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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-21656

HUMBOLDT BANCORP

2998 Douglas Boulevard, Suite 330

916.783.2812

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

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

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

      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     o

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

      The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 28,2002, based on the closing price on that date of $14.01 per share was $158,989,616. The number of shares outstanding of Registrant’s common stock outstanding as of June 28, 2002 and February 28, 2003 were 12,441,992 and 12,566,311, respectively.

Documents Incorporated by Reference

      Information required by Items 10 through 13 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.

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PART I

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

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

      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.

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

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, 2002, Humboldt had total assets of $1.0 billion, total net loans of $749 million, total deposits of $840 million and total shareholders’ equity of $78 million. For the year ended December 31, 2002, Humboldt reported net income of $12.3 million, or $0.94 per diluted share. Humboldt’s principal operating subsidiary is Humboldt Bank (“Bank”), which was founded in 1989 and operates under a charter issued by the State of California. During 2002, Humboldt merged its subsidiaries, Tehama Bank, Capitol Valley Bank and Capitol Thrift & Loan, into the Bank.

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

      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.

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

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

Recent Developments

      On March 13, 2003, the Bank completed the sale of its proprietary merchant bankcard operations to an affiliate of First National Bank Holding Company (“FNB”) for $32 million in cash. Humboldt expects to recognize an after-tax gain of approximately $18 million in connection with this sale during the first quarter of 2003. Under the terms of the agreement, FNB has entered into a five-year lease for approximately 18,000 square feet of office space in a building owned by the Bank. In addition, the Bank will continue to provide FNB with sponsorship to VISA and Mastercard for a period of up to six months after closing, with FNB providing full indemnification for any losses incurred. At the point FNB no longer requires sponsorship by the Bank, approximately $12 million of deposits associated with merchant loss reserves will be transferred to a financial institution selected by FNB.

      On January 2, 2003, the Bank completed the sale of the deposits, assets and certain other liabilities of its branches in Lancaster and Riverside, California to Silvergate Bank. There was no premium received on the deposits sold and no material gain or loss was recorded in connection with the transfer of the other assets and liabilities.

Mergers & Acquisitions

      On March 9, 2001, Humboldt acquired, for approximately 4.4 million shares of 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 represented payment to Tehama shareholders who 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 Bank actively competes in its various market areas, which are principally in non-metropolitan areas of Northern California, with other providers of deposit and credit services. These competitors include other commercial banks, savings banks, savings and loan associations, credit unions, mortgage companies, and brokerage firms. The following table displays the market share percentage and rank for total deposits in each county where the Bank has operations. The table also indicates the ranking by deposit size in each of the local markets. All information in the table was obtained from the Federal Deposit Insurance Corporation (“FDIC”) Summary of Deposits as of June 30,

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

Lending and Credit Functions

      The Bank makes both secured and unsecured loans to individuals, firms, and corporations. Secured loans include first and second real estate mortgage loans. The Bank also makes direct installment loans to consumers on both a secured and unsecured basis. At December 31, 2002, consumer, real estate construction, real estate mortgage, and commercial & industrial loans represented approximately 10%, 17%, 57%, and 16% respectively, of the total loan portfolio. Specific risk elements associated with each of the lending categories include, but are not limited to:

	Commercial & Industrial — Industry concentrations; inability to monitor the condition of collateral (inventory, accounts receivable and vehicles); lack of borrower management expertise, increased competition; use of specialized or obsolete equipment as collateral; insufficient cash flow from operations to service debt payment.
	Real estate-construction — Inadequate collateral and long-term financing agreements.
	Real estate mortgage — Changes in local economy affecting borrower’s 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 Bank has adopted the federal guidelines as the 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 Bank 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 Bank. Secured loans are made to persons who are well established and have net worth, collateral, and cash flow to support the loan. Exceptions to the policy are permitted on a case-by-case basis and require the approving officer to document in writing the reason for the exception. Policy

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     Loan Review and Allowance for Loan Loss Methodology

      The Credit Administration Department of the Bank reviews, or engages an independent third party to review, the Bank’s loan portfolio on a periodic basis to determine any weaknesses in the portfolio and to assess the general quality of credit underwriting. The results of the reviews are presented to the Chief Credit Officer and the Audit Committee. If an individual loan or credit relationship has a weakness identified during the review process, the risk rating of the loan, or all loans comprising a credit relationship, will be downgraded to a classification that most closely matches the current risk level. 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.

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

	6 (Special Mention) — A loan that exhibits potential credit weaknesses or adverse trends in borrower financial condition that requires additional close monitoring by management. Operational cash flow insufficient to service the debt and collateral values with narrow, but sufficient, liquidation margins.
	7 (Substandard) — A loan that is inadequately protected by borrower net worth, cash flow capacity or collateral value. Substandard loans typically have one or more well-defined weaknesses.
	8 (Doubtful) — A specific 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.
	9 (Loss)  — Same characteristics as Doubtful; however, probability of either partial or full loss is certain and can be reasonably estimated. Loans classified as such are generally recommended for charge-off immediately even though there is some potential for future recovery.

      The Bank performs a quarterly analysis to determine the adequacy of the Allowance for Loan Losses (“ALL”). The ALL analysis segregates the loan portfolio into 19 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 the Bank’s loss experience. Next, loans graded 8 or higher in each category are assigned reserve factors based on the inherent risk level of the category and the Bank’s loan loss experience:

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      All loans graded 5 or 6 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 19 loan categories provides the total required ALL.

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

      There is no current process used to measure or adjust for differences between the loss factors for adversely classified loans used in the ALL analysis and actual losses charged to the ALL. 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, 2002 was approximately $1.2 million, or 11% of the total ALL.

      The ALL represents Humboldt’s estimate of the probable losses that have occurred as of the date of the financial statements, as further described in Note 1 in the Notes to the Consolidated Financial Statements. Management believes that the ALL was adequate as of December 31, 2002. There is, however, no assurance that future loan losses will not exceed the levels provided for in the ALL which could result in additional charges to the provision for loan losses. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require additional charges to the provision for loan losses in future periods if the results of their review warrant.

      The Securities and Exchange Commission Staff Accounting Bulletin No. 102 “Selected Loan Loss Allowance Methodology and Documentation Issues” (“SAB No. 102”) was released 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 $60,000 in annual processing transaction volume. For the year ended December 31, 2002, no single merchant accounted for more than .5% of total gross processing volume. At December 31, 2002, Merchant Bankcard Services provided processing services to approximately 103,000 merchants.

      During the second quarter of 2002, Humboldt conducted a strategic review of its Merchant Bankcard Services and the risks and rewards associated with the business in general. The review concluded that Humboldt’s long-term shareholder value would be maximized by reducing the Company’s overall risk profile through the strategic sale its Merchant Bankcard Services and refocusing efforts on community banking. In July 2002, Humboldt entered into a definitive agreement for the sale of its proprietary Merchant Bankcard Services to iPayment Holdings, Inc. This agreement was subsequently terminated by iPayment Holdings. On February 3, 2003, the Bank entered into a definitive agreement with a recently formed affiliate of First National Bank Holding Company called Humboldt Merchant Services, LP, for the sale of the proprietary

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     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, 2002, Humboldt provided ISO processing for three organizations. The aggregate number of merchants covered under these agreements was approximately 90,000 at December 31, 2002. For the year ended December 31, 2002, Humboldt processed approximately $5 billion of ISO merchant transactions. As part of the decision to sell the Proprietary business, Humboldt also decided to exit the ISO processing upon expiration of the existing contracts. Subsequent to December 31, 2002, one of the ISO agreements was terminated and approximately 41,000 merchant accounts were transferred to another sponsor financial institution. Although the two remaining ISO sponsorships expire in September 2003 and March 2004, respectively, Humboldt expects that these ISOs will transfer their merchant accounts to another sponsor institution prior to the termination date.

      In connection with the sale of the Proprietary portfolio, Humboldt will provide ISO sponsorship for a period not to exceed six months in order to provide sufficient time for Humboldt Merchant Services, LP to arrange for an orderly transfer of the merchant accounts. Under the terms of the agreement, Humboldt Merchant Services, LP indemnifies Humboldt for any losses incurred in connection with merchant accounts acquired from Humboldt or added subsequent to closing.

     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 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. In connection with the sale of Humboldt’s proprietary portfolio, the buyer assumed responsibility for all charge-backs received after the closing date.

      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.

      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 $68 million of deposit accounts related to merchant reserves as of December 31, 2002. Substantially all of the merchant deposits account balances were in demand deposit accounts.

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      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 charge-back experience and other factors. At December 31, 2002, the total allowance for merchant losses was $2.7 million.

     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. There is no guarantee that the credit card associations will not, at some future point, adopt more restrictive rules that could adversely impact Humboldt.

      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. 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 is pursuing insurance claims against bond coverage provided by the ATM ISO and also under the Bank’s financial institution bond and other insurance policies provided by the ATM ISO.

      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. This process was completed during the third quarter of 2002.

      In December 2002, Humboldt agreed to pay an ATM ISO $250,000 in order to settle a legal claim in connection with termination of the ATM ISO agreement. Humboldt received a full and unconditional release from the ATM ISO. There were no other pending or threatened legal disputes related to the ATM funding operation as of December 31, 2002.

Asset/ Liability Management

      Humboldt’s Asset/ Liability Management Committee (“ALCO”) is composed of the Chief Financial Officer, Treasurer, Chief Credit Officer, President and one board member. The ALCO meets periodically and is charged with managing the assets and liabilities of the 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.”

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Investment Policy

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

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 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. For the year ended December 31, 2001, Humboldt recognized a total net loss on discontinued operations of $14.0 million.

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

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

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 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

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      In late 2000 and continuing into 2001, the State of California was subject to a deterioration in the ability of major utilities to provide energy for the State’s needs. These shortages resulted in increased costs and, during the summer of 2001, “rolling blackouts” during which electric service was interrupted in some areas for short periods. Although conservation efforts and increased generation capacity have alleviated electricity shortages, there is no assurance that future energy shortages will not have a significant adverse impact on the California economy. In early 2003, the State of California also announced a budget deficit of approximately $35 billion and plans to curtail spending in order to close the budget gap. Although Humboldt is not directly dependent upon funding from the State of California, a further deterioration in the State’s financial condition could have an adverse impact on the prospects for continued economic growth and development.

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

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

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

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

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

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

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

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

Supervision and Regulation of Humboldt

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

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     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 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 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, 2002, the Bank was classified in a manner that the assessment rate was zero.

      The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis in order to manage the BIF and SAIF to prescribed statutory target levels. 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% 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 $2 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

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     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.

      Humboldt believes that at December 31, 2002, the Bank had sufficient capital to qualify as “well capitalized” under the regulatory requirements. Further detail on regulatory capital ratios is included in Note 20 of the Notes to the Consolidated Financial Statements.

     Limits on Dividends and Other Payments

      Humboldt initiated the payment of a quarterly cash dividend during the second quarter of 2002, and paid total cash dividends of $0.07 per share. Humboldt’s ability to obtain funds for the payment of cash dividends, if any, and for other cash requirements is dependent on the amount of dividends that may be declared by the Bank. California bank law provides that dividends may be paid from the lesser of retained earnings or net income of the bank for its last three years. Further, a California-chartered bank may not declare a dividend without the approval of the California Department of Financial Institutions if the total of dividends and distributions declared in a calendar year exceeds the greater of the bank’s retained earnings or net income for its last fiscal year or its current fiscal year. The Bank’s ability to pay dividends may also be limited by capital adequacy guidelines of the FDIC. Moreover, regulatory authorities are authorized to prohibit banks and bank holding companies from paying dividends if payment of dividends would constitute an unsafe and unsound banking practice.

      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

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     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. As of the last CRA exam in October 2000, the Bank had a rating of “outstanding.”

     State Regulation

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

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

Employees

      At December 31, 2002, Humboldt employed a total of 443 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 2003 Annual Meeting.

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      The executive offices of Humboldt are located at 2998 Douglas Boulevard, Suite 330, Roseville, California. Humboldt leases this office space. The Bank conducts business from 19 facilities, all of which are in a good state of repair and appropriately designed for use as banking facilities. The Bank provides services conducts operational functions at 22 locations, of which 12 locations are owned and 10 are leased.

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

      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.

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

PART II

      Humboldt’s common stock is traded on the Nasdaq National Market System (“NASDAQ”) under the symbol “HBEK.” The table below reflects the high and low closing sales prices for Humboldt’s common stock as reported by NASDAQ. As of December 31, 2002, there were 100,000,000 and 20,000,000 shares, respectively, of Humboldt common stock and preferred stock authorized for issuance, of which 12,604,157 shares of common stock and no shares of preferred stock were outstanding.

      The stock prices below have been adjusted to reflect the 6-for-5 stock split issued in August 2002 and the 10% stock dividend issued in June 2001.

      As of December 31, 2002 there were approximately 1,443 shareholders, not including those held in street name by brokerage firms. As of December 31, 2002, a total 1,598,948 options and warrants for Humboldt Bancorp common stock were outstanding.

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

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Humboldt Bancorp