First State Bancorporation
Compensation and Bonus Philosophy and Plan

The Compensation Committee has adopted the policy that the Company's executives
should be paid fairly for the positions they hold in view of the nature and size
of the business that First State Bancorporation ("Company") operates. The
Company recognizes contributions toward the Company's performance by its
executive's compensation levels, which are designed to attract and retain
competent executives who share the objectives of the Company and its
shareholders. The goal of the Committee is to ensure that the Company employs
qualified, experienced executive officers whose financial interest is aligned
with that of the shareholders. The Compensation Committee strives to provide a
competitive total compensation program, pay fair market wages, and provide
incentive and recognition programs to reward employees for the attainment of the
annual business objectives.

There are three key elements to the Company's compensation program for
executives: base salary, performance-based annual bonus, and equity incentives
under the 2003 Equity Incentive Plan. Base salaries for each of the executive
officers other than the Chief Executive Officer of the Company are determined by
taking into consideration performance, length of tenure with the Company,
compensation by industry for comparable positions, and career achievements, and
are based on the recommendation of the Chief Executive Officer.

The Company believes that its executives should have a vested interest in the
performance of the Common Stock and, therefore, equity incentives are used as an
integral part of creating incentives for executives. Incentive awards are used
in order to align the benefits received by the executive officers with the
appreciation realized by shareholders and are dependent upon individual
performance, level of responsibility, and other relevant factors.

Chief Executive Officer Compensation

The compensation of the Chief Executive Officer of the Company should be
consistent with the overall executive officer compensation structure and is set
annually in connection with the Chief Executive Officer's individual performance
for the Company.

The following are the criteria used in making recommendations for the Chief
Executive Officer's compensation:

Continued growth of the Company and the corresponding growth in the Chief
Executive Officer's responsibility for the Company.

Compensation of the Chief Executive Officer relative to peer groups based on 3
year stock price performance, asset size, geographic location and similar growth
patterns or results.

The Company's capital and profitability in relation to regulatory guidelines.

Perceived representation of the banking organization in the communities it
services.

Professional standing and reputation of the Chief Executive Officer in the
financial services industry.

BONUS PLAN

The First State Bancorporation Bonus Plan for the Company's Chief Executive
Officer and Chief Operating Officer is designed to reflect and reward the
achievements of the Company's most senior management by taking into account
strategic planning, the Company's long term success, its earnings growth and its
share price.

The Compensation Committee Bonus Plan includes three key indicators. The
criteria were adopted to enable the Board of Directors to adequately recognize
contributions to growth whether it is a result of earnings or shareholder
enrichment.

- Earnings Growth

- Asset Growth

- Share Price

In addition, the Compensation Committee may find special circumstances
justifying additional compensation or compensation to be awarded on a different
basis.

Following is the proposed schedule of bonus criteria.

Category

*

Target

Range of Results

Bonus Percentage

Earnings Per Share Growth

15%

8-11%

5%

   

12-20%

12-20%

Asset Growth

15%

8-11%

5%

   

12-20%

12-20%

Shareholder Value**

15%

8-11%

5%

(Restricted Stock)

 

12-20%

12-20%

* The numbers are cumulative and not a weighted average
**To calculate the year end gain or loss share price, an average of the current
year December closing market prices are to be compared to the previous year
average December closing market prices

Committee reserves the right to reward additional, or special compensation to
the executive officers outside of, or in addition to such compensation which may
be payable pursuant to the policy and plan adopted by the Committee provided
that, the Committee finds special circumstances justifying said additional
compensation. In addition, the Committee also reserves the right to reduce
compensation called for under the formula established by the Committee in the
event special circumstances are determined.

LONG TERM INCENTIVES

The Committee believes that the Company 2003 Equity Incentive Plan empowers the
Committee to institute long term incentive compensation programs using stock
options, restricted stock and other devices allowed under the Plan. Grants under
the Plan emphasize long term successful performance of the Company from the
perspective of the Company's shareholders.

BOARD REVIEW

All recommendations of the Committee have been and are subject to review and
approval of the Board of Directors.

Example:

Suppose the three categories produced the following results:

Variable

Results

Resulting Bonus

Earnings Growth

9%

5%

Asset Growth

15%

15%

Shareholder Value

12%

12%

 

 

 

 

 

The total bonus would be (5% + 15% + 12%) or 32% of base salary with 12% of the
bonus being represented in restricted stock.

The 15% growth target is based on the historical growth pattern of the Company.
The focus of bonus compensation will be on an ongoing target basis, rather than
from year-to-year.