CONSOLIDATE BANK CHARTERS MAY STRAIN OUR PERSONNEL AND SYSTEMS

Humboldt has grown substantially through mergers, branch acquisition
activity, new bank and branch openings, the introduction of new product lines,
and sustained increases in loans and deposits. Rapid growth has at times put
high demands on management and personnel, and has required increased
expenditures for new employees, enhanced training, office space, and technology
upgrades. The announced plans to consolidate Capitol Valley Bank and Tehama Bank
into Humboldt Bank will require an extensive computer conversion process that
will enhance reporting capabilities and improve overall efficiency.

THE BANKS FACE STRONG COMPETITION

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

- large national and super-regional banks, which have well-established
branches and significant market share in many of the communities we
serve;

- finance companies, investment banking and brokerage firms, and insurance
companies that offer bank-like products;

- credit unions, which can offer highly competitive rates on loans and
deposits because they receive tax advantages not available to commercial
banks;

- government-assisted farm credit programs that offer competitive
agricultural loans;

- other community banks, including start-up banks, which can compete with
us for customers who desire a high degree of personal service;

- technology-oriented financial institutions including large national and
super-regional banks offering on-line deposit, bill payment, and mortgage
loan application services; and

- other companies offering merchant bankcard processing 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 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.

A-2

TRANSITION TO A NEW PRESIDENT AND CHIEF EXECUTIVE OFFICER

On March 25, 2002, Humboldt announced the appointment of Robert M.
Daugherty to succeed Theodore S. Mason as President and Chief Executive Officer
effective April 15, 2002. As with any leadership transition, there is risk that
the transition will not go as planned for a wide variety of reasons. This could
possibly be disruptive to Humboldt as an organization and adversely impact
Humboldt's results of operations.

SUMMARY OF CRITICAL ACCOUNTING POLICIES

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

RESERVES AND CONTINGENCIES

Humboldt must manage and control certain inherent risks in the normal
course of its business. These include, credit risk, fraud risk, operations and
settlement risk, and interest rate risk. Humboldt has established reserves for
risk of losses, including loan losses, tax contingencies, merchant bankcard
losses and losses related to discontinued operations. The allowance for loan
losses represents Humboldt's estimate of the probable losses that have occurred
as of the date of the financial statements, as further described in Note 1 in
the Notes to the Consolidated Financial Statements. Management believes that
Humboldt has appropriately accrued for tax exposures. The allowance for merchant
bankcard losses represents Humboldt's estimate of probable losses that have
occurred as of the date of the financial statements. Reserves related to the
wind-down of discontinued operations represent management's estimate of losses
that will be incurred upon the disposition of assets and the costs associated
with operations during the wind-down period.

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.

DERIVATIVE FINANCIAL INSTRUMENTS

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

DISCONTINUED OPERATIONS/OFF-BALANCE SHEET FINANCING

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

Prior to its classification as a discontinued operation, BFS formed three
subsidiaries that were not consolidated on the financial statements of BFS or
Humboldt. These subsidiaries are commonly referred to as special purpose
entities, or SPEs. As of December 31, 2001, only two subsidiaries were not
consolidated. Both

A-3

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 in provided in
Note 3 in the Notes to the Consolidated Financial Statements.

REVENUE RECOGNITION

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

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

BUSINESS SEGMENTS

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

RESULTS OF CONTINUING OPERATIONS

For the year ended December 31, 2001, net income from continuing operations
was $8.0 million, a decrease of 16.5% as compared with $9.6 million for the same
period in 2000. Diluted earnings per share were $0.74 and $0.90 for the years
ended December 31, 2001, and 2000, respectively.

For the year ended December 31, 2001, Humboldt recognized expenses related
to the Tehama merger of $2.8 million, net of tax. Excluding the impact of merger
related charges, net income from continuing operations for the year ended
December 31, 2001 was $10.8 million, or $1.00 per diluted share, an increase of
11% over the same period in 2000. These operating results, excluding
merger-related expenses, produced a return on average shareholders' equity and
return on average assets for the year ended December 31, 2001 of 15.45% and
1.18%, respectively, compared with 15.13% and 1.25%, respectively, for the same
period in 2000.

The increase in operating earnings during 2001 (excluding $3.5 million in
merger related expense) compared to 2000, was the result of significant growth
in interest earning assets, primarily in loans and merchant bankcard revenue.
For 2001, net interest income increased 9% as compared to 2000. This increase
was primarily due to a 19% increase in average earning assets. The increase in
merchant bankcard services contributed to a 32% increase in non-interest income.
Increases in operating expenses were required to service and support Humboldt's
growth. As a result, increases in revenue were offset for 2001 by a 21% increase
in recurring operating expenses, as compared to 2000.

For the year ended December 31, 2000, net income was $9.6 million, an
increase of 60.0% over net income of $6.0 million earned during the same period
in 1999. Diluted earnings per share were $0.90 and $0.61 for the years ended
December 31, 2000, and 1999, respectively. The return on average assets for the
years ended December 31, 2000 and 1999 was 1.25% and 1.05% respectively. The
return on average equity for the years ended December 31, 2000 and 1999 was
15.13% and 12.30% respectively.

The increase in earnings for the year ended December 31, 2000, versus the
prior period in 1999 can be attributed primarily to the acquisition of Capitol
Thrift & Loan and growth of Humboldt's merchant bankcard division.

A-4

NET INTEREST INCOME

Net interest income increased 9% to $38 million in 2001 from $35 million in
2000. This increase was due to the $129 million, or 19%, increase in
average-earning assets, primarily due to loan growth. Net interest income
increased 34% in 2000, from $26 million in 1999. This increase was primarily due
to the acquisition of Capitol Thrift & Loan.

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

A-5

- ---------------

(1) Tax-exempt income has not been adjusted to its tax-equivalent basis. Net
interest margin on a fully taxable basis, for 1999, 2000, and 2001 was
5.36%, 5.26%, and 4.79, respectively.

(2) Nonaccrual loans are included in the average balance.

(3) Net interest margin is computed by dividing net interest income by total
average earning assets.

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

TABLE 2 -- RATE/VOLUME ANALYSIS