**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**Form 10-KSB**

 
| **ý** | **ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                                                                                                                 |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |                                                                                                                                                                                                                                                                |
|       | **FOR  THE FISCAL YEAR ENDED DECEMBER 31, 2002**                                                                                                                                                                                                                    |
|       |                                                                                                                                                                                                                                                                |
| **o**      | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1945**                                                                                                                                                                             |
|       |                                                                                                                                                                                                                                                                |
|       | **FOR  THE TRANSITION PERIOD FROM                      TO                    ** |

 

**Commission File Number 0-28894**

 

| **Access  Anytime Bancorp, Inc.**                                               |
|---------------------------------------------------------------------------------|
| (Name of small business  issuer in its charter)                                 |
|                                                                            |   |   |
| **DELAWARE**                                                                    |   | **85-0444597** |
| (State or other  jurisdiction of  incorporation or organization)                |   | (I.R.S. Employer  Identification No.) |
|                                                                            |   |   |
| **5210 Eubank, NE, Albuquerque, New  Mexico**                                   |   | **87111** |
| (Address of principal  executive offices)                                       |   | (Zip Code) |
|                                                                            |   |   |
| Issuer’s telephone  number, including area code:  **(505)  299-0900** |
|                                                                            |   |   |
| SECURITIES REGISTERED  UNDER SECTION 12(b) OF THE EXCHANGE ACT:**  None**  |
|                                                                            |
| SECURITIES REGISTERED  UNDER SECTION 12(g) OF THE EXCHANGE ACT:                 |
|                                                                            |   |   |
| **COMMON  STOCK $.01 PAR VALUE**                                                |
| (Title of class)                                                                |

 

Check whether the issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

| Yes ý |   | No o |
|------------|--------|------|

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained herein, and no disclosurewill be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-KSB or any amendment to this Form 10-KSB.  o

 

The issuer’s revenues for the year ended December 31,2002, were $14,329,034.

 

The aggregate market value of the voting stock held bynon-affiliates of the issuer, computed by reference to the average of theclosing bid and asked prices of such stock on the Nasdaq Small-Cap Market as ofFebruary 26, 2003 was approximately $10,268,681.  (The exclusion from such amount of the market value of the sharesowned by any person shall not be deemed an admission by the issuer that suchperson is an affiliate of the issuer.)As of February 26, 2003, the issuer hadoutstanding 1,063,561 shares of Common Stock, par value $0.01 per share, itsonly class of Common Stock.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

The following document is incorporated by referenceinto Part III of this Annual Report on Form 10-KSB: Definitive Proxy Statementfor the issuer’s 2003 Annual Meeting of Stockholders.

 

Transitional Small Business Disclosure Format (checkone):  Yes o   No ý

 

 

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**TABLE OF CONTENTS**

 
| **Part I** |
|------------|
|       |
| Item  1.   | Description of Business |
|       | Overview |
|       | Lending Activities |
|       |   | General |
|       |   | Loan Portfolio Composition |
|       |   | One-to-Four  Family Residential Mortgage Lending |
|       |   | Multi-Family  and Commercial Real Estate Lending |
|       |   | Commercial Business Lending |
|       |   | Construction Lending |
|       |   | Consumer Lending |
|       |   | Loan Servicing |
|       |   | Originations, Purchases and Sales of Loans |
|       | Asset Quality |
|       |   | Delinquent Loans |
|       |   | Non-Performing Assets |
|       |   | Criticized Assets |
|       |   | Allowance for Loan Losses |
|       | Investment Activities |
|       |   | General |
|       |   | Other Investments |
|       | Sources of Funds |
|       |   | The Company |
|       |   | The  Bank |
|       |   | Borrowings |
|       | Subsidiary of the Bank |
|       | Regulation |
|       |   | General |
|       |   | Regulation of the Company |
|       |   | Federal Securities Law |
|       |   | Insurance  of Accounts and Regulation by the FDIC |
|       |   | Regulatory Capital  Requirements |
|       |   | Limitations  on Dividends and Other Capital Distributions |
|       |   | Qualified Thrift Lender  Test |
|       |   | Community Reinvestment Act |
|       |   | Transactions with  Affiliates |
|       |   | Federal Home Loan Bank  System |
|       |   | Regulatory  Developments in 2002 |
|       |   | Proposed Federal  Legislation |
|       | Federal and State Taxation |
|       |   | Federal Taxation |
|       |   | State Taxation |
|       | Competition |
|       | Employees |

 

2

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| Item  2.     | Description of Property                                                                                           |
|--------------|-------------------------------------------------------------------------------------------------------------------|
|         |
| Item  3.     | Legal Proceedings                                                                                                 |
|         |
| Item  4.     | Submission  of Matters to a Vote of Security Holders                                                              |
|         |
| **Part II**  |
|         |
| Item  5.     | Market  for Registrant’s Common Equity and Related Stockholder Matters                                       |
|         |
| Item  6.     | Management’s  Discussion and Analysis or Plan of Operation                                                   |
|         |                                                                                                              | Selected  Consolidated Financial Highlights |
|         |                                                                                                              | General |
|         |                                                                                                              | Regulatory Matters |
|         |                                                                                                              | Results of Operations |
|         |                                                                                                              |   | Comparison of Years Ended  December 31, 2002 and 2001 |
|         |                                                                                                              |   | Comparison of Years Ended December 31,  2001 and 2000 |
|         |                                                                                                              | Asset/Liability  Management and Interest Rate Sensitivity |
|         |                                                                                                              | Liquidity and Capital  Resources |
|         |                                                                                                              | Trust Preferred Securities |
|         |                                                                                                              | Asset Quality |
|         |                                                                                                              |   | Allowance for Loan Losses |
|         |                                                                                                              |   | Non-Performing Assets |
|         |                                                                                                              |   | Investment Securities |
|         |                                                                                                              | Off-Statement  of Financial Condition Financial Instruments |
|         |                                                                                                              | Impact of  Inflation and Changing Prices |
|         |                                                                                                              | Critical Accounting  Policies |
|         |                                                                                                              |   | Allowance for Loan Losses |
|         |                                                                                                              |   | Income Taxes |
|         |                                                                                                              |   | Unidentifiable  Intangible Asset |
|         |                                                                                                              | Contractual Cash  Obligations |
|         |                                                                                                              | Impact of New  Accounting Standards |
|         |                                                                                                              | Forward-Looking Statements |
|         |
| Item  7.     | Financial Statements                                                                                              |
|         |
| Item  8.     | Changes  In and Disagreements with Accountants on Accounting and Financial Disclosure                             |
|         |
| **Part III** |
|         |
| Item  9.     | Directors,  Executive Officers, Promoters and Control Persons; Compliance with Section  16(a) of the Exchange Act |
|         |
| Item  10.    | Executive Compensation                                                                                            |
|         |
| Item  11.    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                  |
|         |
| Item  12.    | Certain  Relationships and Related Transactions                                                                   |

 

3

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| Item  13.                                   | Exhibits and Reports  on Form 8-K |
|---------------------------------------------|-----------------------------------|
|                                        |
| Item  14.                                   | Controls and Procedures           |
|                                        |
| Signatures                                  |
|                                        |
| Certifications                              |
|                                        |
| Index to  Consolidated Financial Statements |
|                                        |
| Glossary of Certain Terms                   |

 

4

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**PART I**

 

**ITEM 1.****                                                     Description of Business.**

 

***Please refer to the Glossary of CertainTerms (page G-1) for definitions of various terms.***

 

**Overview**

 

Access Anytime Bancorp, Inc. (the “Company”), a Delawarecorporation, is the thrift holding company of FirstBank (the “Bank”).  The Company owns all of the outstandingstock of the Bank, which is the Company’s principal asset. The Bank wasoriginally chartered by the FHLBB in 1934. Currently, deposits with the Bank are insured to the maximum extentpermitted by the SAIF, which is under the supervision of the FDIC.  The Bank is a member of the FHLB system andthe Company and the Bank are subject to comprehensive regulation, examination,and supervision of the OTS and the FDIC.

 

The Bank conducts fullservice banking operations through seven offices located in Albuquerque,Clovis, Gallup, and Portales, New Mexico. The Company’s executive offices arelocated at 5210 Eubank, NE, Albuquerque, New Mexico.  The telephone number at that address is (505) 299-0900.  In general, the Bank has a normal lendingterritory, as defined by federal regulations, that includes all areas withinthe State of New Mexico, Arizona, and a 100 mile radius from the Bank’s officesin Clovis, New Mexico, which extends into the State of Texas.  The Bank opened two new in-store branchesand a loan production office in Albuquerque during 2002 to expand the Bank’spresence across New Mexico.

 

The Company’s and the Bank’s revenues are derived principallyfrom interest on loans and securities, income from deposit account servicecharges and gains on the sale of residential mortgage loans.  The results of operations of the Company andthe Bank, in general, are significantly influenced by general economicconditions, the monetary and fiscal policies of the federal government,competition in the Company’s and the Bank’s market area, and the policies offinancial institution regulatory authorities.

 

The Bank is engaged in the business of attracting depositsfrom the general public, making loans secured by first liens on single-familyhomes (primarily for sale into the secondary market), consumer and commercialloans, and investing in securities.  Theprincipal sources of funds for the Bank’s lending and investing activitiesinclude the sale of loans, principal payments and prepayments on loans andmortgage related securities, and deposits. The Bank’s primary sources of income are income on loans and securities,income from deposit account service charges, and gains on the sale ofloans.  Its principal expenses areinterest paid on deposits and borrowings and general operating expenses.  The earnings of the Bank depend primarily onthe differences between its income from lending and investment activities andthe interest cost of its deposits and borrowings.

 

**Lending Activities**

 

*General*.  The Bank has historically originatedfixed-rate and adjustable-rate mortgage loans. In order to reduce its exposure to changes in interest rates, it hasalso, since the early 1980’s, emphasized the origination and retention of ARMloans.  In response to customer demand,however, the Bank continues to originate conventional fixed-rate mortgages.

 

The Bank’s focus in lending activities is on theorigination of loans secured by first mortgages on owner-occupied, one-to-fourfamily residences, and consumer and commercial loans.  The Bank also originates residential construction, commercialreal estate and consumer loans in its market area.  Most residential mortgage loans originated by the Bank are inconformity with FHLMC, FNMA and GNMA loan underwriting standards so that theymay be sold in the secondary market. Mortgage loans made by the Bank are generally long-term loans, amortizedon a monthly basis, with principal and interest due each month.  The initial contractual loan payment periodfor residential loans typically ranges from 15 to 30 years.  The Bank’s experience indicates, however,that real estate loans remain outstanding for significantly shorter periodsthan their contractual terms.  Borrowersmay refinance or prepay loans at their option, subject to any prepaymentpenalty provisions, if included in the note.

 

5

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All of the Bank’s lending is subject to writtenunderwriting standards and to loan origination procedures.  Decisions on loan applications are made onthe basis of detailed applications and property valuations (consistent with theBank’s written appraisal policy) by independent appraisers.  The loan applications are designed primarilyto determine the borrower’s ability to repay and the more significant items onthe application are verified through use of credit reports, financialstatements, tax returns and/or confirmations.

 

In connection with the loan approval process, theBank’s loan personnel analyze the loan application and the propertyinvolved.  Consumer loans are approvedby loan committee and/or individual loan officers, in accordance with policiesestablished by the Bank’s Board of Directors.

 

Loan applicants are notified of the Bank’s decisionsetting forth the terms and conditions of the decision.  If approved, these terms and conditionsinclude the amount of the loan, interest rate, amortization term, a briefdescription of the real estate to be mortgaged to the Bank, and the requirementof fire and casualty insurance coverage to be maintained to protect the Bank’sinterest.

 

It is the general policy of the Bank to obtain a titleinsurance policy or title report, insuring that it has a valid lien on allproperty securing real estate loans. Hazard insurance or homeowner’s policies should be obtained by theborrower prior to closing.  If requiredby federal rules and regulations, flood insurance policies are obtained.  Upon closing, most borrowers are required toadvance funds for the establishment of a mortgage escrow account. Thereafter,the borrower makes contributions to this account along with monthly principaland interest payments. Disbursements are made from this account for items suchas real estate taxes, hazard insurance premiums, and private mortgage insurancepremiums.

 

The Bank receives loan origination fees fororiginating loans and also receives commitment fees for making commitments tooriginate construction, residential, commercial, and multi-family residentialloans, as well as various fees and charges related to existing loans, whichinclude late charges and assumption fees.

 

As part of the loan application, the borrower pays theBank for its out-of-pocket costs in reviewing the application, such as theappraisal fee, whether or not the borrower closes the loan.  The interest rate charged is normally theprevailing rate at the time the loan application is approved.  In the case of larger construction loans,the Bank normally charges a commitment fee, which may be included in the loanorigination charge when the loan is made. Commitment fees and other terms of commercial and multi-familyresidential loans are individually negotiated.

 

In order to monitor the adequacy of cash flows on income-producingproperties, the borrower or lead lender is notified periodically and asked toprovide financial information including rental rates and income, maintenancecosts and an update of real estate property tax payments.

 

The aggregate amount of loans that the Bank ispermitted to make under applicable federal regulations to any one borrower,including related entities, is limited generally to the greater of 15% ofunimpaired capital and surplus or $500,000. At December 31, 2002, the maximum amount which the Bank could have lentto any one borrower and the borrower’s related entities was $2,795,458.  The Bank had no loans in excess of the legallending limit at December 31, 2002.

 

6

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*LoanPortfolio Composition*. The following table shows the composition of the Bank’s loan portfolioin dollar amounts and in percentages as of dates indicated.

 
|                                     |   | **December  31**            |    |
|------------------------------------------|--------|-----------------------------|---------|
|                                     |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                     |   | **Amount**                  |    | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                                     |   | **(Dollars  In Thousands)** |    |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Real estate  loans:                      |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Residential  mortgage loans:             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Construction                             |   | $                           | 1,591   |   | 1.04 | % | $ | 3,363 |   | 2.32 | % | $ | 1,721 |   | 1.42 | % |
| One-to-four  family                      |   | 88,186                      |    | 57.84 |   | 79,625 |   | 55.04 |   | 70,767 |   | 58.22 |   |
| Multi-family                             |   | 788                         |    | 0.52 |   | 794 |   | 0.55 |   | 876 |   | 0.72 |   |
| Other dwelling  units                    |   | 1,254                       |    | 0.82 |   | 1,322 |   | 0.91 |   | 1,317 |   | 1.08 |   |
| Commercial                               |   | 27,999                      |    | 18.36 |   | 29,422 |   | 20.33 |   | 25,896 |   | 21.30 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total real  estate loans                 |   | 119,818                     |    | 78.58 |   | 114,526 |   | 79.15 |   | 100,577 |   | 82.74 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Other loans:                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Commercial                               |   | 9,560                       |    | 6.27 |   | 9,200 |   | 6.36 |   | 6,959 |   | 5.73 |   |
| Savings accounts                         |   | 615                         |    | 0.40 |   | 596 |   | 0.41 |   | 763 |   | 0.63 |   |
| Other consumer  items(a)                 |   | 22,482                      |    | 14.75 |   | 20,371 |   | 14.08 |   | 13,255 |   | 10.90 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total other  loans                       |   | 32,657                      |    | 21.42 |   | 30,167 |   | 20.85 |   | 20,977 |   | 17.26 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total loans                              |   | 152,475                     |    | 100.00 | % | 144,693 |   | 100.00 | % | 121,554 |   | 100.00 | % |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Less:                                    |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Loans in process                         |   | 702                         |    |   |   | 1,391 |   |   |   | 502 |   |   |   |
| Discounts,  deferred loan fees and other |   | 1,092                       |    |   |   | 1,073 |   |   |   | 892 |   |   |   |
| Allowance for  loan losses               |   | 825                         |    |   |   | 745 |   |   |   | 681 |   |   |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total loans  receivable, net             |   | $                           | 149,856 |   |   |   | $ | 141,484 |   |   |   | $ | 119,479 |   |   |   |

 

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(a)                                  Includes,among other things, automobile, credit card and home improvement loans.

 

7

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The following table shows the composition of theBank’s loan portfolio by fixed- and adjustable-rate categories at the datesindicated.

 
|                                     |   | **December  31**            |    |
|------------------------------------------|--------|-----------------------------|---------|
|                                     |   | **2002**                    |    | **2001** |   | **2000** |   |
|                                     |   | **Amount**                  |    | **Percent** |   | **Amount** |   | **Percent** |   | **Amount** |   | **Percent** |   |
|                                     |   | **(Dollars  In Thousands)** |    |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Fixed-rate  loans:                       |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Real estate:                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Residential  mortgage loans:             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Construction                             |   | $                           | 702     |   | 0.46 | % | $ | 3,363 |   | 2.32 | % | $ | 1,721 |   | 1.42 | % |
| One-to-four  family                      |   | 77,159                      |    | 50.59 |   | 66,294 |   | 45.82 |   | 55,134 |   | 45.35 |   |
| Multi-family                             |   | 544                         |    | 0.36 |   | 543 |   | 0.38 |   | 596 |   | 0.49 |   |
| Other dwelling  units                    |   | 265                         |    | 0.17 |   | 246 |   | 0.17 |   | 234 |   | 0.19 |   |
| Commercial                               |   | 9,613                       |    | 6.30 |   | 9,598 |   | 6.63 |   | 15,082 |   | 12.41 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total real  estate loans                 |   | 88,283                      |    | 57.88 |   | 80,044 |   | 55.32 |   | 72,767 |   | 59.86 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Other loans:                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Commercial                               |   | 3,295                       |    | 2.16 |   | 4,996 |   | 3.45 |   | 3,246 |   | 2.67 |   |
| Savings accounts                         |   | 615                         |    | 0.40 |   | 596 |   | 0.41 |   | 763 |   | 0.63 |   |
| Consumer(a)                              |   | 20,993                      |    | 13.78 |   | 18,641 |   | 12.89 |   | 12,149 |   | 10.00 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total other  loans                       |   | 24,903                      |    | 16.34 |   | 24,233 |   | 16.75 |   | 16,158 |   | 13.30 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total fixed-rate  loans                  |   | 113,186                     |    | 74.22 |   | 104,277 |   | 72.07 |   | 88,925 |   | 73.16 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Adjustable-rate  loans:                  |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Real estate:                             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Residential  mortgage loans:             |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Construction                             |   | 889                         |    | 0.58 |   | — |   | — |   | — |   | — |   |
| One-to-four  family                      |   | 11,027                      |    | 7.24 |   | 13,331 |   | 9.22 |   | 15,633 |   | 12.86 |   |
| Multi-family                             |   | 244                         |    | 0.16 |   | 251 |   | 0.17 |   | 280 |   | 0.23 |   |
| Other dwelling  units                    |   | 989                         |    | 0.65 |   | 1,076 |   | 0.74 |   | 1,083 |   | 0.89 |   |
| Commercial                               |   | 18,386                      |    | 12.06 |   | 19,824 |   | 13.70 |   | 10,814 |   | 8.90 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total real  estate loans                 |   | 31,535                      |    | 20.69 |   | 34,482 |   | 23.83 |   | 27,810 |   | 22.88 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Commercial                               |   | 6,265                       |    | 4.11 |   | 4,204 |   | 2.90 |   | 3,713 |   | 3.05 |   |
| Consumer(a)                              |   | 1,489                       |    | .98 |   | 1,730 |   | 1.20 |   | 1,106 |   | .91 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total other  loans                       |   | 7,754                       |    | 5.09 |   | 5,934 |   | 4.10 |   | 4,819 |   | 3.96 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total  adjustable-rate loans             |   | 39,289                      |    | 25.78 |   | 40,416 |   | 27.93 |   | 32,629 |   | 26.84 |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total loans  receivable                  |   | 152,475                     |    | 100.00 | % | 144,693 |   | 100.00 | % | 121,554 |   | 100.00 | % |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Less:                                    |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Loans in process                         |   | 702                         |    |   |   | 1,391 |   |   |   | 502 |   |   |   |
| Discounts,  deferred loan fees and other |   | 1,092                       |    |   |   | 1,073 |   |   |   | 892 |   |   |   |
| Allowance for  loan losses               |   | 825                         |    |   |   | 745 |   |   |   | 681 |   |   |   |
|                                     |   |                        |    |   |   |   |   |   |   |   |   |   |   |
| Total loans  receivable, net             |   | $                           | 149,856 |   |   |   | $ | 141,484 |   |   |   | $ | 119,479 |   |   |   |

 

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(a)                                  Includes,among other things, automobile, credit card and home improvement loans.

 

8

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The following table outlines the specific loan typeswith contractual maturity dates as of December 31, 2002.  Loans which have adjustable or renegotiablerates are shown as maturing during the period when the contract is due.  This schedule does not reflect the effectsof possible principal prepayments by the borrower.

 
|                                       |   | **Real  Estate**            |    | **Non-Real  Estate**        |   |         |   |                        |   |
|--------------------------------------------|--------|-----------------------------|---------|-----------------------------|--------|--------------|--------|-----------------------------|--------|
|                                       |   | **Mortgages**               |    | **Construction**            |   | **Consumer** |   | **Commercial  Business**    |   | **Total** |   |
|                                       |   | **Amount**                  |    | **Weighted  average  rate** |   | **Amount**   |   | **Weighted  average  rate** |   | **Amount** |   | **Weighted  average  rate** |   | **Amount** |   | **Weighted  average  rate** |   | **Amount** |   | **Weighted  average  rate** |   |
|                                       |   |                        |    |                        |   |         |   |                        |   |   |   |
|                                       |   | **(Dollars  In Thousands)** |    |
|                                       |   |                        |    |                        |   |         |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Within one year                            |   | $                           | 7,323   |                        | 6.21   | %            | $      | 1,591                       |   | 7.39 | % | $ | 2,979 |   | 7.95 | % | $ | 2,471 |   | 5.97 | % | $ | 14,364 |   | 6.66 | % |
| More than one  year through two years      |   | 484                         |    | 7.61                        |   | —       |   | —                      |   | 1,492 |   | 10.22 |   | 1,713 |   | 6.44 |   | 3,689 |   | 8.12 |   |
| More than two  years through three years   |   | 1,377                       |    | 7.68                        |   | —       |   | —                      |   | 3,535 |   | 9.76 |   | 1,052 |   | 7.57 |   | 5,964 |   | 8.89 |   |
| More than three  years through five years  |   | 7,590                       |    | 7.13                        |   | —       |   | —                      |   | 7,666 |   | 9.41 |   | 1,677 |   | 6.02 |   | 16,933 |   | 8.05 |   |
| More than five  years through ten years    |   | 19,165                      |    | 6.61                        |   | —       |   | —                      |   | 3,600 |   | 10.02 |   | 784 |   | 6.32 |   | 23,549 |   | 7.12 |   |
| More than ten  years through fifteen years |   | 32,458                      |    | 6.57                        |   | —       |   | —                      |   | 2,198 |   | 9.12 |   | 672 |   | 9.00 |   | 35,328 |   | 6.77 |   |
| More than  fifteen years                   |   | 49,830                      |    | 6.80                        |   | —       |   | —                      |   | 1,627 |   | 7.43 |   | 1,191 |   | 6.32 |   | 52,648 |   | 6.81 |   |
|                                       |   |                        |    |                        |   |         |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans  receivable                    |   | $                           | 118,227 |                        | 6.70   | %            | $      | 1,591                       |   | 7.39 | % | $ | 23,097 |   | 9.26 | % | $ | 9,560 |   | 6.52 | % | $ | 152,475 |   | 7.08 | % |

 

As of December 31, 2002, the total amount of loanswith maturities longer than one year which had fixed interest rates wasapproximately $112 million and with floating or adjustable interest rates wasapproximately $31 million.

 

*One-to-FourFamily Residential Mortgage Lending*.  The primary lending activity of the Bank hasbeen the granting of conventional loans to enable borrowers to purchase new orexisting homes or refinance their current home.  The Bank also originates VA-guaranteed and FHA-insuredloans.  Residential loan originationsare generated by the Bank’s marketing efforts, its present customers, walk-incustomers and referrals from realtors and builders.  The Bank has focused its lending efforts primarily on theorigination of loans secured by first mortgages on owner-occupied,single-family residences in its market area.

 

Loan originations decreased during 1999 and 2000, wheninterest rates were rising.  Wheninterest rates fell during 2001, loan originations and refinancing of mortgageloans increased.  During 2002 interestrates continued to decrease and allowed the Bank to sell the lower ratemortgage loans and put the higher rate mortgage loans into loansheld-to-maturity.

 

The Bank’s fixed-rate loans generally conform to secondarymarket standards (*i.e*., FHLMC, FNMA and GNMA standards) and have beenprimarily originated for sale in the secondary market.  A portion of these loans has been originatedpursuant to forward sales commitments which are taken under best efforts agreements.

 

9

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The Bank has offered ARM loans at rates, terms andfees determined in accordance with market and competitive factors.  The programs currently offered are primarilydesigned to meet the standards and requirements of the secondary market forresidential loans.  The Bank’s currentone-to-four family residential ARM loans are fully amortizing loans withcontractual maturities of up to 30 years. The interest rates on the ARM loans originated by the Bank are subjectto adjustment at stated intervals and are subject to annual and lifetimeadjustment limits below and above the initial rate.  Most of the Bank’s ARM loans have interest rates which adjustannually based on a margin over one of several indices.  These loans’ annual and lifetime caps oninterest rate increases may reduce the extent to which they can help protectthe Bank against interest rate risk. The Bank has from time to time offered ARM loans at below thefully-indexed rate; however, borrowers of ARM loans are qualified at thefully-indexed rates.

 

The Bank retains ARM loans in its portfolio consistentwith its ongoing asset/liability objectives. ARM loans decrease the risks associated with changes in interest ratesbut involve other risks, primarily because as interest rates rise, the paymentby the borrower rises to the extent permitted by the terms of the loan, therebyincreasing the potential for default. At the same time, the marketability of the underlying property may beadversely affected by higher interest rates. The Bank believes that these risks, which have not had a materialadverse effect on the Bank to date, generally are less than the risksassociated with holding fixed-rate loans in a rising interest rateenvironment.  In this regard, the Bank’sdelinquency experience on its ARM loans has generally been similar to itsexperience on fixed-rate residential loans.

 

The Bank evaluates both the borrower’s ability to makeprincipal, interest and escrow payments and the value of the property that willsecure the loan.  The Bank originatesresidential mortgage loans with loan-to-value ratios up to 95%.  On any mortgage loan exceeding an 80%loan-to-value ratio at the time of origination, the Bank will generally requireprivate mortgage insurance in an amount intended to reduce the Bank’s exposureto 80% or less of the appraised value of the underlying property, unlessotherwise approved by the Bank’s Board of Directors.

 

The Bank’s residential mortgage loans customarilyinclude a due-on-sale clause giving the Bank the right to declare the loanimmediately due and payable in the event that, among other things, the borrowersells or otherwise disposes of the property subject to the mortgage and theloan is not repaid.  The Bank hasgenerally enforced due-on-sale clauses in its mortgage loan contracts.  Yield increases may be obtained through theauthorization of assumptions of existing loans at higher rates of interest,assuming the current rates are higher than the existing note rate, and theimposition of assumption fees.  ARMloans may be assumed provided home buyers meet the Bank’s underwritingstandards and the applicable fees are paid.

 

*Multi-Familyand Commercial Real Estate Lending*.  The Bank’s multi-family and commercial realestate loan portfolio includes loans secured by apartment buildings, officebuildings, retail stores and other properties, most of which are located in theBank’s normal lending territory.  Also,the Bank originates multi-family and commercial real estate loans, subject toregulatory restrictions.  Multi-familyand commercial real estate loans generally are originated in amounts up to 75%of the appraised value of the property securing the loan.  Commercial and multi-family loans are madeat both fixed and adjustable interest rates for terms of up to 25 years.  The terms and conditions of multi-family andcommercial real estate loans are negotiated on a case-by-case basis.

 

Appraisals obtained on properties securingmulti-family and commercial real estate loans originated by the Bank areperformed by an independent appraiser subject to regulatory guidelines at thetime the loan is made.  All appraisalson multi-family and commercial real estate loans are reviewed by the Bank’smanagement.  In addition, the current underwritingprocedures require verification of the borrower’s credit history, income andfinancial statements, banking relationships, references and income projectionsfor the property.  Personal guaranteesare generally obtained for the Bank’s multi-family and commercial real estateloans.

 

10

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Multi-family and commercial real estate lendingaffords the Bank an opportunity to receive interest at rates higher than thosegenerally available from one-to-four family residential lending.  Nevertheless, loans secured by suchproperties are generally larger and involve a greater degree of risk thanone-to-four family residential mortgage loans. Because payments on loans secured by multi-family and commercial real estateproperties are often dependent on the successful operation or management of theproperties, repayment of such loans may be subject to adverse conditions in thereal estate market or the economy.  Ifthe cash flow from the project is reduced (for example, if leases are notobtained or renewed), the borrower’s ability to repay the loan may beimpaired.  In addition, adjustable-ratemulti-family and commercial real estate loans are subject to increased risk ofdelinquency or default as interest rates increase.  The Bank has attempted to minimize these risks through itsunderwriting standards.

 

*CommercialBusiness Lending*. The Bank offers commercial business loans guaranteed by the SBA.  The SBA program provides lenders with theability to offer flexible terms and longer maturities on loans to smallbusinesses and professionals.  Theprogram provides the lender a guaranteed portion (generally 50%-80%) ofprincipal and interest.  Since theseloans are guaranteed, they generally offer minimal risk to the Bank.  These loans are made with adjustable andfixed interest rates with maturities of up to 25 years, depending on theunderlying collateral.  The loans areapproved by the SBA.  The Bank intendsto expand its commercial lending by utilizing the SBA program.

 

The Bank provides short and medium term credit tobusinesses in the Bank’s primary lending territory.  Commercial loans include revolving credit lines and term loans,or a combination thereof, and are generally secured by equipment, accountsreceivable, inventories, real estate or other business assets or a combinationthereof.  Commercial business loans aremade pursuant to specified loan approval limits set by the Bank’s Board ofDirectors.  The Bank usually requiresthat business borrowers maintain their operating accounts with the Bank in theform of demand deposits.  Loans made tocorporations are generally personally guaranteed by the principals of thecorporation.

 

*ConstructionLending*.  The Bankoriginates loans to finance the construction of single-family residences andcommercial businesses.  Many of theseloans are made to individuals who will ultimately be the owner-occupants of theresidence.  Such loans are generallymade, although not required, with permanent financing on the constructed propertyto be provided by the Bank.  Residentialconstruction loans are generally made with a six month term on a fixed-rate,interest-only basis.  Residentialconstruction loans to owner-occupants are generally underwritten using the samecriteria as for one-to-four family residential loans.  Commercial construction loans are generally made with 12 to 24month maturities.  Loan proceeds aredisbursed in increments as construction progresses and inspections warrant.

 

Construction loans afford the Bank the opportunity tocharge loan origination fees, to increase the frequency of repricing of itsloan portfolio and to earn yields higher than those obtainable on loans securedby one-to-four family residential properties. The higher yields reflect the higher risks associated with constructionlending, which include principally the difficulty in evaluating accurately thetotal funds required to complete a project and the post-completion value of theproject.  As a result, the Bank places astrong emphasis upon the borrower’s ability to repay and the experience andexpertise of the builder who has contracted to construct the property.

 

*ConsumerLending*. Management considers consumer lending to be an important component ofits strategic plan.  Specifically,consumer loans generally have shorter terms to maturity (thus reducing theBank’s exposure to changes in interest rates) and carry higher rates ofinterest than do residential mortgage loans. In addition, management believesthat the offering of consumer loan products helps to expand and create strongerties to its customer base by increasing the number of customer relationshipsand providing cross-marketing opportunities. Under applicable federal laws, the Bank is authorized to invest up to35% of its assets in consumer loans excluding credit card and education loans.

 

11

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The Bank offers a variety of secured consumer loans,including home improvement loans, auto loans, personal lines of credit, equitylines of credit and loans secured by savings deposits.  The Bank also offers unsecured and creditcard loans.  The Bank currentlyoriginates all of its consumer loans in its market area.  Consumer loan terms vary according to thetype of collateral, length of contract and creditworthiness of theborrower.  The Bank’s consumer loansgenerally have fixed rates of interest.

 

The Bank currently has several arrangements tooriginate consumer automobile and recreational vehicle loans on an indirectbasis (*i.e.,*where loan contracts are purchased from automobile and recreationalvehicle retailers which have extended credit to their customers).  The Bank applies the underwriting standardsmentioned below in the approval process of purchasing these contracts.  These loans have a fixed interest rate andmaturities of 15 years or less.  As ofDecember 31, 2002, the Bank had $14,365,000 in indirect automobile andrecreational vehicle contracts or 9.4% of its loans.

 

The underwriting standards employed by the Bank forconsumer loans include a determination of the applicant’s payment history onother debts and an assessment of the ability to meet existing obligations andpayments on the proposed loan.  Althoughcreditworthiness of the applicant is a primary consideration, the underwritingprocess also includes a comparison of the value of the security, if any, inrelation to the proposed loan amount.

 

Consumer loans may entail greater risk than doresidential mortgage loans, particularly in the case of consumer loans whichare unsecured, or secured by rapidly depreciable assets, such asautomobiles.  In such cases, anyrepossessed collateral for a defaulted consumer loan may not provide anadequate source of repayment of the outstanding loan balance as a result of thegreater likelihood of damage, loss or depreciation.  In addition, consumer loan collections are dependent on theborrower’s continuing financial stability, and thus are more likely to beaffected by adverse personal circumstances. Furthermore, the application of various federal and state laws,including bankruptcy, may limit the amount which can be recovered on suchloans.  Although the level ofdelinquencies in the Bank’s consumer loan portfolio has generally been low (atDecember 31, 2002**,**approximately $227,000, or 0.98% of the net consumer loanportfolio, was 60 days or more delinquent), there can be no assurance thatdelinquencies will not increase in the future.

 

*Loan Servicing**.* In addition to servicing its own loans, theBank services mortgage loans for FNMA. Since the third quarter of 2000, it has been the practice of the Bank tosell most of the lower interest rate one-to-four family residential mortgageloans.  These loans are sold to privateinvestors with servicing released.

 

*Originations**, Purchasesand Sales of Loans.*  As described previously, the Bank originatesloans through its marketing efforts, its existing customer base, walk-incustomers, and real estate brokers and builders.  Commercial real estate loan originations are obtained by directsolicitation.  The Bank originates bothadjustable-rate and fixed-rate loans. Its ability to originate loans is dependent upon the relative customerdemand in the origination market which is affected by market conditions such asshort-term and long-term interest rates as well as the expected future level ofinterest rates.

 

The Bank had no outstandingcommitments to purchase any loans or mortgage-backed securities at December 31,2002.  At December 31, 2002, the Bankheld funded residential mortgage loans with commitments to sell of $6,553,116and also had commitments to sell unfunded residential loans for$6,898,737.  When the commitment is madewith the borrower the loan is committed to be sold under a “best efforts” and“no recourse” contract with one of the four loan investors used by the Bankduring 2002.  The Bank and the loaninvestors are comfortable with the “best efforts” contracts due to theirconsistent historical relationship.

 

12

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During 2002 the Bank’sgeneral policy was to sell all residential fixed-rate mortgage loans that havea rate lower than 6.75% and a term of 15 years or more.  Loans at a lesser rate but with no more thana seven year amortization can be held-to-maturity.  Because rates for residential mortgages were lower than 6.75%,the Bank sold most loans originated during the fourth quarter of 2002.  Most residential mortgage loans with anadjustable-rate, loans with a rate of 6.75% or more, or a term of less than 15years are designated for loans receivable when the commitment is made to theborrower.  These loans are recorded intothe loans receivable portfolio as they are funded.

 

The following table sets forth the principal amount ofthe Bank’s loan origination, purchase and sales activity for the periodsindicated.

 
|                                     |   | **Year Ended  December 31** |   |
|------------------------------------------|--------|-----------------------------|--------|
|                                     |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                     |   | **(Dollars  In Thousands)** |   |
|                                     |   |                        |   |   |   |   |   |
| Originations by  loan type:              |   |                        |   |   |   |   |   |
| Fixed-rate:                              |   |                        |   |   |   |   |   |
| Construction  loans                      |   | $                           | 1,145  |   | $ | 5,928 |   | $ | 3,050 |   |
| Mortgage loans                           |   | 27,836                      |   | 16,900 |   | 21,169 |   |
| Consumer  loans(2)                       |   | 20,165                      |   | 18,897 |   | 11,407 |   |
| Loans refinanced                         |   | 42,826                      |   | 22,414 |   | 2,490 |   |
| Adjustable-rate:                         |   |                        |   |   |   |   |   |
| Construction  loans                      |   | 1,177                       |   | 1,250 |   | 1,750 |   |
| Mortgage loans                           |   | 15,342                      |   | 13,684 |   | 10,405 |   |
| Consumer  loans(2)                       |   | 2,240                       |   | 5,940 |   | 1,895 |   |
| Loans refinanced                         |   | —                      |   | 127 |   | 784 |   |
|                                     |   |                        |   |   |   |   |   |
| Total loans  originated                  |   | 110,731                     |   | 85,140 |   | 52,950 |   |
|                                     |   |                        |   |   |   |   |   |
| Purchases:                               |   |                        |   |   |   |   |   |
| Loans purchased                          |   | —                      |   | 2,744 |   | 2,941 |   |
|                                     |   |                        |   |   |   |   |   |
| Sales and  repayments:                   |   |                        |   |   |   |   |   |
| Sales(1)                                 |   | 41,509                      |   | 24,471 |   | 11,812 |   |
| Principal  repayments                    |   | 61,440                      |   | 40,274 |   | 28,778 |   |
|                                     |   |                        |   |   |   |   |   |
| Total reductions                         |   | 102,949                     |   | 64,745 |   | 40,590 |   |
|                                     |   |                        |   |   |   |   |   |
| Increase  (decrease) in other items, net |   | 590                         |   | (1,134 | ) | 638 |   |
|                                     |   |                        |   |   |   |   |   |
| Net increase(3)                          |   | $                           | 8,372  |   | $ | 22,005 |   | $ | 15,939 |   |

 

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(1) Consists entirely of one-to-four family fixed-rate loans

(2) Includes non-mortgage commercial loans

(3) Includes changes in loans held-for-sale

 

**Asset Quality**

 

*DelinquentLoans*.  When aborrower fails to make a required payment on a loan, the Bank attempts to curethe delinquency by contacting the borrower. In the case of residential loans, a late notice is sent 16 days afterthe due date.  If the delinquency is notcured by the thirtieth day, the borrower is contacted by telephone or a letteris sent.  Additional written and verbalcontacts are made with the borrower between 35 and 70 days after the due date.

 

13

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In the event a real estate loan payment is past duefor 60 days or more, the Bank performs an in-depth review of the loan status,the condition of the property and circumstances of the borrower.  Based upon the results of its review, theBank may negotiate and accept a repayment program with the borrower, accept avoluntary deed in lieu of foreclosure or when deemed necessary, initiateforeclosure proceedings.  If foreclosedon, real property is sold at a public sale and the Bank may bid on the propertyto protect its interest.  A decision asto whether and when to initiate foreclosure proceedings is based on suchfactors as the amount of the outstanding loan in relation to the originalindebtedness, the extent of delinquency and the borrower’s ability andwillingness to cooperate in curing delinquencies.

 

Delinquent consumer loans are handled in a generallysimilar manner, except that contacts are made beginning when the payment is 10days past due.  If these efforts fail tobring the loan current, appropriate action may be taken to collect any loanpayment that remains delinquent.  TheBank’s procedures for repossession and sale of consumer collateral are subjectto various requirements under New Mexico consumer protection laws.  Loans are generally placed on non-accrualstatus after 90 days delinquency or notice of bankruptcy.

 

The following table sets forth the Bank’s loandelinquencies by type, amount, and percentage of type at December 31, 2002.

 
|                     |   | **Loans  Delinquent For**   |   | **Total  Loans Delinquent** |   |
|--------------------------|--------|-----------------------------|--------|-----------------------------|--------|
|                     |   | **60-89 Days**              |   | **90 Days  And Over**       |   | **60 Days or  More** |   |
|                     |   | **Number**                  |   | **Amount**                  |   | **Percent  of loan  category** |   | **Number** |   | **Amount** |   | **Percent  of loan  category** |   | **Number** |   | **Amount** |   | **Percent  of loan  category** |   |
|                     |   | **(Dollars  In Thousands)** |   |
|                     |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans:          |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Construction             |   | 1                           |   | $                           | 120    |   | 7.54 | % | — |   | $ | — |   | — | % | 1 |   | $ | 120 |   | 7.54 | % |
| One-to-four family       |   | 5                           |   | $                           | 335    |   | 0.38 |   | 10 |   | $ | 978 |   | 1.11 |   | 15 |   | 1,313 |   | 1.49 |   |
| Commercial real  estate. |   | 5                           |   | 266                         |   | 0.95 |   | 2 |   | 302 |   | 1.08 |   | 7 |   | 568 |   | 2.03 |   |
| Other Loans              |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial               |   | 2                           |   | 39                          |   | 0.41 |   | 3 |   | 249 |   | 2.60 |   | 5 |   | 288 |   | 3.01 |   |
| Other Consumer           |   | 22                          |   | 133                         |   | 0.59 |   | 16 |   | 94 |   | 0.42 |   | 38 |   | 227 |   | 1.01 |   |
|                     |   |                        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total loans              |   | 35                          |   | $                           | 893    |   | 0.59 | % | 31 |   | $ | 1,623 |   | 1.06 | % | 66 |   | $ | 2,516 |   | 1.65 | % |

 

*Non-PerformingAssets*. Non-performing assets consist of loans on which interest is no longerbeing accrued, troubled debt restructurings, real estate acquired byforeclosure or deed-in-lieu of foreclosure and repossessed assets.

 

The following table sets forth the amounts andcategories of non-performing assets in the Bank’s portfolio.  Loans are generally placed on non-accrualstatus after 90 days delinquency.

 
|                                            |   | **December  31**            |   |
|-------------------------------------------------|--------|-----------------------------|--------|
|                                            |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                            |   | **(Dollars  In Thousands)** |   |
|                                            |   |                        |   |   |   |   |   |
| Non-accrual  loans(1)                           |   | $                           | 1,623  |   | $ | 1,407 |   | $ | 280 |   |
| Past due 90 days  or more and still accruing    |   | —                      |   | — |   | — |   |
| Troubled debt  restructured                     |   | —                      |   | — |   | — |   |
| Real estate  owned(2)                           |   | 648                         |   | 605 |   | 154 |   |
|                                            |   |                        |   |   |   |   |   |
| Total  non-performing assets                    |   | $                           | 2,271  |   | $ | 2,012 |   | $ | 434 |   |
|                                            |   |                        |   |   |   |   |   |
| Ratio of  non-performing assets to total assets |   | 1.18                        | %      | 1.15 | % | 0.28 | % |

 

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(1)                                  Generallyrefers to loans that are contractually delinquent (i.e., payments were due andunpaid for more than 90 days).

(2)                                  Refersto real estate acquired by the Bank through foreclosure or voluntary deed inlieu of loan foreclosure.

 

14

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Gross interest income which would have been recordedhad the non-accruing loans and renegotiated loans been current in accordancewith their original terms amounted to $109,517 and $93,823 for the years endedDecember 31, 2002 and 2001, respectively.

 

*CriticizedAssets*.  Federalregulations provide for the classification of loans and other assets, such asdebt and equity securities considered by the OTS to be of lesser quality, as“substandard,” “doubtful” or “loss.” An asset is considered “substandard” if itis inadequately protected by the current net worth and paying capacity of theobligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility”that the insured institution will sustain “some loss” if the deficiencies arenot corrected. Assets classified as “doubtful” have all of the weaknessesinherent in those classified “substandard,” with the added characteristic thatthe weaknesses present make “collection or liquidation in full,” on the basisof currently existing facts, conditions, and values, “highly questionable andimprobable.”  Assets classified as“loss” are those considered “uncollectible” and of such little value that theircontinuance as assets without the establishment of a specific loss reserve isnot warranted.  Assets which do notcurrently expose the insured institution to sufficient risk to warrantclassification in one of the aforementioned categories, but possess weaknesses,are required to be designated “special mention” by management.

 

When an insured institution classifies problem assetsas either substandard or doubtful, it may establish  general allowances for loan losses in an amount deemed prudent bymanagement.  General allowancesrepresent loss allowances which have been established to recognize the inherentrisk associated with lending activities, but which, unlike specific allowances,have not been allocated to particular problem assets.  When an insured institution classifies problem assets as loss, itis required either to establish a specific allowance for losses equal to 100%of that portion of the asset so classified or to charge-off such amount.  An institution’s determination as to theclassification of its assets and the amount of its valuation allowances issubject to review by the regulatory authorities, who may order theestablishment of additional general or specific loss allowances.

 

In connection with the filing of its periodic reportswith the OTS and in accordance with its classification of assets policy, theBank regularly reviews the problem loans in its portfolio to determine whetherany loans require classification in accordance with applicableregulations.  Criticized assets of theBank at December 31, 2002 were as follows:

 
|                     |   | **December  31,  2002**      |   |
|--------------------------|--------|------------------------------|--------|
|                     |   | **(Dollars  In  Thousands)** |   |
|                     |   |                         |   |
| Substandard              |   | $                            | 1,833  |   |
| Doubtful                 |   | 44                           |   |
| Loss                     |   | —                       |   |
|                     |   |                         |   |
| Total classified  assets |   | 1,877                        |   |
| Special mention  assets  |   | —                       |   |
|                     |   |                         |   |
| Total criticized  assets |   | $                            | 1,877  |   |

 

15

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*Allowancefor Loan Losses*. The allowance for loan losses is established through a provision forloan losses based on management’s quarterly asset classification review andevaluation of the risk inherent in its loan portfolio and changes in the natureand volume of its loan activity.  Suchevaluation, which includes a review of all loans of which full collectibilitymay not be reasonably assured, considers among other matters, the estimatedvalue of the underlying collateral, economic conditions, cash flow analyses,historical loan loss experience, discussions held with delinquent borrowers andother factors that warrant recognition in providing for an adequate loanallowance.  Although management believesit uses the best information available to make such determinations, futureadjustments to reserves may be necessary, and net income could be significantlyaffected, if circumstances differ substantially from the assumptions used inmaking the initial determinations.

 

The following table sets forth an analysis of theBank’s allowance for loan losses for the years indicated.

 
|                                                                                       |   | **Year ended  December 31** |   |
|--------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                       |   | **2002**                    |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                                       |   | **(Dollars  In Thousands)** |   |
|                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Balance at  beginning of year                                                              |   | $                           | 745    |   | $ | 681 |   | $ | 864 |   | $ | 601 |   | $ | 527 |   |
|                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Provision  charged to operations                                                           |   | 786                         |   | 449 |   | 199 |   | 324 |   | 238 |   |
| Acquired reserve                                                                           |   | —                      |   | — |   | (250 | ) | 250 |   | — |   |
|                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Charge-offs:                                                                               |   |                        |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                                            |   |                        |   |   |   |   |   |   |   |   |   |
| Single family                                                                              |   | (53                         | )      | (24 | ) | — |   | — |   | — |   |
| Commercial real  estate                                                                    |   | —                      |   | — |   | — |   | — |   | — |   |
| Other Consumer  loans                                                                      |   |                        |   |   |   |   |   |   |   |   |   |
| Commercial                                                                                 |   | (319                        | )      | (147 | ) | (41 | ) | (81 | ) | (17 | ) |
| Automobile                                                                                 |   | (297                        | )      | (98 | ) | (62 | ) | (123 | ) | (135 | ) |
| Credit card                                                                                |   | (38                         | )      | (45 | ) | (22 | ) | (16 | ) | (12 | ) |
| Other consumer                                                                             |   | (40                         | )      | (128 | ) | (26 | ) | (122 | ) | (26 | ) |
|                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Recoveries:                                                                                |   |                        |   |   |   |   |   |   |   |   |   |
| Mortgage loans:                                                                            |   |                        |   |   |   |   |   |   |   |   |   |
| Single family                                                                              |   | —                      |   | — |   | — |   | — |   | — |   |
| Commercial real  estate                                                                    |   | —                      |   | — |   | — |   | — |   | — |   |
| Other Consumer  loans                                                                      |   |                        |   |   |   |   |   |   |   |   |   |
| Commercial                                                                                 |   | —                      |   | 35 |   | 6 |   | 2 |   | — |   |
| Automobile                                                                                 |   | 40                          |   | 16 |   | 11 |   | 23 |   | 24 |   |
| Credit card                                                                                |   | 1                           |   | — |   | 1 |   | 6 |   | 2 |   |
| Other consumer                                                                             |   | —                      |   | 6 |   | 1 |   | — |   | — |   |
|                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Balances at end  of year                                                                   |   | $                           | 825    |   | $ | 745 |   | $ | 681 |   | $ | 864 |   | $ | 601 |   |
|                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Ratio of net  charge-offs during the period to average loans outstanding during the period |   | 0.49                        | %      | 0.30 | % | 0.12 | % | 0.32 | % | 0.22 | % |
|                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses to non-performing assets, at the end of year                    |   | 36.33                       | %      | 37.02 | % | 156.91 | % | 276.84 | % | 116.62 | % |
|                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |
| Allowance for  loan losses to total loans, at the end of year                              |   | 0.54                        | %      | 0.53 | % | 0.57 | % | 0.83 | % | 0.68 | % |

 

16

----

 

**Investment Activities**

 

*General*.  The Bank has maintained levels ofinvestments that qualify as liquid assets under OTS regulations.  Liquidity may increase or decrease dependingupon the availability of funds and comparative yields on investments inrelation to the return on loans. Historically, the Bank has maintained liquid assets at levels above theminimum requirements imposed by the OTS regulations and at levels believedadequate to meet the requirements of normal operations, including repayments ofmaturing debt and potential deposit outflows. Cash flow projections are regularly reviewed and updated to assure thatadequate liquidity is maintained.

 

Federally chartered thrift institutions have theauthority to invest in various types of liquid assets, including United StatesTreasury obligations, securities of various federal agencies, certaincertificates of deposit of insured banks and savings institutions, certainbankers’ acceptances, repurchase agreements and federal funds. Subject tovarious restrictions, federally chartered thrift institutions may also investtheir assets in commercial paper, investment grade corporate debt securities andmutual funds whose assets conform to the investments that a federally charteredthrift institution is otherwise authorized to make directly.

 

Generally, the investment policy of the Bank is toinvest funds among various categories of investments and maturities based uponthe Bank’s asset/liability management policies, investment quality andmarketability, liquidity needs and performance objectives.

 

The Bank has a portfolio of mortgage-backedsecurities.  Historically, most of theBank’s mortgage-backed securities were long-term, fixed-rate federal agencysecurities.  In recent years, the Bankpurchased other types of mortgage-backed securities consistent with itsasset/liability management and balance sheet objectives.  At December 31, 2002, approximately $4million or 69% of the Bank’s mortgage-backed securities carried adjustablerates of interest.  The Bank’s recentpolicy is to reduce mortgage-backed securities balances and increase loans foryield enhancement.

 

Under the OTS’ risk-based capital requirements, GNMAmortgage-backed securities have a zero percent risk-weighting and FNMA, FHLMCand AA- or higher rated mortgage-backed securities have a 20%risk-weighting.  None of themortgage-backed securities held by the Bank had a risk-weight for regulatorycapital purposes above 20%.

 

All of the Bank’s mortgage-backed securities arebacked by FHLMC, GNMA or FNMA, or are rated AA or higher.  Accordingly, management believes that theBank’s mortgage-backed securities generally are resistant to credit problems.

 

The Bank’s holdings of mortgage-backed securities havedecreased in recent years primarily as a result of increase in the Bank’s loanportfolio.  FHLMC and GNMAmortgage-backed securities generally carry a yield below that of thecorresponding type of residential loan (due to the insurance or guaranteefeature of such securities and the retention of a servicing spread by the loanservicer), and the Bank’s other mortgage-backed securities also carry loweryields (because such securities tend to have shorter actual durations than30-year loans).  The Bank will continueto evaluate corporate bonds, trust preferred securities, mortgage-backedsecurities purchases and loan securitizations of its existing loans in thefuture based on its strategic and asset/liability objectives, market conditionsand alternative investment opportunities.

 

17

----

 

The following table sets forth the composition of theCompany’s investment portfolio at the dates indicated.

 
|                                                                                                                                    |   | **December  31**            |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                                                                                    |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                                                                                                    |   | **Carrying  value**         |   | **% of  total** |   | **Carrying  value** |   | **% of  total** |   | **Carrying  value** |   | **% of  total** |   |
|                                                                                                                                    |   | **(Dollars  In Thousands)** |   |
|                                                                                                                                    |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale:                                                                                                                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities:                                                                                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable  rate                                                                                                                   |   | $                           | 3,901  |   | 58.5 | % | $ | 5,558 |   | 53.2 | % | $ | 7,631 |   | 99.9 | % |
| GNMA fixed rate                                                                                                                         |   | 1,980                       |   | 29.7 |   | 4,204 |   | 40.2 |   | — |   | — |   |
| Equity  securities:                                                                                                                     |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| FNMA common  stock                                                                                                                      |   | 6                           |   | 0.1 |   | 8 |   | 0.1 |   | 8 |   | 0.1 |   |
| Corporate Bonds                                                                                                                         |   | 101                         |   | 1.5 |   | — |   | — |   | — |   | — |   |
| Trust preferred  securities                                                                                                             |   | 677                         |   | 10.2 |   | 677 |   | 6.5 |   | — |   | — |   |
|                                                                                                                                    |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Total  available-for-sale                                                                                                               |   | $                           | 6,665  |   | 100.0 | % | $ | 10,447 |   | 100.0 | % | $ | 7,639 |   | 100.0 | % |
|                                                                                                                                    |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity:                                                                                                                       |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities:                                                                                                            |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| FNMA  participation certificates                                                                                                        |   | $                           | — |   | — | % | $ | — |   | — | % | $ | 130 |   | 2.1 | % |
| FHLMC  participation certificates                                                                                                       |   | —                      |   | — |   | — |   | — |   | 973 |   | 16.0 |   |
| GNMA fixed rate                                                                                                                         |   | —                      |   | — |   | — |   | — |   | 1,656 |   | 27.2 |   |
| FHLMC adjustable  rate                                                                                                                  |   | 463                         |   | 24.9 |   | 615 |   | 38.2 |   | 839 |   | 13.8 |   |
| US Agency bonds                                                                                                                         |   | —                      |   | — |   | — |   | — |   | 1,000 |   | 16.4 |   |
| Corporate bonds                                                                                                                         |   | 1,099                       |   | 59.0 |   | 696 |   | 43.2 |   | 1,193 |   | 19.6 |   |
| Trust preferred  securities                                                                                                             |   | 300                         |   | 16.1 |   | 300 |   | 18.6 |   | 300 |   | 4.9 |   |
|                                                                                                                                    |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Total  held-to-maturity                                                                                                                 |   | 1,862                       |   | 100.0 | % | 1,611 |   | 100.0 | % | 6,091 |   | 100.0 | % |
|                                                                                                                                    |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| FHLB stock                                                                                                                              |   | 1,013                       |   |   |   | 984 |   |   |   | 945 |   |   |   |
|                                                                                                                                    |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Other  interest-earning assets:                                                                                                         |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  deposits with banks                                                                                                   |   | 5,993                       |   |   |   | 798 |   |   |   | 3,796 |   |   |   |
|                                                                                                                                    |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Total                                                                                                                                   |   | $                           | 15,533 |   |   |   | $ | 13,840 |   |   |   | $ | 18,471 |   |   |   |
|                                                                                                                                    |   |                        |   |   |   |   |   |   |   |   |   |   |   |
| Average  remaining life, to maturity, excluding other-interest-earning assets and FHLB  stock (does not include prepayment assumptions) |   | 19 years                    |   |   |   | 21 years |   |   |   | 13 years |   |   |   |

 

18

----

 

The following table sets forth the composition and contractualmaturities of the Company’s investment securities.

 
|                                 |   | **December  31, 2002**      |   |
|--------------------------------------|--------|-----------------------------|--------|
|                                 |   |                        |   |   |   |   |   |   |   |   |   | **Total  investment securities** |   |
|                                 |   | **Within  one year**        |   | **1 to 5  years** |   | **5 to 10  years** |   | **10 to 20  years** |   | **Over 20  years** |   | **Amortized  cost** |   | **Fair  value** |   |
|                                 |   | **(Dollars  In Thousands)** |   |
|                                 |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Available-for-sale:                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed  securities:         |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| GNMA adjustable  rate                |   | $                           | — |   | $ | — |   | $ | — |   | $ | 3,305 |   | $ | 564 |   | $ | 3,869 |   | $ | 3,901 |   |
| GNMA fixed rate                      |   | —                      |   | — |   | — |   | — |   | 1,884 |   | 1,884 |   | 1,980 |   |
| Equity  securities:                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FNMA common  stock                   |   | —                      |   | — |   | — |   | — |   | 7 |   | 7 |   | 6 |   |
| Corporate stock                      |   | —                      |   | 100 |   | — |   | — |   | — |   | 100 |   | 101 |   |
| Trust preferred  securities          |   | —                      |   | — |   | — |   | — |   | 655 |   | 655 |   | 677 |   |
| Total securities  available-for-sale |   | $                           | — |   | $ | 100 |   | $ | — |   | $ | 3,305 |   | $ | 3,110 |   | $ | 6,515 |   | $ | 6,665 |   |
|                                 |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  yield              |   | —                      | %      | 5.92 | % | — | % | 4.97 | % | 6.58 | % | 5.76 | % |   |   |

 
|                               |   | **December  31, 2002**      |   |
|------------------------------------|--------|-----------------------------|--------|
|                               |   |                        |   |   |   |   |   |   |   |   |   | **Total  investment securities** |   |
|                               |   | **Within  one year**        |   | **1 to 5  years** |   | **5 to 10  years** |   | **10 to 20  years** |   | **Over 20  years** |   | **Amortized  cost** |   | **Fair  value** |   |
|                               |   | **(Dollars  In Thousands)** |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Held-to-maturity:                  |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage-backed securities:        |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| FHLMC  participation certificates  |   | $                           | — |   | $ | — |   | $ | — |   | $ | 245 |   | $ | 218 |   | $ | 463 |   | $ | 471 |   |
| Corporate bonds                    |   | 455                         |   | 644 |   | — |   | — |   | — |   | 1,099 |   | 1,099 |   |
| Trust preferred  securities        |   | —                      |   | — |   | — |   | — |   | 300 |   | 300 |   | 310 |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total securities  held-to-maturity |   | $                           | 455    |   | $ | 644 |   | $ | — |   | $ | 245 |   | $ | 518 |   | $ | 1,862 |   | $ | 1,880 |   |
|                               |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted average  yield            |   | 5.60                        | %      | 4.24 | % | — | % | 4.78 | % | 7.63 | % | 5.58 | % |   |   |

 

*OtherInvestments*.  AtDecember 31, 2002, the Bank’s fixed-rate interest bearing deposits with bankswere $5,993,000 or 3.12% of total assets. As of such date, the Bank also had a $1,013,200 investment in FHLBstock.  At December 31, 2002, the Bank’sinvestment in stock of the FHLB was in an amount required by the FHLB.  It is the Bank’s general policy to purchaseinvestment securities and other issues that are rated investment grade or havecredit enhancements.

 

**Sources of Funds**

 

*TheCompany**.* The Company’s primary sources of funds are dividends from the Bank, borrowingsfrom the Bank in the form of advances and outside borrowings.  The Bank paid dividends to the Company of$652,500 and $608,000 in the years ended December 31, 2002 and 2001,respectively.  The Bank had advances of$0 and $0 to the Company at December 31, 2002 and 2001, respectively.

 

19

----

 

At December 31, 2002 and 2001, the Company hadavailable lines of credit totaling $400,000 and $400,000 respectively, fromother banks. Borrowings outstanding under these arrangements were $0 and $0 atDecember 31, 2002 and 2001, respectively. The lines of credit bear market rates of interest and borrowingsthereunder are to be used for general Company purposes.  One of the borrowing arrangements atDecember 31, 2002 matured at January 23, 2003, which was renewed for ayear.  The other borrowing arrangementmatures on  September 20, 2003.

 

*TheBank*.  The Bank’sprimary sources of funds are deposits, amortization and prepayment of loanprincipal, sales or maturities of loans, investment securities, mortgage-backedsecurities and short-term investments, borrowings and funds provided fromoperations.

 

Borrowings, predominantly from the Federal Home LoanBank (“FHLB”) of Dallas, may be used on a short-term basis to compensate forseasonal reductions in deposits or deposit inflows at less than projectedlevels, and may be used in the future on a longer-term basis to support lendingand investing activities.

 

The Bank offers a variety of deposit accounts having awide range of interest rates and terms. The Bank’s deposits consist of statement savings, NOW accounts and moneymarket accounts and CDs.  The Bankrelies primarily on advertising, competitive pricing policies and customerservice to attract and retain these deposits. The Bank solicits deposits fromits primary market area only and does not use brokers to obtain deposits.

 

The flow of deposits is significantly influenced bygeneral economic conditions, changes in money markets and prevailing interestrates and competition.  The Bankenhanced its ability to increase its deposit base by opening two new in-storebranches in Albuquerque in 2002.

 

Management believes that customers continue to place avalue on federal insurance on deposit accounts and that, to the extent the Bankmaintains competitive rates, it will be able to maintain its deposit andliquidity levels.  The Bank manages thepricing of its deposits in keeping with its asset/liability management andprofitability objectives.

 

Based on its experience, the Bank believes that itssavings accounts, interest-bearing and non-interest-bearing checking accountsare relatively stable sources of deposits. However, the ability of the Bank to attract and maintain CDs, and therates paid on these deposits, have been and will continue to be significantlyaffected by market conditions.

 

Liquidity enables the Bankto meet withdrawals of its deposits and the needs of its loan customers.  The Bank maintains its liquidity positionthrough maintenance of cash resources and a core deposit base.  A further source is the Bank’s ability toborrow funds.  The Bank is a member ofthe FHLB which provides a source of borrowings to the Bank for asset andasset/liability matching.  FHLBborrowings were $8.27 and $8.75 million at December 31, 2002 and 2001,respectively.

 

Liquidity risk results fromthe mismatching of assets and liability cash flows.  Management chooses asset/liability strategies that promote stableearnings and reliable funding.  Interestrate risk and funding positions are kept within limits established by the Boardof Directors of the Bank to ensure that risk taking is not excessive and thatliquidity is properly managed.  The Bankkeeps a portion of its interest-bearing assets in adjustable-rate products toreduce interest rate sensitivity. Therefore, if rates increase the Bank can retain its deposits byincreasing rates paid on deposits, while limiting the impact on the Bank’s netinterest margin.  A concentrated effortis made to retain deposits associated with an unidentifiable intangible assetand the current rate paid on these deposits is at a market rate for thearea.  Core customer deposits havehistorically provided the Bank with a sizeable source of stable and low-costfunds.  The primary additional source offunding is provided by FHLB borrowings available to the Bank, of $59.8 and$54.0 million at December 31, 2002 and 2001, respectively.

 

20

----

 

The following tables set forth the deposits in thevarious programs offered by the Bank at the dates indicated:

 
|                          |   | **Balance at  December  31, 2002** |    | **% of  deposits** |   | **Increase  (decrease)** |   | **Balance at  December  31, 2001** |   | **% of  deposits** |    | **Increase  (decrease)** |   | **Balance at  December  31, 2000** |   | **% of  deposits** |   | **Increase  (decrease)** |    | **Balance at  December  31, 1999** |   |
|-------------------------------|--------|------------------------------------|---------|--------------------|--------|--------------------------|--------|------------------------------------|--------|--------------------|---------|--------------------------|--------|------------------------------------|--------|--------------------|--------|--------------------------|---------|------------------------------------|--------|
|                          |   | **(Dollars  In Thousands)**        |    |
|                          |   |                               |    |               |   |                     |   |                               |   |               |    |                     |   |                               |   |               |   |                     |    |                               |   |
| Transactional accounts        |   | $                                  | 26,073  |               | 16.38  | %                        | $      | 7005                               |   | $                  | 19,068  |                     | 12.98  | %                                  | $      | (592               | )      | $                        | 19,660  |                               | 14.32  | % | $ | 2,427 |   | $ | 17,233 |   |
| Jumbo CDs                     |   | 737                                |    | 0.46               |   | (5,387                   | )      | 6,124                              |   | 4.17               |    | (8,621                   | )      | 14,745                             |   | 10.74              |   | 4,911                    |    | 9,834                              |   |
| Savings accounts              |   | 6,602                              |    | 4.15               |   | 866                      |   | 5,736                              |   | 3.90               |    | (339                     | )      | 6,075                              |   | 4.43               |   | (928                     | )       | 7,003                              |   |
| Money market deposit accounts |   | 27,429                             |    | 17.23              |   | 332                      |   | 27,097                             |   | 18.44              |    | 4,799                    |   | 22,298                             |   | 16.24              |   | (1,791                   | )       | 24,089                             |   |
| IRA accounts                  |   | 11,751                             |    | 7.38               |   | 604                      |   | 11,147                             |   | 7.59               |    | 479                      |   | 10,668                             |   | 7.77               |   | (1,206                   | )       | 11,874                             |   |
| Other CDs                     |   | 86,605                             |    | 54.40              |   | 8,857                    |   | 77,748                             |   | 52.92              |    | 13,918                   |   | 63,830                             |   | 46.50              |   | 11,383                   |    | 52,447                             |   |
|                          |   |                               |    |               |   |                     |   |                               |   |               |    |                     |   |                               |   |               |   |                     |    |                               |   |
|                          |   | $                                  | 159,197 |               | 100.00 | %                        | $      | 12,277                             |   | $                  | 146,920 |                     | 100.00 | %                                  | $      | 9,644              |   | $                        | 137,276 |                               | 100.00 | % | $ | 14,796 |   | $ | 122,480 |   |

 

 
|                |   |                    |                             | **December  31, 2002**                |   | **December  31, 2001** |    | **December  31, 2000**             |   |
|---------------------|--------|-------------------------|----------------------------------|---------------------------------------|--------|------------------------|---------|------------------------------------|--------|
| **Minimum  amount** |   | **Category**            |                             | **Weighted  average  interest  rate** |   | **Balance**            |    | **Percentage  of total  deposits** |   | **Weighted  average  interest  rate** |   | **Balance** |   | **Percentage  of total  deposits** |   | **Weighted  average  interest  Rate** |   | **Balance** |   | **Percentage  of total  deposits** |   |
|                |   |                    |                             | **(Dollars  In Thousands)**           |   |
|                |   |                    |                             |                                  |   |                   |    |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| $                   | 100    |                    | Transactional accounts zero-rate |                                  | 0.00   | %                      | $       | 15,239                             |   | 9.57 | % | 0.00 | % | $ | 10,081 |   | 6.86 | % | 0.00 | % | $ | 11,030 |   | 8.03 | % |
| 100                 |   | Transactional accounts  |                             | 0.49                                  |   | 10,834                 |    | 6.81                               |   | 0.48 |   | 8,987 |   | 6.12 |   | 0.92 |   | 8,630 |   | 6.29 |   |
| 1,000               |   | Money market            |                             | 0.59                                  |   | 4,406                  |    | 2.77                               |   | 0.82 |   | 4,960 |   | 3.38 |   | 2.41 |   | 6,605 |   | 4.81 |   |
| 100                 |   | Savings accounts        |                             | 0.80                                  |   | 6,602                  |    | 4.15                               |   | 0.80 |   | 5,736 |   | 3.90 |   | 1.50 |   | 6,075 |   | 4.43 |   |
| 2,500               |   | Access money market     |                             | 1.51                                  |   | 23,023                 |    | 14.45                              |   | 2.32 |   | 22,137 |   | 15.06 |   | 4.44 |   | 15,693 |   | 11.43 |   |
|                |   |                    |                             |                                  |   |                   |    |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                |   | Certificates of Deposit |                             |                                  |   |                   |    |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 1,000               |   | 30-60 day CDs           |                             | 0.86                                  |   | 68                     |    | 0.04                               |   | 1.15 |   | 50 |   | 0.03 |   | 2.87 |   | 53 |   | 0.04 |   |
| 1,000               |   | 91 day CDs              |                             | 1.05                                  |   | 354                    |    | 0.22                               |   | 1.33 |   | 205 |   | 0.14 |   | 5.21 |   | 1,444 |   | 1.05 |   |
| 1,000               |   | 6 month CDs             |                             | 2.09                                  |   | 13,439                 |    | 8.44                               |   | 3.28 |   | 12,373 |   | 8.42 |   | 5.67 |   | 11,944 |   | 8.70 |   |
| 1,000               |   | 9 month CDs             |                             | 2.15                                  |   | 1,375                  |    | 0.86                               |   | 4.12 |   | 2,051 |   | 1.40 |   | 6.75 |   | 5,481 |   | 3.99 |   |
| 1,000               |   | 1 year CDs              |                             | 2.46                                  |   | 14,829                 |    | 9.31                               |   | 4.36 |   | 21,583 |   | 14.70 |   | 5.79 |   | 21,183 |   | 15.45 |   |
| 1,000               |   | 14 month CDs            |                             | 2.90                                  |   | 11,933                 |    | 7.50                               |   | 3.71 |   | 21,142 |   | 14.38 |   | 6.95 |   | 8,840 |   | 6.44 |   |
| 1,000               |   | 18 month CDs            |                             | 3.20                                  |   | 14,021                 |    | 8.81                               |   | 4.22 |   | 10,613 |   | 7.22 |   | 5.49 |   | 3,905 |   | 2.84 |   |
| 1,000               |   | 2 year CDs              |                             | 3.75                                  |   | 11,763                 |    | 7.39                               |   | 5.03 |   | 2,100 |   | 1.43 |   | 4.92 |   | 2,741 |   | 2.00 |   |
| 1,000               |   | 30 month CDs            |                             | 3.90                                  |   | 7,406                  |    | 4.65                               |   | 4.26 |   | 1,125 |   | 0.77 |   | 4.59 |   | 1,748 |   | 1.27 |   |
| 1,000               |   | 3 year CDs              |                             | 4.37                                  |   | 2,735                  |    | 1.72                               |   | 5.49 |   | 2,447 |   | 1.67 |   | 5.60 |   | 1,914 |   | 1.39 |   |
| 1,000               |   | 4 year CDs              |                             | 4.20                                  |   | 1,429                  |    | 0.90                               |   | 4.90 |   | 752 |   | 0.51 |   | 5.11 |   | 1,514 |   | 1.10 |   |
| 1,000               |   | 5 year CDs              |                             | 4.82                                  |   | 7,252                  |    | 4.56                               |   | 5.41 |   | 3,307 |   | 2.25 |   | 5.54 |   | 3,063 |   | 2.23 |   |
| 90,000              |   | Jumbo CDs               |                             | 4.47                                  |   | 737                    |    | 0.46                               |   | 5.07 |   | 6,124 |   | 4.17 |   | 6.18 |   | 14,745 |   | 10.74 |   |
| 100                 |   | IRA floating rate       |                             | 1.87                                  |   | 1,970                  |    | 1.24                               |   | 2.70 |   | 2,102 |   | 1.43 |   | 4.55 |   | 2,741 |   | 2.00 |   |
| 100                 |   | 1 year IRA              |                             | 3.03                                  |   | 3,283                  |    | 2.06                               |   | 4.63 |   | 3,668 |   | 2.50 |   | 5.08 |   | 3,026 |   | 2.20 |   |
| 100                 |   | 15 month IRA            |                             | —                                |   | —                 |    | —                             |   | 5.85 |   | 2 |   | — |   | 5.84 |   | 357 |   | 0.26 |   |
| 100                 |   | 2 year IRA              |                             | —                                |   | —                 |    | —                             |   | — |   | — |   | — |   | 4.26 |   | 66 |   | 0.05 |   |
| 100                 |   | 3 year IRA              |                             | 5.46                                  |   | 2,971                  |    | 1.87                               |   | 5.51 |   | 2,735 |   | 1.86 |   | 5.40 |   | 2,197 |   | 1.60 |   |
| 100                 |   | 4 year IRA              |                             | 4.23                                  |   | 200                    |    | 0.13                               |   | — |   | — |   | — |   | — |   | — |   | — |   |
| 100                 |   | 5 year IRA              |                             | 4.75                                  |   | 3,328                  |    | 2.09                               |   | 5.51 |   | 2,640 |   | 1.80 |   | 5.66 |   | 2,281 |   | 1.66 |   |
|                |   |                    |                             |                                  |   |                   |    |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                |   |                    |                             | 2.33                                  | %      | $                      | 159,197 |                               | 100.00 | % | 3.16 | % | $ | 146,920 |   | 100.00 | % | 4.54 | % | $ | 137,276 |   | 100.00 | % |
|                     |        |                         |                                  |                                       |        |                        |         |                                    |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

21

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The following table sets forth the savings flows ofthe Bank during the periods indicated. Net deposits (withdrawals) refer to the amount of deposits during aperiod less the amount of withdrawals during the same period.  Deposit flows at savings institutions mayalso be influenced by external factors such as governmental credit policies anddepositors’ perceptions of the adequacy of federal insurance of accounts.

 
|                                                 |   | **Year Ended  December 31** |   |
|------------------------------------------------------|--------|-----------------------------|--------|
|                                                 |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                 |   | **(Dollars  In Thousands)** |   |
|                                                 |   |                        |   |   |   |   |   |
| Net deposits  (withdrawals) before interest credited |   | $                           | 8,027  |   | $ | 3,895 |   | $ | 9,623 |   |
| Interest  credited                                   |   | 4,250                       |   | 5,749 |   | 5,173 |   |
|                                                 |   |                        |   |   |   |   |   |
| Net increase  (decrease) in deposits                 |   | $                           | 12,277 |   | $ | 9,644 |   | $ | 14,796 |   |
|                                                 |   |                        |   |   |   |   |   |
| Percent increase                                     |   | 8.36                        | %      | 7.26 | % | 12.08 | % |

 

The following table shows interest rate and maturityinformation for the Bank’s time deposits as of December 31, 2002.

 
|                                       |   | **0.00-  1.99%**            |   | **2.00-  3.99%** |   | **4.00-  5.99%** |   | **6.00-  7.99%** |   | **Total** |   | **Percent  of total** |   |
|--------------------------------------------|--------|-----------------------------|--------|------------------|--------|------------------|--------|------------------|--------|-----------|--------|-----------------------|--------|
|                                       |   | **(Dollars  In Thousands)** |   |
|                                       |   |                        |   |             |   |             |   |             |   |      |   |                  |   |
| Time deposits  maturing in quarter ending: |   |                        |   |             |   |             |   |             |   |      |   |                  |   |
|                                       |   |                        |   |             |   |             |   |             |   |      |   |                  |   |
| March 31, 2003                             |   | $                           | 2,422  |             | $      | 22,197           |   | $                | 3,148  |      | $      | 970                   |   | $ | 28,737 |   | 29.00 | % |
| June 30, 2003                              |   | 4,359                       |   | 9,149            |   | 812              |   | 164              |   | 14,484    |   | 14.62                 |   |
| September 30,  2003                        |   | 381                         |   | 8,081            |   | 676              |   | 11               |   | 9,149     |   | 9.23                  |   |
| December 31,  2003                         |   | 1,438                       |   | 6,059            |   | 549              |   | 216              |   | 8,262     |   | 8.34                  |   |
| March 31, 2004                             |   | 1,663                       |   | 3,756            |   | 1,181            |   | 226              |   | 6,826     |   | 6.89                  |   |
| June 30, 2004                              |   | —                      |   | 7,815            |   | 1,976            |   | 9                |   | 9,800     |   | 9.89                  |   |
| September 30,  2004                        |   | —                      |   | 1,815            |   | 523              |   | —           |   | 2,338     |   | 2.36                  |   |
| December 31,  2004                         |   | —                      |   | 5,567            |   | 1,709            |   | —           |   | 7,276     |   | 7.34                  |   |
| March 31, 2005                             |   | —                      |   | 478              |   | 117              |   | —           |   | 595       |   | 0.60                  |   |
| June 30, 2005                              |   | —                      |   | 569              |   | 316              |   | 289              |   | 1,174     |   | 1.18                  |   |
| September 30,  2005                        |   | —                      |   | 604              |   | 208              |   | —           |   | 812       |   | 0.82                  |   |
| December 31,  2005                         |   | —                      |   | 631              |   | 116              |   | 21               |   | 768       |   | 0.78                  |   |
| Thereafter                                 |   | —                      |   | 633              |   | 8,239            |   | —           |   | 8,872     |   | 8.95                  |   |
|                                       |   |                        |   |             |   |             |   |             |   |      |   |                  |   |
| Total                                      |   | $                           | 10,263 |             | $      | 67,354           |   | $                | 19,570 |      | $      | 1,906                 |   | $ | 99,093 |   | 100.00 | % |
|                                       |   |                        |   |             |   |             |   |             |   |      |   |                  |   |
| Percent of total                           |   | 10.36                       | %      | 67.97            | %      | 19.75            | %      | 1.92             | %      | 100.00    | %      |                  |   |

 

22

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The following table indicates the amount of the Bank’stime deposits by size or from public entities, by time remaining until maturityas of December 31, 2002.

 
|                               |   | **Maturity**                |   |                     |   |
|------------------------------------|--------|-----------------------------|--------|--------------------------|--------|
|                               |   | **3 months  or less**       |   | **Over  3 to 6  months** |   | **Over  6 to 12  months** |   | **Over  12 months** |   | **Total** |   |
|                               |   | **(Dollars  In Thousands)** |   |
|                               |   |                        |   |                     |   |   |   |   |   |   |   |
| Time deposits of  $100,000 or less |   | $                           | 22,144 |                     | $      | 11,052 |   | $ | 15,588 |   | $ | 29,470 |   | $ | 78,254 |   |
|                               |   |                        |   |                     |   |   |   |   |   |   |   |
| Time deposits  over $100,000       |   | 4,768                       |   | 925                      |   | 1,817 |   | 7,991 |   | 15,501 |   |
|                               |   |                        |   |                     |   |   |   |   |   |   |   |
| Public funds(1)                    |   | 1,825                       |   | 2,507                    |   | 6 |   | 1,000 |   | 5,338 |   |
|                               |   |                        |   |                     |   |   |   |   |   |   |   |
| Total time  deposits               |   | $                           | 28,737 |                     | $      | 14,484 |   | $ | 17,411 |   | $ | 38,461 |   | $ | 99,093 |   |

 

----

(1)                                  Timedeposits from government and other public entities.

 

From time to time, the Bank has had greater amounts ofpublic funds.  The amount of publicfunds held by the Bank at December 31, 2002 and 2001 was $6,674,657 and$8,402,922, respectively.  The Bank isrequired to pledge collateral or a letter of credit from FHLB for suchfunds.  At December 31, 2002, the Bankhas $286,633 in letters of credit outstanding.

 

*Borrowings*.  Although deposits are the Bank’s primarysource of funds, the Bank’s policy has been to utilize borrowings when there isa net outflow of deposits, when advances are a less costly source of funds orwhen funds from advances can be invested at a positive spread.  In addition, the Bank has relied uponselected borrowings for short-term liquidity needs.

 

The Bank may obtain advances from the FHLB of Dallasupon the security of its capital stock of the FHLB of Dallas and certain of itsmortgage loans, investment securities and mortgage-backed securities.  Such advances may be made pursuant toseveral different credit programs, each of which has its own interest rate andrange of maturities.  At December 31,2002, the Bank had $8,267,321 in FHLB borrowings outstanding, which allowed theBank to increase the amount of its loans receivable.

 

During fiscal 2002, the Bank utilized advances fromFHLB of Dallas to cover funding of loans.

 

The following table sets forth maximum balance,average balance, and average rate paid on FHLB advances for the periodindicated.

 
|                                             |   | **Year ended  December 31** |   |
|--------------------------------------------------|--------|-----------------------------|--------|
|                                             |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                             |   | **(Dollars  In Thousands)** |   |
|                                             |   |                        |   |   |   |   |   |
| Maximum amount  of borrowings outstanding        |   | $                           | 11,500 |   | $ | 12,050 |   | $ | 16,500 |   |
|                                             |   |                        |   |   |   |   |   |
| Approximate  average borrowings outstanding      |   | $                           | 9,456  |   | $ | 5,840 |   | $ | 8,294 |   |
|                                             |   |                        |   |   |   |   |   |
| Approximate  weighted average interest rate paid |   | 3.47                        | %      | 4.54 | % | 6.12 | % |

 

23

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On June 27, 2002, the Company issued $4 million intrust preferred securities through a private placement of Floating Rate TrustPreferred Securities of Access Anytime Capital Trust II with a liquidationvalue of $1,000 per share to mature 30 years from the date of issuance.  The trust preferred securities are at avariable rate of the London Interbank Offered Rate (LIBOR) plus 365 basis points,floating quarterly, with a five-year cap of 12%.  At December 31, 2002, the interest rate was 5.425%.  The trust preferred securities may beredeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, the Company issued $4 million of10.25% Fixed Rate Capital Trust Pass-through Securities of Access AnytimeCapital Trust I with a liquidation value of $1,000 per share to mature 30 yearsfrom the date of issuance.  The trustpreferred securities may be redeemed by the Company as early as July 25, 2006and may be redeemed at par on July 25, 2011. The Company invested approximately $2.9 million of the net proceeds inthe Bank to increase its capital levels.

 

**Subsidiary of the Bank**

 

In 1974, the Bank incorporated First EquityDevelopment Corporation (“FEDCO”), a New Mexico corporation, as a wholly-ownedsubsidiary of the Bank.  The directorsand officers of FEDCO also serve as officers of the Bank.  Prior to 1991, FEDCO’s primary business wasreal estate acquisition, development and construction, and investment in theBank’s former data processing service bureau. FEDCO had $817 and $817 in cash at December 31, 2002 and 2001, and noother assets or liabilities and is currently an inactive corporation.  Thrift institutions are permitted to investan amount equal to 2% of their assets, through a subsidiary, with an additionalinvestment of 1% of assets where such investment serves primarily community,inner-city and community development purposes.

 

**Regulation**

 

*General*.  The Bank is subject to extensive regulation,examination and supervision by the OTS, as its chartering agency, and the FDIC,as its deposit insurer.  The Bank’sdeposit accounts are insured up to applicable limits by the SAIF administeredby the FDIC, and it is a member of the FHLB of Dallas.  The Bank must file reports with the OTS andthe FDIC concerning its activities and financial condition, and it must obtainregulatory approvals prior to entering into certain transactions, such asmergers with, or acquisitions of, other depository institutions.  The OTS and the FDIC conduct periodicexaminations to assess the Bank’s compliance with various regulatoryrequirements.  Such regulation andsupervision establish a comprehensive framework of activities in which aninstitution may engage and are intended primarily for the protection of theinsurance fund and depositors.  TheCompany, as a unitary thrift holding company, is required to file certainreports with, and otherwise comply with, the rules and regulations of the OTSand of the SEC under the federal securities laws.

 

The OTS and the FDIC have significant discretion inconnection with their supervisory and enforcement activities and examinationpolicies, including policies with respect to the classification of assets andthe establishment of adequate loan loss reserves for regulatory purposes.  Any change in such regulation and policies,whether by the OTS, the FDIC or action of the United States Congress, couldhave an impact on the Company, the Bank and the operations of both.

 

*Regulationof the Company*. The Company, as a unitary thrift holding company, is a savings and loanholding company within the meaning of HOLA. As such, the Company is required to register with the OTS and is subjectto OTS regulations, examinations, supervision and reporting requirements.  In addition, the OTS has enforcementauthority over the Company and its non-thrift subsidiaries, if any.  Among other things, this authority permitsthe OTS to restrict or prohibit activities that are determined to be a seriousrisk to the financial safety, soundness or stability of a subsidiary savingsassociation.

 

24

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Except under limited circumstances, thrift holdingcompanies are prohibited from acquiring, without prior approval of the OTS,control of any other savings institutions or thrift holding company orsubstantially all the assets thereof or more than five percent of the votingshares of a thrift institution or holding company thereof which is not asubsidiary.  In evaluating anapplication by a holding company to acquire a thrift association, the OTS mustconsider the financial and managerial resources and future prospects of thecompany and thrift association involved, the effect of the acquisition on therisk to the insurance funds, the convenience and needs of the community andcompetitive factors.  Acquisitions whichresult in a thrift holding company controlling thrift associations in more thanone state are generally prohibited except in supervisory transactions involvingfailing savings associations or based on specific state authorization to permitsuch acquisitions.

 

Federal law also requires OTS approval prior to anychange of control of the Company or the Bank. Under OTS regulations, “control”is presumed to exist if an individual or company acquires more than twenty-fivepercent of any class of voting stock of a thrift association or holdingcompany.  Control is also presumed toexist, subject to being rebutted, if a person acquires more than ten percent ofany class of voting stock (or more than twenty-five percent of any class ofnon-voting stock) and is subject to any of several control factors, including,among other matters, the relative ownership position of a person, the existenceof control agreements and other factors.

 

As a unitary thrift holding company, the Companygenerally will not be restricted under existing laws to the types of businessactivities in which it may engage, provided that the Bank continues to satisfythe QTL test. Upon any non-supervisory acquisition by the Company of anotherthrift or savings bank that meets the QTL test and is deemed to be a savingsassociation by the OTS and that will be held as a separate subsidiary, theCompany would become a multiple thrift holding company and would be subject tolimitations on the types of business activities in which it could engage.  HOLA generally limits the activities of amultiple thrift holding company and its non-insured association subsidiariesprimarily to activities permissible for bank holding companies under the BankHolding Company Act, subject to the prior approval of the OTS, and to otheractivities authorized by OTS regulation.

 

A thrift association or a thrift holding company isrequired to give 30 days prior written notice to the OTS of any proposedappointment of a director or senior executive officer if the institution hasbeen chartered less than two years, has undergone a change in control withinthe preceding two years, or is not in compliance with the minimum capitalrequirements or otherwise is in a troubled condition.  The OTS then has the opportunity to disapprove any suchappointment.

 

Transactions between the Bank and the Company and itsother subsidiaries are subject to various conditions and limitations.  Well run, healthy thrift institutions thatsatisfy certain criteria would be permitted to file with the OTS schedules ofproposed capital distributions over a specified period not to exceed 12months.  The Bank being a wholly ownedsubsidiary of a thrift holding company must file a notice with the OTS of anticipateddistributions of capital.

 

*FederalSecurities Law**.***** The stock of the Company is registered with the SEC under theSecurities Exchange Act of 1934 (“Exchange Act”).  The Company is subject to the information, proxy solicitation,insider trading restrictions and other requirements of the SEC under theExchange Act.

 

Company stock held by persons who are affiliates(generally officers, directors and principal stockholders) of the Bank may notbe resold without registration or unless sold in accordance with certain resalerestrictions.  If the Company meetsspecified current public information requirements, each affiliate of theCompany is able to sell in the public market, without registration, a limitednumber of shares in any three-month period.

 

25

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*Insuranceof Accounts and Regulation by the FDIC*.  The Bank is a member of the SAIF, which isadministered by the FDIC.  Deposits areinsured up to applicable limits by the FDIC and such insurance is backed by thefull faith and credit of the United States Government.  As insurer, the FDIC imposes depositinsurance premiums and is authorized to conduct examinations of and to requirereporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in anyactivity the FDIC determines by regulation or order to pose a serious risk tothe FDIC.  The FDIC also has theauthority to initiate enforcement actions against thrift associations, aftergiving the OTS an opportunity to take such action, and may terminate thedeposit insurance if it determines that the institution has engaged or isengaging in unsafe or unsound practices, or is in an unsafe or unsoundcondition.  The FDIC may initiate anexamination for institutions graded 3, 4, or 5 without approval of the otheragencies.

 

The FDIC’s deposit insurance premiums are assessedthrough a risk-based system under which all insured depository institutions areplaced into one of nine categories and assessed insurance premiums based upontheir level of capital and supervisory evaluation.  Under the system, institutions classified as well capitalized(i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capitalto risk-weighted assets of at least 6% and a risk-based capital ratio of atleast 10%) and considered healthy pay the lowest premium, while institutionsthat are less than adequately capitalized (i.e., core or Tier 1 risk-basedcapital ratios of less than 4% or a risk-based capital ratio of less than 8%)and considered of substantial supervisory concern pay the highest premium.  Risk classification of all insuredinstitutions will be made by the FDIC for each semi-annual assessment period.

 

*RegulatoryCapital Requirements*. Federally insured thrift associations, such as the Bank, are required tomaintain a minimum level of regulatory capital.  The OTS has established capital standards, including a tangiblecapital requirement, a leverage ratio (or core capital) requirement and arisk-based capital requirement applicable to such thrift associations.  These capital requirements must be generallyas stringent as the comparable capital requirements for national banks.  The OTS is also authorized to impose capitalrequirements in excess of these standards on individual associations on acase-by-case basis.

 

The capital regulations require tangible capital of atleast 1.5% of adjusted total assets (as defined by regulation).  Tangible capital generally includes commonstockholders’ equity and retained income, and certain noncumulative perpetualpreferred stock and related income. Intangible assets including disallowed servicing assets and disalloweddeferred tax assets are deducted from capital to calculate adjusted tangiblecapital.

 

The OTS regulations establish special capitalizationrequirements for thrift associations that own subsidiaries.  Under these regulations certain subsidiariesare consolidated for capital purposes and others are excluded from assets andcapital.  In determining compliance withthe capital requirements, all subsidiaries engaged solely in activitiespermissible for national banks or engaged in certain other activities solely asagent for its customers are “includable” subsidiaries that are consolidated forcapital purposes in proportion to the association’s level of ownership,including the assets of includable subsidiaries in which the association has aminority interest that is not consolidated for accounting principles generallyaccepted in the United States of America purposes.  For excludable subsidiaries, the debt and equity investments insuch subsidiaries are deducted from assets and capital, with a five-yeartransition period beginning on July 1, 1990, for investments made before April12, 1989.  At December 31, 2002, theBank had tangible capital of $17,807,985 or 9.48% of adjusted total assets (asdefined by regulation), which was $14,991,481 above the minimum requirement of1.5% of adjusted total assets in effect on that date.

 

The capital standards also require core capital equalto at least 3% of adjusted total assets (as defined by regulation).  Core capital generally consists of tangiblecapital plus certain intangible assets, including a limited amount of purchasedcredit card relationships.  A thriftassociation must maintain a core capital ratio of at least 4% to be consideredadequately capitalized unless its supervisory condition is such to allow it tomaintain a 3% ratio.  At December 31,2002, the Bank had core capital equal to $17,807,985 or 9.48% of adjusted totalassets, which was $10,297,309 above the minimum leverage ratio requirement of4% as in effect on that date.

 

26

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The OTS risk-based requirement requires thriftassociations to have total capital of at least 8% of risk-weighted assets (asdefined by regulation).  Total capitalconsists of core capital, as defined above, and supplementary capital.Supplementary capital consists of certain permanent and maturing capitalinstruments that do not qualify as core capital and general valuation loan andlease loss allowances up to a maximum of 1.25% of risk-weighted assets.Supplementary capital may be used to satisfy the risk-based requirement only tothe extent of core capital.  The OTS isalso authorized to require a thrift association to maintain an additionalamount of total capital to account for concentration of credit risk and therisk of non-traditional activities.  AtDecember 31, 2002, the Bank had no capital instruments that qualify assupplementary capital.  In addition,general loss reserves at that date were less than 1.25% of risk-weightedassets.

 

Certain exclusions from capital and assets arerequired to be made for the purpose of calculating total capital.  Such exclusions consist of equity investment(as defined by regulation) and that portion of land loans and nonresidentialconstruction loans in excess of an 80% loan-to-value ratio and reciprocalholdings of qualifying capital instruments. The Bank had no such exclusions from capital and assets at December 31,2001.

 

In determining the amount of risk-weighted assets, allassets, including certain off-balance sheet items, will be multiplied by a riskweight, ranging from 0% to 100%, based on the risk inherent in the type ofasset.  For example, the OTS has assigneda risk weight of 50% for prudently underwritten permanent one-to-four familyfirst lien mortgage loans not more than 90 days delinquent and having a loan tovalue ratio of not more than 80% at origination unless insured to such ratio byan insurer approved by the FNMA or FHLMC.

 

At December 31, 2002, the Bank had total risk-basedcapital of $18,565,839 or 13.99% of risk-weighted assets. This amount was$7,950,079 above the 8% requirement in effect on that date.

 

The OTS has adopted a rule that requires every thriftassociation with more than normal interest rate risk to deduct from its totalcapital, for purposes of determining compliance with such requirement, anamount equal to 50% of its interest rate risk exposure multiplied by thepresent value of its assets.  Thisexposure is a measure of the potential decline in the net portfolio value of athrift association, greater than 2% of the present value of its assets, basedupon a hypothetical 200 basis point increase or decrease in interest rates(whichever results in a greater decline). Net portfolio value is the present value of expected cash flows fromassets, liabilities and off-balance sheet contracts.  The rule provides for a two quarter lag between calculatinginterest rate risk and recognizing any deduction from capital.  Any thrift association with less than $300million in assets and a total capital ratio in excess of 12% is exempt fromthis requirement unless the OTS determines otherwise.

 

The OTS and the FDIC are authorized and, under certaincircumstances required, to take certain actions against thrift associationsthat fail to meet their capital requirements. The OTS is generally required to take action to restrict the activitiesof an “undercapitalized association” (generally defined to be one with lessthan either a 4% core capital ratio, a 4% Tier 1 risk-based capital ratio or an8% risk-based capital ratio).  Any suchassociation must submit a capital restoration plan and until such plan isapproved by the OTS may not increase its assets, acquire another institution,establish a branch or engage in any new activities, and generally may not makecapital distributions.  The OTS isauthorized to impose the additional restrictions, discussed below, that areapplicable to significantly undercapitalized associations.

 

As a condition to the approval of the capitalrestoration plan, any company controlling an undercapitalized association mustagree that is will enter into a limited capital maintenance guarantee withrespect to the institution’s achievement of its capital requirements.

 

Any thrift association that fails to comply with itscapital plan or is “significantly undercapitalized” (i.e., Tier 1 risk-based orcore capital ratios of less than 3% or a risk-based capital ratio of less than6%) must be made subject to one or more of additional specified actions andoperating restrictions.  These actionsand restrictions include requiring the issuance of additional votingsecurities; limitations on asset growth; mandated asset reduction; changes insenior management; divestiture, merger or acquisition of the association;restrictions on executive compensation; and any other action the OTS deemsappropriate.  An association thatbecomes “critically undercapitalized” (i.e., a tangible capital ratio of 2% orless) is subject to further mandatory restrictions on its activities inaddition to those applicable to significantly undercapitalizedassociations.  In

 

27

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addition, the OTS must appoint a receiver (or conservator with theconcurrence of the FDIC) for a thrift association, with certain limitedexceptions, within 90 days after it becomes critically undercapitalized.

 

Any undercapitalized association is also subject toother possible enforcement actions by the OTS or the FDIC.  Such actions could include a capitaldirective, a cease-and-desist order, civil money penalties, the establishmentof restrictions on all aspects of the Bank’s operations or the appointment of areceiver or conservator or a forced merger into another institution.

 

If the OTS determines that an association is in anunsafe or unsound condition or is engaged in an unsafe or unsound practice, itis authorized to reclassify a well-capitalized association as an adequatelycapitalized association and if the association is adequately capitalized, toimpose the restrictions applicable to an undercapitalized association.  If the association is undercapitalized, theOTS is authorized to impose the restrictions applicable to a significantly undercapitalizedassociation.

 

The imposition by the OTS or the FDIC of any of thesemeasures on the Bank may have a substantial adverse effect on the Company’soperations and profitability.  TheCompany’s shareholders do not have preemptive rights, and therefore, if theBank is directed by the OTS or the FDIC to issue additional shares of CommonStock, such issuance may result in the dilution in the percentage of ownershipof the Company.

 

*Limitationson Dividends and Other Capital Distributions*.  OTS regulations impose various restrictionson thrift associations with respect to their ability to make distributions ofcapital, which include dividends, stock redemptions or repurchases, cash-outmergers and other transactions charged to the capital account.  OTS regulations also prohibit a thriftassociation from declaring or paying any dividends or from repurchasing any ofits stock if, as a result, the regulatory capital of the association would bereduced below the amount required to be maintained for the liquidation accountestablished in connection with its mutual to stock conversion.

 

Generally, thrift associations, such as the Bank, thatbefore and after the proposed distribution meet their capital requirements, maymake capital distributions during any calendar year equal to the greater of100% of net income for the year-to-date plus 50% of the amount by which thelesser of the association’s tangible, core or risk-based capital exceeds itscapital requirement for such capital component, as measured at the beginning ofthe calendar year, or requirement for such capital component, as measured atthe beginning of the calendar year, or 75% of its net income for the mostrecent four quarter period.  However, anassociation deemed to be in need of more than normal supervision by the OTS mayhave its dividend authority restricted by the OTS.  The Bank may pay dividends in accordance with this generalauthority.

 

Thrift associations proposing to make any capitaldistributions need only submit written notice to the OTS 30 days prior to suchdistribution.  Thrift associations thatdo not, or would not meet their current minimum capital requirements followinga proposed capital distribution, however, must obtain OTS approval prior tomaking such distribution.  The OTS mayobject to the distribution during that 30-day period notice based on safety andsoundness concerns.

 

*QualifiedThrift Lender Tes**t*. All thrift associations, including the Bank, are required to meet a QTLtest to avoid certain restrictions on their operations.  This test requires a savings association tohave at least 65% of its portfolio assets (as defined by regulation) inqualified thrift investments on a monthly average for nine out of every 12months on a rolling basis.  As analternative, the thrift association may maintain 60% of its assets in thoseassets specified in Section 7701(a)(19) of the Internal Revenue Code.  Under either test, such assets primarilyconsist of residential housing related loans and investments.  At December 31, 2002, the Bank met the QTLtest and has always met the test since its inception.

 

Any thrift association that fails to meet the QTL testmust convert to a national bank charter, unless it requalifies as a QTL andthereafter remains a QTL. Requalification as a QTL is restricted to one time only.  If an association does not requalify andconverts to a national bank charter, it must remain SAIF-insured until the FDICpermits it to transfer to the BIF.  Ifan association that fails the test has not yet requalified and has notconverted to a national bank, its new investments and activities are limited tothose permissible for both a thrift association and a national bank, and it islimited to national bank branching rights in its home state.  In addition,

 

28

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the association is immediately ineligible to receive any new FHLBborrowings and is subject to national bank limits for payment ofdividends.  If such association has notrequalified or converted to a national bank within three years after thefailure, it must divest of all investments and cease all activities notpermissible for a national bank.  Inaddition, it must repay promptly any outstanding FHLB borrowings, which mayresult in prepayment penalties.  If anyassociation that fails the QTL test is controlled by a holding company, thenwithin one year after the failure, the holding company must register as a bankholding company and become subject to all restrictions on bank holdingcompanies.

 

*CommunityReinvestment Act**.***** Under the CRA, every FDIC insured institution has a continuing andaffirmative obligation consistent with safe and sound banking practices to helpmeet the credit needs of its entire community, including low and moderate-incomeneighborhoods.  The CRA does notestablish specific lending requirements or programs for financial institutionsnor does it limit an institution’s discretion to develop the types of productsand services that it believes are best suited to its particular community,consistent with the CRA.  The CRArequires the OTS, in connection with the examination of the Bank, to assess theinstitution’s record of meeting the credit needs of its community and to takesuch record into account in its evaluation of certain applications, such as amerger or the establishment of a branch, by the Bank.  An unsatisfactory rating may be used as the basis for the denialof an application by the OTS.  The mostrecent CRA examination as of June 28, 1999 classified the Bank as satisfactory.

 

The federal banking agencies, including the OTS,revised the CRA regulations and the methodology for determining aninstitution’s compliance with the CRA. Due to the heightened attention being given to the CRA, the Bank may be requiredto devote additional funds for investment and lending in its local communities.

 

*Transactionswith Affiliates.* Generally, transactions between a thrift association or its subsidiariesand its affiliates are required to be on terms as favorable to the associationas transactions with non-affiliates.  Inaddition, certain of these transactions, such as loans to an affiliate, arerestricted to a percentage of the association’s capital.  Affiliates of the Bank include the Companyand any company which is under common control with the Bank.  In addition, a thrift association may notlend to any affiliate engaged in activities not permissible for a bank holdingcompany or acquire the securities of most affiliates.  The OTS has the discretion to treat subsidiaries of thriftassociations as affiliates on a case-by-case basis.

 

Certain transactions with directors, officers orcontrolling persons are also subject to conflict of interest regulationsenforced by the OTS.  These conflict ofinterest regulations and other statutes also impose restrictions on loans tosuch persons and their related interests. Among other things, such loans must be made on terms substantially thesame as for loans to unaffiliated individuals. At December 31, 2002, loans to directors, executive officers, and majorstockholders were $1,523,636.

 

*FederalHome Loan Bank System*. The Bank is a member of the FHLB of Dallas, which is one of 12 regionalFHLBs that administer the home financing credit function of thriftassociations.  Each FHLB serves as areserve or central bank for its members within its assigned region.  It is funded primarily from proceeds derivedfrom the sale of consolidated obligations of the FHLB System.  It makes loans to members (i.e., advances)in accordance with policies and procedures established by the board ofdirectors of the FHLB.  These policiesand procedures are subject to the regulation and oversight of the FederalHousing Finance Board.  All advancesfrom the FHLB are required to be fully secured by sufficient collateral asdetermined by the FHLB.  In addition,all long-term advances are required to provide funds for residential homefinancing.

 

Under federal law, the FHLBs are required to providefunds for the resolution of troubled thrift associations and to contribute tolow- and moderately-priced housing programs through direct loans or interestsubsidies on advances targeted for community investment and low- andmoderate-income housing projects. These contributions have affected adverselythe level of FHLB dividends paid and could continue to do so in thefuture.  These contributions could alsohave an adverse effect on the value of FHLB stock in the future.  A reduction in value of the Bank’s FHLBstock may result in a corresponding reduction in the Bank’s capital.

 

29

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As a member, the Bank is required to purchase andmaintain stock in the FHLB of Dallas. At December 31, 2002, the Bank had $1,013,200 in FHLB stock.  The Bank has received dividends on its FHLBstock which have averaged 4.94% over the past five calendar years and were2.94% for calendar year 2002.  Inaddition, the Bank received a one-time special dividend of $14,400 in April2000.

 

For the year ended December 31, 2002, stock and cashdividends paid by the FHLB of Dallas to the Bank totaled $29,223 whichconstitutes a $10,569 decrease from the amount of dividends received in fiscalyear 2001.  The $6,975 dividend received for thequarter ended December 2002 reflects an annualized rate of 2.75%.

 

*RegulatoryDevelopments in 2002.*

 

**Sarbanes-Oxley Act of 2002 and Implementing Regulations**

 

The Sarbanes-Oxley Act, which enacted sweeping measures that, amongother things, tighten the rules governing auditors, corporate officers andexecutives, and investment banking research analysts, was signed into law as ofJuly 30, 2002.  This act includedfar-reaching changes in federal securities regulation that could represent themost significant overhaul since the enactment of the Securities Exchange Act of1934.  Under this act, chief executive officersand chief financial officers of public companies are now required to personallycertify that the reports their companies file with the SEC are accurate andcomplete.  Those persons who areresponsible for accounting or reporting violations are subject to harsh civiland criminal penalties.  The actgenerally prohibits loans to directors and executive officers, but incorporateda provision similar to Regulation O which lets financial firms lend to theirexecutives and directors in the normal course of business under normal marketterms and rates.

 

**Final Regulations Adopted in 2002**

 

The FDIC, FRB, OCC, Treasury and the OTCadopted various final regulations in 2002. The list is numerous, with many being technical and corrective oradministrative in nature, and includes the following:

•                    Savings associations – transactions withaffiliates;

•                    Recordkeeping and confirmations requirementsfor securities transactions and fiduciary powers of savings associations;

•                    Alternative Mortgage Transaction Parity Act;

•                    Regulatory reporting standards;qualifications of independent public accountants performing audit services forvoluntary audit filers;

•                    Capital – qualifying mortgage loan, interestrate risk component;

•                    Risk-based capital guidelines; capitaladequacy guidelines; capital maintenance; capital treatment of recourse, directcredit substitutes and residential asset securitizations; and

•                    USA Patriot Act implementation – anti-moneylaundering; record keeping and reporting

 

**RegulationW**

 

Of these actions, the most noteworthy in thisdiscussion, although not currently applicable to the Company or the Bank, maybe that relating to a parent’s transactions with its affiliates.  Regulation W is comprehensive and coversvirtually all transactions between a bank and its affiliates.

 

30

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*Derivatives.* Regulation W incorporates the January 1, 2002, interim rule whichrequires banks to monitor and control credit exposures from derivativetransactions with affiliates and to ensure that transactions comply with the“arms length” requirements of section 23B. The rule also extends coverage to certain derivative transactions withnonaffiliates.

 

*BankSubsidiaries*.  The Gramm-Leach-Bliley Act (“GLB”)authorized banks to engage in certain new securities, insurance and otheractivities that are “financial in nature” or “incidental to a financialactivity” through affiliates of financial holding companies or throughfinancial subsidiaries of the bank.  GLBprovides that financial subsidiaries of national banks and state banks thatengage in these activities are “affiliates” for purposes of section 23A.  Prior to GLB, certain bank subsidiaries weregenerally excluded from the definition of “affiliate” for purposes of section23A.  Regulation W now applies section23A restrictions prospectively to those subsidiaries.  Operating subsidiaries (those subsidiaries that carry onactivities permissible for a national bank) are not considered affiliates underthe new rule.  And, there is a specialexemption for financial subsidiaries limited to insurance agency activities.

 

*Valuationof Investments in an Affiliate*.  For purposes of section 23A’squantitative limits, investments by a bank in securities issued by an affiliatewill be based on the greater of the purchase price or the carrying value of thesecurities.

 

*The“Section 250.250” Exemption*.  Regulation W provides asection 23A exemption for a bank’s purchase of loans from an affiliate if,before the loan is made by the affiliate, the bank makes an independentevaluation of the creditworthiness of the loan and commits to purchase of theloan.  The exemption would not apply ifthe bank’s loan purchases exceed 50 percent of the affiliate’s total loans.  The allowable percentage could be reduced ifan examiner determines it necessary for safety and soundness reasons.  A pending proposal could further limit loanpurchases to 100% of the purchasing bank’s capital and surplus.

 

*CorporateReorganization*.  Purchasing assets from an affiliate is exemptif: (a) the asset purchase is part of an internal corporate reorganization ofthe holding company; (b) involves the transfer of all, or substantially all, ofthe shares or assets of the affiliate; (c) the member bank provides priorwritten notice to its appropriate federal banking agency and the FRB; (d) theholding company commits to make the bank whole for two years for anytransferred assets that become low-quality assets; (e) the transaction isapproved by a majority of the bank’s board of directors; (f) the value of thecovered transaction is less than 10 percent of the bank’s capital stock andsurplus (or up to 25 percent of such amount if approved by the bank’sappropriate federal banking agency); and (g) the holding company and allsubsidiary banks are well-capitalized and well-managed before and after thetransaction.

 

31

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*Proposed FederalLegislation.*

 

**ProposedFederal Deposit Insurance Reform Act 2003**

The proposed legislationwould:

 

•                    Merge the Bank Insurance Fund (“BIF”) and theSavings Association Insurance fund (“SAIF”);

•                    Terminate the 23 basis point premium “ratecliff” that occurs when the reserve ratio of deposits insured to premiums heldfalls below 1.25% for more than one year;

•                    Create a reserve range within which thereserve ratio can float;

•                    Increase coverage limits for individualaccounts from $100,000 to $130,000 and index future coverage limits toinflation;

•                    Double coverage limits for certain types ofIndividual Retirement Accounts (“IRAs”) and 401(k)s;

•                    Increase coverage limits for municipaldeposits; and

•                    Provide a “lifeline” provision which seeksbasic banking services for the poor with a reduced cost for income-qualifiedcustomers.

 

**Federal and State Taxation**

 

*FederalTaxation*.  Priorto the enactment of recent legislation (discussed below), thrift associationssuch as the Bank that met certain definitional tests relating to thecomposition of assets and other conditions prescribed by the Internal RevenueCode of 1986, as amended (the “Code”), had been permitted to establish reservesfor bad debts and to make annual additions thereto which could, withinspecified formula limits, be taken as a deduction in computing taxable incomefor federal income tax purposes.  Theamount of the bad debt reserve deduction for “non-qualifying loans” wascomputed under the experience method. The amount of the bad debt reserve deduction for “qualifying realproperty loans” (generally loans secured by improved real estate) is computedunder the experience method.

 

In August 1996, legislation was enacted that repealsthe percentage of taxable income method of accounting used by many thrifts tocalculate their bad debt reserve for federal income tax purposes.  As a result, small thrifts were required torecapture that portion of the reserve that exceeds the amount that could havebeen taken under the experience method for post-1987 tax years.  The legislation also requires thrifts toaccount for bad debts for federal income tax purposes on the same basis ascommercial banks for tax years beginning after December 31, 1995.  The recapture was to occur over a six-yearperiod, the commencement of which was delayed until the first taxable yearbeginning after December 31, 1998, provided the institution meets certainresidential lending requirements.  Thelegislation did not have a material impact on the Bank.

 

In addition to regular income tax, corporations,including thrift institutions such as the Bank, generally are subject to aminimum tax.  An alternative minimum tax(“AMT”) is imposed at a minimum tax rate of 20% on alternative minimum taxableincome, which is the sum of a corporation’s regular taxable income (withcertain adjustments) and tax preference items, less any available exemption.  The AMT is imposed to the extent it exceedsthe corporation’s regular income tax and net operating losses can offset nomore than 90% of alternative minimum taxable income.  For taxable years beginning after 1986 and before 1996,corporations, including thrift associations such as the Bank, are also subjectto an environmental tax equal to 0.12% of the excess of AMT income for thetaxable year (determined without regard to net operating losses and thededuction for the environmental tax) over $2 million.

 

32

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To the extent earnings appropriated to a thriftinstitution’s bad debt reserves for “qualifying real property loans” anddeducted for federal income tax purposes exceed the allowable amount of suchreserves computed under the experience method and to the extent of the thrift’ssupplemental reserves for losses on loans (“Excess”), such Excess may not,without adverse tax consequences, be utilized for the payment of cash dividendsor other distributions to a stockholder (including distributions on redemption,dissolution or liquidation) or for any other purpose (except to absorb bad debtlosses).  As of December 31, 2002, theBank had no Excess.  Under present law,should the Bank cease to be a thrift institution, the Company would be requiredto recapture the Bank’s bad debt reserves in its Excess.

 

As of December 31, 2002, the Company had a netdeferred tax asset of $361,368 and a valuation allowance of $900,131 which wasprimarily related to New Mexico Net Operating Loss (“NOL”) carry forwards andAMT credit carry forwards.  As ofDecember 31, 2002, the total New Mexico NOL was $17,488,409, may not be carriedback and will expire in 2005.  The AMTcredit carry forward was approximately $157,000 and will carry forward indefinitely.  Based on the Company’s historical taxabletransactions, the timing of the reversal of existing temporary differences, andthe evaluation of tax planning strategies, management believes it is more likelythan not that the Company’s future taxable income will be sufficient to realizethe benefit of the remaining deferred tax assets at December 31, 2002.

 

Section 382 of the Internal Revenue Code provides thatthe aforementioned tax NOL carryforwards would be subjected to an annuallimitation should there be a change of over 50% in the stock ownership of theCompany during any three year testing period. Due to the fact that the Company has a tax NOL carryforward, it isrequired to report changes in ownership of 5% or greater of stockholders annuallyto the Internal Revenue Service (“IRS”). The statute and applicable Treasury regulations are extremelycomplex.  The Company believes that nochange of ownership as defined in applicable Section 382 regulations occurredthrough the three-year testing period ended December 31, 2002.  However, if such a change in ownershipoccurs, the annual use of the tax NOL carryforwards would be subject to anannual limitation.

 

The Company files consolidated federal income taxreturns with the Bank and its subsidiary on a fiscal year basis using theaccrual method of accounting.  TheBank’s federal income tax returns have not been examined by the InternalRevenue Service since 1990.  Withrespect to years examined by the IRS, either all deficiencies have been satisfiedor sufficient reserves have been established to satisfy asserteddeficiencies.  In the opinion ofmanagement, any examination of still open returns (including returns ofsubsidiaries and predecessors of, or entities merged into, the Bank) would notresult in a deficiency which could have a material adverse effect on thefinancial condition or results of operations of the Company and itsconsolidated subsidiary.

 

*StateTaxation*.  As aDelaware holding company, the Company is exempted from Delaware corporateincome tax but is required to file an annual report with and pay an annual feeto the State of Delaware.  The Bank isalso subject to an annual franchise tax imposed by the State of Delaware.

 

The State of New Mexico has a corporate tax whichsubjects the Bank’s New Mexico taxable income to tax rates ranging from 4.8% to7.65%.  New Mexico taxable income iscomputed by applying certain modifications to federal taxable income.  The principal difference between state andfederal taxable income is that interest earned on U.S. government obligationsis not taxable for state purposes.

 

The Bank’s income tax returns have not been audited bystate authorities during the past five years.

 

33

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**Competition**

 

The Bank’s primary service area, which presentlyrepresents the principal operating activities of the Company, includes the NewMexico counties of Bernalillo, Cibola, Curry, De Baca, Los Alamos, McKinley,Roosevelt, Sandoval, Santa Fe, Torrance, Valencia, Apache county in Arizona,and the Texas counties of Parmer and Bailey. The Bank attracts all of its deposits and loans through its branchoffices, primarily from the communities in which those branch offices arelocated; therefore, competition for those deposits is principally from otherthrift institutions and commercial banks located in the same communities aswell as brokerage firms and insurance companies.

 

**Employees**

 

As of December 31, 2002, the Company and the Bank had78 full-time and 10 peak-time employees. Such employees are not represented by any collective bargaininggroup.  Management considers itsemployee relations to be good.

 

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**Item 2****.****                                                           Description of Property**

 

The following table sets forth information relating toeach of the Company’s current offices. Net book value and total investment figures are for land, building,furniture and fixtures.

 
| **Location**                                    |   | **Date  acquired** |       | **Net book  value at  December 31, 2002(1)** |       | **Branch  deposits at  December 31, 2002** |       |
|-------------------------------------------------|--------|--------------------|------------|----------------------------------------------|------------|--------------------------------------------|------------|
|                                            |   |               |       |                                         |       |                                       |       |
| *Main office:*                                  |   |               |       |                                         |       |                                       |       |
| 801 Pile Street  Clovis, New Mexico             |   | 1966               |       | $                                            | 878,860    |                                       | $          | 63,363,910 |   |
|                                            |   |               | ** ** |                                         | ** ** |                                       | ** ** |
| *Branch offices:*                               |   |               | ** ** |                                         | ** ** |                                       | ** ** |
| Prince and Parkland Streets  Clovis, New Mexico |   | 1978               |       | 299,421                                      |       | 13,247,575                                 |       |
|                                            |   |               | ** ** |                                         | ** ** |                                       | ** ** |
| 400 West First Street  Portales, New Mexico     |   | 1982               |       | 529,609                                      |       | 25,386,743                                 |       |
|                                            |   |               | ** ** |                                         | ** ** |                                       | ** ** |
| 101 West Hill Street  Gallup, New Mexico        |   | 1999               |       | 495,071                                      |       | 17,531,227                                 |       |
|                                            |   |               | ** ** |                                         | ** ** |                                       | ** ** |
| 5210 Eubank N.E.  Albuquerque, New Mexico       |   | 2000               |       | 1,262,545                                    |       | 35,683,271                                 |       |
|                                            |   |               | ** ** |                                         | ** ** |                                       | ** ** |
| 3301 Coors Blvd NW  Albuquerque, New Mexico     |   | 2002               |       | 68,007                                       | (2)        | 3,107,023                                  |       |
|                                            |   |               |       |                                         |       |                                       |       |
| 7101 Jefferson  Albuquerque, New Mexico         |   | 2002               |       | 42,572                                       | (2)        | —                                     | (3)        |
|                                            |   |               | ** ** |                                         | ** ** |                                       | ** ** |
| 2280-B Wyoming NE  Albuquerque, New Mexico      |   | 2002               |       | 78,084                                       | (2)        | 877,409                                    |       |
|                                                 |        |                    |            |                                              |            |                                            |            |  |  |

 

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(1)                                  Thebook value of the Company’s investment in land, premises and equipment, lessaccumulated depreciation, totaled $3,654,169 at December 31, 2002.

 

(2)                                  Thesebranches of the Bank are under lease agreements.

 

(3)                                  TheJefferson branch of the Bank is a loan production office, which does not takedeposits.

 

**Item 3.****                                                           Legal Proceedings**

 

The Company and its subsidiary are from time to timeparties to various legal actions arising in the normal course of business.  Management believes that there is noproceeding threatened or pending against the Company or its subsidiary which,if determined adversely, would have a material adverse effect on theconsolidated financial position or results of operations of the Company.

 

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**Item 4.****                                                           Submission of Matters to a Vote ofSecurity Holders**

 

Not applicable

 

**PART I****I**

 

**Item 5.****                                                           Market for Registrant’s Common Equityand Related Stockholder Matters**

 

The Common Stock of the Bank was traded in theover-the-counter market on the NASDAQ Small Cap Market under the symbol “FSBC”prior to October 21, 1996, and the Common Stock of the Company has been tradedin the over-the-counter market on the NASDAQ Small Cap Market under the symbol“AABC” since October 21, 1996. ** **Asof February 26, 2003, the Company had 1,508,545 shares of common stockoutstanding and 342 holders of record.

 

The following table sets forth the high and low salesprices of the Common Stock of the Company as quoted on the NASDAQ Small CapMarket.

 
|           |   | **Price  range** |   |
|----------------|--------|------------------|--------|
|           |   | **High**         |   | **Low** |   | **Cash  Dividends  per share** |   |
|           |   |             |   |   |   |   |   |
| 2001           |   |             |   |   |   |   |   |
| First Quarter  |   | $                | 6.88   |   | $ | 6.00 |   | — |   |
| Second Quarter |   | $                | 7.30   |   | $ | 5.97 |   | — |   |
| Third Quarter  |   | $                | 9.40   |   | $ | 6.50 |   | — |   |
| Fourth Quarter |   | $                | 8.20   |   | $ | 7.00 |   | — |   |
|           |   |             |   |   |   |   |   |
| 2002           |   |             |   |   |   |   |   |
| First Quarter  |   | $                | 9.00   |   | $ | 7.60 |   | — |   |
| Second Quarter |   | $                | 9.96   |   | $ | 8.36 |   | — |   |
| Third Quarter  |   | $                | 9.34   |   | $ | 8.06 |   | — |   |
| Fourth Quarter |   | $                | 9.72   |   | $ | 8.01 |   | — |   |

 

For a foreseeable period of time, the principal sourceof cash revenues to the Company will be dividends paid by the Bank.  There are certain statutory and regulatorylimitations on the payment of such dividends (and other capital distributions)including OTS regulatory capital requirements. In some cases, the OTS mayprohibit a dividend payment that meets these requirements on the basis thatsuch a distribution would be an unsafe or unsound practice.  Furthermore, the Bank may not pay a dividendif it will cause the institution to become “undercapitalized.”

 

Under the Federal Deposit Insurance Act, an insuredbank is prohibited from paying dividends on its capital stock while in defaultin the payment of any assessment due to the FDIC except in those cases wherethe amount of the assessment is in dispute and the insured bank has depositedsatisfactory security.  The Bank is notin default in the payment of any such assessment.

 

The Bank paid dividends to the Company of $652,500 and$608,000 in the years ended December 31, 2002 and 2001, respectively.

 

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**Item 6.****                                                           Management’s Discussion and Analysis orPlan of Operation**

 

***SelectedConsolidated Financial Highlights***

 

The Company became the unitary thrift holding companyfor the Bank as a result of the consummation of an Agreement and Plan ofReorganization and related Plan of Merger on October 21, 1996 (the “Merger”).The Company did not have any material assets prior to the Merger.  Following the Merger, the Company’sconsolidated statement of financial condition and statement of operations arenot materially different from the Bank’s statement of financial condition andstatement of operations.  The Company isthe successor registrant to the Bank under the Securities Act of 1933 and theSecurities Exchange Act of 1934.  Thefollowing selected consolidated operating and financial condition data for theCompany as of and for each of the five fiscal years ended December 31, 2002 andhas been derived from and should be read in conjunction with the auditedconsolidated financial statements of the Company.  The following summary financial information is qualified in its entiretyby and should be read in conjunction with the detailed information andconsolidated financial statements of the Company, including the notes thereto,which information as of December 31, 2002 and 2001 and for each of the threeyears in the period ended December 31, 2002, is included in this Form 10-KSB.

 
|                                                  |   | **For the  years ended December 31**              |   |
|-------------------------------------------------------|--------|---------------------------------------------------|--------|
| **Selected consolidated operating data:**             |   | **2002**                                          |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                  |   | **(Dollars  In Thousands Except Per Share Data)** |   |
|                                                  |   |                                              |   |   |   |   |   |   |   |   |   |
| Statements of  operations data:                       |   |                                              |   |   |   |   |   |   |   |   |   |
| Interest income                                       |   | $                                                 | 11,909 |   | $ | 12,053 |   | $ | 10,701 |   | $ | 8,887 |   | $ | 8,010 |   |
| Interest expense                                      |   | 5,181                                             |   | 6,280 |   | 5,748 |   | 4,794 |   | 4,523 |   |
| Net interest  income before provision for loan losses |   | 6,728                                             |   | 5,773 |   | 4,953 |   | 4,093 |   | 3,487 |   |
| Provision for  loan losses                            |   | 786                                               |   | 449 |   | 199 |   | 324 |   | 238 |   |
| Net interest  income after provision for loan losses  |   | 5,942                                             |   | 5,324 |   | 4,754 |   | 3,769 |   | 3,249 |   |
| Net gain on  mortgage loans held-for-sale             |   | 787                                               |   | 417 |   | 251 |   | 297 |   | 223 |   |
| Net gain on sale  of securities                       |   | 58                                                |   | — |   | — |   | 739 |   | — |   |
| Real estate  operations, net                          |   | 22                                                |   | (6 | ) | (28 | ) | (35 | ) | 10 |   |
| Other income,  net                                    |   | 1,575                                             |   | 1,249 |   | 1,011 |   | 765 |   | 1,545 |   |
| Other expenses                                        |   | (6,745                                            | )      | (5,535 | ) | (5,367 | ) | (4,379 | ) | (3,921 | ) |
| Income before  income taxes                           |   | 1,639                                             |   | 1,449 |   | 621 |   | 1,156 |   | 1,106 |   |
| Income tax  expense (benefit)                         |   | 636                                               |   | 70 |   | 211 |   | (242 | ) | 346 |   |
|                                                  |   |                                              |   |   |   |   |   |   |   |   |   |
| Net income                                            |   | $                                                 | 1,003  |   | $ | 1,379 |   | $ | 410 |   | $ | 1,398 |   | $ | 760 |   |
|                                                  |   |                                              |   |   |   |   |   |   |   |   |   |
| Per share data:                                       |   |                                              |   |   |   |   |   |   |   |   |   |
| Earnings per  common share-basic                      |   | $                                                 | .77    |   | $ | 1.05 |   | $ | .33 |   | $ | 1.13 |   | $ | 0.62 |   |
| Earnings per  common share-assuming dilution          |   | $                                                 | .73    |   | $ | 1.02 |   | $ | .32 |   | $ | 1.10 |   | $ | 0.59 |   |

 

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|                                                                              |   | **December  31**            |    |
|-----------------------------------------------------------------------------------|--------|-----------------------------|---------|
| **Selected consolidated financial condition data:**                               |   | **2002**                    |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                                              |   | **(Dollars  In Thousands)** |    |
|                                                                              |   |                        |    |   |   |   |   |   |   |   |   |
| Loans  receivable, net                                                            |   | $                           | 149,856 |   | $ | 141,484 |   | $ | 119,479 |   | $ | 104,177 |   | $ | 88,809 |   |
| Loans  held-for-sale                                                              |   | 6,553                       |    | 1,035 |   | 821 |   | 184 |   | 855 |   |
| Securities  held-to-maturity                                                      |   | 1,862                       |    | 1,611 |   | 6,091 |   | 6,857 |   | 7,528 |   |
| Securities  available-for-sale                                                    |   | 6,665                       |    | 10,447 |   | 7,639 |   | 9,120 |   | 11,426 |   |
| Real estate  owned, net                                                           |   | 648                         |    | 606 |   | 154 |   | 188 |   | 166 |   |
| Total assets                                                                      |   | 192,100                     |    | 175,558 |   | 154,345 |   | 141,808 |   | 121,768 |   |
| Deposits                                                                          |   | 159,197                     |    | 146,920 |   | 137,276 |   | 122,480 |   | 105,045 |   |
| Federal Home  Loan Bank advances                                                  |   | 8,267                       |    | 8,750 |   | 2,750 |   | 7,250 |   | 5,750 |   |
| Net unrealized  appreciation (depreciation) on available-for-sale securities, net |   | 90                          |    | 72 |   | (45 | ) | (73 | ) | (41 | ) |
| Stockholders’  equity                                                        |   | 14,817                      |    | 13,502 |   | 11,736 |   | 11,313 |   | 9,925 |   |
|                                                                                   |        |                             |         |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| **Selected  financial ratios and other data:**                                    |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|-----------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|----------|--------|----------|--------|
|                                                                              |   |     |   |     |   |     |   |     |   |     |   |
| **Performance ratios**:                                                           |   |     |   |     |   |     |   |     |   |     |   |
| Return on assets  (ratio of net income to average total assets)                   |   | 0.55     | %      | 0.84     | %      | 0.28     | %      | 1.06     | %      | 0.66     | %      |
| Interest rate  spread information:                                                |   |     |   |     |   |     |   |     |   |     |   |
| Average during  period                                                            |   | 3.71     |   | 3.63     |   | 3.53     |   | 3.17     |   | 3.02     |   |
| End of period                                                                     |   | 3.70     |   | 4.05     |   | 3.46     |   | 3.55     |   | 3.04     |   |
| Net interest  margin(1)                                                           |   | 3.80     |   | 3.72     |   | 3.61     |   | 3.33     |   | 3.20     |   |
| Ratio of  operating expense to average total assets                               |   | 3.66     |   | 3.36     |   | 3.64     |   | 3.35     |   | 3.42     |   |
| Return on equity  (ratio of net income to average equity)                         |   | 7.08     |   | 10.93    |   | 3.56     |   | 13.17    |   | 7.97     |   |
|                                                                              |   |     |   |     |   |     |   |     |   |     |   |
| **Quality ratios:**                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Non-performing  assets to total assets at end of year                             |   | 1.18     | %      | 1.15     | %      | 0.28     | %      | 0.22     | %      | 0.42     | %      |
| Allowance for  loan losses to non-performing assets                               |   | 36.33    |   | 37.02    |   | 157.03   |   | 276.84   |   | 116.62   |   |
| Allowance for  loan losses to total loans                                         |   | 0.54     |   | 0.53     |   | 0.57     |   | 0.83     |   | 0.68     |   |
|                                                                              |   |     |   |     |   |     |   |     |   |     |   |
| **Capital ratios:**                                                               |   |     |   |     |   |     |   |     |   |     |   |
| Equity to total  assets at the end of year                                        |   | 7.71     | %      | 7.69     | %      | 7.60     | %      | 7.98     | %      | 8.15     | %      |
| Average equity  to average assets                                                 |   | 7.70     |   | 7.65     |   | 7.78     |   | 8.06     |   | 8.33     |   |
| Ratio of average  interest-earning assets to average interest-bearing liabilities |   | 102.82   |   | 102.31   |   | 101.84   |   | 104.25   |   | 112.47   |   |
|                                                                              |   |     |   |     |   |     |   |     |   |     |   |
| Number of full  service facilities                                                |   | 7        |   | 5        |   | 5        |   | 4        |   | 3        |   |

 

----

(1)                                  Netinterest income divided by average interest earning assets

 

38

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***General***

 

The Company is a Delaware corporation which wasorganized in 1996 for the purpose of becoming the thrift holding company of theBank.  The Bank is a federally charteredstock savings bank conducting business from seven banking locations in Clovis,Albuquerque, Gallup, and Portales, New Mexico. The Bank has a wholly-owned subsidiary, FEDCO, which is currentlyinactive.

 

The Bank is principally engaged in the business ofattracting retail deposits from the general public and investing those funds infirst mortgage loans in owner occupied, single-family residential loans andmortgage-backed securities.  To a lesserextent, the Bank originates residential construction loans and commercial realestate loans. The Bank also originates consumer loans, including loans for thepurchase of automobiles and home improvement loans, and commercial loansincluding SBA loans.

 

The most significant outside factors influencing theoperations of the Bank and other financial institutions include generaleconomic conditions, competition in the local market place and the relatedmonetary and fiscal policies of agencies that regulate financialinstitutions.  More specifically, thecost of funds, primarily consisting of deposits, is influenced by interestrates on competing investments and general market rates of interest.  Lending activities are influenced by thedemand for real estate financing and other types of loans, which in turn isaffected by the interest rates at which such loans may be offered and otherfactors affecting loan demand and funds availability.

 

Liquidity enables the Bankto meet withdrawals of its deposits and the needs of its loan customers.  The Bank maintains its liquidity positionthrough maintenance of cash resources and a core deposit base.  A further source is the Bank’s ability toborrow funds.  The Bank is a member ofthe Federal Home Loan Bank (“FHLB”) which provides a source of borrowings tothe Bank for asset and asset/liability matching.  FHLB borrowings were $8.27 and $8.75 million at December 31, 2002and 2001, respectively.

 

Liquidity risk results fromthe mismatching of assets and liability cash flows.  Management chooses asset/liability strategies that promote stableearnings and reliable funding.  Interestrate risk and funding positions are kept within limits established by the Boardof Directors of the Bank to ensure that risk taking is not excessive and thatliquidity is properly managed.  The Bankkeeps a portion of its interest-bearing assets in adjustable-rate products toreduce interest rate sensitivity. Therefore, if rates increase the Bank can retain its deposits byincreasing rates paid on deposits, while limiting the impact on the Bank’s netinterest margin.  A concentrated effortis made to retain deposits associated with unidentifiable intangible asset.  The primary additional source of funding isprovided by FHLB borrowings available to the Bank, of $59.8 and $54.0 millionat December 31, 2002 and 2001, respectively.

 

In order to continue to meet the financial servicesneeds of the communities it serves, the Bank intends to continue to grow in areasonable, prudent manner which may include expansion of the existing branchnetwork.  As a part of this intendedgrowth, the Bank has increased the portfolio allocation of single-familylending, consumer lending and commercial lending.  Leased in-store branches have been added and should assist in theexpansion of the Bank’s core deposit base.

 

Growth of the Bank may be financed by eitherincreasing the deposit portfolio or from borrowed funds.  The use of borrowed funds to purchase shortduration, mortgage-backed securities or single family mortgage loans may beconsidered to add to the Bank’s portfolio.

 

The Company’s strategic plan will continue to bereviewed quarterly for progress by the Board of Directors.  The Board will modify the plan as deemedappropriate to reflect the operational environment of the Bank.

 

39

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The Bank originated a high volume of single-familymortgage loans during 2002 and 2001, because of the historically low interestrates on mortgage loans.  The Bank wasable to increase its loans sold while increasing the loans receivable during2001 and increased those levels in 2002. In 2002 and 2001 the Bank sold the lower rate mortgage loans and put thehigher rate mortgage loans into loans held-to-maturity.

 

Prepayment tendencies on loans and mortgage-backedsecurities may vary from historical experience and depositors’ preference forvarious deposit products and maturities may also vary.  The Bank’s favorable liquidity positionallows some flexibility in adjusting to cash flow requirements brought on byinterest rate changes.  The Bank’sone-year interest-rate sensitivity gap was a negative 12.08% of total assets atDecember 31, 2002.  A negative gapindicates there are more interest-bearing liabilities repricing during a statedperiod than interest-earnings assets.

 

At December 31, 2002, the Bank had unrealized gains inits mortgage-backed securities portfolio which are being held-to-maturity.  The Bank has both the intent and ability tohold these securities until maturity. In addition, management believes the Bank will be able to collect allamounts due according to the contractual terms of the debt securities and isnot aware of any information that would indicate the inability of any issuer ofsuch securities to make contractual payments in a timely manner.  As such the Bank believes that theseunrealized gains will not ultimately be realized.

 

All of the Bank’s mortgage-backed securities areagency securities and are either guaranteed by the full faith and credit of theUnited States Government (GNMA) or are insured by a government sponsoredenterprise (FNMA and FHLMC).  None ofthese securities are considered “high risk” as defined by the OTS and none havefailed to pass the FFIEC mandatory test for “high risk” securities.  The Bank does not invest in such “high risk”securities.

 

Management of the investment portfolio is not designedto be the primary source of funds for the Company’s operations.  Rather, it is viewed as a use of fundsgenerated by the Company to be invested in interest-earning assets to beheld-to-maturity or available-for-sale. Cash flow mismatches between sources and uses of funds should notrequire any of the securities to be liquidated.  While cash flows from the securities vary depending on theprepayment speeds associated with each particular security, the variance in theprepayment speeds does not impact the over-all cash flow needs of the Banksince the Bank has the ability to borrow funds from the FHLB of Dallas.  See ***Liquidity and Capital Resources*** in this Form 10-KSB.

 

***Regulatory Matters***

 

Under the CRA, every FDIC insured institution has acontinuing and affirmative obligation consistent with safe and sound bankingpractices to help meet the credit needs of its entire community, including lowand moderate-income neighborhoods.  Themost recent CRA examination as of June 28, 1999 classified the Bank assatisfactory.

 

40

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***Results of Operations***

 

The Company’s operating results are impacted by manyfactors, the most important factor being the interest spread between the yieldon loans and investments and the cost of funds.  The following table presents operating results for theCompany.  The table presents for theperiods indicated the total dollar amount of interest income from averageinterest-earning assets and the resultant yields, as well as the interestexpense on average interest-bearing liabilities, expressed both in dollars andrates.  No tax equivalent adjustmentswere made and all average balances are monthly average balances.  Non-accruing loans have been included in thetable as loans carrying a zero yield.

 
|                                                                     |   | **Years  ended December 31,**     |    |
|--------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                     |   | **2002**                          |    | **2001** |   | **2000** |   |
|                                                                     |   | **Average  outstanding  balance** |    | **Interest  earned/  paid** |   | **Yield/  rate** |   | **Average  outstanding  balance** |   | **Interest  earned/  paid** |   | **Yield/  rate** |   | **Average  outstanding  balance** |   | **Interest  earned/  paid** |   | **Yield/  rate** |   |
|                                                                     |   | **(Dollars  In Thousands)**       |    |
| Interest-earning assets:                                                 |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans receivable(1)                                                      |   | $                                 | 152,614 |   | $ | 10,985 |   | 7.20 | % | $ | 133,541 |   | $ | 10,775 |   | 8.07 | % | $ | 113,463 |   | $ | 9,193 |   | 8.10 | % |
| Mortgage-backed securities                                               |   | 8,444                             |    | 485 |   | 5.73 |   | 10,783 |   | 681 |   | 6.31 |   | 13,674 |   | 849 |   | 6.21 |   |
| Investment securities                                                    |   | 3,042                             |    | 179 |   | 5.88 |   | 3,293 |   | 208 |   | 6.32 |   | 3,394 |   | 243 |   | 7.15 |   |
| Other interest-earning assets                                            |   | 13,107                            |    | 260 |   | 1.97 |   | 7,593 |   | 389 |   | 5.11 |   | 6,772 |   | 416 |   | 6.14 |   |
|                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-earning assets(1)                                         |   | $                                 | 177,207 |   | $ | 11,909 |   | 6.72 | % | $ | 155,210 |   | $ | 12,053 |   | 7.77 | % | $ | 137,303 |   | $ | 10,701 |   | 7.79 | % |
|                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                                            |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                                                                 |   | $                                 | 155,803 |   | $ | 4,239 |   | 2.72 | % | $ | 142,732 |   | $ | 5,734 |   | 4.02 | % | $ | 125,636 |   | $ | 5,155 |   | 4.10 | % |
| Federal Home Loan Bank advances                                          |   | 9,455                             |    | 329 |   | 3.48 |   | 5,840 |   | 265 |   | 4.54 |   | 8,294 |   | 508 |   | 6.12 |   |
| Other borrowings                                                         |   | 7,083                             |    | 613 |   | 8.66 |   | 3,128 |   | 281 |   | 8.99 |   | 895 |   | 85 |   | 9.61 |   |
|                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                                       |   | $                                 | 172,341 |   | $ | 5,181 |   | 3.01 | % | $ | 151,700 |   | $ | 6,280 |   | 4.14 | % | $ | 134,825 |   | $ | 5,748 |   | 4.26 | % |
|                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest income                                                      |   |                              |    | $ | 6,728 |   |   |   |   |   | $ | 5,773 |   |   |   |   |   | $ | 4,953 |   |   |   |
| Net interest rate spread                                                 |   |                              |    |   |   | 3.71 | % |   |   |   |   | 3.63 | % |   |   |   |   | 3.53 | % |
|                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net interest-earning assets                                              |   | $                                 | 4,866   |   |   |   |   |   | $ | 3,510 |   |   |   |   |   | $ | 2,478 |   |   |   |   |   |
| Net yield on average interest-earning assets                             |   |                              |    |   |   | 3.80 | % |   |   |   |   | 3.72 | % |   |   |   |   | 3.61 | % |
|                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average interest-earning assets to average interest-bearing  liabilities |   |                              |    | 102.82 | % |   |   |   |   | 102.31 | % |   |   |   |   | 101.84 | % |   |   |

 

----

(1)                                  Calculatednet of loans in process

 

41

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The following table presents the dollar amount ofchanges in interest income and interest expense for major components ofinterest-earning assets and interest-bearing liabilities and distinguishesbetween the increase related to higher or lower outstanding balances and thevolatility of interest rates.  For eachcategory of interest-earning assets and interest-bearing liabilities,information is provided on changes attributable to (i) changes in volume (i.e.,changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,changes in rate multiplied by old volume). For purposes of this table, changes attributable to both rate andvolume, which cannot be segregated, have been presented separately.

 
|                                |   | **Years  ended December 31**    |   |
|-------------------------------------|--------|---------------------------------|--------|
|                                |   | **2002 vs  2001**               |   | **2001 vs  2000** |   |
|                                |   | **Increase  (decrease) due to** |   | **Increase  (decrease) due to** |   |
|                                |   | **Volume**                      |   | **Rate** |   | **Rate/  volume** |   | **Total** |   | **Volume** |   | **Rate** |   | **Rate/  volume** |   | **Total** |   |
|                                |   | **(Dollars  In Thousands)**     |   |
| Interest-earning  assets:           |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loan portfolio                      |   | $                               | 1,539  |   | $ | (1,162 | ) | $ | (167 | ) | $ | 210 |   | $ | 1,626 |   | $ | (34 | ) | $ | (10 | ) | $ | 1,582 |   |
| Mortgage-backed  securities         |   | (148                            | )      | (63 | ) | 15 |   | (196 | ) | (180 | ) | 14 |   | (2 | ) | (168 | ) |
| Investments                         |   | (16                             | )      | (14 | ) | 1 |   | (29 | ) | (7 | ) | (28 | ) | 0 |   | (35 | ) |
| Other interest  earning assets      |   | 282                             |   | (238 | ) | (173 | ) | (129 | ) | 50 |   | (70 | ) | (7 | ) | (27 | ) |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-earning assets      |   | $                               | 1,657  |   | $ | (1,477 | ) | $ | (324 | ) | $ | (144 | ) | $ | 1,489 |   | $ | (118 | ) | $ | (19 | ) | $ | 1,352 |   |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:      |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits                            |   | $                               | 525    |   | $ | (1,856 | ) | $ | (164 | ) | $ | (1,495 | ) | $ | 701 |   | $ | (101 | ) | $ | (21 | ) | $ | 579 |   |
| Federal Home  Loan Bank advances    |   | 164                             |   | (62 | ) | (38 | ) | 64 |   | (150 | ) | (131 | ) | 38 |   | (243 | ) |
| Other borrowings                    |   | 356                             |   | (10 | ) | (14 | ) | 332 |   | 215 |   | (6 | ) | (13 | ) | 196 |   |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total  interest-bearing liabilities |   | $                               | 1,045  |   | $ | (1,928 | ) | $ | (216 | ) | $ | (1,099 | ) | $ | 766 |   | $ | (238 | ) | $ | 4 |   | $ | 532 |   |
|                                |   |                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change in net  interest income      |   | $                               | 612    |   | $ | 451 |   | $ | (108 | ) | $ | 955 |   | $ | 723 |   | $ | 120 |   | $ | (23 | ) | $ | 820 |   |

 

42

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*Comparison of Years Ended**December31, 2002 and 2001*

 

Net income for the year ended December 31, 2002 was$1,003,000, or $0.77 per basic share compared to $1,379,000, or $1.05 for theyear ended December 31, 2001.  Thedecrease was $376,000, or 27.27% for the year.

 

*NetInterest Income*.  Netinterest income before provision for loan losses increased by 16.55% or$6,728,000 in 2002, compared to $5,773,000 in 2001.  The increase in 2002 was primarily due to a decrease in totalinterest expense of $1,099,000, which was due to a $1,494,000 decrease ininterest expense on deposits.  Thedecrease in interest expense on deposits in 2002 occurred while depositsincreased by $12.3 million, and was primarily due to lower rates paid ondeposits.

 

*Provisionfor Loan Losses*.  Thelevel of the allowance for loan losses is based on such factors as the amountof non-performing assets, historical loss experience, regulatory policies,general economic conditions, the estimated fair value of the underlyingcollateral and other factors which may affect the collectibility of theloans.  During 2002, the provision forloan losses increased to $786,000 from $449,000 in 2001, primarily due to theincrease in loans receivable and an increase in loss experience in dealerautomobile and commercial loans during 2002.

 

*NoninterestIncome*.  Noninterestincome was $2,420,000 in 2002 compared to $1,666,000 in 2001.  During 2002, gains on sales of loansincreased $370,000, loans servicing and other fees increased $224,000reflecting the increase in loans originated in 2002, and other income increasedby $101,000 due to an increase in fees on deposit accounts.

 

*NoninterestExpense*.  Noninterestexpense was $6,723,000 in 2002 compared to $5,541,000 in 2001.  The increase was primarily due to a $716,000increase in salaries and employee benefits and $337,000 increase in otherexpense.

 

*Provisionfor Income Taxes*. During 2001, the Company reversed certain deferred tax allowancespreviously recorded in accordance with SFAS 109.  These allowances related to state income tax net operating losscarryforwards and alternative minimum tax (AMT) credit carryforwards.  The effect of this change in estimates wasan increase in net income of approximately $420,000 (tax benefit).  Therefore, the net income tax expense of$636,000 in 2002 was an increase of $566,000 from the $69,000 expense in 2001.

 

*Comparison of**Years EndedDecember 31, 2001 and 2000*

 

Net income for the year ended December 31, 2001 was$1,379,000 or $1.05 per basic share compared to $410,000, or $.33 per basicshare for the year ended December 31, 2000. The increase was $969,000, or 236.34% for the year.

 

*NetInterest Income*.  Netinterest income before provision for loan losses increased by 16.56% to$5,773,000 in 2001, compared to $4,953,000 in 2000.  The increase in 2001 was due to an increase in loans receivable,which increased interest income on loans receivable by $1,582,000 or 17.20%.

 

*Provisionfor Loan Losses*.  Thelevel of the allowance for loan losses is based on such factors as the amountof non-performing assets, historical loss experience, regulatory policies,general economic conditions, the estimated fair value of the underlyingcollateral and other factors which may affect the collectibility of theloans.  During 2001, the provision forloan losses increased to $449,000 from $199,000 in 2000, primarily due to theincrease in loans receivable and non-performing assets during 2001.

 

*NoninterestIncome*.  Noninterestincome was $1,666,000 in 2001 compared to $1,262,000 in 2000.  During 2001, gains on sales of loansincreased $166,000 and loans servicing and other fees increased $98,000reflecting the increase in loans originated in 2001.

 

43

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*NoninterestExpense*.  Noninterestexpense was $5,541,000 in 2001 compared to $5,393,000 in 2000.  The increase was primarily due to an$137,000 increase in salaries and employee benefits.

 

*Provisionfor Income Taxes*.  Inaddition to the improvements in the net interest income, noninterest income andexpense controls and after performing a detailed analysis of the Company’scurrent income tax position, and strong fourth quarter results, the Companyreversed certain deferred tax allowances previously recorded in accordance withSFAS 109.  These allowances related tostate income tax net operating loss carryforwards and AMT credit carryforwards.  The effect of this change in estimates wasan increase in net income of approximately $420,000 (tax benefit).  The net income tax expense of $69,000 in2001 was a decrease of $142,000 from the $211,000 expense in 2000.

 

**Asset/Liability Management andInterest Rate Sensitivity**

 

The Bank attempts to maximize net interest income byachieving a positive interest rate spread that can be sustained duringfluctuations in prevailing interest rates. Management monitors the mix of earning assets on a continuous basis inorder to react to fluctuating interest rate environments.

 

Risk-based capital guidelines and the correspondingasset risk weighting have resulted in an incentive to invest in mortgage-backedand U.S. agency securities, particularly those issued by government sponsoredentities such as FNMA, GNMA, and FHLMC. In addition, the favorable risk weighting assigned to residential loansprovided the incentive to invest in these assets.  This asset mix has always been the basis on which the Bank hasfocused.

 

The Bank assumes a high level of interest rate risk asa result of its policy to originate fixed-rate single family home loans.  These loans generally have longer terms thanthe short term characteristics and liabilities of customer accounts andborrowed money.  Rates increased in 1999and 2000, but rates decreased in 2001 and continued to decrease during2002.  As the increase in prepayment andloan refinancing of mortgage loans and mortgage-backed securities has occurred,the proceeds have been channeled to new single family home loans, consumerloans, and commercial loans with a resulting increase in interest income andgains on sales of loans.

 

Interest rate sensitivity is the rate at which theBank’s assets and liabilities are subject to repricing at future timeperiods.  Management seeks to effectivelymanage interest rate sensitivity to insure that net interest income ismaximized while the impact of change on market interest rates isminimized.  It is the objective of theBank to reduce the sensitivity of its earnings to fluctuating interest rates bydiversifying the sources of funds, improving its interest rate spread, andimproving the ratio of earning assets to interest bearing liabilities.  Also, the Bank needs to maintain a match ofmaturities and interest rate sensitivity of its assets and liabilities.

 

The differences between the volume of assets andliabilities in the Bank’s current portfolio, which are subject to repricing infuture time periods, are known as interest rate sensitivity gaps.  Certain estimates and assumptions areincluded in the data in the table below which sets forth the interest ratesensitivity analysis at December 31, 2002.

 

The following table sets forth the assumed repricingand maturity periods of the Bank’s interest-earning assets and interest-bearingliabilities at December 31, 2002 and the interest rate sensitivity gappercentages at the dates indicated.  Theinterest rate sensitivity gap is defined as the amount by which assetsrepricing within the respective periods exceed liabilities repricing withinsuch periods.  The effect of theseassumptions is to quantify the dollar amount of items that are interest-ratesensitive and can be repriced within each of the periods specified. Suchrepricing can occur in one of three ways: (1) the rate of interest to be paid on an asset or liability may

 

44

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adjust periodically on the basis of an index; (2) an asset or liabilitysuch as a mortgage loan may amortize, permitting reinvestment of cash flows atthe then-prevailing interest rates; or (3) an asset or liability may mature, atwhich time the proceeds can be reinvested at current market rates.

 
|                                                                             |   | **Maturing  or Repricing Amount** |    |
|----------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                             |   | **Within one  year**              |    | **Over 1 to  3  years** |   | **Over 3 to  5  years** |   | **Over 5 to  10  years** |   | **Over 10 to  20 years** |   | **Over 20  years** |   | **Total** |   |
|                                                                             |   | **(Dollars  In Thousands)**       |    |
|                                                                             |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Rate  Sensitive Assets:                                                    |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgages:                                                                       |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Adjustable-rate  (1)                                                             |   | $                                 | 7,984   |   | $ | 2,701 |   | $ | 316 |   | $ | 26 |   | $ | — |   | $ | — |   | $ | 11,027 |   |
| Fixed-rate (2)                                                                   |   | 28,060                            |    | 36,585 |   | 11,331 |   | 4,452 |   | 175 |   | 1 |   | 80,604 |   |
| Construction (6)                                                                 |   | 1,591                             |    | — |   | — |   | — |   | — |   | — |   | 1,591 |   |
| Non-residential  adjustable (2)                                                  |   | 7,939                             |    | 10,385 |   | 1,296 |   | — |   | — |   | — |   | 19,620 |   |
| Non-residential  fixed                                                           |   | 1,032                             |    | 5,006 |   | 2,299 |   | 452 |   | 117 |   | 10 |   | 8,916 |   |
| Non-Mortgages:                                                                   |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Consumer and  Commercial adjustable                                              |   | 6,278                             |    | 1,461 |   | — |   | — |   | — |   | — |   | 7,739 |   |
| Consumer and  Commercial fixed (2)(6)                                            |   | 4,319                             |    | 13,197 |   | 5,848 |   | 2,411 |   | 1,431 |   | — |   | 27,206 |   |
| Investments:                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Investment securities  (3)                                                       |   | 1,939                             |    | 744 |   | — |   | — |   | — |   | 200 |   | 2,883 |   |
| Mortgage-backed  (1) (2)                                                         |   | 5,331                             |    | 744 |   | 119 |   | 22 |   | — |   | — |   | 6,216 |   |
| Funds sold (3)                                                                   |   | 10,228                            |    | 1,500 |   | — |   | — |   | — |   | — |   | 11,728 |   |
|                                                                             |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                                                            |   | $                                 | 74,701  |   | $ | 72,323 |   | $ | 21,209 |   | $ | 7,363 |   | $ | 1,723 |   | $ | 211 |   | $ | 177,530 |   |
|                                                                             |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Total Rate  Sensitive Liabilities:                                               |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Deposits:                                                                        |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Certificates of  deposit (3)                                                     |   | $                                 | 53,513  |   | $ | 27,306 |   | $ | 6,523 |   | $ | — |   | $ | — |   | $ | — |   | $ | 87,342 |   |
| IRAs                                                                             |   | 7,120                             |    | 2,284 |   | 2,347 |   | — |   | — |   | — |   | 11,751 |   |
| Money market (4)                                                                 |   | 22,185                            |    | 1,062 |   | 398 |   | 3,784 |   | — |   | — |   | 27,429 |   |
| NOW accounts (4)                                                                 |   | 8,007                             |    | 661 |   | 541 |   | 1,625 |   | — |   | — |   | 10,834 |   |
| Savings accounts  (4)                                                            |   | 4,319                             |    | 642 |   | 304 |   | 1,337 |   | — |   | — |   | 6,602 |   |
| Advances                                                                         |   | 2,500                             |    | 1,000 |   | 4,767 |   | — |   | — |   | — |   | 8,267 |   |
|                                                                             |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| TOTAL                                                                            |   | $                                 | 97,644  |   | $ | 32,955 |   | $ | 14,880 |   | $ | 6,746 |   | $ | — |   | $ | — |   | $ | 152,225 |   |
|                                                                             |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| December 31,  2002                                                               |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative  interest rate sensitivity gap (5)                                    |   | $                                 | (22,943 | ) | $ | 16,425 |   | $ | 22,754 |   | $ | 23,371 |   | $ | 25,094 |   | $ | 25,305 |   |   |   |
| Cumulative  interest rate sensitivity gap (5) as a percent of total assets       |   | (12.08                            | )%      | 8.65 | % | 11.98 | % | 12.31 | % | 13.21 | % | 13.33 | % |   |   |
| December 31,  2001                                                               |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative  interest rate sensitivity gap (5) as a percent of  total assets |   | (7.02                             | )%      | (2.72 | )% | 4.58 | % | 4.43 | % | 8.67 | % | 9.38 | % |   |   |
| December 31,  2000                                                               |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
| Cumulative  interest rate sensitivity gap (5) as a percent of total assets       |   | (9.62                             | )%      | (1.76 | )% | 4.57 | % | 4.56 | % | 8.32 | % | 8.76 | % |   |   |
|                                                                                  |        |                                   |         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

*(1)**                   Mostadjustable rate assets are included in the “under 1 year” category, as they aresubject to an interest rate adjustment every six or twelve months, dependingupon loan plan.*

*(2)**                   Maturity/ratesensitivity is based upon contractual maturity with projected repayment ofprincipal.*

*(3)**                   Basedon contractual maturity of the investments.*

*(4)**                   Savingsaccount decay rates used assume that the accounts have a market valuesensitivity approximating that of a 2 1⁄2 year treasury bond.*

*(5)**                   Thedifference between rate sensitive assets and rate sensitive liabilities.*

*(6)**                   Generallyfixed rate.*

 

45

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As prepayment activity changes, however, the resultinggap is expected to be affected.  Anincrease in prepayment speeds would be expected to move the gap toward amatched or positive position.  Theopposite would be expected to occur if prepayment speeds decrease.  Prepayment speeds are influenced by fluctuationin interest rates and may not produce the same results as reflected in the previoustable.  Also, certain assets andliabilities may have similar maturities or repricing periods but could reactdifferently to changes in interest rates. Assets which have adjustable-rate features may have a limitation on theperiodic interest rate adjustments and could result in a rate that is stillbelow existing market rates.  This samefeature may also limit the downward adjustment in a declining rate environment.

 

As interest rates declined and loans receivableincreased during 2002 and 2001, management of the Bank lengthened the durationof its interest bearing liabilities, to match the duration of its interestearning assets.

 

The Asset and Liability Committee (“ALCO”) of the Bankis made of management of the Bank and outside directors of the Bank which meetsweekly.  ALCO’s principal goal is toestablish internal bank asset/liability management communications and controlprocedures.  ALCO reviews interest raterisk measurements according to guidelines established by the OTS in ThriftBulletin 13A “Management of Interest Rate Risk, Investment Securities andDerivative Activities,” and the Board of Director’s approved limits. Inaddition, the Bank runs its own interest rate risk management model, RiskAnalytics, which management compares to the information provided by the OTSmodel.  ALCO makes decisions aboutretaining deposits, market interest rates, the impact on net interest margins,alternative sources of funding, interest rate sensitivity, and gap imbalancesbased on these guidelines and measurements.

 

Presented below, as of December 31, 2002, is ananalysis of the Bank’s interest rate risk as measured by changes in net presentvalue for instantaneous and sustained parallel shifts in the yield curve, in 50or 100 basis point increments, up and down 300 basis points.  As illustrated in the table, the Bank’s NPVis sensitive to both rising rates and declining rates.  This occurs principally because, as ratesrise, the market value of fixed-rate loans declines due to both the rateincrease and slowing prepayments (and the NPV focuses on the Bank’s entireportfolio, not just assets that are subject to adjustment or maturity withinone year).  When rates decline, the Bankdoes not experience a significant rise in market value for these loans becauseborrowers repay at relatively high rates.

 
| **Change in  interest rate  (basis points)** |         | **Net  Present Value  At December 31, 2002** |         |
|----------------------------------------------|--------------|----------------------------------------------|--------------|
|                                         | **$ Change** |                                         | **% Change** |   |
|                                         |         | **(000’s)**                             |         |   |   |   |
| **(Dollars  in Thousands)**                  |         |                                         |
|                                         |         |                                         |         |   |   |   |
| +300                                         |         | $                                            | (4,365       | ) | (14 | )% |   |
| +200                                         |         | (1,737                                       | )            | (6 | ) |   |
| +100                                         |         | 312                                          |         | 1 |   |   |
| +50                                          |         | 519                                          |         | 2 |   |   |
| 0                                            |         | —                                       |         | — |   |   |
| -50                                          |         | (566                                         | )            | (2 | ) |   |
| -100                                         |         | (1,323                                       | )            | (4 | ) |   |
| -200                                         |         | (2,784                                       | )            | (9 | ) |   |
| -300                                         |         | (3,851                                       | )            | (13 | ) |   |
|                                              |              |                                              |              |  |  |  |  |

 

46

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Management, ALCO, and the board of directors of theBank review these measurements periodically. In addition to monitoring selected measures on NPV, management alsomonitors effects on net interest income resulting from increases or decreasesin rates. This measure is used in conjunction with NPV measures to identifyexcessive interest rate risk.

 

Certain shortcomings are inherent in the method ofanalysis presented in the foregoing table. For example, although certain assets and liabilities may have similarmaturities or periods to repricing, they may react in different degrees tochanges in market interest rates.  Also,the interest rates on certain types of assets and liabilities may fluctuate inadvance of changes in market rates. Additionally, certain assets, such as adjustable rate mortgage loans,have features which restrict changes in interest rates on a short-term basisand over the life of the asset. Further, in the event of a change in interest rates, prepayment andearly withdrawal levels would likely deviate significantly from those assumedin calculating the table.  Finally, theability of many borrowers to service their debt may decrease in the event of aninterest rate increase.

 

In addition, the previous table does not necessarilyindicate the impact of general interest rate movements on the Bank’s netinterest income because the repricing of certain categories of assets andliabilities is subject to competitive and other pressures beyond the Bank’scontrol.  As a result, certain assetsand liabilities indicated as maturing or otherwise repricing within a statedperiod may in fact mature or reprice at different times and at differentvolumes.

 

**Liquidityand Capital Resources**

 

The Company’s current liquidity and capital resourcesare dependent on its ability to borrow funds from the Bank and other sources aswell as receive dividends from the Bank. The Bank’s primary sources of funds are deposits, sales of mortgageloans, principal and interest payments on loans and mortgage-backed securities,borrowings, and funds provided by operations. While scheduled loan and mortgage-backed securities principal repaymentsare a relatively predictable source of funds, deposits flows, prepayments ofprincipal on loans and mortgage-backed securities, and sales of mortgage loansare greatly influenced by general interest rates, economic conditions, andcompetition.

 

During the year ended December 31, 2002, totaldeposits increased approximately $12.3 million or 8.36%, trust preferredsecurities notes payable increased by $4 million, and securitiesavailable-for-sale decreased by $3.8 million. The primaryadditional source of funding is provided by FHLB borrowings available to theBank, of $59.8 and $54.0 million at December 31, 2002 and 2001,respectively.  Stock options wereexercised with proceeds to the Company of $80,852 during 2002.  The increase in funds during 2002 was usedto increase loans receivable by $8.3 million and loans held-for-sale by $5.5million, increase certificates of deposit purchased by $5.2 million, and to payoff a note payable on the Employee Stock Option Plan of $1.1 million.

 

The Bank’s capital for regulatory purposes at December31, 2002 was $17,807,985 or 9.48% of total regulatory assets.  Regulations require savings institutions tohave a minimum regulatory tangible capital ratio equal to 1.5% of adjustabletangible assets, a minimum 3% core capital ratio, and a minimum 8% risk-basedcapital ratio.  At December 31, 2002 and2001, the Bank was in compliance with all applicable capital standards.

 

The OTS has adopted a rule that requires every thriftassociation with more than normal interest rate risk to deduct from its totalcapital, for purposes of determining compliance with such requirement, anamount equal to 50% of its interest rate risk exposure multiplied by thepresent value of its assets.  Thisexposure is a measure of the potential decline in the net portfolio value of athrift association, greater than 2% of the present value of its assets, basedupon a hypothetical 200 basis point increase or decrease in interest rates(whichever results in a greater decline). Net portfolio value is the present value of expected cash flows fromassets, liabilities and off-balance sheet contracts.  The rule provides for a two quarter lag between calculatinginterest rate risk and recognizing any deduction from capital.  Any thrift association with less than $300million in assets and a total capital ratio in excess of 12% is exempt fromthis requirement unless the OTS determines otherwise.

 

47

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The table below presents the Bank’s capital positionat December 31, 2002 relative to the existing regulatory requirements:

 
|                                                 |   | **Amount**                  |   | **Percent of  assets(1)** |   |
|------------------------------------------------------|--------|-----------------------------|--------|---------------------------|--------|
|                                                 |   | **(Dollars  In Thousands)** |   |                      |   |
|                                                 |   |                        |   |                      |   |
| Tangible capital                                     |   | $                           | 17,808 |                      | 9.48   | % |
| Tangible capital  requirement                        |   | 2,817                       |   | 1.50                      |   |
|                                                 |   |                        |   |                      |   |
| Excess tangible  capital                             |   | $                           | 14,991 |                      | 7.98   | % |
|                                                 |   |                        |   |                      |   |
| Core capital                                         |   | $                           | 17,808 |                      | 9.48   | % |
| Core capital  requirement                            |   | 7,511                       |   | 4.00                      |   |
|                                                 |   |                        |   |                      |   |
| Excess core  capital                                 |   | $                           | 10,297 |                      | 5.48   | % |
|                                                 |   |                        |   |                      |   |
| Total capital  (i.e., core and supplemental capital) |   | $                           | 18,566 |                      | 13.99  | % |
| Risk-based  capital requirement                      |   | 10,616                      |   | 8.00                      |   |
|                                                 |   |                        |   |                      |   |
| Excess total  capital                                |   | $                           | 7,950  |                      | 5.99   | % |

 

----

(1)             Based upon adjustedassets for purposes of the tangible capital and core capital requirements, andrisk-weighted assets for purposes of the risk-based capital requirement.

 

The OTS Capital Distribution Regulation differentiatesthrift institutions primarily by their capital levels and prescribes the amountof capital distributions that can be made without prior OTS approval.

 

The Bank has met its liquidity requirements with fundsgenerated from operations, proceeds from repayment or sale of loans andinvestment securities, short-term borrowings, and the purchase of depositsduring 2002.  If alternative funding is needed,the Bank can generate additional funds from several other sources.  Currently, the FHLB system functions as asource of credit for the Bank.

 

**Trust Preferred Securities**

 

On June 27, 2002, the Company issued $4 million intrust preferred securities through a private placement of Floating Rate TrustPreferred Securities of Access Anytime Capital Trust II with a liquidationvalue of $1,000 per share to mature 30 years from the date of issuance.  The trust preferred securities are at avariable rate of the London Interbank Offered Rate (LIBOR) plus 365 basispoints, floating quarterly, with a five-year cap of 12%.  At December 31, 2002, the interest rate was5.425%.  The trust preferred securitiesmay be redeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, the Company issued $4 million of10.25% Fixed Rate Capital Trust Pass-through Securities of Access AnytimeCapital Trust I with a liquidation value of $1,000 per share to mature 30 yearsfrom the date of issuance.  The trustpreferred securities may be redeemed by the Company as early as July 25, 2006and may be redeemed at par on July 25, 2011. The Company invested approximately $2.9 million of the net proceeds inthe Bank to increase its capital levels.

 

**Asset Quality**

 

*Allowancefor loan losses**.* The allowance for loan losses is established through a provision forloan losses based on management’s quarterly asset classification review andevaluation of the risk inherent in its loan portfolio and changes in the natureand volume of its loan activity.  Suchevaluation, which includes a review of all loans of which full collectibilitymay not be reasonably assured, considers among other matters, the estimatedfair value of the underlying collateral, economic conditions, cash flowanalysis, historical loan loss experience,

 

48

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discussions held with delinquent borrowers and other factors thatwarrant recognition in providing for allowance for loan losses.

 

During 2002, net loans increased approximately$8,372,000 or 5.92% from December 31, 2001 and the allowance for loan lossesincreased $80,000.  Management feelsthat the December 31, 2002 allowances are adequate for future needs.

 

The following presents an analysis of the allowancefor loan losses for years ended December 31, 2002, 2001, and 2000.

 
|                                                                  |   | **Year ended  December 31** |   |
|-----------------------------------------------------------------------|--------|-----------------------------|--------|
|                                                                  |   | **2002**                    |   | **2001** |   | **2000** |   |
|                                                                  |   | **(Dollars  In Thousands)** |   |
| **Mortgage Loans:**                                                   |   |                        |   |   |   |   |   |
| Balance at  beginning of year                                         |   | $                           | 451    |   | $ | 386 |   | $ | 422 |   |
| Charged off:                                                          |   |                        |   |   |   |   |   |
| Single family                                                         |   | (53                         | )      | (24 | ) | — |   |
| Commercial real  estate                                               |   | —                      |   | — |   | — |   |
| Recoveries                                                            |   | —                      |   | — |   | — |   |
| Net loans  charged-off                                                |   | (53                         | )      | (24 | ) | — |   |
| Provision for  loan losses charged to operations                      |   | 162                         |   | 89 |   | 72 |   |
| Transfers                                                             |   | (350                        | )      | — |   | (108 | ) |
|                                                                  |   |                        |   |   |   |   |   |
| **Balance at end of year**                                            |   | $                           | 210    |   | $ | 451 |   | $ | 386 |   |
|                                                                  |   |                        |   |   |   |   |   |
| **Consumer and Other:**                                               |   |                        |   |   |   |   |   |
| Balance at  beginning of year                                         |   | $                           | 294    |   | $ | 295 |   | $ | 442 |   |
| Charged-off:                                                          |   |                        |   |   |   |   |   |
| Commercial                                                            |   | (319                        | )      | (147 | ) | (41 | ) |
| Automobile                                                            |   | (297                        | )      | (98 | ) | (62 | ) |
| Credit card                                                           |   | (38                         | )      | (45 | ) | (22 | ) |
| Other consumer                                                        |   | (40                         | )      | (128 | ) | (26 | ) |
| Recoveries:                                                           |   |                        |   |   |   |   |   |
| Commercial                                                            |   | —                      |   | 35 |   | 6 |   |
| Automobile                                                            |   | 40                          |   | 16 |   | 11 |   |
| Credit card                                                           |   | 1                           |   | — |   | 1 |   |
| Other consumer                                                        |   | —                      |   | 6 |   | 1 |   |
| Net loans  charged-off                                                |   | (653                        | )      | (361 | ) | (132 | ) |
| Provision for  loan losses charged to operations                      |   | 624                         |   | 360 |   | 127 |   |
| Transfers                                                             |   | 350                         |   | — |   | 108 |   |
| Acquired reserve                                                      |   | —                      |   | — |   | (250 | ) |
|                                                                  |   |                        |   |   |   |   |   |
| **Balance at end of year**                                            |   | $                           | 615    |   | $ | 294 |   | $ | 295 |   |
|                                                                  |   |                        |   |   |   |   |   |
| **Total Allowance for Loan Losses:**                                  |   |                        |   |   |   |   |   |
| Balance at  beginning of year                                         |   | $                           | 745    |   | $ | 681 |   | $ | 864 |   |
|                                                                  |   |                        |   |   |   |   |   |
| Loans  charged-off                                                    |   | (747                        | )      | (442 | ) | (151 | ) |
| Recoveries                                                            |   | 41                          |   | 57 |   | 19 |   |
| Net loans  charged-off                                                |   | (706                        | )      | (385 | ) | (132 | ) |
| Provision for  loan losses charged to operations                      |   | 786                         |   | 449 |   | 199 |   |
| Acquired reserve                                                      |   | —                      |   | — |   | (250 | ) |
|                                                                  |   |                        |   |   |   |   |   |
| **Balance at end of year**                                            |   | $                           | 825    |   | $ | 745 |   | $ | 681 |   |
|                                                                  |   |                        |   |   |   |   |   |
| Allowance for loan  losses as a percentage of total loans outstanding |   | 0.54                        | %      | 0.53 | % | 0.57 | % |

 

49

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*Non-performingassets*.  Totalnon-performing assets increased by approximately $259,000 during 2002.  The non-performing assets to total assetsratio is one indicator of the exposure to credit risk.  Non-performing assets of the Bank consist ofnon-accruing loans, troubled debt restructurings, and real estate which wasacquired as a result of foreclosure. The composition of the Bank’s portfolio ofnon-performing assets is shown in the following table:

 
|                                            |   | **2002**                    |   | **2001** |   | **2000** |   |
|-------------------------------------------------|--------|-----------------------------|--------|----------|--------|----------|--------|
|                                            |   | **(Dollars  In Thousands)** |   |
|                                            |   |                        |   |     |   |     |   |
| Non-accruing  loans*                            |   | $                           | 1,623  |     | $      | 1,407    |   | $ | 280 |   |
| Past due 90 days  or more and still accruing    |   | —                      |   | —   |   | —   |   |
| Troubled debt  restructured                     |   | —                      |   | —   |   | —   |   |
| Other real  estate                              |   | 648                         |   | 605      |   | 154      |   |
|                                            |   |                        |   |     |   |     |   |
| Total  non-performing assets                    |   | $                           | 2,271  |     | $      | 2,012    |   | $ | 434 |   |
|                                            |   |                        |   |     |   |     |   |
| Ratio of  non-performing assets to total assets |   | 1.18                        | %      | 1.15     | %      | 0.28     | %      |

 

----

* Primarily loans which are past due for 90 days or more

 

Interest lost on non-performing assets amounted to$109,517 in 2002 compared to $93,823 in 2001.

 

*Investmentsecurities* - The Bank’s available-for-sale securitiesportfolio has an $150,327 unrealized gain, while a $119,794 unrealized gain wasrecorded at December 31, 2001.  TheBank’s held-to-maturity securities portfolio has an unrealized gain of $17,424and $38,591 at December 31, 2002 and 2001, respectively.  The Bank’s available-for-sale andheld-to-maturity portfolios did not experience significant fair market valuefluctuations during the year ended December 31, 2002.

 

**Off-Statementof Financial Condition Financial Instruments**

 

The Bank may be a party to financial instruments withoff-statement of financial condition risk in the normal course of business tomeet the financing needs of its customers and to reduce its own exposure tofluctuation in interest rates.  Thesefinancial instruments include commitments to extend credit (including creditcards), standby letters of credit, and financial guarantees.  These instruments involve, to varyingdegrees, elements of credit and interest rate risk in excess of the amountrecognized in the consolidated statements of financial condition.  The contract or notional amounts of theseinstruments reflect the extent of involvement the Bank has in particularclasses of financial instruments.  TheBank uses the same credit policies in making commitments and conditionalobligations as it does for the consolidated statements of financial conditioninstruments.

 

At December 31, 2002, unfunded credit commitments areas follows:

 
|                                     |   | **(Dollars  In  Thousands)** |   |
|------------------------------------------|--------|------------------------------|--------|
|                                     |   |                         |   |
| Commitments to  extend residential loans |   | $                            | 6,899  |   |
| Lines of credit                          |   | $                            | 10,516 |   |
| Credit cards                             |   | $                            | 2,074  |   |

 

50

----

 

Commitments to extend credit are agreements to lend toa customer as long as there is no violation of any condition established in thecontract.  Commitments generally havefixed expiration dates or other termination clauses and may require payment ofa fee.  Some of the commitments areexpected to expire without being drawn upon. The total commitment amounts do not necessarily represent future cashrequirements.  The Bank evaluates eachcustomer’s creditworthiness on a case-by-case basis.  The amount of collateral obtained, if deemed necessary by theBank upon extension of credit, is based on management’s credit evaluation ofthe customers.

 

Standby letters of credit and financial guaranteeswritten are conditional commitments issued by the Bank to guarantee theperformance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially thesame as that involved in extending loan facilities to customers.  The Bank holds collateral and personalguarantees as deemed necessary.  AtDecember 31, 2002 and 2001, the Bank had $286,633 and $4,000,000 in standbyletters of credit outstanding, respectively.

 

At December 31, 2002, the Bank had no open interestrate swaps, futures, options, or forward contracts.

 

At December 31, 2002 and 2001, the Bank had$13,451,853 and $2,264,188, respectively, of commitments to sell single familyresidential loans.

 

**Impactof Inflation and Changing Prices**

 

The consolidated financial statements and related datahave been prepared in accordance with accounting principles generally acceptedin the United States of America which require measurement of financial positionand operating results in terms of historical dollars, without consideringchanges in relative purchasing power over time due to inflation.

 

Virtually all of the assets and liabilities of afinancial institution are monetary in nature. As a result, interest rates generally have a more significant impact onthe Company’s and the Bank’s performance than does the effect of inflation.

 

**Critical Accounting Policies**

 

*Allowancefor Loan**Losses*. The level of allowance for loan losses is based on such factors as theamount of non-performing assets, historical loss experience, regulatorypolicies, general economic conditions, the estimated fair value of theunderlying collateral and other factors which may affect the collectibility ofthe loans.  During 2002, the provisionfor loan losses increased to $786,000 from $449,000 for 2001, due to theincrease in loans receivable and non-performing assets.

 

Management of the Bank reviewed its Loan Loss ReservePolicy during 2001 for compliance with SEC Staff Accounting Bulletin (SAB)102.  In determining the Loan LossReserve and Allowances for Loan Loss Reserve the Bank uses the OTS and SECguidelines, specifically the guidance outlined in OTS CEO Memo 142, SEC SAB102, FAS 5, and FAS 114.

 

Based on recommendations by management of the Bank,the Bank’s Board of Directors is responsible for the accuracy and adequacy ofthe Loan Loss Calculation and reviews and approves the Calculated Reserve andProvisions.  The Board delegates theresponsibility to its Audit Committee to oversee the process of how the LoanLoss Reserve is calculated and the periodic validation of the calculationprocess.

 

The loan portfolio is segmented and historical losspercentages will be applied to the identified segments of the portfolio inconjunction with FAS 5.  In addition,certain loans will be individually analyzed and a loss reserve amountcalculated for each one of these loans, in conjunction with FAS 114.

 

51

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Management of the Bank makes various assumptions andjudgments about the collectibility of our loan portfolio and provides anallowance for potential losses based on a number of factors.  If the assumptions are wrong, our allowancefor loan losses may not be sufficient to cover loan losses.  The allowances may be increased in thefuture, which would decrease our net income.

 

The allowance for loanlosses is established by management of the Bank to incorporate a systematicmethodology, which is applied quarterly, to determine the elements of theallowance for loan losses and the resultant provisions for loan losses itconsiders adequate to provide for anticipated loan losses.  This methodology includes the followingelements:

 

•                  A systematic loan grading system

•                  A periodic review of the summary of theallowance for loan loss balance using historical loss factors

•                  Identification of loans to be evaluated on anindividual basis for impairment

•                  Consideration of internal factors such as theBank’s size, organizational structure, loan portfolio structure, loanadministration procedures, past due and delinquency trends, and loss experience

•                  Consideration of risks inherent in differentkinds of lending

•                  Consideration of external factors such aslocal, regional, and national economic factors

•                  An overall evaluation of the quality of theunderlying collateral, and holding and disposition costs

 

Specific reserves areprovided for individual loans where ultimate collection is consideredquestionable by management after reviewing the current status of loans that arecontractually past due and considering the net realizable value of the securityand of the loan guarantees, if applicable.

 

The Bank’s exposure to commercial loans generallyinvolves a higher degree of credit risk than single-family residentiallending.  These loans involve largerloan balances to a single borrower or groups of related borrowers.  These loans are more susceptible to a riskof loss during a downturn in the business cycle.  The underwriting, review and monitoring performed by our officersand directors cannot eliminate all of the risks related to these loans.

 

*IncomeTaxes*.  TheCompany’s valuation allowance was decreased by approximately $109,000 duringthe year ended December 31, 2002, due to the expiration of the state netoperating losses that had a valuation allowance against them.  As of December 31, 2002, the Company had atotal New Mexico net operating loss of $17 million.  The loss may not be carried back, and will expire in varyingamounts through 2005.  Due to theuncertainty of the realization of the state net operating loss, the Company hasestablished a valuation allowance of approximately $0.9 million as of December31, 2002.  In assessing therealizability of the remaining deferred tax assets, management consideredprojected future taxable income and tax planning strategies.  Based on the Company’s historical taxabletransactions, the timing of the reversal of existing temporary differences, andthe evaluation of tax planning strategies, management believes it is morelikely than not that the Company’s future taxable income will be sufficient torealize the benefit of the remaining deferred tax assets existing at December31, 2002.

 

*UnidentifiableIntangible Asset*. The Company has an unidentifiable intangible asset that was originatedin connection with the Company’s expansion through an acquisition of twoestablished branch operations in target markets in 1999.  The intangible asset did not meet thedefinition of a business combination in accordance with Statement No. 141.  As such, the Company continues to amortizethe intangible asset related to the acquisition in accordance with StatementNo. 142 over a period of fifteen years.

 

52

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**Contractual Cash Obligations**

 

The following tables present contractual cashobligations and commercial commitments of the Company as of December 31, 2002.

 
|                                      |   | **Payments  due by Period** |   |
|-------------------------------------------|--------|-----------------------------|--------|
| **Contractual Cash Obligations**          |   | **Less than  One Year**     |   | **One to  Three Years** |   | **Four to  Five Years** |   | **After  Five Years** |   | **Total** |   |
|                                      |   | **(Dollars  in Thousands)** |   |
|                                      |   |                        |   |   |   |   |   |   |   |   |   |
| Federal Home  Loan Bank advances          |   | $                           | 2,500  |   | $ | 1,000 |   | $ | 4,767 |   | $ | — |   | $ | 8,267 |   |
| Trust Preferred  Securities-Notes Payable |   | —                      |   | — |   | — |   | 8,000 |   | 8,000 |   |
| Operating leases                          |   | 39                          |   | 65 |   | 22 |   | 11 |   | 137 |   |
| Total  contractual cash obligations       |   | $                           | 2,539  |   | $ | 1,065 |   | $ | 4,789 |   | $ | 8,011 |   | $ | 16,404 |   |

 

**Impactof New Accounting Standards**

 

In June 1998, the Financial Accounting Standards Board(“FASB”) issued Statement No. 133 (“Statement 133”),*Accounting for Derivative Instrumentsand Hedging Activities*.  InJune 1999, the FASB issued Statement No. 137, *Deferral of the Effective Date of FASBStatement No. 133,* which deferred the effective date of Statement133 to no later than January 1, 2001 for the Company’s consolidated financialstatements.  Statement 133 requirescompanies to record derivatives on the statement of financial condition at fairvalue.  Changes in the fair values ofthose derivatives would be reported in earnings or other comprehensive incomedepending on the use of the derivative and whether it qualifies for hedgeaccounting.  The key criterion for hedgeaccounting is that the hedging relationship must be highly effective inachieving offsetting changes in fair value of assets or liabilities or cashflows from forecasted transactions.  InJune 2000, the FASB issued Statement No. 138, *Accounting for Certain Derivative Instrumentsand Certain Hedging Activities,* an amendment of FASB Statement No.133.  The Company implemented Statement133 on January 1, 2001 and this implementation did not have any impact on theCompany’s consolidated financial statements.

 

In September 2000, the FASB issued Statement No. 140(Statement 140), *Accounting for the Transfers and Servicing of Financial Assets andExtinguishments of Liabilities,* which replaces Statement No. 125 (ofthe same title).  Statement 140 revisescertain standards in the accounting for securitizations and other transfers offinancial assets and collateral, and requires some disclosures relating tosecuritization transactions and collateral, but it carries over most ofStatement 125’s provisions.  Thecollateral and disclosure provisions of Statement 140 were effective foryear-end 2000 financial statements.  Theother provisions of this Statement were effective for transfers and servicingof financial assets and extinguishment of liabilities occurring after March 31,2001.  The adoption of this standard didnot have any impact on the Company’s consolidated financial statements.

 

In June 2001, the FinancialAccounting Standards Board (FASB) issued Statement No. 141 (“Statement 141”), *BusinessCombinations*, and Statement No. 142 (“Statement 142”), *Goodwill andOther Intangible Assets*. Statement 141 requires that the purchase method of accounting be usedfor all business combinations initiated after June 30, 2001. The Companyadopted the provisions of Statement 141 as of July 1, 2001.  The adoption of Statement 141 did not haveany impact on the Company’s consolidated financial statements.

 

Statement 142 requires thatgoodwill and intangible assets with indefinite useful lives no longer beamortized, but instead be tested for impairment at least annually.  The Company does not have goodwill orintangible assets with indefinite useful lives subject to the provisions ofStatement 142.

 

53

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In August 2001, the FASB issued Statement No. 144(Statement 144*), Accounting for the Impairment of Disposal of Long-Lived Assets*,which supersedes FASB Statement No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of*.  Statement 144 addresses financial accountingand reporting for the impairment or disposal of long-lived assets.  The provisions of the statement areeffective for financial statements issued for fiscal years beginning afterDecember 15, 2001, and interim periods within those fiscal years.  The Company adopted Statement 144 on January1, 2002 and this adoption had no impact on the Company’s consolidated financialstatements.

 

In December 2001, theAmerican Institute of Certified Public Accountants (“AICPA”) issued Statementof Position 01-6 (SOP 01-6), *Accounting by Certain Entities (Including EntitiesWith Trade Receivables) That Lend to or Finance the Activities of Others*.  SOP 01-6 is effective for years beginningafter December 15, 2001.  SOP01-6 applies to any entity that lends to orfinances the activities of others, and it also provides specialized guidancefor other types of transactions specific to certain financialinstitutions.  The Company adopted SOP01-6 on January 1, 2002, and this adoption had no impact on the Company’sconsolidated financial statements.

 

In October 2002, the FASBissued Statement No. 147 (“Statement 147”), *Acquisitionsof Certain Financial Institutions*. This statement requires that unidentifiable intangible assets that wereacquired in a transaction that did not meet the definition of a businesscombination continue to be amortized over their remaining useful lives.  The Company adopted the provisions ofStatement No. 147 as of July 1, 2002, and this adoption had no impact on theCompany’s consolidated financial statements.

 

In December 2002, the FASBissued Statement No. 148 (“Statement 148”), *Accounting for Stock-Based Compensation-Transitionand Disclosure-an amendment of FASB Statement No. 123.*  This statement amends Statement 123 toprovide alternative methods of transition to a voluntary change to the fairvalue based method of accounting for stock-based employee compensation.  In addition, Statement 148 amends thedisclosure requirements to require prominent disclosures in both annual andinterim financial statements about the method of accounting for stock-basedemployee compensation and the effect of the method used on reportedresults.  Statement 148 is effective forfiscal years ending after December 15, 2002, and for interim periods beginningafter December 15, 2002.

 

Statement 148 allows for the fair value based methodunder Statement 123, *Accounting for Stock Based Compensation*,or the intrinsic value based method under APB Opinion No. 25 (“Opinion 25”), *Accountingfor Stock Issued to Employees*. Under the fair value based method of accounting, compensation cost ismeasured at the grant date based on the value of the award and is recognizedover the service period, which is generally the vesting period.  Under the intrinsic value method ofaccounting, compensation cost is the excess, if any, of the quoted market priceof the stock at grant date or other measurement date over the amount anemployee must pay to acquire the stock. The Company has elected to continue to use the intrinsic value method ofaccounting under Opinion 25, and will disclose the proforma effects of the fairvalue based method for the periods presented in its consolidated financialstatements.

 

54

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**Forward-LookingStatements**

 

When used in this report, the words “believes,”“anticipates,” “expect” and similar expressions are intended to identify“forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995.  Suchstatements are subject to certain risks and uncertainties which could causeactual results to differ materially from historical or projected economicconditions, including, but not limited to, those set forth in “Management’sDiscussion and Analysis or Plan of Operation,” changes in economic conditionsin the Company’s market area, changes in policies by regulatory agencies,fluctuations in interest rates, demand for loans in the Company’s market areaand competition.  **READERS ARE CAUTIONED NOT TO PLACE UNDUERELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATEHEREOF.  THE COMPANY UNDERTAKES NOOBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO THESEFORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR CIRCUMSTANCESAFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCE OF ANTICIPATED ORUNANTICIPATED EVENTS.**

 

**Item 7.****                                                           Financial Statements**

 

Financial statements are filed as a part of thisreport at the end of Part III hereof beginning at page F-1, Index toConsolidated Financial Statements, and are incorporated herein by reference.

 

**Item8.****                                                           Changes In and Disagreements withAccountants on Accounting and Financial Disclosure**

 

Information has been previously reported as defined inSEC Rule 12b-2.

 

**PART III**

 

The information required by Items 9 through 12 of PartIII is omitted from this report because the Company will file a definitiveProxy Statement for the Company’s 2003 Annual Meeting of Stockholders (the“Proxy Statement”) pursuant to Regulation 14A of the Securities Exchange Act of1934 not later than 120 days after the end of the fiscal year covered by thisForm 10-KSB and certain information included therein is incorporated herein byreference.

 

**Item9.****                                                           Directors, Executive Officers, Promoters and ControlPersons; Compliance with Section 16(a) of the Exchange Act**

 

The information required by this Item is incorporatedby reference to the Proxy Statement.

 

**Item 10.****                                                    Executive Compensation**

 

The information required by this Item is incorporatedby reference to the Proxy Statement.

 

**Item11.****                                                    Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

The information required by this Item is incorporatedby reference to the Proxy Statement.

 

**Item 12.****                                                    Certain Relationships and RelatedTransactions**

 

The information required by this Item is incorporatedby reference to the Proxy Statement.

 

55

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**Item 13.****                                                    Exhibits and Reports on Form 8-K**

 

**(a)Exhibits**

 
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                       |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                  |
| **2.0           |   | Branch Purchase and Deposit Assumption Agreement  dated June 18, 1999 between Bank of Albuquerque, National Association, and  FirstBank, a federal savings bank (incorporated by reference from the  Company’s Form 8-K filed November 19, 1999)                                                 |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **2.1           |   | Letter amendment, dated September 30, 1999, to  Branch Purchase and Deposit Assumption Agreement dated June 18, 1999 between  Bank of Albuquerque, National Association, and FirstBank, a federal savings  bank (incorporated by reference from the Company’s Form 8-K filed November  19, 1999) |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **3.1           |   | Certificate of Amendment of Certificate of  Incorporation and Certificate of Incorporation of the Company (incorporated  by reference from the Company’s Quarterly Report on Form 10-QSB for the  quarter ended June 30, 1997, SEC File No. 0-28894)                                             |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **3.2           |   | Amended Bylaws of the Company (incorporated by  reference from the Company’s Registration Statement on Form S-8, filed June  2, 1997, SEC File No. 333-28215)                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.1          |   | Agreement and Plan of Reorganization and Plan of  Merger (incorporated by reference from the Company’s Registration Statement  on Form 8-A, filed October 11, 1996, SEC File No. 001-12309)                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.3          |   | Profit Sharing and Employee Stock Ownership Plan of  FirstBank (incorporated by reference from the Company’s December 31, 2000  10-KSB)                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.3.1        |   | Amendment Number One to Profit Sharing and Employee  Stock Ownership Plan of FirstBank (incorporated by reference from the  Company’s December 31, 2001 10-KSB)                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.3.2        |   | Amendment Number Two to Profit Sharing and Employee  Stock Ownership Plan of FirstBank (incorporated by reference from the  Company’s December 31, 2001 10-KSB)                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.3.3        |   | Amendment Number Three to Profit Sharing and  Employee Stock Ownership Plan of FirstBank (incorporated by reference from  the Company’s December 31, 2001 10-KSB)                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.4          |   | Agreement for Standby Letter of Credit  Advances/Confirmation, Collateral Pledge and Security Agreement with FHLB of  Dallas (incorporated by reference from the Company’s Registration Statement  on Form 8-A, filed October 11, 1996, SEC File No. 001-12309)                                  |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.6      |   | Employment Agreement with Kenneth J. Huey, Jr.  (incorporated by reference from the Company’s Registration Statement on Form  8-A, filed October 11, 1996, SEC File No. 001-12309)                                                                                                               |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.6.1    |   | Extension of Employment Agreement with Kenneth J.  Huey, Jr. dated November 20, 1997 (incorporated by reference from the  Company’s September 30, 1999 10-QSB)                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.6.2    |   | Extension of Employment Agreement with Kenneth J.  Huey, Jr. dated July 29, 1999 (incorporated by reference from the Company’s  September 30, 1999 10-QSB)                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.6.3    |   | Extension of Employment Agreement with Kenneth J.  Huey, Jr. dated August 23, 2001 (incorporated by reference from the Company’s  September 30, 2001 10-QSB)                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.7      |   | Employment Agreement with Norman R. Corzine  (incorporated by reference from the Company’s 1996 10-KSB)                                                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.7.1    |   | Extension of Employment Agreement with Norman R.  Corzine dated November 20, 1997 (incorporated by reference from the Company’s  September 30, 1999 10-QSB)                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.7.2    |   | Extension of Employment Agreement with Norman R.  Corzine dated July 29, 1999 (incorporated by reference from the Company’s  September 30, 1999 10-QSB)                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.7.3    |   | Extension of Employment Agreement with Norman R.  Corzine dated August 23, 2001 (incorporated by reference from the Company’s  September 30, 2001 10-QSB)                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                  |
| */***10.7.4     |   | Extension of Employment Agreement with Norman R.  Corzine dated December 19, 2002                                                                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.8      |   | Employment Agreement with Don K. Padgett  (incorporated by reference from the Company’s June 30, 2002 10-QSB)                                                                                                                                                                                    |
|            |   |                                                                                                                                                                                                                                                                                                  |
| */***10.8.1     |   | Extension of Employment Agreement with Don K.  Padgett dated December 19, 2002                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.10     |   | Non-Employee Director Retainer Plan (incorporated by  reference from the Company’s Registration Statement on Form S-8, filed June  2, 1997, SEC File No. 333-28217)                                                                                                                              |

 

56

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| **/***10.10.1 |   | Amendment Number One to Non-Employee Director  Retainer Plan dated April 26, 2001 (incorporated by reference from the Company’s  June 30, 2001 10-QSB)               |
|---------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                      |
| **/***10.11   |   | 1997 Stock Option and Incentive Plan (incorporated  by reference from the Company’s Registration Statement on Form S-8, filed  June 2, 1997, SEC File No. 333-28215) |
|          |   |                                                                                                                                                                      |
| **/***10.12   |   | Executive Savings Plan dated June 1, 1998  (incorporated by reference from the Company’s December 31, 1998 10-KSB)                                                   |
|          |   |                                                                                                                                                                      |
| **/***10.12.1 |   | Amendment Number One to the Executive Savings Plan  dated June 1, 1998 (incorporated by reference from the Company’s September  30, 1999 10-QSB)                     |
|          |   |                                                                                                                                                                      |
| **/***10.12.2 |   | Amendment Number Two to the Executive Savings Plan  dated June 1, 1998 (incorporated by reference from the Company’s September  30, 2002 10-QSB)                     |
|          |   |                                                                                                                                                                      |
| */***10.12.3  |   | Amendment Number Three to the Executive Savings Plan  dated June 1, 1998                                                                                                  |
|          |   |                                                                                                                                                                      |
| **16.1        |   | Letter from the certifying accountants required by  Regulation S-B, Item 304(a)(3) (incorporated by reference from the Company’s  December 31, 2000 10-KSB)          |
|          |   |                                                                                                                                                                      |
| *21           |   | Subsidiaries of the Small Business Issuer                                                                                                                                 |
|          |   |                                                                                                                                                                      |
| *23.1         |   | Consent of Independent Accountants from Robinson  Burdette Seright & Burrows, L.L.P.                                                                                  |
|          |   |                                                                                                                                                                      |
| *23.2         |   | Consent of Independent Auditors from KPMG LLP                                                                                                                             |
|          |   |                                                                                                                                                                      |
| *99.1         |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                       |
|          |   |                                                                                                                                                                      |
| *99.2         |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002                                                                       |

 

----

| *   |   | Filed herewith                                                                                                                             |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| **  |   | Previously filed                                                                                                                           |
| *** |   | Designates each management contract or compensatory  plan or arrangement required to be identified pursuant to Item 13(a) of Form  10-KSB. |

** **

**(b)  Reports on Form 8-K**

 

The following subparagraph sets forth informationconcerning three Form 8-Ks, two of which were filed after the fourth quarterended December 31, 2002:

 

1.  On December18, 2002 the Company filed a Form 8-K to announce that the Board of Directorsof FirstBank appointed Don K. Padgett to serve as President and Chief ExecutiveOfficer of FirstBank effective January 1, 2003.

 

2.  On February25, 2003 the Company filed a Form 8-K to announce it has entered into a stockrepurchase program whereby the Company plans to repurchase up to 100,000 commonshares before December 31, 2003.

 

3.  On February27, 2003 the Company filed a Form 8-K to announce it completed the stockrepurchase program whereby the Company repurchased 100,000 common shares of itsstock.

 

57

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**Item 14.****                                                    Controls and Procedures**

 

Evaluation of Disclosure Controls and Procedures

 

Within the 90 days prior to the date of this report,the Company carried out an evaluation, under the supervision and with theparticipation of the Company’s management, including the Company’s ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of thedesign and operation of the Company’s disclosure controls and procedures.  The Company’s disclosure controls andprocedures are designed to ensure that information required to be disclosed bythe Company in its periodic Securities and Exchange Commission (“SEC”) filingsis recorded, processed and reported within the time periods specified in theSEC’s rules and forms.  Based on thatevaluation, the Chief Executive Officer and Chief Financial Officer concludedthat the Company’s disclosure controls and procedures are effective in timelyalerting them to material information relating to the Company (including itsconsolidated subsidiaries) required to be included in the Company’s periodicSEC filings.

 

Changes in Internal Controls

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of their evaluation.

 

58

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the Registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|   |                           | ACCESS ANYTIME BANCORP, INC.                               |
|--------|--------------------------------|------------------------------------------------------------|
|   |                           |                                                       |
|   |                           |                                                       |
|   | Date:   February 28, 2003 | /s/ Norman R. Corzine                                      |
|   |                           | Norman R. Corzine, Chairman of the Board,                  |
|   |                           | Chief Executive Officer*(Duly  Authorized Representative)* |

 

Pursuant to the requirement of the Securities ExchangeAct of 1934, this report has been signed below by the following persons onbehalf of the registrant and in the capacities and on the dates indicated.

 
| By:    | /s/ Norman R.  Corzine                                          |   | By:    | /s/ R. Chad  Lydick           |
|--------|-----------------------------------------------------------------|--------|--------|-------------------------------|
|   | Norman R.  Corzine                                              |   |   | R. Chad Lydick                |
|   | Chairman of the Board  Chief Executive Officer  Director        |   |   | Director                      |
|   |                                                            |   |   |                          |
|   | Date:  February 28, 2003                                   |   |   | Date:  February 28, 2003 |
|   |                                                            |   |   |                          |
| By:    | /s/ Ken Huey,  Jr.                                              |   | By:    | /s/ Charles  Guthals          |
|   | Ken Huey, Jr.                                                   |   |   | Charles Guthals               |
|   | Chief Financial Officer  Principal Accounting Officer  Director |   |   | Director                      |
|   |                                                            |   |   |                          |
|   | Date:  February 28, 2003                                   |   |   | Date:  February 28, 2003 |
|   |                                                            |   |   |                          |
| By:    | /s/ Thomas W.  Martin, III                                      |   | By:    | /s/ Allan M.  Moorhead        |
|   | Thomas W.  Martin, III                                          |   |   | Allan M.  Moorhead            |
|   | Director                                                        |   |   | Director                      |
|   |                                                            |   |   |                          |
|   | Date:  February 28, 2003                                   |   |   | Date:  February 28, 2003 |
|   |                                                            |   |   |                          |
| By:    | /s/ David  Ottensmeyer, M.D.                                    |   | By:    | /s/ Cornelius  Higgins, Ph.D. |
|   | David  Ottensmeyer                                              |   |   | Cornelius  Higgins            |
|   | Director                                                        |   |   | Director                      |
|   |                                                            |   |   |                          |
|   | Date:  February 28, 2003                                   |   |   | Date:  February 28, 2003 |

 

59

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| By:    | /s/ Richard H. Harding        |   | By:    | /s/ Don K. Padgett            |
|--------|-------------------------------|--------|--------|-------------------------------|
|   | Richard H. Harding            |   |   | Don K. Padgett                |
|   | Director                      |   |   | President  Director           |
|   |                          |   |   |                          |
|   | Date:  February 28, 2003 |   |   | Date:  February 28, 2003 |

 

60

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** **

CERTIFICATIONS

 

I,Norman R. Corzine, certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-KSB of Access Anytime Bancorp,Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known  to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:   February 28, 2003 | /s/ Norman R. Corzine                      |
|--------------------------------|--------------------------------------------|
|                           | Norman R.  Corzine, Chairman of the Board, |
|                           | Chief Executive  Officer                   |
|                           | *(Principal Executive Officer)*            |

 

61

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CERTIFICATIONS

 

I, KenHuey, Jr., certify that:

 

1.                                       Ihave reviewed this annual report on Form 10-KSB of Access Anytime Bancorp,Inc.;

 

2.                                       Basedon my knowledge, this annual report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this annual report;

 

3.                                       Basedon my knowledge, the financial statements, and other financial informationincluded in this annual report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant asof, and for, the periods presented in this annual report;

 

4.                                       Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

a)              designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known  to us by others within those entities,particularly during the period in which this annual report is being prepared;

 

b)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (the“Evaluation Date”); and

 

c)              presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                                       Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

a)              all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                                       Theregistrant’s other certifying officers and I have indicated in this annualreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  February 28, 2003 | /s/ Ken Huey, Jr.                               |
|-------------------------------|-------------------------------------------------|
|                          | Ken  Huey, Jr., Chief Financial Officer         |
|                          | Director                                        |
|                          | *(Principal  Financial and Accounting Officer)* |

 

62

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**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 
| Independent Auditors’ Report  |
|------------------------------------|
| Independent Auditors’  Report |
|                               |
| Financial Statements:              |
|                               | Consolidated  Statements of Financial Condition |
|                               | Consolidated  Statements of Operations |
|                               | Consolidated  Statements of Stockholders’ Equity |
|                               | Consolidated  Statements of Cash Flows |
|                               | Notes to  Consolidated Financial Statements |

 

F-1

----

 

**Independent Auditors’ Report**

 

The Board of Directorsand Stockholders

Access Anytime Bancorp,Inc.:

 

We have audited theaccompanying consolidated statements of financial condition of Access AnytimeBancorp, Inc. and subsidiary (the Company) as of December 31, 2002 and 2001,and the related consolidated statements of operations, stockholders’ equity,and cash flows for the years then ended. These consolidated financial statements are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these consolidated financialstatements based on our audit.

 

We conducted our audit inaccordance with auditing standards generally accepted in the United States ofAmerica.  Those standards require thatwe plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Access Anytime Bancorp, Inc. andsubsidiary as of December 31, 2002 and 2001, and the results of theiroperations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in the United States of America.

 

### **KPMGLLP**

 
| Albuquerque, New Mexico |
|-------------------------|
| January 30, 2003        |

 

F-2

----

 

**INDEPENDENT AUDITORS’ REPORT**

 

To the Board of Directors

Access Anytime Bancorp,Inc.

 

We have audited theaccompanying consolidated statements of operations, stockholders’ equity andcash flow of Access Anytime Bancorp, Inc. and subsidiary for the year endedDecember 31, 2000.  These financialstatements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audit.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the results of operations and cash flows of Access AnytimeBancorp, Inc. and subsidiary for the year ended December 31, 2000 in conformitywith accounting principles generally accepted in the United States of America.

 

*Robinson Burdette Martin Seright & Burrows, L.L.P.*

 
| Lubbock, Texas   |
|------------------|
| January 31, 2001 |

 

F-3

----

 

**ACCESS ANYTIME BANCORP, INC. ANDSUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF FINANCIALCONDITION**

 
|                                                                                                                                                                    |   | **December  31** |        |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|-------------|
|                                                                                                                                                                    |   | **2002**         |        | **2001** |   |
| ASSETS                                                                                                                                                                  |   |             |        |   |   |
|                                                                                                                                                                    |   |             |        |   |   |
| Cash  and cash equivalents                                                                                                                                              |   | $                | 12,342,444  |   | $ | 10,611,093 |   |
| Certificates  of deposit                                                                                                                                                |   | 5,993,000        |        | 798,000 |   |
| Securities  available-for-sale (amortized cost of $6,515,011 and $10,327,387)                                                                                           |   | 6,665,338        |        | 10,447,181 |   |
| Securities  held-to-maturity (aggregate fair value of $1,879,898 and  $1,649,788)                                                                                  |   | 1,862,474        |        | 1,611,197 |   |
| Loans  held-for-sale (aggregate fair value of $6,688,146 and $1,055,950)                                                                                                |   | 6,553,116        |        | 1,034,719 |   |
| Loans  receivable, net                                                                                                                                                  |   | 149,856,081      |        | 141,484,353 |   |
| Interest  receivable, loans                                                                                                                                             |   | 771,189          |        | 763,202 |   |
| Interest  receivable, securities                                                                                                                                        |   | 102,198          |        | 92,816 |   |
| Real  estate owned                                                                                                                                                      |   | 647,917          |        | 605,552 |   |
| Federal  Home Loan Bank stock                                                                                                                                           |   | 1,013,200        |        | 984,200 |   |
| Premises  and equipment, net                                                                                                                                            |   | 3,654,169        |        | 3,700,329 |   |
| Unidentifiable  intangible asset, net of accumulated amortization of $460,444 and $314,784                                                                              |   | 1,723,644        |        | 1,869,304 |   |
| Deferred  tax asset                                                                                                                                                     |   | 361,368          |        | 972,607 |   |
| Other  assets                                                                                                                                                           |   | 553,997          |        | 583,078 |   |
|                                                                                                                                                                    |   |             |        |   |   |
| Total  assets                                                                                                                                                           |   | $                | 192,100,135 |   | $ | 175,557,631 |   |
|                                                                                                                                                                    |   |             |        |   |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                              |   |             |        |   |   |
|                                                                                                                                                                    |   |             |        |   |   |
| Liabilities:                                                                                                                                                            |   |             |        |   |   |
| Deposits                                                                                                                                                                |   | $                | 159,197,158 |   | $ | 146,919,998 |   |
| Federal  Home Loan Bank advances                                                                                                                                        |   | 8,267,321        |        | 8,750,000 |   |
| Accrued  interest and other liabilities                                                                                                                                 |   | 1,384,196        |        | 936,039 |   |
| Advanced  payments by borrowers for taxes and insurance                                                                                                                 |   | 434,247          |        | 307,669 |   |
| Employee  Stock Ownership Plan – Note Payable                                                                                                                      |   | —           |        | 1,141,766 |   |
| Trust  Preferred Securities – Notes Payable                                                                                                                        |   | 8,000,000        |        | 4,000,000 |   |
|                                                                                                                                                                    |   |             |        |   |   |
| Total  liabilities                                                                                                                                                      |   | 177,282,922      |        | 162,055,472 |   |
|                                                                                                                                                                    |   |             |        |   |   |
| Commitments  and contingencies                                                                                                                                          |   |             |        |   |   |
|                                                                                                                                                                    |   |             |        |   |   |
| Stockholders’  equity:                                                                                                                                             |   |             |        |   |   |
| Preferred  stock, $.01 par value; 4,000,000 shares authorized; none issued                                                                                              |   | —           |        | — |   |
|                                                                                                                                                                    |   |             |        |   |   |
| Common  stock, $.01 par value; 6,000,000 shares authorized; 1,508,012 and 1,495,633  shares issued; 1,302,161 and 1,269,991 outstanding in 2002 and 2001,  respectively |   | 15,080           |        | 14,956 |   |
| Capital  in excess of par value                                                                                                                                         |   | 11,378,222       |        | 11,157,895 |   |
| Retained  earnings                                                                                                                                                      |   | 4,547,359        |        | 3,544,326 |   |
| Accumulated  other comprehensive income, net of tax expense of $60,131 and $47,918                                                                                      |   | 90,197           |        | 71,877 |   |
|                                                                                                                                                                    |   | 16,030,858       |        | 14,789,054 |   |
| Unallocated  Employee Stock Ownership Plan shares; 160,000 and 192,000 shares outstanding                                                                               |   | (870,000         | )           | (1,050,000 | ) |
| Treasury  stock, at cost; 45,851 and 33,642 shares outstanding                                                                                                          |   | (343,645         | )           | (236,895 | ) |
| Total  stockholders’ equity                                                                                                                                        |   | 14,817,213       |        | 13,502,159 |   |
|                                                                                                                                                                    |   |             |        |   |   |
| Total  liabilities and stockholders’ equity                                                                                                                        |   | $                | 192,100,135 |   | $ | 175,557,631 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-4

----

 

**ACCESS ANYTIME BANCORP, INC. ANDSUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
|                                                          |   | **Years  ended December 31** |       |
|---------------------------------------------------------------|--------|------------------------------|------------|
|                                                          |   | **2002**                     |       | **2001** |   | **2000** |   |
| Interest  income:                                             |   |                         |       |   |   |   |   |
| Loans  receivable                                             |   | $                            | 10,984,706 |   | $ | 10,774,835 |   | $ | 9,193,286 |   |
| Equity  securities                                            |   | 178,954                      |       | 208,101 |   | 242,756 |   |
| Mortgage-backed  securities                                   |   | 485,022                      |       | 680,482 |   | 849,396 |   |
| Other  interest income                                        |   | 260,723                      |       | 389,431 |   | 415,922 |   |
|                                                          |   |                         |       |   |   |   |   |
| Total  interest income                                        |   | 11,909,405                   |       | 12,052,849 |   | 10,701,360 |   |
|                                                          |   |                         |       |   |   |   |   |
| Interest  expense:                                            |   |                         |       |   |   |   |   |
| Deposits                                                      |   | 4,239,111                    |       | 5,733,378 |   | 5,154,911 |   |
| Federal  Home Loan Bank advances                              |   | 328,484                      |       | 265,283 |   | 507,792 |   |
| Other  borrowings                                             |   | 613,482                      |       | 281,111 |   | 85,973 |   |
|                                                          |   |                         |       |   |   |   |   |
| Total  interest expense                                       |   | 5,181,077                    |       | 6,279,772 |   | 5,748,676 |   |
|                                                          |   |                         |       |   |   |   |   |
| Net  interest income before provision for loan losses         |   | 6,728,328                    |       | 5,773,077 |   | 4,952,684 |   |
| Provision  for loan losses                                    |   | 786,000                      |       | 449,354 |   | 199,378 |   |
|                                                          |   |                         |       |   |   |   |   |
| Net  interest income after provision for loan losses          |   | 5,942,328                    |       | 5,323,723 |   | 4,753,306 |   |
|                                                          |   |                         |       |   |   |   |   |
| Noninterest  income:                                          |   |                         |       |   |   |   |   |
| Loan  servicing and other fees                                |   | 578,567                      |       | 354,301 |   | 256,302 |   |
| Net  realized gains on sales of available-for-sale securities |   | 58,115                       |       | — |   | — |   |
| Gains  on sales of mortgage loans held-for-sale               |   | 786,825                      |       | 417,066 |   | 251,363 |   |
| Other  income                                                 |   | 996,122                      |       | 894,889 |   | 754,062 |   |
|                                                          |   |                         |       |   |   |   |   |
| Total  noninterest income                                     |   | 2,419,629                    |       | 1,666,256 |   | 1,261,727 |   |
|                                                          |   |                         |       |   |   |   |   |
| Noninterest  expense:                                         |   |                         |       |   |   |   |   |
| Salaries  and employee benefits                               |   | 3,468,295                    |       | 2,752,748 |   | 2,615,728 |   |
| Occupancy  expense                                            |   | 842,959                      |       | 768,838 |   | 834,983 |   |
| Deposit  insurance premium                                    |   | 97,224                       |       | 125,794 |   | 105,043 |   |
| Advertising                                                   |   | 84,442                       |       | 73,694 |   | 92,033 |   |
| Professional  fees                                            |   | 340,927                      |       | 268,393 |   | 286,094 |   |
| Other  expense                                                |   | 1,889,129                    |       | 1,551,977 |   | 1,459,245 |   |
|                                                          |   |                         |       |   |   |   |   |
| Total  noninterest expense                                    |   | 6,722,976                    |       | 5,541,444 |   | 5,393,126 |   |
|                                                          |   |                         |       |   |   |   |   |
| Income  before income taxes                                   |   | 1,638,981                    |       | 1,448,535 |   | 621,907 |   |
|                                                          |   |                         |       |   |   |   |   |
| Income  tax expense                                           |   | 635,948                      |       | 69,482 |   | 211,449 |   |
|                                                          |   |                         |       |   |   |   |   |
| Net  income                                                   |   | $                            | 1,003,033  |   | $ | 1,379,053 |   | $ | 410,458 |   |
|                                                          |   |                         |       |   |   |   |   |
| Earnings  per common share-basic                              |   | $                            | .77        |   | $ | 1.05 |   | $ | .33 |   |
|                                                          |   |                         |       |   |   |   |   |
| Earnings  per common share-assuming dilution                  |   | $                            | .73        |   | $ | 1.02 |   | $ | .32 |   |

 

**The accompanying notes are anintegral part of these consolidated financial statements.**

** **

**F-5**

----

** **

**ACCESSANYTIME BANCORP, INC. AND SUBSIDIARY**

** **

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

 
|                                                                                      |   |                          |   | **Common  Stock**         |   |       |   |                                              |   | **Accumulated**

**Other** |   |                                               |   | **Treasury  Stock**               |   |                      |   |
|-------------------------------------------------------------------------------------------|--------|-------------------------------|--------|---------------------------|--------|------------|--------|---------------------------------------------------|--------|----------------------------|--------|----------------------------------------------------|--------|-----------------------------------|--------|---------------------------|--------|
|                                                                                      |   | **Comprehensive**

**Income** |   | **Number**

**of shares** |   | **Amount** |   | **Capital**

**in Excess**

**of Par**

**Value** |   | **Retained**

**Earnings** |   | **Comprehensive**

**Income**

**(Loss)**

**Net** |   | **Unallocated  ESOP**

**Shares** |   | **Number**

**of shares** |   | **Amount** |   | **Total** |   |
| Balance at December 31, 1999                                                              |   |                          |   | 1,244,016                 |   | $ 12,440   |   | $9,659,555                                        |   | $1,754,815                 |   | $(73,368                                           | )      | $—                           |   | 5,642                     |   | $(40,010 | ) | $11,313,432 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Net income                                                                                |   | $410,458                      |   | —                    |   | —     |   | —                                            |   | 410,458                    |   | —                                             |   | —                            |   | —                    |   | — |   | 410,458 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Net change in unrealized appreciation  on available-for-sale securities, net of  tax |   | 28,684                        |   | —                    |   | —     |   | —                                            |   | —                     |   | 28,684                                             |   | —                            |   | —                    |   | — |   | 28,684 |   |
| Total comprehensive income                                                                |   | $439,142                      |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Common stock issued                                                                       |   |                          |   | 245,100                   |   | 2,451      |   | 1,365,287                                         |   | —                     |   | —                                             |   | —                            |   | —                    |   | — |   | 1,367,738 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Common stock rights awarded in lieu of directors’  cash compensation                 |   |                          |   | —                    |   | —     |   | 20,150                                            |   | —                     |   | —                                             |   | —                            |   | —                    |   | — |   | 20,150 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Purchase of ESOP shares                                                                   |   |                          |   | —                    |   | —     |   | —                                            |   | —                     |   | —                                             |   | (1,350,000                        | )      | —                    |   | — |   | (1,350,000 | ) |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Purchases of   treasury stock                                                        |   |                          |   | —                    |   | —     |   | —                                            |   | —                     |   | —                                             |   | —                            |   | 18,301                    |   | (123,623 | ) | (123,623 | ) |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| ESOP shares allocated                                                                     |   |                          |   | —                    |   | —     |   | 9,209                                             |   | —                     |   | —                                             |   | 60,261                            |   | —                    |   | — |   | 69,470 |   |
| Balance at December 31, 2000                                                              |   |                          |   | 1,489,116                 |   | 14,891     |   | 11,054,201                                        |   | 2,165,273                  |   | (44,684                                            | )      | (1,289,739                        | )      | 23,943                    |   | (163,633 | ) | 11,736,309 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Net income                                                                                |   | $1,379,053                    |   | —                    |   | —     |   | —                                            |   | 1,379,053                  |   | —                                             |   | —                            |   | —                    |   | — |   | 1,379,053 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Net change in unrealized appreciation  on available-for-sale securities, net of  tax |   | 116,561                       |   | —                    |   | —     |   | —                                            |   | —                     |   | 116,561                                            |   | —                            |   | —                    |   | — |   | 116,561 |   |
| Total comprehensive income                                                                |   | $1,495,614                    |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Common stock issued                                                                       |   |                          |   | 6,517                     |   | 65         |   | 28,622                                            |   | —                     |   | —                                             |   | —                            |   | —                    |   | — |   | 28,687 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Common stock rights awarded in lieu of directors’  cash compensation                 |   |                          |   | —                    |   | —     |   | 37,350                                            |   | —                     |   | —                                             |   | —                            |   | —                    |   | — |   | 37,350 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Purchases of   treasury stock                                                        |   |                          |   | —                    |   | —     |   | —                                            |   | —                     |   | —                                             |   | —                            |   | 9,699                     |   | (73,262 | ) | (73,262 | ) |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| ESOP shares allocated                                                                     |   |                          |   | —                    |   | —     |   | 37,722                                            |   | —                     |   | —                                             |   | 239,739                           |   | —                    |   | — |   | 277,461 |   |
| Balance at December  31, 2001                                                        |   |                          |   | 1,495,633                 |   | 14,956     |   | 11,157,895                                        |   | 3,544,326                  |   | 71,877                                             |   | (1,050,000                        | )      | 33,642                    |   | (236,895 | ) | 13,502,159 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Net Income                                                                                |   | $1,003,033                    |   |                      |   |       |   |                                              |   | 1,003,033                  |   |                                               |   |                              |   |                      |   |   |   | 1,003,033 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Net change in unrealized appreciation  on available-for-sale securities, net of  tax |   | 18,320                        |   | —                    |   | —     |   | —                                            |   | —                     |   | 18,320                                             |   | —                            |   | —                    |   | — |   | 18,320 |   |
| Total comprehensive income                                                                |   | $1,021,353                    |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Common stock issued                                                                       |   |                          |   | 12,379                    |   | 124        |   | 80,728                                            |   | —                     |   | —                                             |   | —                            |   | —                    |   | — |   | 80,852 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Common stock rights awarded in lieu of directors’  cash compensation                 |   |                          |   | —                    |   | —     |   | 52,800                                            |   | —                     |   | —                                             |   | —                            |   | —                    |   | — |   | 52,800 |   |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| Purchases of   treasury stock                                                        |   |                          |   | —                    |   | —     |   | —                                            |   | —                     |   | —                                             |   | —                            |   | 12,209                    |   | (106,750 | ) | (106,750 | ) |
|                                                                                      |   |                          |   |                      |   |       |   |                                              |   |                       |   |                                               |   |                              |   |                      |   |   |   |   |   |
| ESOP shares allocated                                                                     |   |                          |   | —                    |   | —     |   | 86,799                                            |   | —                     |   | —                                             |   | 180,000                           |   | —                    |   | — |   | 266,799 |   |
| Balance at December  31, 2002                                                        |   |                          |   | 1,508,012                 |   | $15,080    |   | $11,378,222                                       |   | $4,547,359                 |   | $90,197                                            |   | $(870,000                         | )      | 45,851                    |   | $(343,645 | ) | $14,817,213 |   |

 

F-6

----

 
|                                                                            |   | **Years  ended December 31** |   |
|---------------------------------------------------------------------------------|--------|------------------------------|--------|
|                                                                            |   | **2002**                     |   | **2001** |   | **2000** |   |
|                                                                            |   |                         |   |   |   |   |   |
| Disclosure  of reclassification amounts:                                        |   |                         |   |   |   |   |   |
| Unrealized  holding gains arising during period                                 |   | $                            | 76,435 |   | $ | 116,561 |   | $ | 28,684 |   |
| Reclassification  adjustment for gains included in net income                   |   | (58,115                      | )      | — |   | — |   |
| Net  unrealized appreciation on available-for-sale securities,  net of tax |   | $                            | 18,320 |   | $ | 116,561 |   | $ | 28,684 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-7

----

 

**ACCESS ANYTIME BANCORP, INC. ANDSUBSIDIARY**

 

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

** **
|                                                                                |   | **Years  ended December 31** |       |
|-------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                |   | **2002**                     |       | **2001** |   | **2000** |   |
| Cash  flows from operating activities:                                              |   |                         |       |   |   |   |   |
| Net  income                                                                         |   | $                            | 1,003,033  |   | $ | 1,379,053 |   | $ | 410,458 |   |
| Adjustments  to reconcile net income to cash fromoperating activities:              |   |                         |       |   |   |   |   |
| Depreciation                                                                        |   | 436,141                      |       | 407,664 |   | 448,813 |   |
| Deferred  income taxes                                                              |   | 611,239                      |       | 28,602 |   | 206,449 |   |
| Provision  for loan losses                                                          |   | 786,000                      |       | 449,354 |   | 199,378 |   |
| Amortization  of premiums on investment securities                                  |   | 34,420                       |       | 84,789 |   | 71,400 |   |
| Amortization  of loan premiums, discounts and deferred fees, net                    |   | 290,736                      |       | 181,267 |   | 126,065 |   |
| Amortization  of unidentifiable intangible asset                                    |   | 145,660                      |       | 145,661 |   | 145,067 |   |
| Non-cash  ESOP contribution                                                         |   | 266,799                      |       | 277,461 |   | 69,470 |   |
| Gains  on sale of available-for-sale securities                                     |   | (58,115                      | )          | — |   | — |   |
| Gains  on sales of mortgage loans held-for-sale                                     |   | (786,825                     | )          | (417,066 | ) | (251,363 | ) |
| Proceeds  from sales of mortgage loans held-for-sale                                |   | 41,508,677                   |       | 24,471,091 |   | 11,811,842 |   |
| Originations  of mortgage loans held-for-sale                                       |   | (46,240,249                  | )          | (24,267,564 | ) | (12,203,007 | ) |
| Common  stock rights awarded in lieu of directors compensation                      |   | 52,800                       |       | 37,350 |   | 20,150 |   |
| (Gain)  loss on sale of foreclosed real estate                                      |   | (45,440                      | )          | 2,533 |   | (1,806 | ) |
| (Gain)  loss on disposition of assets                                               |   | (100                         | )          | (11,447 | ) | 4,791 |   |
| Net  increase in accrued interest receivable and other assets                       |   | 448,157                      |       | (205,414 | ) | (226,180 | ) |
| (Decrease)  increase in accrued interest and other liabilities                      |   | (655,608                     | )          | (158,079 | ) | 270,161 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Net  cash from operating activities                                                 |   | (2,202,675                   | )          | 2,405,255 |   | 1,101,688 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Cash  flows from investing activities:                                              |   |                         |       |   |   |   |   |
| Purchases  of available-for-sale securities                                         |   | (800,000                     | )          | (3,555,000 | ) | — |   |
| Proceeds  from maturities and principal repayments of available-for-sale securities |   | 3,429,004                    |       | 2,449,393 |   | 1,475,846 |   |
| Purchases  of held-to-maturity securities                                           |   | (780,000                     | )          | — |   | (2,191,887 | ) |
| Proceeds  from maturities and principal repayments of held-to-maturity securities   |   | 527,390                      |       | 2,867,409 |   | 2,935,486 |   |
| Proceeds  from sales of available-for-sale-securities                               |   | 1,177,867                    |       | — |   | — |   |
| Net  (increase) decrease in certificates of deposit                                 |   | (5,195,000                   | )          | 2,998,000 |   | 1,296,000 |   |
| Net  increase in loans                                                              |   | (9,448,464                   | )          | (22,716,955 | ) | (16,068,996 | ) |
| Proceeds  from sales of foreclosed real estate                                      |   | 659,715                      |       | — |   | 478,179 |   |
| Purchases  of premises and equipment                                                |   | (389,881                     | )          | (583,652 | ) | (1,493,795 | ) |
|                                                                                |   |                         |       |   |   |   |   |
| Net  cash from investing activities                                                 |   | (10,819,369                  | )          | (18,540,805 | ) | (13,569,167 | ) |
|                                                                                |   |                         |       |   |   |   |   |
| Cash  flows from financing activities:                                              |   |                         |       |   |   |   |   |
| Net  increase in deposits                                                           |   | 12,277,160                   |       | 9,644,032 |   | 14,796,228 |   |
| Net  (increase) decrease in Federal Home Loan Bank advances                         |   | (482,679                     | )          | 6,000,000 |   | (4,300,000 | ) |
| Net  increase in advance payments by borrowers for taxes and insurance              |   | 126,578                      |       | 149,891 |   | 57,917 |   |
| Repayment  of employee stock ownership plan-note payable                            |   | (1,141,766                   | )          | (147,973 | ) | (60,261 | ) |
| Issuance  of trust preferred security-note payable                                  |   | 4,000,000                    |       | 4,000,000 |   | — |   |
| Purchase  of treasury stock                                                         |   | (106,750                     | )          | (73,262 | ) | (123,623 | ) |
| Proceeds  from issuance of common stock                                             |   | 80,852                       |       | 28,687 |   | 1,367,738 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Net  cash from financing activities                                                 |   | 14,753,395                   |       | 19,601,375 |   | 11,737,999 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                                   |   | 1,731,351                    |       | 3,465,825 |   | (729,480 | ) |
| Cash  and cash equivalents at beginning of year                                     |   | 10,611,093                   |       | 7,145,268 |   | 7,874,748 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Cash  and cash equivalents at end of year                                           |   | $                            | 12,342,444 |   | $ | 10,611,093 |   | $ | 7,145,268 |   |
|                                                                                |   |                         |       |   |   |   |   |
| Supplemental  disclosures of cash flow information:                                 |   |                         |       |   |   |   |   |
| Cash  paid during the year for:                                                     |   |                         |       |   |   |   |   |
| Interest                                                                            |   | $                            | 5,243,310  |   | $ | 6,243,960 |   | $ | 5,633,390 |   |
| Income  taxes                                                                       |   | 26,750                       |       | 150 |   | 5,000 |   |
| Supplemental  disclosure of non-cash investing and financing activities             |   |                         |       |   |   |   |   |
| Real  estate acquired in settlement of loans                                        |   | 673,575                      |       | 356,959 |   | 513,092 |   |
| Loans  to facilitate the sale of real estate owned                                  |   | —                       |       | — |   | 72,172 |   |
| Non-cash  transfer of investment security pursuant to FASB 133                      |   | —                       |       | 1,607,997 |   | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

 

F-8

----

 

**ACCESS ANYTIME BANCORP, INC. ANDSUBSIDIARY**

 

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**NOTE 1****                            SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES**

 

***Basis of Presentation, Principles of Consolidation and Useof Estimates*** - Access Anytime Bancorp, Inc. (the“Company”) is a thrift holding company for its wholly-owned subsidiaryFirstBank (the “Bank”) and the Bank’s wholly-owned subsidiary, First EquityDevelopment Corporation (“FEDCO”). The consolidated financial statementsinclude the accounts and transactions of the Company, the Bank and FEDCO. Allsignificant intercompany accounts and transactions have been eliminated inconsolidation.

 

The preparation offinancial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.  Key estimates include the following:

 

*Allowance for Loan Losses*.  The level of allowance for loan losses isbased on such factors as the amount of non-performing assets, historical lossexperience, regulatory policies, general economic conditions, the estimatedfair value of the underlying collateral and other factors which may affect thecollectibility of the loans.  During2002, the provision for loan losses increased to $786,000 from $449,354 for2001, and from $199,378 in 2000 due to the increase in loans receivable and non-performingassets.

 

Management of the Bankhas reviewed its Loan Loss Reserve Policy for compliance with SEC StaffAccounting Bulletin (SAB) 102.  Indetermining the allowance for loan losses the Bank follows the OTS and SECguidelines, specifically the guidance outlined in OTS CEO Memo 142, SEC SAB102, FAS 5, and FAS 114.

 

Based on recommendationsby management of the Bank, the Bank’s Board of Directors is responsible for theaccuracy and adequacy of the allowance for loan losses and reviews and approvesthe allowance and related provision. The Board delegates the responsibility to its Audit Committee to overseethe process of how the allowance for loan losses is calculated and the periodicvalidation of the calculation process.

 

Theallowance for loan losses incorporates a systematic methodology, which isapplied quarterly, to determine the elements of the allowance for loan lossesand the resultant provisions for loan losses it considers adequate to providefor anticipated loan losses.  Thismethodology includes the following elements:

 

•                  A systematic loan grading system

•                  A periodic review of the summary of theallowance for loan loss balance using historical loss factors

•                  Identification of loans to be evaluated on anindividual basis for impairment

•                  Consideration of internal factors such as theBank’s size, organizational structure, loan portfolio structure, loanadministration procedures, past due and delinquency trends, and loss experience

•                  Consideration of risks inherent in differentkinds of lending

•                  Consideration of external factors such aslocal, regional, and national economic factors

•                  An overall evaluation of the quality of theunderlying collateral, and holding and disposition costs

 

F-9

----

 

Theloan portfolio is segmented and historical loss percentages will be applied tothe identified segments of the portfolio in conjunction with FAS 5.  In addition, certain loans will beindividually analyzed and a loss reserve amount calculated for each one ofthese loans, in conjunction with FAS 114. Specific reserves are provided for individual loans where ultimatecollection is considered questionable by management after reviewing the currentstatus of loans that are contractually past due and considering the netrealizable value of the security and of the loan guarantees, if applicable.

 

TheBank’s exposure to commercial loans generally involves a higher degree ofcredit risk than single-family residential lending.  These loans involve larger loan balances to a single borrower orgroups of related borrowers.  Theseloans are more susceptible to a risk of loss during a downturn in the businesscycle.  The underwriting, review andmonitoring performed by our officers and directors cannot eliminate all of therisks related to these loans.

 

Managementof the Bank makes various assumptions and judgments about the collectibility ofthe loan portfolio and provides an allowance for potential losses based on anumber of factors.  If the assumptionsare wrong, our allowance for loan losses may not be sufficient to cover loanlosses.  The allowances may be increasedin the future, which would decrease net income.

 

*Income Taxes*.  The Company’s valuation allowance was decreased by approximately$482,000 during the year ended December 31, 2001, due to a re-evaluation of therealizability of the state net operating loss. As of December 31, 2002 the Company had a total New Mexico net operatingloss of $17 million.  The loss may notbe carried back, and will expire in varying amounts through 2005.  Due to the uncertainty of the realization ofthe state net operating loss, the Company has established a valuation allowanceof approximately $900,000 as of December 31, 2002.  In assessing the realizability of the remaining deferred taxassets, management considered projected future taxable income and tax planningstrategies.  Based on the Company’shistorical taxable transactions, the timing of the reversal of existingtemporary differences, and the evaluation of tax planning strategies,management believes it is more likely than not that the Company’s futuretaxable income will be sufficient to realize the benefit of the remainingdeferred tax assets existing at December 31, 2002.

 

*Unidentifiable Intangible Asset*.  The Company has an unidentifiable intangibleasset that was originated in connection with the Company’s expansion through anacquisition of two established branch operations in target markets in1999.  The intangible asset did not meetthe definition of a business combination in accordance with Statement No.141.  As such, the Company continues toamortize the intangible asset related to the acquisition in accordance withStatement No. 142 over a period of fifteen years.

 

F-10

----

 

***Cash and Cash Equivalents*** - Cash andcash equivalents include cash, due from banks and all certificates of depositwith original maturities of three months or less.  There are no amounts subject to withdrawal or usage restrictions.

 

***Securities Available-For-Sale***-Securities to be held for indefinite periods of time and not intended to beheld-to-maturity are classified as available-for-sale.  Assets included in this category are thoseassets that management intends to use as part of its asset/liability managementstrategy and that may be sold in response to changes in liquidity needs,interest rates, resultant prepayment risk, and other factors related tointerest rate and resultant prepayment risk changes.  Securities available-for-sale are recorded at fair value.  Both unrealized gains and losses onsecurities available-for-sale, net of taxes, are included as a separatecomponent of accumulated other comprehensive income in the consolidatedstatements of financial condition until these gains or losses arerealized.  Gains and losses aredetermined using the specific-identification method.  If a security has a decline in fair value that is other thantemporary, the security is written down to its fair value by recording a lossin the consolidated statements of operations.

 

***Securities Held-To-Maturity*** -Securities for which the Bank has the positive intent and ability to hold tomaturity are reported at cost, adjusted for premiums and discounts that arerecognized in interest income using the interest method over the period tomaturity.  If a security has a declinein fair value below its amortized cost that is other than temporary, thesecurity is written down to its new cost basis by recording a loss in the consolidatedstatements of operations.  The Bank hasnot experienced a permanent decline on securities that would result in a chargeto operations.

 

***Loans Held-For-Sale*** - Loans to be heldfor indefinite periods of time and not intended to be held-to-maturity areclassified as held-for-sale.  Loans held-for-saleare recorded at the lower of amortized cost or fair value with only netunrealized gains and losses included in the consolidated statements ofoperations.

 

***Loans Receivable*** - Loans receivablethat management has the intent and ability to hold for the foreseeable futureor until maturity or pay-off are reported at their outstanding principaladjusted for any unearned discount, the allowance for loan losses and anydeferred fees or costs on originated loans.

 

Unearned discount oninstallment loans is recognized as income over terms which approximate theinterest method.  Interest on otherloans is recognized using the simple-interest method on the daily balances ofthe principal amounts outstanding.

 

The accrual of intereston impaired loans is discontinued when, in management’s opinion, the borrowermay be unable to meet payments as they become due.  When interest accrual is discontinued, all unpaid accruedinterest is reversed.  If the ultimatecollectibility of principal, wholly or partially, is in doubt, any paymentreceived on a loan on which the accrual of interest has been suspended isapplied to reduce principal to the extent necessary to eliminate suchdoubt.  Otherwise, interest income isrecognized for such payments.

 

Loan origination fees anddirect origination costs are deferred and recognized as an adjustment of theyield of the related loan.

 

F-11

----

 

The Bank defines a loanas impaired when, based on current information and events, it is probable thatthe Bank will be unable to collect all amounts due according to the contractualterms of the loan agreement.  The Bankuses the same criteria in placing a loan on nonaccrual status, exclusive ofresidential mortgage loans and consumer loans which are placed on nonaccrualstatus when they become 90 days past due. When interest accrual is discontinued, all unpaid accrued interest isreversed.  Interest income is subsequentlyrecognized only to the extent cash payments are received.

 

The allowance for loanlosses is increased by charges to income and decreased by revisions in theestimate of the necessary allowance and by charge-offs (net ofrecoveries).  Management’s periodicevaluation of the adequacy of the allowance is based on the Bank’s past loanloss experience, known and inherent risks in the portfolio, adverse situationsthat may affect the borrower’s ability to repay, the estimated value of anyunderlying collateral, and current economic conditions.

 

***Loan Servicing***- The cost of mortgageservicing rights is amortized in proportion to, and over the period of,estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fairvalue of those rights.  Fair values areestimated using discounted cash flows based on a current market interestrate.  For purposes of measuringimpairment, the rights are stratified based on the predominant riskcharacteristics of the underlying loans. The amount of impairment recognized is the amount by which thecapitalized mortgage servicing rights for a stratum exceed their fair value.

 

For originated mortgageservicing rights, the Bank allocates the total cost of the mortgage loans tothe mortgage servicing rights and the loans (without the mortgage servicingrights) based on their relative fair values. Fair values are based on quoted market prices in active markets forloans and loan servicing rights.  Forpurchased mortgage servicing rights, the cost of acquiring loan servicingcontracts is capitalized to the extent such costs do not exceed the amount bywhich the present value of estimated future servicing revenue exceeds thepresent value of expected future servicing costs.

 

***Foreclosed Real Estate***- Real estateproperties acquired through foreclosure, or in lieu of foreclosure, are to besold and are initially recorded at fair value at the date of foreclosureestablishing a new cost basis.  Anyexcess of the loan balance and foreclosure costs over the fair value at thedate of foreclosure is charged to the allowance for loan losses.  After foreclosure, valuations areperiodically performed by management and the real estate is carried at thelower of carrying amount or fair value less cost to sell.  Revenue and expenses from operations andchanges in the valuation allowance are included in other expense.

 

***Federal Home Loan Bank (FHLB) Stock*** -This asset is owned due to regulatory requirements and is carried at cost.  This stock is pledged as collateral tosecure FHLB advances.

 

***Premises and Equipment*** - Land iscarried at cost.  Premises and equipmentare carried at cost, less accumulated depreciation computed by thestraight-line method over the estimated useful life of the assets.  Maintenance and repairs are charged toexpense as incurred and improvements are capitalized.

 

F-12

----

 

***Unidentifiable Intangible Asset*** – TheCompany has an unidentifiable intangible asset that was originated inconnection with the Company’s expansion through an acquisition of twoestablished branch operations in target markets in 1999.  The intangible asset did not meet thedefinition of a business combination in accordance with Statement No. 141.  As such, the Company continues to amortizethe intangible asset related to the acquisition in accordance with StatementNo. 142 over a period of fifteen years.

 

***Income Taxes***- The Company utilizesthe asset and liability method of accounting for income taxes, whereby deferredincome taxes are recognized for the tax consequences in future years ofdifferences in the tax bases of assets and liabilities and their financialreporting amounts based on enacted tax laws and statutory tax rates applicableto the periods in which the differences are expected to affect taxableincome.  Valuation allowances areestablished, if necessary, to reduce deferred tax assets to the amount expectedto be realized.

 

***Stock-Based Compensation***- The Companyapplies Accounting Principles Board Opinion No. 25*, Accounting for Stock Issued toEmployees* (APB 25) and related interpretations in accounting for itsstock-based compensation plans.

 

Under Statement No. 123,the Company may elect to recognize stock-based compensation expense based onthe fair value of the awards or continue to account for stock-basedcompensation under APB 25.  In December2002, Statement No. 148 amended Statement No. 123, concerning the transitionand disclosure of stock-based compensation. The Company has elected to continue to apply the measurement provisionsof APB 25.

 

***Net Income Per Share -***Basic earningsper share has been computed on the basis of the weighted-average number ofshares of common stock outstanding during the periods.  Diluted earnings per share reflects thepotential dilution that would have occurred if stock options and othercontingently issuable shares of common stock had been issued during theperiods.

 

***Impact of New Accounting Standards*** –In June 1998, the Financial Accounting Standards Board (“FASB”) issuedStatement No. 133 (“Statement 133”),*Accounting for Derivative Instruments and Hedging Activities*.  In June 1999, the FASB issued Statement No.137, *Deferralof the Effective Date of FASB Statement No. 133,* which deferred theeffective date of Statement 133 to no later than January 1, 2001 for theCompany’s consolidated financial statements.  Statement 133 requires companies to record derivatives on thestatement of financial conditions at fair value.  Changes in the fair values of those derivatives would be reportedin earnings or other comprehensive income depending on the use of the derivativeand whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationshipmust be highly effective in achieving offsetting changes in fair value ofassets or liabilities or cash flows from forecasted transactions.  In June 2000, the FASB issued Statement No.138, *Accountingfor Certain Derivative Instruments and Certain Hedging Activities,*an amendment of FASB Statement 133.  TheCompany implemented Statement 133 on January 1, 2001 and this implementation didnot have any impact on the Company’s consolidated financial statements.

 

F-13

----

 

In September 2000, theFASB issued Statement No. 140 (Statement 140), *Accounting for the Transfers andServicing of Financial Assets and Extinguishments of Liabilities,*which replaces Statement No. 125 (of the same title).  Statement 140 revises certain standards in the accounting forsecuritizations and other transfers of financial assets and collateral, andrequires some disclosures relating to securitization transactions andcollateral, but it carries over most of Statement 125’s provisions.  The collateral and disclosure provisions ofStatement 140 were effective for year-end 2000 financial statements.  The other provisions of this Statement wereeffective for transfers and servicing of financial assets and extinguishment ofliabilities occurring after March 31, 2001. The adoption of this standard did not have any impact on the Company’sconsolidated financial statements.

 

InJune 2001, the Financial Accounting Standards Board (FASB) issued Statement No.141 (“Statement 141”), *Business Combinations*, and Statement No.142 (“Statement 142”), *Goodwill and Other Intangible Assets*.  Statement 141 requires that the purchasemethod of accounting be used for all business combinations initiated after June30, 2001. The Company adopted the provisions of Statement 141 as of July 1,2001.  The adoption of Statement 141 didnot have any impact on the Company’s consolidated financial statements.

 

Statement142 requires that goodwill and intangible assets with indefinite useful livesno longer be amortized, but instead be tested for impairment at leastannually.  The Company does not havegoodwill or intangible assets with indefinite useful lives subject to theprovisions of Statement 142.

 

InAugust 2001, the FASB issued Statement No. 144 (“Statement 144”), *Accountingfor the Impairment or Disposal of Long-Lived Assets*, whichsupersedes FASB Statement No. 121, *Accounting for the Impairment of Long-Lived Assetsand for Long-Lived Assets to Be Disposed Of*.  Statement 144 addresses financial accountingand reporting for the impairment or disposal of long-lived assets.  The provisions of the statement areeffective for financial statements issued for fiscal years beginning afterDecember 15, 2001, and interim periods within those fiscal years.  The Company adopted Statement 144 on January1, 2002 and this adoption had no impact on the Company’s consolidated financialstatements.

 

InDecember 2001, the American Institute of Certified Public Accountants (“AICPA”)issued Statement of Position 01-6 (SOP 01-6), *Accounting by Certain Entities(Including Entities With Trade Receivables) That Lend to or Finance theActivities of Others*.  SOP01-6 is effective for years beginning after December 15, 2001.  SOP01-6 applies to any entity that lends to or finances the activities ofothers, and it also provides specialized guidance for other types oftransactions specific to certain financial institutions.  The Company adopted SOP 01-6 on January 1,2002, and this adoption had no impact on the Company’s consolidated financialstatements.

 

InOctober 2002, the FASB issued Statement No. 147 (“Statement 147”), *Acquisitions of Certain Financial Institutions*.  This statement requires that unidentifiableintangible assets that were acquired in a transaction that did not meet thedefinition of a business combination continue to be amortized over theirremaining useful lives.  The Companyadopted the provisions of Statement No. 147 as of July 1, 2002, and thisadoption had no impact on the Company’s consolidated financial statements.

 

F-14

----

 

InDecember 2002, the FASB issued Statement No. 148 (“Statement 148”), *Accountingfor Stock-Based Compensation-Transition and Disclosure-an amendment of FASBStatement No. 123.*  Thisstatement amends Statement 123 to provide alternative methods of transition toa voluntary change to the fair value based method of accounting for stock-basedemployee compensation.  In addition,Statement 148 amends the disclosure requirements to require prominentdisclosures in both annual and interim financial statements about the method ofaccounting for stock-based employee compensation and the effect of the methodused on reported results.  Statement 148is effective for fiscal years ending after December 15, 2002, and for interimperiods beginning after December 15, 2002.

 

Statement 148 allows forthe fair value based method under Statement 123, *Accounting for Stock Based Compensation*,or the intrinsic value based method under APB Opinion No. 25 (“Opinion 25”), *Accountingfor Stock Issued to Employees*. Under the fair value based method of accounting, compensation cost ismeasured at the grant date based on the value of the award and is recognizedover the service period, which is generally the vesting period.  Under the intrinsic value method ofaccounting, compensation cost is the excess, if any, of the quoted market priceof the stock at grant date or other measurement date over the amount anemployee must pay to acquire the stock. The Company has elected to continue to use the intrinsic value method ofaccounting under Opinion 25, and has disclosed the proforma effects of the fairvalue based method for the periods presented in its consolidated financialstatements as shown below.

 

Had compensation cost forall grants of stock options and the director retainer plan shares during 2002,2001, and 2000 been determined based on the fair value at the date of grant,reported net income and earnings per share would have been adjusted to thepro-forma amounts shown below:

 
|                                                                                                                                          |   | **2002** |      | **2001** |   | **2000**  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                                                                                                                          |   |     |      |     |   |      |   |
| Net  income, as reported                                                                                                                      |   | $        | 1,003,033 |     | $      | 1,379,053 |   | $ | 410,458 |   |
| Deduct:  Total stock-based employee compensation expense determined under fair value  based method for all awards, net of related tax effects |   | (35,275  | )         | —   |   | (9,105    | )      |
| Pro  forma net income                                                                                                                         |   | $        | 967,758   |     | $      | 1,379,053 |   | $ | 401,353 |   |
|                                                                                                                                          |   |     |      |     |   |      |   |
| Earnings  per share                                                                                                                           |   |     |      |     |   |      |   |
| As  reported                                                                                                                                  |   | $        | 0.77      |     | $      | 1.05      |   | $ | 0.33 |   |
| Pro-forma                                                                                                                                     |   | 0.74     |      | 1.05     |   | 0.32      |   |
|                                                                                                                                          |   |     |      |     |   |      |   |
| Earnings  per share-assuming dilution                                                                                                         |   |     |      |     |   |      |   |
| As  reported                                                                                                                                  |   | $        | 0.73      |     | $      | 1.02      |   | $ | 0.32 |   |
| Pro-forma                                                                                                                                     |   | 0.71     |      | 1.02     |   | 0.32      |   |

 

F-15

----

 

**NOTE 2****                            ACQUISITIONOF BRANCHES**

 

In 1999, the Bankacquired certain assets of two branches of Bank of Albuquerque, N.A., awholly-owned subsidiary of BOK Financial Corporation, for the assumption ofdeposits and related liabilities of the branches.  The acquisition was accounted for as a purchase.

 

TheCompany has an unidentifiable intangible asset that was originated inconnection with the Company’s expansion in 1999.  The intangible asset did not meet the definition of a businesscombination in accordance with Statement No. 141.  As such, the Company continues to amortize the intangible assetrelated to the acquisition in accordance with Statement No. 142 over a periodof fifteen years.

 

F-16

----

 

**NOTE 3****                            SECURITIES**

 

Securities have beenclassified in the consolidated statements of financial condition according tomanagement’s intent.  The carryingamounts of securities and their approximate fair values at December 31 follow:

 
|                                |   | **Amortized  Cost** |       | **Gross  unrealized** |   | **Fair  Value** |   |
|-------------------------------------|--------|---------------------|------------|-----------------------|--------|-----------------|--------|
| **Gains**                           |   | **Losses**          |       |
|                                |   |                |       |                  |   |            |   |   |   |
| **Available-for-sale  securities:** |   |                |       |                  |   |            |   |   |   |
|                                |   |                |       |                  |   |            |   |   |   |
| December  31, 2002:                 |   |                |       |                  |   |            |   |   |   |
| Mortgage-backed  securities:        |   |                |       |                  |   |            |   |   |   |
| GNMA  adjustable rate               |   | $                   | 3,869,130  |                  | $      | 35,498          |   | $ | 3,216 |   | $ | 3,901,412 |   |
| GNMA  fixed rate                    |   | 1,884,218           |       | 95,672                |   | —          |   | 1,979,890 |   |
| Equity  securities:                 |   |                |       |                  |   |            |   |   |   |
| FNMA  common stock                  |   | 6,858               |       | —                |   | 425             |   | 6,433 |   |
| Corporate  bonds                    |   | 99,805              |       | 971                   |   | —          |   | 100,776 |   |
| Trust  preferred securities         |   | 655,000             |       | 22,150                |   | 323             |   | 676,827 |   |
|                                |   | $                   | 6,515,011  |                  | $      | 154,291         |   | $ | 3,964 |   | $ | 6,665,338 |   |
|                                |   |                |       |                  |   |            |   |   |   |
| December  31, 2001:                 |   |                |       |                  |   |            |   |   |   |
| Mortgage-backed  securities:        |   |                |       |                  |   |            |   |   |   |
| GNMA  adjustable rate               |   | $                   | 5,529,599  |                  | $      | 41,514          |   | $ | 13,603 |   | $ | 5,557,510 |   |
| GNMA  fixed rate                    |   | 4,135,930           |       | 68,244                |   | —          |   | 4,204,174 |   |
| Equity  securities:                 |   |                |       |                  |   |            |   |   |   |
| FNMA  common stock                  |   | 6,858               |       | 1,139                 |   | —          |   | 7,997 |   |
| Trust  preferred securities         |   | 655,000             |       | 22,500                |   | —          |   | 677,500 |   |
|                                |   | $                   | 10,327,387 |                  | $      | 133,397         |   | $ | 13,603 |   | $ | 10,447,181 |   |

 

 
|                              |   | **Amortized  Cost** |      | **Gross  unrealized** |   | **Fair  Value** |   |
|-----------------------------------|--------|---------------------|-----------|-----------------------|--------|-----------------|--------|
| **Gains**                         |   | **Losses**          |      |
|                              |   |                |      |                  |   |            |   |   |   |
| **Held-to-maturity  securities:** |   |                |      |                  |   |            |   |   |   |
|                              |   |                |      |                  |   |            |   |   |   |
| December  31, 2002:               |   |                |      |                  |   |            |   |   |   |
| Mortgage-backed  securities:      |   |                |      |                  |   |            |   |   |   |
| FHLMC  adjustable rate            |   | $                   | 463,270   |                  | $      | 7,828           |   | $ | — |   | $ | 471,098 |   |
| Corporate  bonds                  |   | 1,099,204           |      | 2,105                 |   | 2,737           |   | 1,098,572 |   |
| Trust  preferred securities       |   | 300,000             |      | 10,228                |   | —          |   | 310,228 |   |
|                              |   |                |      |                  |   |            |   |   |   |
|                              |   | $                   | 1,862,474 |                  | $      | 20,161          |   | $ | 2,737 |   | $ | 1,879,898 |   |
|                              |   |                |      |                  |   |            |   |   | ** ** |
| December  31, 2001:               |   |                |      |                  |   |            |   |   |   |
| Mortgage-backed  securities:      |   |                |      |                  |   |            |   |   |   |
| FHLMC  adjustable rate            |   | $                   | 615,153   |                  | $      | 2,260           |   | $ | — |   | $ | 617,413 |   |
| Corporate  bonds                  |   | 696,044             |      | 22,426                |   | 4,195           |   | 714,275 |   |
| Trust  preferred securities       |   | 300,000             |      | 18,100                |   |            |   | 318,100 |   |
|                              |   | $                   | 1,611,197 |                  | $      | 42,786          |   | $ | 4,195 |   | $ | 1,649,788 |   |

 

F-17

----

 

The scheduled maturitiesof securities available-for-sale and held-to-maturity at December 31, 2002 wereas follows:

 
|                        |   | **Available-for-sale  securities:** |      | **Held-to-maturity  securities:** |   |
|-----------------------------|--------|-------------------------------------|-----------|-----------------------------------|--------|
|                        |   | **Amortized  Cost**                 |      | **Fair  Value**                   |   | **Amortized  Cost** |   | **Fair  Value** |   |
|                        |   |                                |      |                              |   |   |   |   |   |
| Due  in one year or less    |   | $                                   | —    |                              | $      | — |   | $ | 455,246 |   | $ | 455,507 |   |
| Due  from one to five years |   | 99,768                              |      | 99,410                            |   | 643,958 |   | 643,064 |   |
| Due  from five to ten years |   | —                              |      | —                            |   | — |   | — |   |
| Due  after ten years        |   | 6,415,243                           |      | 6,565,928                         |   | 763,270 |   | 781,327 |   |
|                        |   |                                |      |                              |   |   |   |   |   |
|                        |   | $                                   | 6,515,011 |                              | $      | 6,665,338 |   | $ | 1,862,474 |   | $ | 1,879,898 |   |

 

For purposes of thematurity table, mortgage-backed securities, which are not due at a singlematurity date, have been allocated over maturity groupings based on theweighted-average contractual maturities of underlying collateral.  The underlying principal on mortgage-backedsecurities may be recovered earlier than their scheduled contractual maturitiesbecause of principal prepayments.

 

Securities of $5,360,114and $8,214,282 were pledged to secure public deposits and for other purposesrequired or permitted by law at December 31, 2002 and 2001, respectively.

 

**NOTE 4****                            LOANSHELD-FOR-SALE**

 

The carrying amount ofloans held-for-sale and their estimated fair value, as determined on anaggregate basis, at December 31, follows:

 
|            |   |                |      | **Gross  unrealized** |   |       |   |
|-----------------|--------|---------------------|-----------|-----------------------|--------|------------|--------|
| **December 31** |   | **Amortized  cost** |      | **Gains**             |   | **Losses** |   | **Fair value** |   |
|            |   |                |      |                  |   |       |   |   |   |
| 2002            |   | $                   | 6,553,116 |                  | $      | 135,030    |   | $ | — |   | $ | 6,688,146 |   |
| 2001            |   | 1,034,719           |      | 21,231                |   | —     |   | 1,055,950 |   |
|                 |        |                     |           |                       |        |            |        |  |  |  |  |  |  |

 

Proceeds from sale ofloans held-for-sale were $41,508,677, $24,471,091, and $11,811,842 for theyears ended December 31, 2002, 2001 and 2000, respectively.  Gains of $786,964 and losses of $139 wererecognized in 2002, gains of $418,205 and losses of $1,139 were recognized in2001, while gains of $259,165 and losses of $7,802 were recognized in 2000.

 

F-18

----

 

**NOTE 5****                            LOANSRECEIVABLE**

 

The components of loansin the consolidated statements of financial condition were as follows:

 
|                                               |   | **December  31** |        |
|----------------------------------------------------|--------|------------------|-------------|
|                                               |   | **2002**         |        | **2001** |   |
|                                               |   |             |        |   |   |
| First  mortgage loans:                             |   |             |        |   |   |
| Conventional                                       |   | $                | 72,697,413  |   | $ | 67,661,640 |   |
| FHA  insured and VA guaranteed                     |   | 12,305,845       |        | 9,381,090 |   |
| Commercial  real estate loans                      |   | 27,998,956       |        | 28,671,294 |   |
| Commercial  loans, other than mortgage             |   | 9,559,696        |        | 9,259,407 |   |
| Consumer  and installment loans                    |   | 23,096,720       |        | 20,907,241 |   |
| Construction  loans                                |   | 1,590,619        |        | 3,363,911 |   |
| Other                                              |   | 5,225,768        |        | 5,448,069 |   |
|                                               |   |             |        |   |   |
|                                               |   | 152,475,017      |        | 144,692,652 |   |
|                                               |   |             |        |   |   |
| Less:                                              |   |             |        |   |   |
| Loans  in process                                  |   | 702,086          |        | 1,390,710 |   |
| Unearned  discounts, deferred loan fees, and other |   | 1,091,865        |        | 1,072,602 |   |
| Allowance  for loan losses                         |   | 824,985          |        | 744,987 |   |
|                                               |   |             |        |   |   |
|                                               |   | $                | 149,856,081 |   | $ | 141,484,353 |   |

 

An analysis of thechanges in allowance for loan losses follows:

 
|                                             |   | **Years  ended December 31** |    |
|--------------------------------------------------|--------|------------------------------|---------|
|                                             |   | **2002**                     |    | **2001** |   | **2000** |   |
|                                             |   |                         |    |   |   |   |   |
| Balance  at beginning of year                    |   | $                            | 744,987 |   | $ | 681,486 |   | $ | 864,317 |   |
|                                             |   |                         |    |   |   |   |   |
| Loans  charged-off                               |   | (747,263                     | )       | (442,827 | ) | (150,873 | ) |
| Recoveries                                       |   | 41,261                       |    | 56,974 |   | 18,664 |   |
|                                             |   |                         |    |   |   |   |   |
| Net  loans charged-off                           |   | (706,002                     | )       | (385,853 | ) | (132,209 | ) |
| Provision  for loan losses charged to operations |   | 786,000                      |    | 449,354 |   | 199,378 |   |
| Acquired  reserve                                |   | —                       |    | — |   | (250,000 | ) |
|                                             |   |                         |    |   |   |   |   |
| Balance  at end of year                          |   | $                            | 824,985 |   | $ | 744,987 |   | $ | 681,486 |   |

 

The Bank maintains a highconcentration of its loan portfolio in the state of New Mexico.

 

An analysis of thechanges of loans to directors, executive officers, and major stockholdersfollows:

 
|                                          |   | **Years  ended December 31** |      |
|-----------------------------------------------|--------|------------------------------|-----------|
|                                          |   | **2002**                     |      | **2001** |   | **2000** |   |
|                                          |   |                         |      |   |   |   |   |
| Balance  at beginning of year                 |   | $                            | 1,429,690 |   | $ | 1,279,920 |   | $ | 1,300,285 |   |
| Loans  originated                             |   | 648,100                      |      | 474,735 |   | 98,114 |   |
| Loan  principal payments and other reductions |   | (554,154                     | )         | (324,965 | ) | (118,479 | ) |
|                                          |   |                         |      |   |   |   |   |
| Balance  at end of year                       |   | $                            | 1,523,636 |   | $ | 1,429,690 |   | $ | 1,279,920 |   |

 

F-19

----

 

The Bank had outstandingcommitments to originate real estate loans at December 31, 2002 and 2001 ofapproximately $6,899,000 and $1,229,000, respectively.  At December 31, 2002, the Bank hasoutstanding letters of credit of $286,633.

 

The following tablesummarizes impaired loan information:

 
|                                           |   | **Years  ended December 31** |      |
|------------------------------------------------|--------|------------------------------|-----------|
|                                           |   | **2002**                     |      | **2001** |   | **2000** |   |
|                                           |   |                         |      |   |   |   |   |
| Recorded  investment in impaired loans         |   | $                            | 1,275,423 |   | $ | 1,439,032 |   | $ | 888,204 |   |
| Average  recorded investment in impaired loans |   | 1,357,228                    |      | 1,163,618 |   | 601,127 |   |
| Interest  income lost on impaired loans        |   | 91,341                       |      | 10,776 |   | — |   |
| FASB  114 allowance on impaired loans          |   | 67,131                       |      | 188,333 |   | — |   |
|                                                |        |                              |           |  |  |  |  |  |  |  |

 

The Bank is not committedto lend additional funds to borrowers with non-performing or renegotiatedloans.

 

**NOTE 6****                            PREMISESAND EQUIPMENT**

 

Components of premisesand equipment included in the consolidated statements of financial condition atDecember 31, 2002 and 2001 were as follows:

 
|                           |   | **2002**  |      | **2001**  |   |
|--------------------------------|--------|-----------|-----------|-----------|--------|
|                           |   |      |      |      |   |
| Cost:                          |   |      |      |      |   |
| Land                           |   | $         | 964,393   |      | $      | 964,393 |   |
| Bank  premises                 |   | 3,252,095 |      | 3,242,250 |   |
| Furniture  and equipment       |   | 2,455,564 |      | 2,129,632 |   |
| Automobiles                    |   | 159,074   |      | 108,811   |   |
|                           |   |      |      |      |   |
| Total  cost                    |   | 6,831,126 |      | 6,445,086 |   |
| Less  accumulated depreciation |   | 3,176,957 |      | 2,744,757 |   |
|                           |   |      |      |      |   |
| Net  book value                |   | $         | 3,654,169 |      | $      | 3,700,329 |   |

 

Certain Bank facilitiesand equipment are leased under various operating leases.  Rental expense was $25,400 in 2002, $64,235in 2001, and $86,048 in 2000.

 

Futureminimum rental commitments under noncancelable leases are:

 
| 2003        |   | $      | 39,050  |   |
|-------------|--------|--------|---------|--------|
| 2004        |   | 42,848 |    |
| 2005        |   | 21,866 |    |
| 2006        |   | 15,050 |    |
| 2007        |   | 7,050  |    |
| After  2007 |   | 11,200 |    |
|        |   | $      | 137,064 |   |

 

F-20

----

 

**NOTE 7****                            LOANSERVICING**

 

Mortgage loans servicedfor others are not included in the accompanying consolidated statements offinancial condition.  The Bank did notretain the servicing on any loans sold during 2002 and 2001.  The unpaid balances of loans serviced forothers at December 31 are summarized as follows:

 
|                                        |   | **2002** |      | **2001** |   | **2000**  |   |
|---------------------------------------------|--------|----------|-----------|----------|--------|-----------|--------|
|                                        |   |     |      |     |   |      |   |
| Mortgage  loan portfolios serviced for FNMA |   | $        | 3,829,546 |     | $      | 5,600,379 |   | $ | 6,618,588 |   |
|                                        |   |     |      |     |   |      |   |
|                                        |   | $        | 3,829,546 |     | $      | 5,600,379 |   | $ | 6,618,588 |   |

 

Custodial escrow balancesmaintained in connection with loan servicing were $32,579 and $55,883 at December31, 2002 and 2001, respectively.

 

No mortgage servicingrights retained on loans sold were capitalized during 2002, 2001, or 2000.

 

**NOTE 8****                            CONCENTRATIONOF CREDIT RISK**

 

The Bank investsavailable funds in mortgage-backed securities and interest-bearing deposits andmaintains funds in other depository institutions, including the FHLB ofDallas.  Generally, the Bank’sinvestments in equity securities and mortgage-backed securities are recorded inbook entry form only, and the Bank does not take possession of the actualinvestment certificates.  The Bank’sinvestment in interest-bearing deposits, excluding those with the FHLB ofDallas, is limited to amounts covered by applicable Federal Deposit InsuranceCorporation (FDIC) limits.

 

The Bank has seven fullservice bank locations in Albuquerque, Clovis, Gallup, and Portales, NewMexico.  The Bank’s primary service areaincludes the New Mexico counties of Bernalillo, Cibola, Curry, De Baca, LosAlamos, McKinley, Roosevelt, Sandoval, Santa Fe, Torrance, Valencia, Apachecounty in Arizona, and the Texas counties of Parmer and Bailey.

 

The Bank’s eight officesprimarily service the Bernalillo, Curry, McKinley, and Roosevelt counties ofNew Mexico, and the adjoining Arizona and West Texas counties.  The Bank offers a comprehensive range ofcredit and depository services, while conducting business in a manner based onfinancial stability, service, and community involvement.

 

The Bank grants consumer,commercial business, commercial real estate, and residential loans to customersin its trade area.  Generally, the loansare secured by real estate; however, the Bank does make consumer loans andcommercial loans.  The loans areexpected to be repaid from the cash flow of the borrowers.  Although the Bank has a diversified loanportfolio, a substantial portion of its debtors’ ability to honor theircontracts is dependent upon the general economic conditions of the region.

 

F-21

----

 

The Bank’s collateralpolicy is to secure all real estate loans by mortgages, place first liens onavailable assets underlying commercial loans, and perfect purchase money lienson consumer loan products.  The Bankgrants unsecured loans to its customers.

 

**NOTE 9****                            DEPOSITS**

 

The composition of depositsand the effective rates of interest at December 31 were as follows:

 
|                                                                               |   | **2002**   |        | **2001**   |   |
|------------------------------------------------------------------------------------|--------|------------|-------------|------------|--------|
|                                                                               |   |       |        |       |   |
| Checking  accounts - noninterest bearing                                           |   | $          | 15,238,683  |       | $      | 10,081,246 |   |
| Savings  accounts (2002 – 0.71%; 2001 – 0.80%)                           |   | 6,602,057  |        | 5,735,404  |   |
| Insured  Money Market accounts (2002 – 0.025%-1.93%; 2001 – 0.70%-2.70%) |   | 27,429,125 |        | 27,097,143 |   |
| Transaction  accounts (2002 - .01%-1.25%; 2001 -.01%-1.25%)                        |   | 10,834,155 |        | 8,986,804  |   |
| Time  deposits:                                                                    |   |       |        |       |   |
| 0.01%  - 1.00%                                                                     |   | 347,331    |        | —     |   |
| 1.01%  - 2.00%                                                                     |   | 9,916,119  |        | 731,819    |   |
| 2.01%  - 3.00%                                                                     |   | 34,410,537 |        | 9,211,583  |   |
| 3.01%  - 4.00%                                                                     |   | 33,166,558 |        | 35,867,376 |   |
| 4.01%  - 5.00%                                                                     |   | 14,254,289 |        | 26,342,956 |   |
| 5.01%  - 6.00%                                                                     |   | 5,346,134  |        | 17,787,838 |   |
| 6.01%  - 7.00%                                                                     |   | 1,493,432  |        | 4,919,091  |   |
| 7.01%  - 8.00%                                                                     |   | 158,738    |        | 158,738    |   |
|                                                                               |   |       |        |       |   |
|                                                                               |   | $          | 159,197,158 |       | $      | 146,919,998 |   |

 

At December 31, 2002, thescheduled maturities of time deposits were as follows:

 
|   |   | **Amount** |       | **Percent of  total** |   |
|--------|--------|------------|------------|-----------------------|--------|
|   |   |       |       |                  |   |
| 2003   |   | $          | 60,631,860 |                  | 61.2   | % |
| 2004   |   | 26,240,517 |       | 26.5                  |   |
| 2005   |   | 3,350,459  |       | 3.4                   |   |
| 2006   |   | 2,509,895  |       | 2.5                   |   |
| 2007   |   | 6,360,407  |       | 6.4                   |   |
|   |   |       |       |                  |   |
|   |   | $          | 99,093,138 |                  | 100.0  | % |

 

At December 31, 2002 and2001, individual time deposits in excess of $100,000 amounted to $41,115,382and $19,902,914, respectively.

 

From time to time, theBank has had greater amounts of public funds. The amount of public funds held by the Bank at December 31, 2002 and2001 was $6,674,657 and $8,402,922, respectively.  The Bank is required to pledge collateral or a letter of creditfrom FHLB for such funds.

 

F-22

----

 

Interest expense ondeposits for the years ended December 31 was as follows:

 
|                   |   | **2002**  |      | **2001**  |   | **2000**  |   |
|------------------------|--------|-----------|-----------|-----------|--------|-----------|--------|
|                   |   |      |      |      |   |      |   |
| Savings  accounts      |   | $         | 47,723    |      | $      | 59,100    |   | $ | 110,047 |   |
| Money  Market accounts |   | 469,622   |      | 728,846   |   | 807,683   |   |
| Transaction  accounts  |   | 46,258    |      | 50,295    |   | 82,236    |   |
| Time  deposits         |   | 3,675,508 |      | 4,895,137 |   | 4,154,945 |   |
|                   |   |      |      |      |   |      |   |
|                   |   | $         | 4,239,111 |      | $      | 5,733,378 |   | $ | 5,154,911 |   |

 

At December 31, 2002 and2001, the Bank had accrued interest payable on time deposits totaling $23,971and $87,797, respectively.  The weightedaverage interest rate on deposits was 2.72%, 4.02%, and 4.10% for the yearsended December 31, 2002, 2001 and 2000, respectively.

 

**NOTE 10****                     OTHERBORROWED FUNDS**

 

At December 31,2002 and 2001, the Company had lines of credit totaling $400,000 and $400,000respectively, from other banks. The Company has no borrowings outstanding underthese arrangements at December 31, 2002 and 2001, respectively.  The lines of credit bear market rates ofinterest and borrowings thereunder are to be used for general purposes.  One of the borrowing arrangements atDecember 31, 2002 matured at January 23, 2003, which has been renewed for ayear.  The other borrowing arrangementmatures in September 20, 2003.

 

Each FHLB is authorizedto make advances to its members, subject to such regulations and limitations asthe FHLB may prescribe.  At December 31,2002 and 2001, advances from FHLB of $8,267,321 and $8,750,000, respectively,were collateralized by mortgage loans held by the Bank.  Under the blanket bond of the FHLB, the Bank has additional advancesavailable of $59.8 and $54.0 million at December 31, 2002 and 2001,respectively.  The Bank is alsorequired to maintain stock ownership in the FHLB of at least a minimumpercentage of its loans.  At December31, 2002, the Bank’s investment in stock of the FHLB was adequate.

 

On June 27, 2002, theCompany issued $4 million in trust preferred securities through a privateplacement of Floating Rate Trust Preferred Securities of Access Anytime CapitalTrust II with a liquidation value of $1,000 per share to mature 30 years fromthe date of issuance.  The trustpreferred securities are at a variable rate of the London Interbank OfferedRate (LIBOR) plus 365 basis points, floating quarterly, with a five-year cap of12%.  At December 31, 2002, the interestrate was 5.425%.  The trust preferredsecurities may be redeemed by the Company at par on July 25, 2007.

 

On July 17, 2001, theCompany issued $4 million of 10.25% Fixed Rate Capital Trust Pass-through Securitiesof Access Anytime Capital Trust I with a liquidation value of $1,000 per shareto mature 30 years from the date of issuance. The trust preferred securities may be redeemed by the Company as earlyas July 25, 2006 and may be redeemed at par on July 25, 2011.  The Company invested approximately $2.9million of the net proceeds in the Bank to increase its capital levels.

 

F-23

----

 

On December 31, 2002 theCompany paid off a note payable for the Employee Stock Ownership Plan of$964,753.

 

F-24

----

 

**NOTE 11****                     INCOMETAXES**

 

Income tax expenseconsisted of the following:

 
|                      |   | **2002** |    | **2001** |   | **2000** |   |
|---------------------------|--------|----------|---------|----------|--------|----------|--------|
|                      |   |     |    |     |   |     |   |
| Federal                   |   | $        | —  |     | $      | 23,340   |   | $ | 5,426 |   |
| State                     |   | —   |    | 250      |   | 150      |   |
| Deferred                  |   | 635,948  |    | 45,892   |   | 205,873  |   |
|                      |   |     |    |     |   |     |   |
| Total  income tax expense |   | $        | 635,948 |     | $      | 69,482   |   | $ | 211,449 |   |

 

Actual income tax expense differs from the “expected” income taxexpense (computed at the Federal Statutory corporate tax rate of 34 percent) asfollows:

** **
|                                                  |   | **2002** |    | **2001** |   | **2000** |   |
|-------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                  |   |     |    |     |   |     |   |
| Computed  “expected” income tax expense     |   | $        | 557,254 |     | $      | 492,502  |   | $ | 211,449 |   |
| Increase  (reduction) in income taxes resulting from: |   |     |    |     |   |     |   |
| Current  state tax                                    |   | 65,846   |    | 57,422   |   | —   |   |
| Permanent  differences                                |   | 2,540    |    | 1,313    |   | —   |   |
| Change  in Valuation Allowance                        |   | (108,879 | )       | (481,755 | )      | —   |   |
| Expiration  of state deferred asset                   |   | 108,879  |    | —   |   | —   |   |
| Other                                                 |   | 10,308   |    | —   |   | —   |   |
|                                                  |   |     |    |     |   |     |   |
| Total  income tax expense                             |   | $        | 635,948 |     | $      | 69,482   |   | $ | 211,449 |   |

 

F-25

----

 

The significantcomponents of deferred income tax expense assets and liabilities are asfollows:

 
|                                  |   | **2002**  |    | **2001**   |   |
|---------------------------------------|--------|-----------|---------|------------|--------|
| Deferred  tax assets:                 |   |      |    |       |   |
| Allowance  for loan losses            |   | $         | 262,768 |       | $      | 246,556 |   |
| Unearned  discounts                   |   | 7,829     |    | 11,974     |   |
| Net  intangibles                      |   | 3,503     |    | 3,503      |   |
| Net  operating loss – federal    |   | 191,854   |    | 798,346    |   |
| Net  operating loss – state      |   | 1,049,305 |    | 1,267,156  |   |
| Other                                 |   | 159,381   |    | 60,926     |   |
| Credits                               |   | 157,069   |    | 138,422    |   |
| Gross  deferred tax assets            |   | 1,831,709 |    | 2,526,883  |   |
| Net  valuation allowance              |   | (900,131  | )       | (1,009,010 | )      |
| Net  deferred tax assets              |   | 931,578   |    | 1,517,873  |   |
|                                  |   |      |    |       |   |
| Deferred  tax liabilities:            |   |      |    |       |   |
| Investments                           |   | (60,131   | )       | (47,918    | )      |
| Depreciation                          |   | (280,889  | )       | (271,900   | )      |
| FHLB  Stock                           |   | (223,580  | )       | (211,980   | )      |
| Originated  mortgage servicing rights |   | (5,610    | )       | (13,468    | )      |
| Gross  deferred tax liabilities       |   | (570,210  | )       | (545,266   | )      |
|                                  |   |      |    |       |   |
| Net  deferred tax asset               |   | $         | 361,368 |       | $      | 972,607 |   |

 

The decrease in thevaluation allowances during the three years ended December 31, 2002, 2001, and2000 was due to the expiration of the state net operating losses that had avaluation allowance against them.  As ofDecember 31, 2002, the Company had a total New Mexico net operating loss of$17,488,409.  The loss may not becarried back, and will expire per the following table below.  Due to the uncertainty of the realization ofthe state net operating loss, the Company has established a valuation allowanceof approximately $900,000 as of December 31, 2002, $1,009,000 as of December31, 2001, and $1,500,000 as of December 31, 2000.  In assessing the realizability of the remaining deferred taxassets, management considered projected taxable income and tax planningstrategies.  Based on the Company’shistorical taxable transactions, the timing of the reversal of existingtemporary differences, and the evaluation of tax planning strategies,management believes it is more likely than not that the Company’s futuretaxable income will be sufficient to realize the benefit of the remainingdeferred tax assets existing at December 31, 2002, 2001, and 2000 respectively.

 

Expiration of State NetOperating Loss Carryforwards are as follows:

 
| 2003                                         |   | $         | 6,118,655  |   |
|----------------------------------------------|--------|-----------|------------|--------|
| 2004                                         |   | 6,282,431 |       |
| 2005                                         |   | 5,087,323 |       |
|                                         |   |      |       |
| Total State Net Operating Loss Carryforwards |   | $         | 17,488,409 |   |

 

F-26

----

 

**NOTE 12****                     REGULATORYMATTERS**

 

The Bank is subject tovarious regulatory capital requirements administered by the federal bankingagencies. Failure to meet minimum capital requirements can initiate certainmandatory, and possibly additional discretionary actions by regulators that, ifundertaken, could have a direct material effect on the Bank’s financialstatements.  Under capital adequacyguidelines and the regulatory framework for prompt corrective action, the Bankmust meet specific capital guidelines that involve quantitative measures of theBank’s assets, liabilities, and certain off-balance-sheet items as calculatedunder regulatory accounting practices. The Bank’s capital amounts and classification are also subject toqualitative judgments by the regulators about components, risk weightings, andother factors.

 

In accordance withOffice of Thrift Supervision (“OTS”) regulations, the Bank must have:  (1) core capital equal to 4% of adjustedtotal assets; (2) tangible capital equal to 1.5% of adjusted total assets; and(3) total capital equal to 8.0% of risk-weighted assets, which includesoff-statement of financial condition items.

 

The following table is areconciliation of the Bank’s capital for regulatory purposes at December 31,2002 as reported to the OTS.

 
|                                                               |   | **Tier 1-  Core   Capital** |        | **Tier 1-   Risk-based  Capital** |        | **Total   Risk-based  Capital** |   |
|--------------------------------------------------------------------|--------|-----------------------------|-------------|-----------------------------------|-------------|---------------------------------|--------|
|                                                               |   |                        |        |                              |        |                            |   |
| Total  regulatory assets                                           |   | $                           | 189,627,207 |                              |        |                            |   |   |
| Net  unrealized appreciation on available-for-sale securities, net |   | (136,660                    | )           |                              |        |                            |   |
| Less  intangible assets disallowed for regulatory purposes         |   | (1,723,644                  | )           |                              |        |                            |   |
|                                                               |   |                        |        |                              |        |                            |   |
| Adjusted  regulatory total assets                                  |   | $                           | 187,766,903 |                              |        |                            |   |   |
|                                                               |   |                        |        |                              |        |                            |   |
| Risk-based  assets                                                 |   |                        |        | $                                 | 132,697,000 |                            | $      | 132,697,000 |   |
|                                                               |   |                        |        |                              |        |                            |   |
| Stockholder’s  equity                                         |   | $                           | 19,613,625  |                              | $           | 19,613,625                      |   | $ | 19,613,625 |   |
| Net  unrealized appreciation on available-for-sale securities, net |   | (81,996                     | )           | (81,996                           | )           | (81,996                         | )      |
| General  valuation allowance                                       |   | —                      |        | —                            |        | 757,854                         |   |
| Less  intangible assets disallowed for regulatory purposes         |   | (1,723,644                  | )           | (1,723,644                        | )           | (1,723,644                      | )      |
|                                                               |   |                        |        |                              |        |                            |   |
| Regulatory  capital                                                |   | 17,807,985                  |        | 17,807,985                        |        | 18,565,839                      |   |
| Regulatory  capital required to be “well capitalized”    |   | 9,388,345                   |        | 7,961,820                         |        | 13,269,700                      |   |
|                                                               |   |                        |        |                              |        |                            |   |
| Excess  regulatory capital                                         |   | $                           | 8,419,640   |                              | $           | 9,846,165                       |   | $ | 5,296,139 |   |
|                                                               |   |                        |        |                              |        |                            |   |
| Bank’s  capital to adjusted regulatory assets                 |   | 9.48                        | %           |                              |        |                            |   |
|                                                               |   |                        |        |                              |        |                            |   |
| Bank’s  capital to risk-based assets                          |   |                        |        | 13.42                             | %           | 13.99                           | %      |

 

F-27

----

 

The most recentnotification from the OTS categorized the Bank as “well capitalized” under theregulatory framework for prompt corrective action.  To remain categorized as “well capitalized”, the Bank would haveto maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverageratios as disclosed in the table below. There are no conditions or events since the most recent notificationthat management believes have changed the Bank’s prompt corrective actioncategory.

 
|                                        |   | **Actual** |       | **For  Capital   Adequacy Purposes** |   | **To Be Well  Capitalized  Under Prompt Corrective  Action Provisions** |   |
|---------------------------------------------|--------|------------|------------|--------------------------------------|--------|-------------------------------------------------------------------------|--------|
|                                        |   | **Amount** |       | **Ratio**                            |   | **Amount**                                                              |   | **Ratio** |   | **Amount** |   | **Ratio** |   |
| At December 31, 2002:                       |   |       |       |                                 |   |                                                                    |   |   |   |   |   |   |   |
|                                        |   |       |       |                                 |   |                                                                    |   |   |   |   |   |   |   |
| Total  Capital   (to risk weighted assets)  |   | $          | 18,565,839 |                                 | 13.99  | %                                                                       | $      | 10,615,760 |   | 8.00 | % | $ | 13,269,700 |   | 10.00 | % |
| Tier  1 Capital   (to risk weighted assets) |   | 17,807,985 |       | 13.42                                | %      | 5,307,880                                                               |   | 4.00 | % | 7,961,820 |   | 6.00 | % |
| Tier  1 Capital   (to regulatory assets)    |   | 17,807,985 |       | 9.48                                 | %      | 7,510,676                                                               |   | 4.00 | % | 9,388,345 |   | 5.00 | % |
|                                        |   |       |       |                                 |   |                                                                    |   |   |   |   |   |   |   |
| At  December 31, 2001:                      |   |       |       |                                 |   |                                                                    |   |   |   |   |   |   |   |
|                                        |   |       |       |                                 |   |                                                                    |   |   |   |   |   |   |   |
| Total  Capital   (to risk weighted assets)  |   | $          | 16,556,327 |                                 | 13.25  | %                                                                       | $      | 9,998,160 |   | 8.00 | % | $ | 12,497,700 |   | 10.00 | % |
| Tier  1 Capital   (to risk weighted assets) |   | 15,811,340 |       | 12.65                                | %      | 4,999,080                                                               |   | 4.00 | % | 7,498,620 |   | 6.00 | % |
| Tier  1 Capital   (to regulatory assets)    |   | 15,811,340 |       | 9.16                                 | %      | 6,903,680                                                               |   | 4.00 | % | 8,629,960 |   | 5.00 | % |

 

OTS regulations imposevarious restrictions on the Bank with respect to its ability to pay dividendsto the Company.

 

F-28

----

 

**NOTE 13****                     COMMONSTOCK, STOCK OPTION PLANS AND DIRECTOR RETAINER PLAN**

 

No cash dividends weredeclared or paid in 2002, 2001, or 2000.

 

In 1997, the stockholdersapproved the 1997 Stock Option and Incentive Plan (“1997 Plan”) to provide ameans for the Company to attract and retain officers, directors andemployees.  Under the terms of the 1997Plan, the aggregate number of shares of stock to be issued pursuant to theexercise of all options granted under the 1997 Plan may not exceed183,600.  No options may be grantedunder the 1997 Plan after ten years from the date of the adoption of the 1997Plan.  In addition, the 1997 Planprovides for the granting of Stock Appreciation Rights (“SARs”).  During 1997, options to purchase 165,240shares were granted, all of which were immediately exercisable.  No options were awarded under the 1997 Planduring 1998.  During 1999, options topurchase 12,000 shares were granted, all of which were immediatelyexercisable.  During 2000, options topurchase 4,000 shares were granted all of which were immediatelyexercisable.  No options were awardedunder the 1997 plan in 2001.  During2002, options to purchase 5,000 shares were granted all of which wereimmediately exercisable.  No SARs have beenawarded as of December 31, 2002.  During1998, 7,100 shares of common stock were issued in connection with exercise ofoptions under the 1997 Plan with proceeds to the Company of $39,938.  During 1999, 6,600 shares of common stockwere issued in connection with exercise of options under the 1997 Plan withproceeds to the Company of $37,124. During 2000, 5,100 shares of common stock were issued in connection withexercise of options under the 1997 Plan with proceeds to the Company of$28,687.  During 2001, 5,100 shares ofcommon stock were issued in connection with exercise of options under the 1997Plan with proceeds to the Company of $28,687. During 2002, 12,379 shares of common stock were issued in connection withexercise of options under the 1997 plan with proceeds to the Company of$80,852. Previously awarded stock options under the 1997 Plan to purchase 4,080shares were forfeited during 1999, leaving these shares available forreissuance.  Previously awarded stockoptions under the 1997 Plan to purchase 4,080 shares were forfeited during2001, leaving those shares available for reissuance.  At December 31, 2002, options to purchase 5,520 shares of theCompany’s common stock were available for issuance under the 1997 Plan.

 

F-29

----

 

A summary of the statusof the Company’s stock options as of December 31, 2002, 2001 and 2000, and thechanges for the years then ended is presented below:

 
|                                                                   |   | **For the  year ended December** |   |
|------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                   |   | **2002**                         |   | **2001** |   | **2000** |   |
|                                                                   |   | **Shares**                       |   | **Weighted   Average   Exercise   Price** |   | **Shares** |   | **Weighted**

**Average    Exercise   Price** |   | **Shares** |   | **Weighted   Average    Exercise   Price** |   |
|                                                                   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Options  outstanding, beginning of year                                |   | 149,180                          |   | $ | 7.054 |   | 158,360 |   | $ | 7.042 |   | 159,460 |   | $ | 6.981 |   |
| Granted                                                                |   | 5,000                            |   | 7.990 |   | — |   | — |   | 4,000 |   | 7.680 |   |
| Exercised                                                              |   | (12,379                          | )      | 6.531 |   | (5,100 | ) | 5.625 |   | (5,100 | ) | 5.625 |   |
| Expired                                                                |   | —                           |   | — |   | (4,080 | ) | 8.375 |   | — |   | — |   |
|                                                                   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Options  outstanding, end of year                                      |   | 141,801                          |   | $ | 7.133 |   | 149,180 |   | $ | 7.054 |   | 158,360 |   | $ | 7.042 |   |
|                                                                   |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Weighted  average fair market value of options granted during the year |   |                             |   | $ | 5.694 |   |   |   | $ | — |   |   |   | $ | 3.450 |   |

 

The following tablesummarizes information about options outstanding:

 
|               |   | **Options  Outstanding and Exercisable** |            |
|--------------------|--------|------------------------------------------|-----------------|
|               |   | **Range of   Exercise   Price**          |            | **Number  Outstanding and   Exercisable** |   | **Weighted  Average   Remaining Contractual  Life (In Years)** |   | **Weighted  Average  Exercise Price** |   |
| December  31, 2002 |   | $                                        | 5.625 to $8.375 |   | 141,801 |   | 5.02 |   | $ | 7.133 |   |
|               |   |                                     |            |   |   |   |   |   |   |
| December  31, 2001 |   | $                                        | 5.625 to $8.375 |   | 149,180 |   | 5.84 |   | $ | 7.054 |   |
|               |   |                                     |            |   |   |   |   |   |   |
| December  31, 2000 |   | $                                        | 5.625 to $8.375 |   | 158,360 |   | 6.83 |   | $ | 7.042 |   |

 

F-30

----

 

The Company has adopted the Non-Employee Director Retainer Plan(“Retainer Plan”) which provides for the payment of all or a portion of thedirectors fees in shares of common stock of the Company.  The number of shares is determined based onthe fair market value of the Company’s stock during the month the fee ispayable.

 

The Retainer Plan defersthe recognition of compensation by the directors by deferring the issuance ofcommon stock to the director until the director leaves the board.  A total of 50,000 shares of common stockhave been reserved for issuance under the Retainer Plan.  During 1999, $18,500 of director fees,representing 2,436 shares of common stock to be issued, were reserved under theterms of the Retainer Plan.  During2000, $20,150 of directors fees, representing 3,180 shares of common stock tobe issued, were reserved under the terms of the Retainer Plan.  During 2001, $37,350 of directors fees,representing 5,253 shares of common stock to be issued, were reserved under theterms of the Retainer Plan.  During2002, $52,800 of directors fees, representing 6,108 shares of common stock tobe issued, were reserved under the terms of the Retainer Plan.  As of December 31, 2002, 1,878 of theseshares have been issued.

 

The Company accounts forcompensation costs incurred in connection with the granting of stock options anddirector retainer plan using the intrinsic value method prescribed in APBOpinion No. 25.  As such, nocompensation expense was recorded in connection with the awarding of stockoptions during 2002, 2001, or 2000 as the exercise price was not below the marketprice of the Company’s common stock at the respective dates of grant. In 1995,the FASB issued SFAS No. 123, *Accounting for Stock Based Compensation,*and in December 2002, SFAS No. 148, *Accounting for Stock Based Compensation*,which amended SFAS No. 123, concerning the transition and disclosure.  The Company has elected to continue to applythe measurement provisions of APB 25. However, pro-forma disclosure of net income and earnings per share as ifthe Company adopted the cost recognition provisions of SFAS No. 123 and SFASNo. 148 is presented in Note 1 in the Summary of Significant AccountingPolicies.

 

No stock options weregranted in 2001.  The fair value of eachstock option granted during 2002 and 2000 was estimated on the date of grantusing the Black-Scholes option-pricing model with the following weightedaverage assumptions:

 
|                       |   | **2002** |   | **2000** |   |
|----------------------------|--------|----------|--------|----------|--------|
| Dividend  yield            |   | —   | %      | —   | %      |
| Expected  volatility       |   | 40.00    | %      | 40.15    | %      |
| Risk-fee  interest rate    |   | 3.65     | %      | 6.59     | %      |
| Expected  lives (in years) |   | 7        |   | 5        |   |

 

The fair value of thedirector retainer plan shares granted during 2002, 2001, and 2000 was estimatedon the date of grant using the Black-Scholes option-pricing model with thefollowing weighted average assumptions:

 
|                       |   | **2002** |   | **2001** |   | **2000** |   |
|----------------------------|--------|----------|--------|----------|--------|----------|--------|
|                       |   |     |   |     |   |     |   |
| Dividend  yield            |   | —   | %      | —   | %      | —   | %      |
| Expected  volatility       |   | 40.00    | %      | 40.00    | %      | 40.15    | %      |
| Risk-fee  interest rate    |   | 3.19     | %      | 4.61     | %      | 5.30     | %      |
| Expected  lives (in years) |   | 5        |   | 5        |   | 5        |   |

 

F-31

----

 

**NOTE 14****                     EMPLOYEEBENEFIT PLANS**

 

The Company and the Bankhave a profit sharing/employee stock ownership plan (“ESOP”) for whichsubstantially all employees are eligible. Contributions, when made, may be made in the form of cash or in commonstock of the Company.  Contributionamounts are based upon employee’s compensation, but may not exceed maximumdeductible limits for federal income tax purposes.  Employer contributions to the ESOP of $56,000, $41,300, and$24,996, were made in 2002, 2001 and 2000, respectively.  The profit sharing plan also includes a401(k) before-tax salary deferral feature. Employees may elect to contribute tothe plan and such contributions may be matched by the Bank as a percentage ofeach employee’s contribution.  Employercontributions made to the 401(k) plan for the years ended December 31, 2002,2001, and 2000 totaled $19,700, $17,500, and $11,392, respectively.

 

During 2000, the ESOPpurchased 240,000 shares of previously unissued Company common stock at $5.625per share for proceeds to the Company of $1,350,000.  This purchase was facilitated by a loan from an unrelated thirdparty in the amount of $1,350,000.  Theshares purchased initially were pledged as collateral for the loan, and werereleased at the rate of 8,000 shares for each quarterly payment.  The loan principal and interest paymentswere paid by the Company, and at December 31, 2002 the loan was paid off.  The shares continue to be allocated toemployees of the Company at the rate of 8,000 shares for each quarter.

 

As shares are allocatedto employees, the Company reports compensation expense equal to the currentmarket price of the shares and the shares become outstanding forearnings-per-share computations.  ESOPcompensation expense relative to this release of shares was $266,799, $277,461,and $69,470 for the years ended December 31, 2002, 2001, and 2000,respectively.

 

Shares of the Company’scommon stock held by the ESOP at December 31, 2002 and 2001 were as follows:

 
|                            |   | **2002** |      | **2001** |   |
|---------------------------------|--------|----------|-----------|----------|--------|
|                            |   |     |      |     |   |
| Allocated  shares               |   | 43,788   |      | 33,067   |   |
| Shares  released for allocation |   | 80,000   |      | 48,000   |   |
| Unearned  ESOP shares           |   | 160,000  |      | 192,000  |   |
|                            |   | 283,788  |      | 273,067  |   |
|                            |   |     |      |     |   |
| Fair  value of unearned shares  |   | $        | 1,537,600 |     | $      | 1,536,000 |   |
|                                 |        |          |           |          |        |  |  |

 

In 1998, the Bankestablished an executive savings plan to provide additional benefits for selecthighly compensated management employees of the Bank as a means for participantsto defer an unlimited portion of their compensation for the future.  Participants may contribute to the plan anunlimited percentage of their basic compensation into the plan.  The Bank may make discretionary matchingcontributions to the plan.  Salarydeferrals and matching contributions, if any, are funded into a Rabbi Trustwhich are available to the general creditors of the Bank and, as a result, arerecorded on the books and records of the Company.  Employer contributions made to the executive savings plan for theyears ended December 31, 2002, 2001, and 2000, totaled $60,950, $35,000, and$50,143, respectively.  All salarydeferral contributions are currently invested in the Company’s common stock.

 

F-32

----

 

**NOTE 15****                     NETINCOME PER SHARE**

 

Basic net income pershare has been computed by dividing net income available to common stockholdersfor the period by the weighted average number of common shares outstandingduring the period.  Diluted net incomeper share has been computed by dividing net income available to commonstockholders for the period by the weighted average number of common sharesoutstanding during the period adjusted for the assumed exercise of outstandingstock options and other contingently issuable shares of common stock.  Net income for basic and diluted earningsper share are the same, as there are no contingently issuable shares of stockwhose issuance would have impacted net income.

 

A reconciliation betweenbasic and diluted weighted average common shares outstanding follows:

 
|                                                |   | **2002**  |   | **2001**  |   | **2000**  |   |
|-----------------------------------------------------|--------|-----------|--------|-----------|--------|-----------|--------|
|                                                |   |      |   |      |   |      |   |
| Weighted  average common shares – Basic*       |   | 1,306,352 |   | 1,316,109 |   | 1,246,814 |   |
|                                                |   |      |   |      |   |      |   |
| Plus  effect of dilutive securities:                |   |      |   |      |   |      |   |
| Stock  Options                                      |   | 25,502    |   | 14,394    |   | 8,768     |   |
| Shares  held by Rabbi Trust                         |   | 37,277    |   | 27,120    |   | 12,611    |   |
|                                                |   |      |   |      |   |      |   |
| Weighted  average common shares - Assuming Dilution |   | 1,369,131 |   | 1,357,623 |   | 1,268,193 |   |

 

----

*Includes shares awardedto directors under the Non-Employee Director Retainer Plan

 

**NOTE 16****                     FINANCIALINSTRUMENTS**

 

The Bank is a party tofinancial instruments with off-statement of financial condition risk in thenormal course of business to meet the financing needs of its customers and toreduce its own exposure to fluctuation in interest rates.  These financial instruments includecommitments to extend credit, standby letters of credit, and financialguarantees. These instruments involve, to varying degrees, elements of creditand interest rate risk in excess of the amount recognized in the consolidatedstatements of financial condition.  Thecontract or notional amounts of these instruments reflect the extent ofinvolvement the Bank has in particular classes of financial instruments.  The Bank uses the same credit policies inmaking commitments and conditional obligations as it does for the consolidatedstatements of financial condition instruments.

 

At December 31, 2002,unfunded credit commitments are as follows:

 
| Commitments to extend residential loans |   | $ | 6,898,737  |   |
|-----------------------------------------|--------|---|------------|--------|
| Lines  of credit                        |   | $ | 10,516,078 |   |
| Credit  cards                           |   | $ | 2,074,235  |   |

 

F-33

----

 

Commitments to extendcredit are agreements to lend to a customer as long as there is no violation ofany condition established in the contract. Commitments generally have fixed expiration dates or other terminationclauses and may require payment of a fee. Some of the commitments are expected to expire without being drawnupon.  The total commitment amounts donot necessarily represent future cash requirements.  The Bank evaluates each customer’s creditworthiness on acase-by-case basis.  The amount ofcollateral obtained, if deemed necessary by the Bank upon extension of credit,is based on management’s credit evaluation of the customers.

 

Standby letters of creditand financial guarantees written are conditional commitments issued by the Bankto guarantee the performance of a customer to a third party.  Currently, letters of credit are notextended beyond one year.  The creditrisk involved in issuing letters of credit is essentially the same as thatinvolved in extending loan facilities to customers.  The Bank holds collateral and personal guarantees as deemednecessary.  The Bank had $286,633 and$4,000,000 in standby letters of credit outstanding at December 31, 2002 and2001, respectively.

 

At December 31, 2002 and2001, the Bank had no open interest rate swaps, futures, options, or forwardcontracts.

 

At December 31, 2002 and2001, the Bank had $13,451,853 and $2,264,188, respectively, of commitments tosell single family residential loans. These commitments include loans held-for-sale and loans to beoriginated.

 

SFAS No. 107, *Disclosuresabout Fair Value of Financial Instruments*, requires disclosure offair value information about financial instruments, whether or not recognizedon the consolidated statements of financial condition, for which it ispracticable to estimate that value. Quoted market prices, if available, are utilized as an estimate of thefair value of financial instruments. Because no quoted market prices exist for a part of the Bank’s financialinstruments, the fair value of such instruments has been derived based onmanagement’s assumptions with respect to future economic conditions, the amountand timing of future cash flows and estimated discount rates.  Different assumptions could significantlyaffect these estimates.  Accordingly,the estimates provided herein do not necessarily indicate amounts which couldbe realized in a current exchange. Further, as it is management’s intent to hold a portion of its financialinstruments to maturity, it is not probable that the fair values shown belowwill be realized in a current transaction. In addition, fair value estimates are based solely on existingoff-consolidated statements of financial condition instruments withoutattempting to estimate the value of anticipated future business and the valueof assets and liabilities that are not considered financial instruments.  Examples would include portfolios of loansserviced for others, investments in real estate, premises and equipment, anddeferred tax assets.

 

Because of the wide rangeof permissible valuation techniques and the numerous estimates which must bemade, it may be difficult to make reasonable comparisons of the fair valueinformation to that of other financial institutions.  The aggregate fair value amount should in no way be construed asrepresentative of the underlying value of the Company and/or the Bank.

 

F-34

----

 

The following methods andassumptions were used to estimate the fair value of each class of financialinstruments for which it is practical to estimate that value:

 

***Cash and cash equivalents*** - Thecarrying amount for cash and cash equivalents approximates the assets’ fairvalue because of the short maturity of those instruments.

 

***Securities*** - The fair value oflong-term investments such as corporate bonds, trust preferred securities andmortgage-backed securities is estimated based on bid quotations received fromsecurities dealers and the FHLB.

 

***Loans Receivable*** - Fair values areestimated for portfolios of loans with similar financial characteristics.Mortgage loans are segregated by type, including but not limited to residential,commercial and construction. Consumer loans are segregated by type, includingbut not limited to home improvement loans, automobile loans, loans secured bydeposits and secured and unsecured personal loans.  Each loan category may be segmented, as appropriate, into fixedand adjustable interest rate terms, ranges of interest rates, performing andnon-performing, and repricing frequency.

 

For certain homogeneouscategories of loans, such as some residential mortgages, fair value isestimated using the quoted market prices for securities backed by similarloans, adjusted for differences in loan characteristics.  The fair values of other types of loans areestimated by discounting the future scheduled and unscheduled cash flows usingthe current rates at which similar loans would be made to borrowers withsimilar credit ratings and for the same remaining maturities.  Unscheduled cash flows take the form ofestimated prepayments and may be based upon historical experience as well asanticipated experience derived from current and prospective economic andinterest rate environments.  For certaintypes of loans, anticipated prepayment experience exists in published tablesfrom securities dealers.

 

The fair value ofsignificant non-performing mortgage loans is based on estimated value of thecollateral.  Where appraisals are notavailable, estimated cash flows are discounted using a rate commensurate withthe credit risk associated with those cash flows.  Assumptions regarding credit risk, cash flows and discount ratesare judgementally determined using available market information and specificborrower information.  The fair value ofnon-performing consumer loans is based on historical experience with suchloans.

 

The fair value of loansheld-for-sale is estimated based on outstanding commitments from investors orcurrent market prices for similar loans.

 

***Federal Home Loan Bank stock*** - Thefair value of stock in the FHLB is estimated to be equal to its carrying amountgiven it is not a publicly traded equity security, it has an adjustabledividend rate, and all transactions in the stock are executed at the stated parvalue.

 

***Deposits and advances from borrowers for taxes and insurance***- The fair value of deposits with no stated maturity, such as interest-bearingor non-interest-bearing checking accounts, savings accounts, money marketaccounts and advances from borrowers for taxes and insurance is equal to theamount payable upon demand.  The fairvalue of certificates of deposit is based on the lower of redemption ordiscounted value of contractual cash flows. Discount rates for certificates of deposit are estimated using currentmarket rates.

 

F-35

----

 

***Federal Home Loan Bank advances****-*Theestimated fair value of the FHLB advances is normally based upon the discountedvalue of the differences between contractual interest rates and current marketrates for similar agreements.  However,the estimated fair value is the same as the carrying value due to the short-termnature of the advances.

 

***ESOP Note*** – Effective May 1, 2000, theCompany issued and sold 240,000 shares of Common Stock for cash to itsESOP.  The ESOP transaction wasfacilitated by a loan in the amount of $1,350,000 to the ESOP from a thirdparty lender.  On December 31, 2002, theCompany paid off a note payable for the Employee Stock Ownership Plan of$964,753. On December 31, 2002, 160,000 of these shares are unallocated.

 

***Trust Preferred Securities*** –

On June 27, 2002, theCompany issued $4 million in trust preferred securities through a privateplacement of Floating Rate Trust Preferred Securities of Access Anytime CapitalTrust II with a liquidation value of $1,000 per share to mature 30 years fromthe date of issuance.  The trustpreferred securities are at a variable rate of the London Interbank OfferedRate (LIBOR) plus 365 basis points, floating quarterly, with a five-year cap of12%.  At December 31, 2002, the interestrate was 5.425%.  The trust preferredsecurities may be redeemed by the Company at par on July 25, 2007.  On July 17, 2001, the Company issued $4million of 10.25% Fixed Rate Capital Trust Pass-through Securities of AccessAnytime Capital Trust I with a liquidation value of $1,000 per share to mature30 years from the date of issuance.  Thetrust preferred securities may be redeemed by the Company as early as July 25,2006 and may be redeemed at par on July 25, 2011.  The Company invested approximately $2.9 million of the netproceeds in the Bank to increase its capital levels.

 

***Off-statement of financial condition financial instruments***- The fair value of commitments to extend credit is estimated using the feescurrently charged to enter into similar agreements, taking into account theremaining terms of the agreements and the present creditworthiness of thecounterparties.  For fixed-rate loancommitments, fair value also considers the difference between current levels ofinterest rates and the committed rates. The fair value of guarantees and letters of credit is based on fees currentlycharged for similar agreements or on the estimated cost to terminate them orotherwise settle the obligations with the counterparties at the reporting date.

 

The fair value ofoff-statement of financial condition financial instruments is estimated toequal the carrying amount at December 31, 2002 and 2001.

 

***Non-financial instruments*** - SFAS No.107 does not permit financial institutions to take into account the value oflong-term relationships with depositors, commonly known as core depositintangibles, when estimating the fair value of deposit liabilities.  These intangibles are considered to beseparate intangible assets that are not financial instruments.  Nonetheless, financial institutions’ coredeposits have typically traded at premiums to their book values under bothhistorical and current market conditions.

 

Likewise, SFAS No. 107does not permit financial institutions to take into account the value of thecash flows and income stream derived from its portfolio of loans serviced forothers.

 

F-36

----

 

The estimated fair valuesof the Bank’s financial instruments are shown below:

 
|                                                   |   | **December  31, 2002** |   | **December  31, 2001**     |   |
|--------------------------------------------------------|--------|------------------------|--------|----------------------------|--------|
|                                                   |   | **Carrying   amount**  |   | **Estimated  fair  value** |   | **Carrying  amount** |   | **Estimated  fair  value** |   |
|                                                   |   | **(In Thousands)**     |   |
|                                                   |   |                   |   |                       |   |   |   |   |   |
| Financial  assets:                                     |   |                   |   |                       |   |   |   |   |   |
| Cash  and cash equivalents                             |   | $                      | 12,342 |                       | $      | 12,342 |   | $ | 10,611 |   | $ | 10,611 |   |
| Certificates  of deposit                               |   | 5,993                  |   | 6,025                      |   | 798 |   | 807 |   |
| Securities  available-for-sale                         |   | 6,665                  |   | 6,665                      |   | 10,447 |   | 10,447 |   |
| Securities  held-to-maturity                           |   | 1,862                  |   | 1,872                      |   | 1,611 |   | 1,651 |   |
| Loans  held-for-sale                                   |   | 6,553                  |   | 6,688                      |   | 1,035 |   | 1,056 |   |
|                                                   |   |                   |   |                       |   |   |   |   |   |
| Loans  receivable                                      |   | 149,839                |   | 152,748                    |   | 141,484 |   | 142,837 |   |
| Interest  receivable                                   |   | 873                    |   | 873                        |   | 856 |   | 856 |   |
| FHLB  stock                                            |   | 1,013                  |   | 1,013                      |   | 984 |   | 984 |   |
|                                                   |   |                   |   |                       |   |   |   |   |   |
| Financial  liabilities:                                |   |                   |   |                       |   |   |   |   |   |
| Deposits                                               |   | 159,197                |   | 151,737                    |   | 146,920 |   | 139,508 |   |
| Accrued  interest and other liabilities                |   | 1,384                  |   | 1,384                      |   | 936 |   | 936 |   |
| Advance  payments by borrowers for taxes and insurance |   | 434                    |   | 434                        |   | 308 |   | 308 |   |
| FHLB  advances                                         |   | 8,267                  |   | 8,396                      |   | 8,750 |   | 8,834 |   |
| ESOP  note payable                                     |   | —                 |   | —                     |   | 1,142 |   | 1,142 |   |
| Trust  preferred securities                            |   | 8,000                  |   | 8,448                      |   | 4,000 |   | 4,000 |   |
|                                                        |        |                        |        |                            |        |  |  |  |  |  |  |  |  |

 

The deferred incomeamounts arising from unrecognized financial instruments are not significant.  Also, these financial instruments havecontractual interest rates at or above current market rates.  Therefore, no market value disclosure isprovided for these items.

 

**NOTE 17****                     COMMITMENTSAND CONTINGENCIES**

 

The Company and itssubsidiary are from time to time parties to various legal actions arising inthe normal course of business. Management believes that there is no proceeding threatened or pendingagainst the Company or its subsidiary which, if determined adversely, wouldhave a material adverse effect on the consolidated financial position orresults of operations of the Company.

 

F-37

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**NOTE 18****                     PARENTCOMPANY CONDENSED FINANCIAL STATEMENTS**

 

The following condensedstatements of financial condition as of December 31, 2002 and 2001, and therelated statements of operations and cash flows for each of the years in threeyear period ended December 31, 2001 for the Company should be read inconjunction with the consolidated financial statements and notes thereto.

 

**Statements of Financial Condition**

 
|                                               |   | **December  31** |       |
|----------------------------------------------------|--------|------------------|------------|
|                                               |   | **2002**         |       | **2001** |   |
| Assets:                                            |   |             |       |   |   |
| Cash  and cash equivalents                         |   | $                | 1,395,385  |   | $ | 350,310 |   |
| Certificates  of deposit                           |   | 1,000,000        |       | — |   |
| Investment  in the Bank                            |   | 19,613,625       |       | 18,041,205 |   |
| Securities  available-for-sale                     |   | 468,667          |       | 180,000 |   |
| Securities  held-to-maturity                       |   | 300,000          |       | — |   |
| Premises  and equipment, net                       |   | 400,611          |       | 409,003 |   |
| Other  assets                                      |   | 294,246          |       | 162,503 |   |
|                                               |   |             |       |   |   |
| Total  assets                                      |   | $                | 23,472,534 |   | $ | 19,143,021 |   |
|                                               |   |             |       |   |   |
| Liabilities:                                       |   |             |       |   |   |
| Accounts  payable and accrued expenses             |   | $                | 655,321    |   | $ | 499,096 |   |
| Employee  Stock Ownership Plan – Note Payable |   | —           |       | 1,141,766 |   |
| Trust  Preferred Securities – Notes Payable   |   | 8,000,000        |       | 4,000,000 |   |
|                                               |   |             |       |   |   |
| Total  liabilities                                 |   | 8,655,321        |       | 5,640,862 |   |
|                                               |   |             |       |   |   |
| Stockholders’  equity:                        |   |             |       |   |   |
| Common  stock                                      |   | 15,080           |       | 14,956 |   |
| Capital  in excess of par value                    |   | 11,378,222       |       | 11,157,895 |   |
| Retained  earnings                                 |   | 4,547,359        |       | 3,544,326 |   |
| Accumulated  other comprehensive income, net       |   | 90,197           |       | 71,877 |   |
|                                               |   | 16,030,858       |       | 14,789,054 |   |
| Unallocated  Employee Stock Ownership Plan shares  |   | (870,000         | )          | (1,050,000 | ) |
| Treasury  stock, at cost                           |   | (343,645         | )          | (236,895 | ) |
| Total  stockholders’ equity                   |   | 14,817,213       |       | 13,502,159 |   |
|                                               |   |             |       |   |   |
| Total  liabilities and stockholders’ equity   |   | $                | 23,472,534 |   | $ | 19,143,021 |   |

 

F-38

----

 

**Statements of Operations**

 
|                                        |   | **Years  ended December 31** |      |
|---------------------------------------------|--------|------------------------------|-----------|
|                                        |   | **2002**                     |      | **2001** |   | **2000** |   |
| Dividends  from the Bank                    |   | $                            | 652,500   |   | $ | 608,000 |   | $ | — |   |
| Equity  in undistributed income of the Bank |   | 1,554,381                    |      | 1,552,925 |   | 779,818 |   |
| Other  income                               |   | 68,686                       |      | 24,158 |   | — |   |
| Interest  expense                           |   | (574,867                     | )         | (281,111 | ) | (85,973 | ) |
| Salaries  and employee benefits             |   | (537,762                     | )         | (446,931 | ) | (213,111 | ) |
| Other  expense                              |   | (159,905                     | )         | (77,988 | ) | (70,276 | ) |
|                                        |   |                         |      |   |   |   |   |
| Net  income                                 |   | $                            | 1,003,033 |   | $ | 1,379,053 |   | $ | 410,458 |   |

 

F-39

----

 

**Statementsof Cash Flows**

 
|                                                                    |   | **Years  ended December 31** |      |
|-------------------------------------------------------------------------|--------|------------------------------|-----------|
|                                                                    |   | **2002**                     |      | **2001** |   | **2000** |   |
| Cash  flows from operating activities:                                  |   |                         |      |   |   |   |   |
| Net  income                                                             |   | $                            | 1,003,033 |   | $ | 1,379,053 |   | $ | 410,458 |   |
| Adjustments  to reconcile net income to cash from operating activities: |   |                         |      |   |   |   |   |
| Equity  in income of the Bank                                           |   | (2,206,881                   | )         | (2,160,925 | ) | (779,818 | ) |
| Depreciation                                                            |   | 8,392                        |      | 3,497 |   | — |   |
| Non-cash  ESOP compensation expense                                     |   | 266,799                      |      | 277,461 |   | 69,470 |   |
| Common  stock rights issued in lieu of directors compensation           |   | 52,800                       |      | 37,350 |   | 20,150 |   |
| Increase  in other assets                                               |   | (149,782                     | )         | (148,625 | ) | (3,485 | ) |
| Increase  in accounts payable and accrued expenses                      |   | 160,878                      |      | 283,081 |   | 151,317 |   |
| Net  cash from operating activities                                     |   | (864,761                     | )         | (329,108 | ) | (131,908 | ) |
|                                                                    |   |                         |      |   |   |   |   |
| Cash  flows from investing activities:                                  |   |                         |      |   |   |   |   |
| Capital  contribution to the Bank                                       |   | —                       |      | — |   | (1,350,000 | ) |
| Purchases  of certificates of deposit                                   |   | (1,000,000                   | )         | — |   | — |   |
| Purchases  of available-for-sale securities                             |   | (275,000                     | )         | (180,000 | ) | — |   |
| Purchases  of held-to-maturity securities                               |   | (300,000                     | )         | — |   | — |   |
| Purchases  of premises and equipment                                    |   | —                       |      | (412,500 | ) | — |   |
| Investment  in the Bank                                                 |   | —                       |      | (2,919,447 | ) | — |   |
| Dividend  from the Bank                                                 |   | 652,500                      |      | 608,000 |   | — |   |
| Net  cash from investing activities                                     |   | (922,500                     | )         | (2,903,947 | ) | (1,350,000 | ) |
|                                                                    |   |                         |      |   |   |   |   |
| Cash  flows from financing activities:                                  |   |                         |      |   |   |   |   |
| (Decrease)  increase in payable to Bank                                 |   | —                       |      | (50,718 | ) | 50,718 |   |
| Borrowed  funds on ESOP purchase                                        |   | —                       |      | — |   | 1,350,000 |   |
| Purchase  of treasury stock                                             |   | (106,750                     | )         | (73,262 | ) | (123,623 | ) |
| Net  proceeds from issuance of common stock                             |   | 80,852                       |      | 28,687 |   | 17,738 |   |
| Net  (decrease) increase in other borrowed funds                        |   | —                       |      | (200,000 | ) | 200,000 |   |
| Repayment  of debt                                                      |   | (1,141,766                   | )         | (147,973 | ) | (60,261 | ) |
| Issuance  of trust preferred security                                   |   | 4,000,000                    |      | 4,000,000 |   | — |   |
| Net  cash from financing activities                                     |   | 2,832,336                    |      | 3,556,734 |   | 1,434,572 |   |
|                                                                    |   |                         |      |   |   |   |   |
| Increase  (decrease) in cash and cash equivalents                       |   | 1,045,075                    |      | 323,679 |   | (47,336 | ) |
| Cash  and cash equivalents at beginning of year                         |   | 350,310                      |      | 26,631 |   | 73,967 |   |
|                                                                    |   |                         |      |   |   |   |   |
| Cash  and cash equivalents at end of year                               |   | $                            | 1,395,385 |   | $ | 350,310 |   | $ | 26,631 |   |

 

F-40

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**GLOSSARY OF CERTAIN TERMS**

 

The following are definitions of certain terms used in this report onForm 10-KSB.

 
| AMT    |   | Alternative Minimum Tax                            |
|--------|--------|----------------------------------------------------|
| ARM    |   | Adjustable Rate Mortgage                           |
| ATM    |   | Automatic Teller Machines                          |
| BIF    |   | Bank Insurance Fund                                |
| CAMELS |   | Capital Adequacy, Asset  Quality,                  |
|   |   | Management/Administration, Earnings                |
|   |   | Liquidity-Asset/Liability  Management,             |
|   |   | Sensitivity                                        |
| CD     |   | Certificate of Deposit                             |
| CRA    |   | Community Reinvestment Act                         |
| DOT    |   | Department of Treasury                             |
| FASB   |   | Financial Accounting Standards Board               |
| FDIC   |   | Federal Deposit Insurance Corporation              |
| FFIEC  |   | Federal Financial  Institution Examination Council |
| FHA    |   | Federal Housing Administration                     |
| FHLB   |   | Federal Home Loan Bank                             |
| FHLBB  |   | Federal Home Loan Bank Board                       |
| FHLMC  |   | Federal Home Loan Mortgage Corporation             |
| FNMA   |   | Federal National Mortgage Association              |
| FRB    |   | Federal Reserve Bank                               |
| GNMA   |   | Government National Mortgage Association           |
| HOLA   |   | Home Owners’ Loan Act                         |
| IRA    |   | Individual Retirement Account                      |
| IRR    |   | Interest Rate Risk                                 |
| IRS    |   | Internal Revenue Service                           |
| NOL    |   | Net Operating Loss                                 |
| NOW    |   | Negotiable Order of Withdrawal                     |
| NPV    |   | Net Present Value                                  |
| OCC    |   | Office of The Comptroller of The Currency          |
| OTS    |   | Office of Thrift Supervision                       |
| QTL    |   | Qualified Thrift Lender                            |
| SAIF   |   | Savings Association Insurance Fund                 |
| SBA    |   | Small Business Administration                      |
| SEC    |   | Securities and Exchange Commission                 |
| SFAS   |   | Statement of Financial Accounting Standards        |
| VA     |   | Veterans Administration                            |

 

G-1

----

 

**INDEX OF EXHIBITS**

** **
| **Exhibit No.** |   | **Description**                                                                                                                                                                                                                                                                                       |
|-----------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |   |                                                                                                                                                                                                                                                                                                  |
| **2.0           |   | Branch Purchase and  Deposit Assumption Agreement dated June 18, 1999 between Bank of Albuquerque,  National Association, and FirstBank, a federal savings bank (incorporated by  reference from the Company’s Form 8-K filed November 19, 1999)                                                 |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **2.1           |   | Letter amendment, dated  September 30, 1999, to Branch Purchase and Deposit Assumption Agreement dated  June 18, 1999 between Bank of Albuquerque, National Association, and  FirstBank, a federal savings bank (incorporated by reference from the  Company’s Form 8-K filed November 19, 1999) |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **3.1           |   | Certificate of  Amendment of Certificate of Incorporation and Certificate of Incorporation of  the Company (incorporated by reference from the Company’s Quarterly Report on  Form 10-QSB for the quarter ended June 30, 1997, SEC File No. 0-28894)                                             |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **3.2           |   | Amended Bylaws of the  Company (incorporated by reference from the Company’s Registration Statement  on Form S-8, filed June 2,1997, SEC File No. 333-28215)                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.1          |   | Agreement and Plan of  Reorganization and Plan of Merger (incorporated by reference from the  Company’s Registration Statement on Form 8-A, filed October 11, 1996, SEC  File No. 001-12309)                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.3          |   | Profit Sharing and  Employee Stock Ownership Plan of FirstBank (incorporated by reference from  the Company’s December 31, 2000 10-KSB)                                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.3.1        |   | Amendment Number One to  Profit Sharing and Employee Stock Ownership Plan of FirstBank (incorporated  by reference from the Company’s December 31, 2001 10-KSB)                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.3.2        |   | Amendment Number Two to  Profit Sharing and Employee Stock Ownership Plan of FirstBank (incorporated  by reference from the Company’s December 31, 2001 10-KSB)                                                                                                                                  |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.3.3        |   | Amendment Number Three  to Profit Sharing and Employee Stock Ownership Plan of FirstBank  (incorporated by reference from the Company’s December 31, 2001 10-KSB)                                                                                                                                |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **10.4          |   | Agreement for Standby  Letter of Credit Advances/Confirmation, Collateral Pledge and Security  Agreement with FHLB of Dallas (incorporated by reference from the Company’s  Registration Statement on Form 8-A, filed October 11, 1996, SEC File No.  001-12309)                                 |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.6      |   | Employment Agreement with  Kenneth J. Huey, Jr. (incorporated by reference from the Company’s  Registration Statement on Form 8-A, filed October 11, 1996, SEC File No.  001-12309)                                                                                                              |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.6.1    |   | Extension of Employment  Agreement with Kenneth J. Huey, Jr. dated November 20, 1997 (incorporated by  reference from the Company’s September 30, 1999 10-QSB)                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.6.2    |   | Extension of Employment  Agreement with Kenneth J. Huey, Jr. dated July 29, 1999 (incorporated by  reference from the Company’s September 30, 1999 10-QSB)                                                                                                                                       |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.6.3    |   | Extension of Employment  Agreement with Kenneth J. Huey, Jr. dated August 23, 2001 (incorporated by  reference from the Company’s September 30, 2001 10-QSB)                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.7      |   | Employment Agreement  with Norman R. Corzine (incorporated by reference from the Company’s 1996  10-KSB)                                                                                                                                                                                         |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.7.1    |   | Extension of Employment  Agreement with Norman R. Corzine dated November 20, 1997 (incorporated by  reference from the Company’s September 30, 1999 10-QSB)                                                                                                                                      |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.7.2    |   | Extension of Employment  Agreement with Norman R. Corzine dated July 29, 1999 (incorporated by  reference from the Company’s September 30, 1999 10-QSB)                                                                                                                                          |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.7.3    |   | Extension of Employment  Agreement with Norman R. Corzine dated August 23, 2001 (incorporated by  reference from the Company’s September 30, 2001 10-QSB)                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                  |
| */***10.7.4     |   | Extension of Employment  Agreement with Norman R. Corzine dated December 19, 2002                                                                                                                                                                                                                     |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.8      |   | Employment Agreement  with Don K. Padgett (incorporated by reference from the Company’s June 30,  2002 10-QSB)                                                                                                                                                                                   |
|            |   |                                                                                                                                                                                                                                                                                                  |
| */***10.8.1     |   | Extension of Employment  Agreement with Don K. Padgett dated December 19, 2002                                                                                                                                                                                                                        |
|            |   |                                                                                                                                                                                                                                                                                                  |
| **/***10.10     |   | Non-Employee Director  Retainer Plan (incorporated by reference from the Company’s Registration  Statement on Form S-8, filed June 2, 1997, SEC File No. 333-28217)                                                                                                                              |

 

----

 
| **/***10.10.1 |   | Amendment Number One to  Non-Employee Director Retainer Plan dated April 26, 2001 (incorporated by  reference from the Company’s June 30, 2001 10-QSB)               |
|---------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |   |                                                                                                                                                                      |
| **/***10.11   |   | 1997 Stock Option and  Incentive Plan (incorporated by reference from the Company’s Registration  Statement on Form S-8, filed June 2, 1997, SEC File No. 333-28215) |
|          |   |                                                                                                                                                                      |
| **/***10.12   |   | Executive Savings Plan  dated June 1, 1998 (incorporated by reference from the Company’s December 31,  1998 10-KSB)                                                  |
|          |   |                                                                                                                                                                      |
| **/***10.12.1 |   | Amendment Number One to  the Executive Savings Plan dated June 1, 1998 (incorporated by reference from  the Company’s September 30, 1999 10-QSB)                     |
|          |   |                                                                                                                                                                      |
| **/***10.12.2 |   | Amendment Number Two to  the Executive Savings Plan dated June 1, 1998 (incorporated by reference from  the Company’s September 30, 2002 10-QSB)                     |
|          |   |                                                                                                                                                                      |
| */***10.12.3  |   | Amendment Number Three  to the Executive Savings Plan dated June 1, 1998                                                                                                  |
|          |   |                                                                                                                                                                      |
| **16.1        |   | Letter from the  certifying accountants required by Regulation S-B, Item 304(a)(3) (incorporated  by reference from the Company’s December 31, 2000 10-KSB)          |
|          |   |                                                                                                                                                                      |
| *21           |   | Subsidiaries of the  Small Business Issuer                                                                                                                                |
|          |   |                                                                                                                                                                      |
| *23.1         |   | Consent of Independent  Accountants from Robinson Burdette Seright & Burrows, L.L.P.                                                                                  |
|          |   |                                                                                                                                                                      |
| *23.2         |   | Consent of Independent  Auditors from KPMG LLP                                                                                                                            |
|          |   |                                                                                                                                                                      |
| *99.1         |   | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                       |
|          |   |                                                                                                                                                                      |
| *99.2         |   | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                       |

 

----

| *   |   | Filed herewith                                                                                                                             |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------|
| **  |   | Previously filed                                                                                                                           |
| *** |   | Designates each  management contract or compensatory plan or arrangement required to be  identified pursuant to Item 13(a) of Form 10-KSB. |

 

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